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FILED PURSUANT TO RULE 424(B)(4)
REGISTRATION NO. 333-37554
FILED PURSUANT TO RULE 424(B)(4)
REGISTRATION NO. 333-46896
PROSPECTUS
SEPTEMBER 29, 2000
[LOGO]
WILSON GREATBATCH TECHNOLOGIES
5,000,000 SHARES OF COMMON STOCK
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WILSON GREATBATCH TECHNOLOGIES, INC.:
- We are a leading developer and manufacturer of power sources, feedthroughs
and wet tantalum capacitors used in implantable medical devices, and we
also develop and manufacture other components used in implantable medical
devices.
- 10,000 Wehrle Drive
Clarence, New York 14031
(716) 759-6901
TRADING SYMBOL AND MARKET:
- Our common stock has been approved for listing on the New York Stock
Exchange, subject to notice of issuance, under the symbol "GB".
THE OFFERING:
- We are offering 5,000,000 shares of our common stock.
- The underwriters have an option to purchase an additional 750,000
shares of common stock to cover over-allotments.
- This is our initial public offering and no public market currently
exists for our shares.
- We plan to use the net proceeds of this offering to repay
indebtedness.
- Closing: October 3, 2000.
<TABLE>
<CAPTION>
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Per Share Total
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<S> <C> <C>
Public offering price: $16.00 $80,000,000
Underwriting fees: 1.12 5,600,000
Proceeds to Wilson Greatbatch Technologies,
Inc.: 14.88 74,400,000
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</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH & CO.
----------------
BANC OF AMERICA SECURITIES LLC
U.S. BANCORP PIPER JAFFRAY
DLJDIRECT INC.
<PAGE>
MEDICAL PRODUCTS
COMPONENTS FOR IMPLANTABLE DEVICES
[Photograph of Feedthrough]
FEEDTHROUGHS
HIGHLY DURABLE SEAL
MULTIFUNCTIONAL
[Photograph of Precision Components]
PRECISION COMPONENTS
HIGH LEVEL OF MANUFACTURING PRECISION
BROAD MANUFACTURING FLEXIBILITY
[Close-up Photograph of Electrode Tip]
ELECTRODE TIPS
PRECISION QUALITY COATED SURFACE
CUSTOMIZED OFFERING OF SURFACES AND TIPS
[Diagram of ICD showing location
[Photograph of a Capacitor] of components]
CAPACITORS IMPLANTABLE CARDIOVERTER
PROPRIETARY TECHNOLOGY DEFIBRILLATOR SHOWING COMPONENTS
ENABLES COMPONENT SIZE REDUCTION OF UP TO 50% FROM WILSON GREATBATCH
ALLOWS A WIDE RANGE OF CUSTOM CONFIGURATIONS TECHNOLOGIES, INC.
[Photograph of four Implantable Power Sources]
IMPLANTABLE POWER SOURCES
INDUSTRY STANDARD
PROPRIETARY TECHNOLOGIES
DECADES OF IMPLANT EXPERIENCE WITH SUPPORTIVE LIFE TEST DATA
COMMERCIAL PRODUCTS
HIGH PERFORMANCE, SAFE AND RELIABLE PRIMARY POWER SUPPLIES . . .
[Photograph of various power sources]
. . . SPECIFICALLY DESIGNED FOR THE MOST DEMANDING APPLICATIONS SUCH AS SPACE
FLIGHT, OCEANOGRAPHY AND PETROLEUM EXPLORATION
[Photographs of a space shuttle, oceanographic exploration and a drilling rig]
[Logo]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary..................... 1
Risk Factors........................... 7
Forward Looking Statements............. 16
Use of Proceeds........................ 17
Dividend Policy........................ 17
Capitalization......................... 18
Dilution............................... 20
Selected Consolidated Financial Data... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Business............................... 36
Management............................. 49
Related Party Transactions............. 56
Principal Stockholders................. 62
Description of Capital Stock........... 64
Shares Eligible for Future Sale........ 67
Underwriting........................... 69
Legal Matters.......................... 73
Experts................................ 73
Where You Can Find More Information.... 73
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION
REGARDING US AND THE COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR HISTORICAL
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THE HISTORICAL CONSOLIDATED
FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
WILSON GREATBATCH TECHNOLOGIES, INC.
OUR BUSINESS
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 believe
that we are a preferred supplier of power sources and components because we
offer technologically advanced, highly reliable and long lasting products for
implantable medical devices. Through continuous technological innovation and
improvements, we have enabled our customers to continually develop and introduce
implantable medical devices that are progressively smaller, longer lasting, more
efficient and more functional. Our customers include leading implantable medical
device manufacturers such as Guidant, St. Jude Medical and Medtronic, the three
largest manufacturers of pacemakers and implantable cardioverter defibrillators,
or ICDs, based on revenues. We leverage our core competencies in technology and
manufacturing to develop and produce power sources for commercial applications
that demand high performance and reliability, including aerospace, oil and gas
exploration and oceanographic equipment.
Our history, market leadership and reputation for quality and technological
innovation in the implantable medical device industry began with Mr. Wilson
Greatbatch, who patented the implantable pacemaker in 1962 and founded our
company in 1970. We continue to develop pioneering technology used in
implantable medical devices and other demanding commercial applications. As of
July 1, 2000, we employed 135 scientists, engineers and technicians. To remain a
leader in developing new technology, we also maintain close relationships with a
number of research organizations, clinicians and other industry professionals.
Since 1970, our company has received 321 patents worldwide, and as of July 1,
2000, we held 137 active patents.
We work closely with our customers to enable them to develop innovative
medical devices that utilize our specially designed, proprietary power sources
and components. We believe that our proprietary technology, close customer
relationships, market leadership and dedication to quality provide us with
significant competitive advantages over our competitors and create a barrier to
entry for potential market entrants.
STRATEGY
Our objective is to enhance our position as a leading developer and
manufacturer of power sources and other components for implantable medical
devices. We intend to:
- expand our proprietary technology portfolio through continuous
technological innovation and continue to focus our research, development
and engineering efforts on pioneering power sources and advanced
components for implantable medical devices;
- enhance our position as an integrated component supplier to the
implantable medical device industry by broadening our product line to
include a more comprehensive range of power sources and components;
- continue to collaborate with our customers to jointly develop new
technologies that enable them to develop and market increasingly more
effective and technologically innovative products; and
- enter into strategic alliances and make selective acquisitions that
complement our core competencies in technology and manufacturing for both
implantable medical devices and other demanding commercial applications.
1
<PAGE>
IMPLANTABLE MEDICAL DEVICE INDUSTRY
An implantable medical device is an instrument that is surgically inserted
into the body to provide diagnosis or therapy. The market for our implantable
power sources and components benefits directly from the growth of the
implantable medical device industry. The largest and fastest growing segment of
the implantable medical device market is cardiac rhythm management, which
includes devices such as pacemakers and ICDs. Pacemakers treat bradycardia, a
condition that occurs when a patient has an abnormally slow heartbeat, by
stimulating the heart with regular electrical pulses. ICDs treat tachycardia, a
condition that occurs when a patient has a rapid and irregular heartbeat, by
delivering concentrated and timed electrical energy to the heart to restore a
normal heart rate.
The use of implantable medical devices has grown as advances in technology
have enabled the treatment of a wider range of conditions. As the size of
implantable medical devices has become smaller, implantation has become less
invasive, making the use of these devices more attractive to patients and
surgeons. Emerging applications, such as the treatment of congestive heart
failure and atrial fibrillation, a condition associated with an unsynchronized
motion of the atrium that produces an irregular heartbeat, increased ease of
implantation and the general aging of the population are expected to drive the
growth of the implantable medical device industry. Medical Data International,
an independent industry publisher, estimates that revenues from pacemakers sold
worldwide will increase from $2.6 billion in 1999 to $3.6 billion in 2004,
representing a compound annual growth rate of 6.7%. Medical Data International
also estimates that revenues from ICDs sold worldwide will increase from $1.5
billion in 1999 to $5.5 billion in 2004, representing a compound annual growth
rate of 29.7%. The faster growth predicted for the ICD market is predicated on
anticipated new applications for, and greater acceptance of, ICDs.
As a leading developer and manufacturer of power sources and other
components for implantable medical devices, we believe that our company will
continue to be well positioned to meet the requirements of manufacturers of
these products.
2
<PAGE>
PRODUCTS
We currently manufacture and market 26 models of pacemaker batteries and 15
models of ICD batteries as well as numerous other components for our customers
in the implantable medical device industry. Our commercial power sources are
used in aerospace, oil and gas exploration and oceanographic equipment. The
following table provides information about our principal products:
<TABLE>
<CAPTION>
PRINCIPAL PRODUCT
PRODUCT DESCRIPTION USED IN ATTRIBUTES
------- ----------- ------- -----------------
<S> <C> <C> <C>
MEDICAL:
Implantable power sources Batteries for implantable medical Pacemakers, ICDs, High reliability and
devices left ventricular predictability
assist devices, Long service life
neurostimulators, Customized configuration
drug pumps and Light weight
hearing assist Compact and less intrusive
devices
Capacitors Store energy generated by a ICDs Stores more energy per unit
battery before delivery to the volume (energy density) than
heart other existing technologies
Customized configuration
Medical components:
Feedthroughs Allow electrical signals to be Pacemakers, ICDs, Ceramic to metal seal is
brought from inside an left ventricular substantially more durable than
implantable medical device to an assist devices, traditional seals
electrode neurostimulators, Multifunctional
drug pumps and
hearing assist
devices
Electrodes Deliver electrical signal from Pacemakers and ICDs High quality coated surface
the feedthrough to a body part Flexible in utilizing any
undergoing stimulation combination of biocompatible
coating surfaces
Customized offering of surfaces
and tips
Precision components Machined and molded parts for Pacemakers, ICDs High level of manufacturing
implantable medical devices and drug pumps precision
Broad manufacturing flexibility
COMMERCIAL:
Commercial power sources Batteries for demanding Aerospace, oil and Long-life dependability
commercial applications gas exploration and High energy density
oceanographic
equipment
</TABLE>
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... 5,000,000 shares
Common stock to be outstanding after this
offering................................... 18,152,814 shares
Use of proceeds.............................. Repayment of a portion of our Term A and Term
B loans
NYSE symbol.................................. GB
</TABLE>
------------------------
The outstanding share information is based on our shares outstanding as of
August 15, 2000. Unless otherwise indicated, the outstanding share information
gives effect to our August 7, 2000 purchase of Battery Engineering, Inc. for
339,856 shares of common stock and assumption of approximately $2.7 million of
indebtedness and our sale of 200,000 shares of common stock to Hitachi-
Maxell, Ltd., the former parent of Battery Engineering, Inc. This information
excludes 584,683 shares of common stock issuable upon exercise of outstanding
stock options at a weighted average exercise price of $8.95 per share and an
aggregate of 1,086,689 shares of common stock that were available for future
issuance under our stock option plans as of August 15, 2000. Unless otherwise
indicated, the information in this prospectus assumes no exercise of the
underwriters' over-allotment option to purchase additional shares of our common
stock and all common stock figures reflect a one-for-three reverse stock split
that occurred in May 2000 and a three-for-five reverse stock split that occurred
in August 2000.
------------------------
Our facilities are located in greater Buffalo, New York, Canton,
Massachusetts and Columbia, Maryland. Our principal executive offices are
located at 10,000 Wehrle Drive, Clarence, New York 14031. Our telephone number
at that location is (716) 759-6901. Our Internet address is WWW.GREATBATCH.COM.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table provides summary consolidated financial data of our
company for the periods indicated. You should read the summary consolidated
financial data set forth below in conjunction with "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
prospectus.
The unaudited pro forma consolidated statement of operations data and cash
flow data for the year ended December 31, 1999 and for the six months ended
June 30, 2000 give effect to this offering and the application of the net
proceeds of this offering to repay a portion of our indebtedness as if this
offering and the repayment of indebtedness had occurred on January 2, 1999. The
as adjusted consolidated balance sheet data is adjusted as if this offering and
the repayment of indebtedness had occurred on June 30, 2000 and gives effect to
our purchase of Battery Engineering, Inc. for 339,856 shares of common stock and
assumption of approximately $2.7 million of indebtedness and our sale of 200,000
shares of common stock to the former parent of Battery Engineering, Inc.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED PRO FORMA SIX MONTHS ENDED SIX MONTHS
------------------------- YEAR ENDED ----------------------- ENDED
JANUARY 1, DECEMBER 31, DECEMBER 31, JULY 2, JUNE 30, JUNE 30,
1999(1) 1999 1999 1999 2000 2000
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues................................ $ 77,361 $79,235 $ 79,235 $38,318 $46,584 $46,584
Cost of goods sold............................ 36,454 41,057 41,057 19,385 26,385 26,385
-------- ------- -------- ------- ------- -------
Gross profit.................................. 40,907 38,178 38,178 18,933 20,199 20,199
Selling, general and administrative........... 11,484 9,880 9,880 5,124 5,132 5,132
Research, development and engineering......... 12,190 9,339 9,339 5,130 5,046 5,046
Intangible amortization....................... 5,197 6,510 6,510 3,266 3,267 3,267
-------- ------- -------- ------- ------- -------
12,036 12,449 12,449 5,413 6,754 6,754
Interest expense.............................. 10,572 13,420 6,745 6,519 7,787 3,803
Other......................................... 364 1,343 1,343 129 71 71
-------- ------- -------- ------- ------- -------
Income (loss) before income taxes............. 1,100 (2,314) 4,361 (1,235) (1,104) 2,880
Income tax expense (benefit).................. 410 (605) 1,134 (321) (328) 864
Cumulative effect of accounting change........ -- (563) (563) (563) -- --
-------- ------- -------- ------- ------- -------
Net income (loss)............................. $ 690 $(2,272) $ 2,664(4) $(1,477) $ (776) $ 2,016
======== ======= ======== ======= ======= =======
Net earnings (loss) per share (2):
Basic....................................... $ 0.07 $ (0.18) $ 0.15 $ (0.12) $ (0.06) $ 0.11
Diluted..................................... $ 0.06 $ (0.18) $ 0.15 $ (0.12) $ (0.06) $ 0.11
Weighted average shares outstanding (2):
Basic....................................... 10,461 12,491 17,491 12,406 12,615 17,615
Diluted..................................... 10,677 12,491 17,737 12,406 12,615 17,841
CONSOLIDATED CASH FLOW DATA:
Cash provided by operating activities......... $ 8,927 $ 6,900 N/A $ 4,060 $ 8,417 N/A
Cash used in investing activities............. (83,375) (8,847) N/A (3,882) (3,507) N/A
Cash provided by (used in) financing
activities.................................. 76,269 1,670 N/A (2,858) (6,320) N/A
EBITDA (3).................................... 20,543 22,152 N/A 11,015 12,760 N/A
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 2000
-----------------------
ACTUAL AS ADJUSTED
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,453 $ 3,747(5)
Total assets................................................ 184,361 195,281
Total debt.................................................. 126,562 56,439
Total stockholders' equity.................................. 45,561 125,371
</TABLE>
5
<PAGE>
(1) In August 1998, we acquired the assets and liabilities of Hittman Materials
and Medical Components, Inc., or Hittman. These figures include the results
of operations of Hittman from August 8, 1998 to January 1, 1999.
(2) We calculate basic earnings per share by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the
period. We calculate diluted earnings (loss) per share by adjusting for
common stock equivalents, which consist of stock options. During the year
ended December 31, 1999, the six months ended July 2, 1999 and June 30, 2000
and the pro forma six months ended June 30, 2000, there were options to
purchase 246, 283, 226 and 226 shares of common stock, respectively, that
were not included in the computation of diluted earnings per share because
to do so would be antidilutive for those periods. Diluted earnings per share
for the year ended January 1, 1999 includes the potentially dilutive effect
of stock options.
(3) When we refer to EBITDA, we mean net earnings or loss before interest
expense, income taxes, depreciation and amortization. We have included
EBITDA because our management and industry analysts generally consider it to
be a measurement of the financial performance of our company that provides a
relevant basis for comparison among companies. EBITDA is not a measurement
of financial performance under accounting principles generally accepted in
the United States and should not be considered a substitute for net income
or loss as a measure of performance, or to cash flow as a measure of
liquidity. Investors should note that this calculation of EBITDA might
differ from similarly titled measures for other companies.
(4) The pro forma net income for the year ended December 31, 1999 does not
include an expense, net of tax, of $1.6 million as a result of the early
extinguishment of indebtedness.
(5) The as adjusted cash and cash equivalents excludes $2.8 million of cash
received from Hitachi-Maxell, Ltd. related to the sale of 200,000 shares of
our common stock. Such cash is restricted and is being maintained in an
escrow account.
6
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RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD UNDERSTAND THE HIGH DEGREE
OF RISK INVOLVED. YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS AND OTHER
INFORMATION IN THIS PROSPECTUS, INCLUDING OUR HISTORICAL CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES, BEFORE YOU DECIDE TO PURCHASE SHARES OF OUR COMMON
STOCK. THE FOLLOWING RISKS AND UNCERTAINTIES ARE NOT THE ONLY ONES WE FACE.
HOWEVER, THESE ARE THE RISKS OUR MANAGEMENT BELIEVES ARE MATERIAL. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND OPERATING
RESULTS COULD BE ADVERSELY AFFECTED. AS A RESULT, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE PART OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE DEPEND HEAVILY ON A LIMITED NUMBER OF CUSTOMERS, AND IF WE LOSE ANY OF
THEM, WE WOULD LOSE A SUBSTANTIAL PORTION OF OUR REVENUES.
A substantial portion of our business in 1999 was conducted with a limited
number of customers, including Guidant, St. Jude Medical, Medtronic, Biotronik
and Sulzer Intermedics, which was acquired by Guidant in 1999. Guidant accounted
for approximately 33% of our revenues and St. Jude Medical accounted for
approximately 31% of our revenues in 1999. As a result, we depend heavily on
revenues from Guidant and St. Jude Medical. Our supply agreements, particularly
with our large customers, might not be renewed in the future after they expire,
including our agreements with Guidant, which expires in 2001, and St. Jude
Medical, which expires in 2003. Our supply agreements with St. Jude Medical,
Medtronic, Biotronik and Guidant do not require that our customers maintain any
minimum purchase levels. The loss of any large customer for any reason could
harm our business, financial condition and results of operations.
IF WE DO NOT RESPOND TO CHANGES IN TECHNOLOGY, OUR PRODUCTS MAY BECOME
OBSOLETE AND WE MAY EXPERIENCE REDUCED SALES AND A LOSS OF CUSTOMERS, WHICH
WOULD NEGATIVELY AFFECT OUR REVENUES.
We sell our products to customers in several industries that are
characterized by rapid technological changes, frequent new product introductions
and evolving industry standards. For example, in 1998, an industry-wide design
change in ICDs occurred, resulting in new ICDs using one battery instead of two.
Primarily as a result of this design change, our implantable power source
revenues decreased 19% in 1999 compared to 1998. Without the timely introduction
of new products and enhancements, our products and services will likely become
technologically obsolete over time and we may lose a number of our customers. In
addition, other new products introduced by our customers may require fewer of
our power sources or components. We dedicate a significant amount of resources
to the development of our power sources and other products and technologies and
we would be harmed if we did not meet customer requirements and expectations.
Our inability, for technological or other reasons, to successfully develop and
introduce new and innovative power sources and other products could cause our
business to suffer. If this occurs, our revenues and operating results would
suffer.
IF WE ARE UNABLE TO SUCCESSFULLY MARKET OUR CURRENT OR FUTURE PRODUCTS, OUR
BUSINESS WILL BE HARMED.
The market for our power sources, components and other products has been
growing in recent years. If the market for our products does not grow as rapidly
as forecasted by industry experts, our revenues could be less than expected. In
addition, it is difficult to predict the rate at which the market for our
products will grow or at which new and increased competition will result in
market saturation. Slower growth in the pacemaker and ICD markets in particular
would negatively impact our revenues. In addition, we face the risk that our
products will lose widespread market acceptance. We cannot assure you that our
customers will continue to utilize the products we offer or that a market will
develop for our future products. We may at times determine that it is not
technically or economically
7
<PAGE>
feasible for us to manufacture future products and we may not be successful in
developing or marketing them. Additionally, new technologies that we develop may
not be rapidly accepted because of industry-specific factors, including the need
for regulatory clearance, entrenched patterns of clinical practice and
uncertainty over third party reimbursement. If this occurs, our business will be
harmed.
WE ARE CURRENTLY EXPERIENCING LOSSES AND MAY NOT BECOME PROFITABLE IN THE
FUTURE.
We are currently experiencing losses and we cannot assure you that we will
become profitable in the foreseeable future, if ever. For the six months ended
June 30, 2000, and the year ended December 31, 1999, we had losses of $0.8
million and $2.3 million, respectively. Even if we do achieve profitability, we
may be unable to sustain or increase our profitability in the future.
AMORTIZATION OF OUR INTANGIBLE ASSETS, WHICH REPRESENT A SIGNIFICANT PORTION
OF OUR TOTAL ASSETS, WILL ADVERSELY IMPACT OUR NET INCOME AND WE MAY NEVER
REALIZE THE FULL VALUE OF OUR INTANGIBLE ASSETS.
As of December 31, 1999, we had $112.9 million of intangible assets,
representing 59% of our total assets and 243% of our stockholders' equity. These
intangible assets consist primarily of goodwill arising from our acquisition of
Hittman and accruals relating to our trademarks and patented technology. We
expect to incur amortization expenses relating to these intangible assets of
$8.0 million in each of 2000 and 2001. These expenses will reduce our future
earnings or increase our future losses. We may not receive the recorded value
for our intangible assets if we sell or liquidate our business or assets. The
material concentration of intangible assets increases the risk of a large charge
to earnings in the event that the recoverability of these intangible assets are
impaired, and in the event of such a charge to earnings, the market price of our
common stock could be adversely affected.
WE ARE SUBJECT TO PRICING PRESSURES FROM CUSTOMERS, WHICH COULD HARM OUR
OPERATING RESULTS.
We have made price concessions to some of our large customers in recent
years and we expect customer pressure for pricing concessions will continue.
Further, price concessions or reductions may cause our operating results to
suffer. In addition, any delay or failure by a large customer to make payments
due to us also could harm our operating results or financial condition.
QUALITY PROBLEMS WITH OUR POWER SOURCES AND OTHER PRODUCTS COULD HARM OUR
REPUTATION FOR PRODUCING HIGH QUALITY PRODUCTS AND ERODE OUR COMPETITIVE
ADVANTAGE.
Our power sources and other products are held to high quality standards. In
the event our power sources and other products fail to meet these standards, our
reputation for producing high quality power sources and other products could be
harmed, which would damage our competitive advantage.
OUR OPERATING RESULTS MAY FLUCTUATE, WHICH MAY MAKE IT DIFFICULT TO FORECAST
OUR FUTURE PERFORMANCE AND MAY RESULT IN VOLATILITY IN OUR STOCK PRICE.
Our operating results have fluctuated in the past and are likely to
fluctuate significantly from quarter to quarter due to a variety of factors,
including:
- the fixed nature of a substantial percentage of our costs, which results
in our operations being particularly sensitive to fluctuations in revenue;
- changes in the relative portion of our revenue represented by our various
products and customers, which could result in reductions in our profits if
the relative portion of our revenue represented by lower margin products
increases. For a discussion of a recent fluctuation in our operating
results due to a shift in the relative portion of our revenue among
product lines, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--First Six
Months of 2000 Compared to First Six Months of 1999--Gross profit";
8
<PAGE>
- timing of orders placed by our principal customers who account for a
significant portion of our revenues; and
- increased costs of raw materials or supplies.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
We rely on a combination of patents, licenses, trade secrets and know-how to
establish and protect our proprietary rights to our technologies and products.
As of July 1, 2000, we held 137 active patents. We cannot guarantee that the
steps we have taken or will take to protect our proprietary rights will be
adequate to deter misappropriation of our intellectual property. In addition to
seeking formal patent protection whenever possible, we attempt to protect our
proprietary rights and trade secrets by entering into confidentiality and
non-compete agreements with employees, consultants and third parties with which
we do business. However, these agreements can be breached and, if they are,
there may not be an adequate remedy available to us and we may be unable to
prevent the unauthorized disclosure or use of our technical knowledge, practices
or procedures. If our trade secrets become known, we may lose our competitive
advantages.
In addition, we may not be able to detect unauthorized use of our
intellectual property and take appropriate steps to enforce our rights. If third
parties infringe or misappropriate our patents or other proprietary rights, our
business could be seriously harmed. We may be required to spend significant
resources to monitor our intellectual property rights, we may not be able to
detect infringement of these rights and may lose our competitive advantages
associated with our intellectual property rights before we do so. In addition,
competitors may design around our technology or develop competing technologies
that do not infringe on our proprietary rights.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY CLAIMS, WHICH COULD BE COSTLY AND
TIME CONSUMING AND COULD DIVERT OUR MANAGEMENT AND KEY PERSONNEL FROM OUR
BUSINESS OPERATIONS.
In producing our power sources and other components for implantable medical
devices, third parties may claim that we are infringing their intellectual
property rights, and we may be found to have infringed those intellectual
property rights. While we do not believe that any of our products infringe the
intellectual property rights of third parties, we may be unaware of intellectual
property rights of others that may be used in our technology and products. In
addition, third parties may claim that our patents have been improperly granted
and may seek to invalidate our existing or future patents. Although we do not
believe that any of our active patents should be subject to invalidation, if any
claim for invalidation prevailed, the result could be greatly expanded
opportunities for third parties to manufacture and sell products which compete
with our products. We also typically do not receive significant indemnification
from parties which license technology to us against third party claims of
intellectual property infringement. Any litigation or other challenges regarding
our patents or other intellectual property could be costly and time consuming
and could divert our management and key personnel from our business operations.
The complexity of the technology involved in producing our power sources and
other components for implantable medical devices, and the uncertainty of
intellectual property litigation increase these risks. Claims of intellectual
property infringement might also require us to enter into costly royalty or
license agreements. However, we may not be able to obtain royalty or license
agreements on terms acceptable to us, or at all. We also may be subject to
significant damages or injunctions against development and sale of our products.
Infringement claims, even if not substantiated, could result in significant
legal and other costs and may be a distraction to management.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, OUR EARNINGS AND FINANCIAL
CONDITION COULD SUFFER.
The manufacture and sale of our products expose us to potential product
liability claims and product recalls, including those which may arise from
misuse or malfunction of, or design flaws in, our
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products or use of our products with components or systems not manufactured or
sold by us. Provisions contained in our agreements with key customers attempting
to limit our damages, including provisions to limit damages to liability for
gross negligence, may not be enforceable in all instances or may otherwise fail
to protect us from liability for damages. Product liability claims or product
recalls, regardless of their ultimate outcome, could require us to spend
significant time and money in litigation or otherwise or require us to pay
significant damages. The occurrence of product liability claims or product
recalls could cause our earnings and financial condition to suffer.
We carry product liability insurance coverage which is limited in scope and
amount. Our management believes that our insurance coverage is adequate given
the risks we face. We cannot assure you that we will be able to maintain this
insurance or to do so at reasonable cost and on reasonable terms. We also cannot
assure you that this insurance will be adequate to protect us against a product
liability claim that arises in the future.
WE ARE DEPENDENT UPON OUR SENIOR MANAGEMENT TEAM AND KEY PERSONNEL AND THE
LOSS OF ANY OF THEM COULD SIGNIFICANTLY HARM US.
Our future performance depends to a significant degree upon the continued
contributions of our senior management team and key technical personnel. Our
products are highly technical in nature. In general, only highly qualified and
trained scientists have the necessary skills to develop our power sources and
other products. The loss or unavailability to us of any member of our senior
management team or a key technical employee could significantly harm us. We face
intense competition for these professionals from our competitors, our customers
and other companies operating in our industry. To the extent that the services
of members of our senior management team and key technical personnel would be
unavailable to us for any reason, we would be required to hire other personnel
to manage and operate our company and to develop our products and technology. We
cannot assure you that we would be able to locate or employ such qualified
personnel on acceptable terms.
WE MAY NOT BE ABLE TO ATTRACT, TRAIN AND RETAIN A SUFFICIENT NUMBER OF
QUALIFIED PROFESSIONALS TO MAINTAIN AND GROW OUR BUSINESS.
Our success will depend in large part upon our ability to attract, train,
retain and motivate highly-skilled employees and management. There is currently
aggressive competition for employees who have experience in technology and
engineering that is used in manufacturing and producing power sources and other
components for implantable medical devices. We compete intensely with other
companies to recruit and hire from this limited pool. The industries in which we
compete for employees are characterized by high levels of employee attrition.
Although we believe we offer competitive salaries and benefits, we may have to
increase spending in order to retain personnel. In 1999, we temporarily reduced
salaries company-wide by 10% and later restored salaries to their original
levels. In connection with these salary reductions, we implemented various
measures to retain our existing employees, including granting stock options to
some of our key employees to compensate for the 10% reduction in salaries. If a
number of our employees resign from our company to join or form a competitor,
the loss of these employees and any resulting loss of existing or potential
clients to a competitor could harm our business, financial condition and results
of operations. Any inability to attract, train, retain and motivate employees
and management would cause our business, financial condition and results of
operations to suffer.
WE RELY ON THIRD PARTY SUPPLIERS FOR RAW MATERIALS, KEY PRODUCTS AND
SUBCOMPONENTS AND IF WE ARE UNABLE TO OBTAIN THESE MATERIALS, PRODUCTS AND
SUBCOMPONENTS ON A TIMELY BASIS OR ON TERMS ACCEPTABLE TO US, OUR ABILITY TO
MANUFACTURE PRODUCTS WILL SUFFER.
Our business depends on a continuous supply of raw materials. The principal
raw materials used in our business include lithium, iodine, plastics, cases,
lids, glass, screens, tantalum, ruthenium, tantalum pellets and vanadium
pentoxide. Raw materials needed for our business are susceptible to fluctuations
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due to transportation, government regulations, price controls, economic climate
or other unforeseen circumstances. In addition, there are a limited number of
worldwide suppliers of the lithium needed to manufacture our products. We cannot
assure you that we will be able to continue to procure raw materials critical to
our business.
We rely on third party manufacturers to supply many of our raw materials.
For example, we rely on FMC to supply us with lithium for our power sources and
HC Starks to supply us with tantalum powder and wire for capacitors.
Manufacturing problems may occur with these and other outside sources, as a
supplier may fail to develop and supply products and subcomponents to us on a
timely basis, or may supply us with products and subcomponents that do not meet
our quality, quantity and cost requirements. If any of these problems occur, we
may be unable to obtain substitute sources of these products and subcomponents
on a timely basis or on terms acceptable to us, which could harm our ability to
manufacture our own products and components profitably or on time. In addition,
to the extent the processes that our suppliers use to manufacture products and
subcomponents are proprietary, we may be unable to obtain comparable
subcomponents from alternative suppliers.
WE MAY FACE COMPETITION FROM ONE OF OUR PRINCIPAL CUSTOMERS THAT COULD HARM
OUR BUSINESS AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST NEW ENTRANTS
AND ESTABLISHED COMPANIES WITH GREATER RESOURCES.
Competition in connection with the manufacturing of power sources for
implantable medical devices may intensify in the future. One or more of our
customers that manufactures implantable medical devices may undertake additional
vertical integration initiatives and begin to manufacture some or all of their
power source needs. Although Medtronic manufactures its own lithium batteries
for its pacemakers and ICDs, to date, to our knowledge, Medtronic has not sold
batteries to third parties. In 1999, Medtronic introduced a new ICD that reduced
the number of batteries from two to one and caused us to lose some unit volume.
If Medtronic were to begin selling power sources for implantable medical devices
to third parties, our revenues could be harmed. As the implantable medical
device industry continues to consolidate, this risk will intensify. Many of our
potential implantable power source and component competitors, which include some
of our customers, have greater name recognition, longer operating histories,
larger customer bases, longer customer relationships and greater financial,
technical, personnel and marketing resources than our company.
The market for commercial power sources is competitive, fragmented and
subject to rapid technological change. Many other commercial power source
suppliers are larger and have greater financial, operational, personnel, sales,
technical and marketing resources than our company. These and other companies
may develop products that are superior to ours, which could cause our results of
operations to suffer.
ACCIDENTS AT ONE OF OUR FACILITIES COULD DELAY PRODUCTION AND ADVERSELY
AFFECT OUR OPERATIONS.
Our business involves complex manufacturing processes and hazardous
materials that can be dangerous to our employees. Although we employ safety
procedures in the design and operation of our facilities and we have not
experienced any serious accidents or deaths, there is a risk that an accident or
death could occur in one of our facilities. Any accident, such as a chemical
spill, could result in significant manufacturing delays or claims for damages
resulting from injuries, which would harm our operations and financial
condition. The potential liability resulting from any such accident or death, to
the extent not covered by insurance, could cause our business to suffer. Any
disruption of operations at any of our facilities could harm our business.
IF WE ARE NOT SUCCESSFUL IN MAKING ACQUISITIONS TO EXPAND AND DEVELOP OUR
BUSINESS, OUR FINANCIAL RESULTS MAY SUFFER.
A component of our strategy is to make selective acquisitions that
complement our core competencies in technology and manufacturing to enable us to
manufacture and sell additional
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products to our existing customers and to expand our business into related
markets. For example, in August 1998, we acquired Hittman, a medical components
manufacturer. Our continued growth will depend on our ability to identify and
acquire companies that complement or enhance our business on acceptable terms.
We may not be able to identify or complete future acquisitions. Some of the
risks that we may encounter include expenses associated with, and difficulties
in identifying, potential targets, the costs associated with incomplete
acquisitions and higher prices for acquired companies because of competition for
attractive acquisition targets. Our failure to acquire additional companies
could cause our financial results to suffer.
WE MAY MAKE ACQUISITIONS THAT COULD SUBJECT US TO A NUMBER OF OPERATIONAL
RISKS AND WE MAY NOT BE SUCCESSFUL IN INTEGRATING COMPANIES WE ACQUIRE INTO OUR
EXISTING OPERATIONS.
We expect to make selective acquisitions that complement our core
competencies in technology and manufacturing to enable us to manufacture and
sell additional products to our existing customers and to expand our business
into related markets. However, implementation of our acquisition strategy
entails a number of risks, including:
- inaccurate assessments of undisclosed liabilities;
- diversion of our management's attention from our core businesses;
- potential loss of key employees or customers of the acquired businesses;
- difficulties in integrating the operations and products of an acquired
business or in realizing projected efficiencies and cost savings; and
- increases in our indebtedness and a limitation in our ability to access
additional capital when needed.
WE INTEND TO EXPAND INTO NEW MARKETS AND OUR PROPOSED EXPANSION PLANS MAY
NOT BE SUCCESSFUL.
We intend to expand into new markets through the development of new product
applications based on our existing component technologies. These efforts have
required, and will continue to require, us to make substantial investments,
including significant research, development and engineering expenditures and
capital expenditures for new, expanded or improved manufacturing facilities. We
cannot assure you that we will be able to successfully manage expansion into new
markets and products or that these efforts will not have an adverse impact on
our business. Specific risks in connection with expanding into new markets
include the inability to transfer our quality standards into new products, the
failure of customers in new markets to accept our products and price
competition.
OUR FAILURE TO OBTAIN LICENSES FROM THIRD PARTIES FOR NEW TECHNOLOGIES OR
THE LOSS OF THESE LICENSES COULD IMPAIR OUR ABILITY TO DESIGN AND MANUFACTURE
NEW PRODUCTS.
We occasionally license technologies from third parties rather than
depending exclusively on our own proprietary technology and developments. For
example, we license wet tantalum technology from the Evans Capacitor Company to
produce our capacitors. Our ability to license new technologies from third
parties is and will continue to be critical to our ability to offer new and
improved products. We cannot assure you that we will be able to continue to
identify new technologies developed by others and even if we are able to
identify new technologies, we may not be able to negotiate licenses on favorable
terms, or at all. Additionally, we could lose rights granted under licenses for
reasons beyond our control. For example, the licensor could lose patent
protection for a number of reasons, including invalidity of the licensed patent.
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RISKS RELATED TO OUR INDUSTRY
WE AND OUR CUSTOMERS ARE SUBJECT TO VARIOUS POLITICAL, ECONOMIC AND
REGULATORY CHANGES IN THE HEALTHCARE INDUSTRY WHICH COULD FORCE US TO MAKE
MODIFICATIONS TO HOW WE DEVELOP AND PRICE OUR PRODUCTS.
The healthcare industry is highly regulated and is influenced by changing
political, economic and regulatory factors. Several of our product lines are
subject to international, federal, state and local health and safety, packaging
and product content regulations. In addition, implantable medical device
products produced by our healthcare customers are subject to regulation by the
United States Food and Drug Administration, or FDA, and similar international
agencies. These regulations govern a wide variety of product activities from
design and development to labeling, manufacturing, promotion, sales and
distribution. Compliance with these regulations may be time consuming,
burdensome and expensive and could negatively affect our customers' abilities to
sell their products, which in turn would adversely affect our ability to sell
our products. This may result in higher than anticipated costs or lower than
anticipated revenues.
These regulations are also complex, change frequently and have tended to
become more stringent over time. Federal and state legislatures have
periodically considered programs to reform or amend the U.S. healthcare system
at both the federal and state levels. In addition, these regulations may contain
proposals to increase governmental involvement in healthcare, lower
reimbursement rates or otherwise change the environment in which healthcare
industry participants operate. We may be required to incur significant expenses
to comply with these regulations or remedy past violations of these regulations.
Any failure by our company to comply with applicable government regulations
could also result in cessation of portions or all of our operations, impositions
of fines and restrictions on our ability to carry on or expand our operations.
In addition, because many of our products are sold into regulated industries, we
must comply with additional regulations in marketing our products.
OUR BUSINESS IS SUBJECT TO ENVIRONMENTAL REGULATIONS THAT COULD BE COSTLY
FOR OUR COMPANY TO COMPLY WITH.
Federal, state and local regulations impose various environmental controls
on the manufacturing, transportation, storage, use and disposal of batteries and
hazardous chemicals and other materials used in the manufacturing of batteries.
We cannot assure you that conditions relating to our historical operations which
may require expenditures for clean-up will not arise in the future or that
changes in environmental laws and regulations will not impose costly compliance
requirements on us or otherwise subject us to future liabilities. We also cannot
assure you that additional or modified regulations relating to the manufacture,
transportation, storage, use and disposal of materials used to manufacture our
batteries or restricting disposal of batteries will not be imposed. In addition,
we cannot predict the effect that additional or modified regulations may have on
us or our customers.
CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD HAVE AN ADVERSE EFFECT ON OUR
REVENUES AND RESULTS OF OPERATIONS.
Many healthcare industry companies are consolidating to create new companies
with greater market power. As the healthcare industry consolidates, competition
to provide products and services to industry participants will become more
intense. These industry participants may try to use their market power to
negotiate price concessions or reductions for our products. If we are forced to
reduce our prices because of consolidation in the healthcare industry, our
revenues would decrease and our results of operations would suffer.
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OUR BUSINESS IS INDIRECTLY SUBJECT TO HEALTHCARE INDUSTRY COST CONTAINMENT
MEASURES THAT COULD RESULT IN REDUCED SALES OF OUR PRODUCTS.
Our healthcare customers rely on third party payors, such as government
programs and private health insurance plans, to reimburse some or all of the
cost of the procedures in which our products are used. The continuing efforts of
government, insurance companies and other payors of healthcare costs to contain
or reduce those costs could lead to patients being unable to obtain approval for
payment from these third party payors. If that occurred, sales of implantable
medical devices may decline significantly, and our customers may reduce or
eliminate purchases of our products. The cost containment measures that
healthcare providers are instituting, both in the United States and
internationally, could harm our ability to operate profitably.
OUR COMMERCIAL POWER SOURCE REVENUES ARE DEPENDENT ON CONDITIONS IN THE OIL
AND NATURAL GAS INDUSTRY, WHICH HISTORICALLY HAS BEEN VOLATILE.
Sales of our commercial power sources depend to a great extent upon the
condition of the oil and gas industry and, specifically, the exploration and
production expenditures of oil and gas companies. In the past, oil and natural
gas prices have been volatile and the oil and gas exploration and production
industry has been cyclical, and it is likely that oil and natural gas prices
will continue to fluctuate in the future. The current and anticipated prices of
oil and natural gas influence the oil and gas exploration and production
business and are affected by a variety of political and economic factors beyond
our control, including worldwide demand for oil and natural gas, worldwide and
domestic supplies of oil and natural gas, the ability of the Organization of
Petroleum Exporting Countries, or OPEC, to set and maintain production levels
and pricing, the level of production of non-OPEC countries, the price and
availability of alternative fuels, political stability in oil producing regions
and the policies of the various governments regarding exploration and
development of their oil and natural gas reserves. An adverse change in the oil
and gas exploration and production industry or a reduction in the exploration
and production expenditures of oil and gas companies could cause our revenues
from commercial power sources to suffer.
RISKS RELATED TO THIS OFFERING
AN ACTIVE PUBLIC TRADING MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP AND THE
MARKET PRICE OF OUR COMMON STOCK MAY DECLINE BELOW THE PRICE OF THIS OFFERING.
Prior to this offering, you could not buy or sell our common stock publicly.
Although our common stock has been approved for listing on the New York Stock
Exchange, an active public market for our common stock might not develop or be
sustained after this offering. Moreover, even if an active market does develop,
the market price of our common stock may decline below the initial public
offering price.
THE POSSIBLE VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT OUR
STOCKHOLDERS.
Securities markets worldwide have recently experienced significant price and
volume fluctuations, and the market prices of the securities of technology
companies have been especially volatile. This market volatility, as well as
general economic, market or political conditions, could reduce the market price
of our common stock in spite of our operating performance. In addition, our
operating results could be below the expectations of public market analysts and
investors, and in response, the market price of our common stock could decrease
significantly. Investors may be unable to resell their shares of our common
stock at or above the initial public offering price. In the past, companies that
have experienced volatility in the market price of their stock have been the
object of securities class action litigation. If we were to become the object of
securities class action litigation, we may face substantial costs and our
management's attention and resources may be diverted, which could harm our
business.
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DLJ MERCHANT BANKING PARTNERS II, L.P. AND SOME OF ITS AFFILIATES CONTROL
THE MAJORITY OF OUR VOTING STOCK AND AS A RESULT EXERT SIGNIFICANT INFLUENCE
OVER US AND MAY HAVE INTERESTS THAT CONFLICT WITH THOSE OF OTHER STOCKHOLDERS,
INCLUDING PURCHASERS IN THIS OFFERING.
DLJ Merchant Banking Partners II, L.P. and some of its affiliates, which we
refer to collectively as DLJ Merchant Banking, have substantial control over our
company and may have different interests than those of other holders of our
common stock. Prior to this offering, DLJ Merchant Banking held 77.8% of our
outstanding common stock and after this offering, these entities will
beneficially own approximately 56.3%, or 54.1% if the underwriters exercise
their over-allotment option in full, of our outstanding common stock. As a
result of its stock ownership and related contractual rights, DLJ Merchant
Banking has significant control over our business policies and affairs,
including the power to:
- nominate all but one member of our Board of Directors and elect our
directors;
- appoint new management; and
- approve any action requiring the approval of the holders of common stock,
including the adoption of amendments to our restated certificate of
incorporation and approval of mergers or sales of all substantially all of
our assets.
The parties to the stockholders agreements have agreed to vote in favor of
DLJ Merchant Banking's director nominees. The directors elected by DLJ Merchant
Banking have the ability to control decisions affecting the business and
management of our company, including our capital structure. This includes the
issuance of additional capital stock, the implementation of stock repurchase
programs and the declaration of dividends.
The general partners of each of the entities comprising DLJ Merchant Banking
are affiliates or employees of Donaldson, Lufkin & Jenrette Securities
Corporation, one of the joint book-running managers of this offering.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
Sales of a substantial number of shares of common stock after this offering,
or the perception that these sales could occur, could adversely affect the
market price of our common stock and could impair our ability to raise capital
through the sale of additional equity securities. Immediately after this
offering, affiliates and holders of "restricted securities," as defined in
Rule 144 under the Securities Act, will own 13,152,814 shares, representing
approximately 72.5%, or 69.6% if the underwriters exercise their over-allotment
option in full, of the outstanding shares of common stock. A decision by these
persons to sell shares of common stock could adversely affect the trading price
of our common stock.
WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS, WHICH
MAY REDUCE OR ELIMINATE YOUR ABILITY TO SELL YOUR SHARES FOR A PREMIUM IN A
CHANGE OF CONTROL TRANSACTION.
Various provisions of our restated certificate of incorporation and bylaws
and in Delaware corporate law may discourage, delay or prevent a change in
control or takeover attempt of our company by a third party which is opposed to
by our management and Board of Directors. Public stockholders who might desire
to participate in such a transaction may not have the opportunity to do so.
These anti-takeover provisions could substantially impede the ability of public
stockholders to benefit from a change of control or change in our management and
Board of Directors. These provisions include:
- authorizing the issuance of "blank check" preferred stock that could be
issued by our Board of Directors to increase the number of outstanding
shares and thwart a takeover attempt;
- limiting who may call special meetings of our stockholders; and
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- establishing advance notice requirements for nominations of candidates for
election to our Board of Directors or for proposing matters that can be
acted upon by our stockholders at stockholder meetings.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price of our common stock will be substantially
higher than the book value per share of our outstanding common stock. If you
purchase common stock in this offering, you will incur immediate and substantial
dilution in the net tangible book value per share of the common stock from the
price you paid.
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO INVESTORS.
Some investors favor companies that pay dividends, particularly in market
downturns. We currently intend to retain any future earnings for funding growth
and, therefore we do not currently anticipate paying cash dividends on our
common stock in the foreseeable future. Because we may not pay dividends, your
return on this investment likely depends on your ability to sell our stock for a
profit.
FORWARD LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. We have based these forward-looking statements on
our current expectations, which are subject to known and unknown risks,
uncertainties and assumptions. They include statements relating to:
- future revenues, expenses and profitability;
- the future development and expected growth of our business and the
implantable medical device industry;
- our ability to successfully execute our business model and our business
strategy;
- our ability to identify trends within the industries for implantable
medical devices, medical components and commercial power sources and to
offer products and services that meet the changing needs of those markets;
- projected capital expenditures; and
- trends in government regulation.
You can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those suggested
by these forward-looking statements. In evaluating these statements, you should
carefully consider the risks outlined under "Risk Factors."
In this prospectus, we rely on and refer to information and statistics
regarding the implantable medical device industry and our market share in the
sectors in which we compete. We obtained this information and statistics from
various third party sources, discussions with our customers and/or our own
internal estimates. We believe that these sources and estimates are reliable,
but we have not independently verified them.
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USE OF PROCEEDS
We will receive proceeds from this offering, based on the initial public
offering price of $16.00 per share and after deducting underwriting discounts
and commissions and estimated offering expenses of $7.2 million payable by us,
of approximately $72.8 million, or $84.0 million if the underwriters exercise
their over-allotment option in full.
We plan to use the net proceeds of this offering to repay indebtedness as
follows:
- $31.0 million, or $35.8 million if the underwriters exercise their
over-allotment option in full, of our Term A loans which bear an annual
interest rate, at our option, of prime plus 2.25% or LIBOR plus 3.50% and
are due and payable on September 30, 2004. As of July 1, 2000, the
interest rate for our Term A loans was 10.31%; and
- $41.8 million, or $48.2 million if the underwriters exercise their
over-allotment option in full, of our Term B loans which bear an annual
interest rate, at our option, of prime plus 2.50% or LIBOR plus 3.75% and
are due and payable on September 30, 2006. As of July 1, 2000, the
interest rate for our Term B loans was 10.28%.
DLJ Capital Funding, Inc., which led a syndicate of financial institutions
that extended us the Term A loans and Term B loans, will receive approximately
$1.4 million, or $1.6 million if the underwriters exercise their over-allotment
option in full, as its pro rata share of the proceeds of this offering to be
applied to the Term A loans and Term B loans. DLJ Capital Funding, Inc. is
affiliated with DLJ Merchant Banking, which holds approximately 78% of our
outstanding common stock.
DIVIDEND POLICY
We do not intend to pay cash dividends in the foreseeable future. We
currently intend to retain any earnings to further develop and grow our business
and to reduce our indebtedness. We are a holding company and are dependent on
distributions from our subsidiaries to meet our cash requirements. The terms of
the credit agreement governing our credit facility restrict the ability of our
subsidiaries to make distributions to us and, consequently, restrict our ability
to pay dividends on our common stock.
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CAPITALIZATION
The following table sets forth our cash and capitalization as of June 30,
2000 on an unaudited actual basis, unaudited pro forma basis and on an unaudited
as adjusted basis. Our capitalization pro forma gives effect to our August 7,
2000 purchase of Battery Engineering, Inc. for 339,856 shares of common stock
and assumption of approximately $2.7 million of indebtedness and our sale of
200,000 shares of common stock to Hitachi-Maxell, Ltd., the former parent of
Battery Engineering, Inc. Our capitalization as adjusted gives effect to pro
forma capitalization and the sale by us of 5,000,000 shares of common stock
offered by this prospectus at an initial public offering price of $16.00 per
share and after deducting underwriting discounts and commissions and estimated
offering expenses of $7.2 million payable by us and application of the net
proceeds of this offering to repay a portion of our indebtedness as if this
offering and the repayment of indebtedness had occurred on June 30, 2000. This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements
and accompanying notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
(UNAUDITED)
AS OF JUNE 30, 2000
----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents (1)............................... $ 2,453 $ 3,747 $ 3,747
======== ======== =========
Long-term debt:
Credit facility:
Term loans (2).......................................... $102,700 $102,700 $ 29,850
Revolving credit facility (3)........................... 1,100 1,100 1,100
Senior subordinated notes (4)............................. 22,762 22,762 22,762
Other (5)................................................. -- 2,727 2,727
-------- -------- ---------
Total long-term debt...................................... 126,562 129,289 56,439
Stockholders' equity:
Preferred stock $.001 par value, 100,000,000 shares
authorized and none outstanding (actual); 100,000,000
shares authorized and none outstanding (as adjusted).... -- -- --
Common stock $.001 par value; 100,000,000 shares
authorized; 12,624,928 shares issued and 12,612,958
shares outstanding (actual); 13,164,784 shares issued
and 13,152,814 shares outstanding (pro forma);
18,164,784 shares issued and 18,152,814 shares
outstanding (as adjusted)............................... 12 13 18
Capital in excess of par value............................ 63,488 71,585 144,430
Retained deficit.......................................... (17,760) (17,760) (18,898)(6)
Treasury stock, at cost (11,970 shares, actual, pro forma
and as adjusted)........................................ (179) (179) (179)
-------- -------- ---------
Total stockholders' equity.............................. 45,561 53,659 125,371
-------- -------- ---------
Total capitalization.................................. $172,123 $182,948 $ 181,810
======== ======== =========
</TABLE>
------------------------
(1) The pro forma and as adjusted cash and cash equivalents excludes
$2.8 million of cash received from Hitachi-Maxell, Ltd. related to the sale
of 200,000 shares of our common stock. Such cash is restricted and is being
maintained in an escrow account.
(2) Term loans on an actual basis include outstanding Term A loans of
$43.8 million and Term B loans of $58.9 million. Term loans on an as
adjusted basis includes outstanding Term A loans of $12.8 million and Term B
loans of $17.1 million, or $8.0 million and $10.7 million if the
underwriters exercise their over-allotment option in full, Term A loans and
Term B loans, respectively.
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(3) At June 30, 2000, we had a maximum principal amount of $13.0 million, of
which $11.9 million was available, under our revolving credit facility,
subject to customary borrowing conditions. If we meet the debt to EBITDA
ratio contained in our credit agreement, after December 31, 2000, the
maximum availability under our revolving credit facility will increase to
$20.0 million.
(4) $25.0 million of proceeds from the senior subordinated notes was initially
allocated between $21.8 million of senior subordinated notes and
$3.2 million of common stock issued to the holders of the senior
subordinated notes. The difference between the principal amount of the notes
and the amount allocated is being amortized using the effective yield method
and is charged to interest expense over the term of the senior subordinated
notes. The balance on an actual basis as of June 30, 2000 of $22.8 million
includes $1.0 million of amortization of the discount on the notes.
(5) Represents outstanding debt assumed as part of our August 7, 2000
acquisition of Battery Engineering, Inc. This debt has a maturity date of
December 2006. Interest is charged at a variable rate based on the bond
market. The interest rate for 1999 was 4.35%.
(6) The as adjusted retained deficit includes an expense, net of tax, of
$1.1 million as a result of the early extinguishment of indebtedness.
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<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of June 30,
2000 was $(56.3) million, or $(4.28) per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets, less the
amount of our total liabilities, and then divided by the total number of shares
of common stock outstanding. Dilution in pro forma net tangible book value per
share represents the difference between the amount paid per share by purchasers
of shares of common stock in this offering and the pro forma net tangible book
value per share of common stock immediately after the completion of this
offering. Such amounts give effect to our August 7, 2000 purchase of Battery
Engineering, Inc. for 339,856 shares of common stock and assumption of
approximately $2.7 million of indebtedness and our sale of 200,000 shares of
common stock to the former parent of Battery Engineering, Inc. After giving
effect to the sale of the 5,000,000 shares of common stock offered by us at an
initial public offering price of $16.00 per share, and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value at June 30, 2000 would have been
$16.5 million or $0.91 per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $5.19 per share to existing
stockholders and an immediate dilution of $15.09 per share to new investors
purchasing shares at the initial public offering price. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $ 16.00
Pro forma net tangible book value per share as of June 30,
2000.................................................... $ (4.28)
Increase per share attributable to new investors.......... 5.19
--------
Pro forma net tangible book value per share after the
offering.................................................. 0.91
--------
Dilution per share to new investors......................... $ 15.09
========
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 2000,
the differences between the existing stockholders and new investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid (such amounts give
effect to our August 7, 2000 purchase of Battery Engineering, Inc. for 339,856
shares of common stock and assumption of approximately $2.7 million of
indebtedness and our sale of 200,000 shares of common stock to the former parent
of Battery Engineering, Inc.):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 13,164,784 72.5% $ 65,184,000 44.9% $ 4.95
New investors.................. 5,000,000 27.5 80,000,000 55.1 16.00
---------- ---- ------------ ------
Total........................ 18,164,784 100.0% $145,184,000 100.0%
========== ==== ============ ======
</TABLE>
The foregoing table excludes 584,683 shares of common stock to be issued
upon the exercise of options outstanding under our stock option plans as of
August 15, 2000 at a weighted average price of $8.95 per share. If all of these
outstanding options are exercised, the percentage of total shares purchased by
new investors will be further diluted from 27.5% to 26.7%.
20
<PAGE>
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 "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 prospectus.
The consolidated statement of operations data for the period from January 1,
1997 to July 10, 1997, the period from July 11, 1997 to January 2, 1998 and for
the years ended January 1, 1999 and December 31, 1999, and the consolidated
balance sheet data at January 1, 1999 and December 31, 1999 have been derived
from our financial statements and related notes appearing elsewhere in this
prospectus which have been audited by Deloitte & Touche LLP, independent
auditors. The statement of operations data for the years ended December 31, 1995
and December 31, 1996 and the balance sheet data at December 31, 1995,
December 31, 1996 and January 2, 1998 have been derived from our audited
financial statements and related notes not included in this prospectus which
have been audited by Deloitte & Touche LLP, independent auditors. The
consolidated statement of operations data and cash flow data for the six months
ended July 2, 1999 and June 30, 2000 and the consolidated balance sheet data at
June 30, 2000 are unaudited but, in the opinion of management, include all
adjustments, consisting of normal, recurring adjustments, necessary for a fair
presentation of our results for these interim periods. The results of operations
for the six months ended June 30, 2000 are not necessarily indicative of results
to be expected for the entire year or for any period.
<TABLE>
<CAPTION>
WILSON GREATBATCH LTD. (1)
-----------------------------------------
YEAR ENDED DECEMBER 31, JANUARY 1, 1997
----------------------- TO
1995 1996 JULY 10, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $55,012 $51,390 $30,468
Cost of goods sold.......................... 28,437 26,070 14,922
------- ------- -------
Gross profit................................ 26,575 25,320 15,546
Selling, general and administrative......... 10,527 10,356 6,729
Research, development and engineering....... 7,033 7,951 4,400
Intangible amortization..................... -- -- --
Transaction related expenses................ -- -- 11,097
Write-off of purchased in-process research,
development and engineering............... -- -- --
------- ------- -------
9,015 7,013 (6,680)
Interest expense............................ 506 388 252
Other....................................... (196) (124) (117)
------- ------- -------
Income (loss) before income taxes........... 8,705 6,749 (6,815)
Income tax expense (benefit) (3)............ 194 157 1,053
Cumulative effect of accounting change...... -- -- --
------- ------- -------
Net income (loss)........................... $ 8,511 $ 6,592 $(7,868)
======= ======= =======
Net earnings (loss) per share (4):
Basic..................................... $ 946 $ 732 $ (874)
Diluted................................... $ 946 $ 732 $ (874)
Weighted average shares outstanding (4):
Basic..................................... 9 9 9
Diluted................................... 9 9 9
CONSOLIDATED CASH FLOW DATA:
Cash provided by operating
activities................................
Cash used in investing activities...........
Cash provided by (used in) financing
activities................................
EBITDA (5)(6)...............................
<CAPTION>
WILSON GREATBATCH TECHNOLOGIES, INC.
-------------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
JULY 11, 1997 ------------------------- ---------------------
TO JANUARY 1, DECEMBER 31, JULY 2, JUNE 30,
JANUARY 2, 1998 1999 (2) 1999 1999 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $ 27,193 $ 77,361 $ 79,235 $ 38,318 $ 46,584
Cost of goods sold.......................... 12,241 36,454 41,057 19,385 26,385
-------- -------- -------- -------- --------
Gross profit................................ 14,952 40,907 38,178 18,933 20,199
Selling, general and administrative......... 5,412 11,484 9,880 5,124 5,132
Research, development and engineering....... 4,619 12,190 9,339 5,130 5,046
Intangible amortization..................... 1,810 5,197 6,510 3,266 3,267
Transaction related expenses................ -- -- -- -- --
Write-off of purchased in-process research,
development and engineering............... 23,779 -- -- -- --
-------- -------- -------- -------- --------
(20,668) 12,036 12,449 5,413 6,754
Interest expense............................ 4,128 10,572 13,420 6,519 7,787
Other....................................... 74 364 1,343 129 71
-------- -------- -------- -------- --------
Income (loss) before income taxes........... (24,870) 1,100 (2,314) (1,235) (1,104)
Income tax expense (benefit) (3)............ (9,468) 410 (605) (321) (328)
Cumulative effect of accounting change...... -- -- (563) (563) --
-------- -------- -------- -------- --------
Net income (loss)........................... $(15,402) $ 690 $ (2,272) $ (1,477) $ (776)
======== ======== ======== ======== ========
Net earnings (loss) per share (4):
Basic..................................... $ (1.74) $ 0.07 $ (0.18) $ (0.12) $ (0.06)
Diluted................................... $ (1.74) $ 0.06 $ (0.18) $ (0.12) $ (0.06)
Weighted average shares outstanding (4):
Basic..................................... 8,855 10,461 12,491 12,406 12,615
Diluted................................... 8,855 10,677 12,491 12,406 12,615
CONSOLIDATED CASH FLOW DATA:
Cash provided by operating
activities................................ $ 4,994 $ 8,927 $ 6,900 $ 4,060 $ 8,417
Cash used in investing activities........... (3,653) (83,375) (8,847) (3,882) (3,507)
Cash provided by (used in) financing
activities................................ (932) 76,269 1,670 (2,858) (6,320)
EBITDA (5)(6)............................... (17,345) 20,543 22,152 11,015 12,760
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
WILSON GREATBATCH
LTD. (1) WILSON GREATBATCH TECHNOLOGIES, INC.
------------------- ---------------------------------------------------
DECEMBER 31,
------------------- JANUARY 2, JANUARY 1, DECEMBER 31, JUNE 30,
1995 1996 1998 1999 1999 2000
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 42 $ 54 $ 2,319 $ 4,140 $ 3,863 $ 2,453
Total assets......................................... 32,300 32,462 111,709 194,390 189,779 184,361
Total debt........................................... 4,521 6,131 70,863 130,733 132,402 126,562
Total stockholders' equity........................... 16,316 16,914 28,239 45,595 46,407 45,561
</TABLE>
------------------------------
(1) The financial data for periods prior to July 11, 1997 relate to Wilson
Greatbatch Ltd., our predecessor.
(2) In August 1998, we acquired the assets and liabilities of Hittman. These
figures include the results of operatons of Hittman from August 8, 1998 to
January 1, 1999.
(3) Wilson Greatbatch Ltd., our predecessor, incurred minimal state taxes as a
former subchapter S corporation. The federal and state taxes for the period
from January 1, 1997 to July 10, 1997 are directly attributable to our
acquisition of our predecessor in July 1997.
(4) We calculate basic earnings per share by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the
period. We calculate diluted earnings (loss) per share by adjusting for
common stock equivalents, which consist of stock options. During the period
from July 11, 1997 to January 2, 1998, the year ended December 31, 1999 and
the six months ended July 2, 1999 and June 30, 2000, there were options to
purchase 0, 246, 283 and 226 shares of common stock, respectively, that were
not included in the computation of diluted earnings per share because to do
so would be antidilutive for those periods. Diluted earnings per share for
the year ended January 1, 1999 includes the potentially dilutive effect of
stock options.
(5) When we refer to EBITDA, we mean net earnings or loss before interest
expense, income taxes, depreciation and amortization. We have included
EBITDA because our management and industry analysts generally consider it to
be a measurement of the financial performance of our company that provides a
relevant basis for comparison among companies. EBITDA is not a measurement
of financial performance under accounting principles generally accepted in
the United States and should not be considered a substitute for net income
or loss as a measure of performance, or to cash flow as a measure of
liquidity. Investors should note that this calculation of EBITDA might
differ from similarly titled measures for other companies.
(6) EBITDA for the period July 11, 1997 to January 2, 1998 would have been
$7.8 million if we had excluded the $23.8 million write-off of purchased
in-process research, development and engineering related to the July 1997
leveraged buyout and $1.4 million of other transaction expenses.
22
<PAGE>
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 PROSPECTUS. THIS DISCUSSION AND
ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES
AND ASSUMPTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
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. These applications include aerospace, oil and gas exploration
and oceanographic equipment.
In July 1997, DLJ Merchant Banking and members of our management formed our
company to acquire Wilson Greatbatch Ltd. from relatives of its founder, Mr.
Wilson Greatbatch, in a leveraged buyout transaction. In the leveraged buyout
transaction, DLJ Merchant Banking and its affiliates initially acquired
approximately 86% of our outstanding common stock. In connection with the
leveraged buyout, 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 senior Term A and Term B loans. Affiliates of DLJ
Merchant Banking originally purchased $22.5 million of the principal amount of
the notes and led a syndicate of financial institutions in extending us the line
of credit and term loans. In October 1997, an affiliate of DLJ Merchant Banking
transferred $5.0 million of the principal amount of the notes to an affiliate of
Merrill Lynch, Pierce, Fenner & Smith Incorporated. The leveraged buyout
generated $82.9 million in intangible assets, of which approximately
$6.1 million was allocated to goodwill. In connection with the leveraged buyout,
we recorded a one time write-off of $23.8 million of purchased in-process
research and development costs. A brief description follows of the more
significant projects which comprise the 1997 purchased in-process research and
development costs. Each description addresses the status as of the acquisition
date and the current status of each project.
CAPACITORS
The objective of this project was to develop new capacitor technology to
facilitate a significant reduction in the size of ICDs by significantly
improving the energy density.
Capacitor project expenditures, at the time of the acquisition, totaled
$2.6 million with additional expenditures of $2.0 million anticipated through
completion of the project. We expected development efforts to be completed by
mid-1998 and projected first year revenues of $1.4 million. We deemed the
technical risks associated with this project to be moderate, as the technology
was similar to our battery technology, and the commercialization risks we viewed
as low, since we were working with the same customers as for our battery
business.
Development efforts for the first generation capacitors continued through
the third quarter of 1999. Revenues in 1999 were $2.3 million. Total development
costs through the end of 1999 (including operating losses as this project
transitioned to product line status) were $10.8 million. In addition,
approximately $8.2 million in capital expenditures have been incurred. The
revisions of our original timeline and cost estimates resulted from the
difficulty in manufacturing capacitors to customer specifications, which became
more stringent than those originally envisioned.
23
<PAGE>
NEXT GENERATION ICD
The objective of this project was to develop several proprietary process
improvements to reduce the size of the ICD battery, while at the same time
delivering more energy density than the products sold at the time.
At the date of the acquisition, $0.1 million had been expended on this
project with additional expenditures of $0.4 million anticipated through
completion. We expected development efforts to be completed by the end of 1997.
First year revenues of $6.4 million were projected to begin in 1998. We deemed
the technical and commercialization risks to be low since the technology,
end-user applications and customer base were familiar to us.
Development efforts were completed by December 1997 with a total cost of
$0.5 million. First year revenues were $6.4 million.
GREATBATCH SCIENTIFIC
The objective of this project was the development of battery-powered
surgical devices which were magnetic resonance imaging, or MRI, compatible, in
order to develop a new product line, a new customer base and a new outlet for
our already-existing batteries.
At the time of the acquisition, we had expended $2.0 million on this project
with additional expenditures of $1.7 million anticipated through completion. We
expected to ship the first instruments in the third quarter of 1998. First year
revenues of $4.6 million were projected to begin in 1998. We viewed the
technical risk as moderate, as we had not produced a wide variety of surgical
devices, and the commercialization risk as high. We intended to outsource much
of the production and to initiate distribution to a completely new customer
base.
In order to focus our efforts on integrating the Hittman acquisition and
bringing our capacitor project into full production, we sold the Greatbatch
Scientific operation to an unrelated medical device company in August 1998 in
exchange for stock of the acquiror. Greatbatch Scientific had no further impact
on our sales or operating costs after August 1998.
Sales from July 1997 through August 1998 were less than $0.1 million.
LITHIUM ION PRODUCTS
The objective of this project was to develop and manufacture rechargeable
lithium ion batteries suitable for use in implantable medical devices.
At the time of the acquisition, $0.5 million had been expended on this
project, which was expected to be completed by the end of 1997. First year
revenues of $0.9 million were projected to begin in 1998. We viewed the
technical risk as moderate as we had not previously developed multi-use
batteries. We viewed commercialization risk as moderate because we would be
targeting a new customer base.
We completed development efforts on the first generation of rechargeable
lithium ion cell in the second quarter of 2000. Sales revenue has not yet begun.
However, non-refundable engineering fees, which are recorded as an offset to
development expenses, have approximated $1.9 million since the acquisition.
Development costs since the acquisition have totaled $4.6 million. We have
revised our original timelines and cost estimates due to delays in the
development phase of this project. Some of the customers for this project are
themselves development-stage enterprises.
In August 1998, we acquired Hittman, a medical components manufacturer, for
$71.8 million. At the time of the of acquisition, we paid $69.0 million. A
portion of the consideration was contingent upon Hittman achieving financial
targets after the acquisition. Some of these targets were achieved in 1998 and
we subsequently paid $2.8 million to the former owner of Hittman. In connection
with our
24
<PAGE>
acquisition of Hittman, we borrowed an additional $60.0 million of Term A and
Term B loans and increased our revolving line of credit up to a maximum of
$20.0 million. We recorded the Hittman acquisition using the purchase method of
accounting. The excess of the purchase price over the fair value of the net
assets that we acquired was $67.7 million, of which $17.4 million was allocated
to identifiable intangible assets and $50.3 million was allocated to goodwill.
Sales by Hittman of $8.8 million are reflected in our 1998 results.
Our fiscal year ends on the closest Friday to December 31. Accordingly, our
fiscal year will periodically contain more or less than 365 days. For example,
fiscal 1997 ended on January 2, 1998 and fiscal 1998 ended on January 1, 1999.
Our fiscal quarters are three-month periods that end on the Friday closest to
the end of the applicable calendar quarter.
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 accounted for approximately 33% of our revenues and St.
Jude Medical accounted for approximately 31% of our revenues in 1999. We have
entered into long term supply agreements ranging from two to ten years with most
of our large customers.
Our implantable power source revenues are derived from sales of batteries
for pacemakers, ICDs 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 is our sole source
of royalty fees. Although our license agreement with Medtronic itself has no
termination date, the patents from which we receive royalty payments from
Medtronic 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 six 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 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.
25
<PAGE>
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. In addition to product and royalty revenues,
we also receive cash flows from cost reimbursements for research, development
and engineering conducted on behalf of some of our customers. We record these
cost reimbursements as an offset to research, development and engineering costs.
We recognize cost reimbursements upon achieving related milestones. The cost
reimbursement charged to customers represents actual costs incurred by us in the
design and testing of prototypes built to customer specifications. This cost
reimbursement does not include a mark-up. Price concessions have not
significantly affected revenues in the historical periods presented.
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, 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 as an offset to research, development and engineering
expenses.
Other expenses primarily include amortization of intangible assets and
interest expense. Amortization of intangible assets is primarily related to the
leveraged buyout and our acquisition of Hittman. Interest expense is primarily
related to indebtedness we assumed in connection with these transactions. We
expect to use the proceeds of this offering to repay a portion of our
outstanding Term A and Term B loans.
26
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
which the listed amounts bear to total revenues:
<TABLE>
<CAPTION>
FIRST SIX
FISCAL YEAR MONTHS OF
-------------------------------- -------------------
PRO FORMA
1997 (1) 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
Revenues:
Implantable power sources................................. 69.7% 65.1% 51.1% 50.8% 44.1%
Capacitors................................................ 0.0 0.1 2.9 2.6 14.8
Medical components........................................ 9.9 18.1 33.4 33.6 30.7
----- ----- ----- ----- -----
Total medical revenues.................................. 79.6 83.3 87.4 87.0 89.6
Commercial power sources.................................. 20.4 16.7 12.6 13.0 10.4
----- ----- ----- ----- -----
Total revenues.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Income statement data as a percentage of revenues:
Gross profit.............................................. 52.9% 52.9% 48.2% 49.4% 43.3%
Net income (loss)......................................... 4.0 0.9 (2.9) (3.8) (1.7)
EBITDA(2)................................................. 21.4% 26.6% 28.0% 28.7% 27.4%
</TABLE>
------------------------------
(1) The unaudited pro forma data for fiscal 1997 gives effect to the July 1997
leveraged buyout as if it had occurred on January 1, 1997.
(2) When we refer to EBITDA, we mean net earnings or loss before interest
expense, income taxes, depreciation and amortization. We have included
EBITDA because our management and industry analysts generally consider it to
be a measurement of the financial performance of our company that provides a
relevant basis for comparison among companies. EBITDA is not a measurement
of financial performance under accounting principles generally accepted in
the United States and should not be considered a substitute for net income
or loss as a measure of performance, or to cash flow as a measure of
liquidity. Investors should note that this calculation of EBITDA might
differ from similarly titled measures for other companies.
FIRST SIX MONTHS OF 2000 COMPARED TO FIRST SIX MONTHS OF 1999
REVENUES
Total revenues for the first six months of 2000 were $46.6 million, an
$8.3 million, or 22%, increase from $38.3 million for the first six months of
1999. Implantable power source revenues for the first six months of 2000 were
$20.5 million, a $1.0 million, or 5%, increase from $19.5 million for the first
six months of 1999. This increase was primarily due to higher pacemaker battery
sales as a result of an increase in pacemaker sales by our customers, including,
in particular, a European device manufacturer receiving a large order from a
national health agency. This increase was partially offset due to an
industry-wide design change in ICDs that resulted in ICDs using one battery
instead of two. Capacitor revenues for the first six months of 2000 were
$6.9 million, a $5.9 million, or 605%, increase from $1.0 million for the first
six months of 1999. This increase was primarily due to initial commercial sales
of our new wet tantalum capacitors beginning in the fourth quarter of 1999.
Medical components revenues for the first six months of 2000 were
$14.3 million, a $1.4 million, or 11%, increase from $12.9 million for the first
six months of 1999. This increase was 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 first
six months of 2000 were $4.8 million, a $0.2 million, or 3%, decrease from
$5.0 million for the first six months of 1999. This decrease was primarily due
to continued weakness in the oil and gas industry.
27
<PAGE>
GROSS PROFIT
Gross profit for the first six months of 2000 was $20.2 million, a
$1.3 million, or 7%, increase from $18.9 million for the first six months of
1999. As a percentage of total revenues, gross profit for the first six months
of 2000 declined to 43% from 49% for the first six months of 1999. This decrease
was primarily due to a lower percentage of total revenues from established
product lines such as power sources, with no accompanying start-up costs, versus
a higher percentage of total revenues from newer products, with accompanying
high start-up costs, such as capacitors. Increased costs incurred with respect
to our capacitor line decreased gross profit by $0.2 million, despite a
$5.9 million increase in sales. The decrease in gross profit attributable to the
decrease in commercial power source revenues was $0.1 million. These decreases
were more than offset by increases in gross profit of $0.7 million from
increased implantable power sources revenues and $0.9 million from increased
sales of medical components.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the first six months of
2000 were $5.1 million, the same as for the first six months of 1999. As a
percentage of total revenues, selling, general and administrative expenses for
the first six months of 2000 declined to 11% from 13% for the first six months
of 1999. This decrease was primarily due to an increase in revenues attributable
to capacitor sales and several actions taken to streamline expenses, the most
significant of which was a reduction in discretionary operating expenses,
including professional fees, consulting fees and travel expenses.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
Research, development and engineering expenses for the first six months of
2000 were $5.0 million, a $0.1 million, or 2%, decrease from $5.1 million for
the first six months of 1999. As a percentage of total revenues, research,
development and engineering expenses for the first six months of 2000 declined
to 11% from 13% for the first six months of 1999. This decrease was primarily
due to an increase in revenues attributable to capacitor sales, an increase in
non-refundable engineering fees, which are an offset to research, development
and engineering expenses, and our efforts to curtail operating expenses, such as
lower depreciation charges due to reduced capital expenditures, materials used
in research and development projects and travel. This cost containment did not
impact the funding of programs that we believed to be important to our future
growth.
OTHER OPERATING EXPENSES
Intangible amortization was $3.3 million for both the six months ended
June 30, 2000 and the six months ended July 2, 1999. Interest expense for the
six months ended June 30, 2000 was $7.8 million, an increase of $1.3 million, or
19%, from $6.5 million for the six months ended July 2, 1999. This increase was
primarily due to higher interest rates.
PROVISION FOR INCOME TAXES
Our effective tax rate increased to 30% for the first six months of 2000
from 26% for the first six months of 1999. This increase was primarily due to
the decrease in state tax credits available to us for the first six months of
2000 compared to the first six months of 1999.
NET LOSS
As a result of the reasons described above, as well as the nonrecurring
cumulative effect of an accounting change which resulted in a charge of
$0.6 million, net of taxes, the net loss for the first six
28
<PAGE>
months of 2000 was $0.8 million, a $0.7 million decrease from the net loss of
$1.5 million for the first six months of 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES
Total revenues for 1999 were $79.2 million, a $1.9 million, or 2%, increase
from $77.4 million for 1998. Implantable power source revenues for 1999 were
$40.5 million, a $9.9 million, or 20%, decrease from $50.3 million for 1998.
This decrease was primarily due to a 1999 industry-wide design change in ICDs
that reduced the number of batteries from two to one and the loss of market
share by our ICD battery customers as a result of the introduction of a new ICD
by Medtronic. Medtronic manufactured its own power sources for this ICD. This
decrease was also due to a reduction in pacemaker battery demand resulting from
Guidant's acquisition and subsequent closure of operations of Sulzer
Intermedics, which previously purchased batteries from us. This decrease was
partially offset by the successful launch of a new pacemaker by one of our
customers and increased demand and orders from one of our customers that secured
a government contract for pacemakers. Capacitor revenues for 1999 were
$2.3 million, a $2.2 million increase from $0.1 million for 1998. This increase
resulted primarily because we began selling our new wet tantalum capacitors
commercially in the fourth quarter of 1999. Medical components revenues for 1999
were $26.4 million, a $12.4 million, or 89%, increase from $14.0 million for
1998. This increase was primarily due to the inclusion of a full year of
operations from our Hittman acquisition and the sale of a greater number of
implantable medical devices by our customers. Commercial power source revenues
for 1999 were $10.0 million, a $2.9 million, or 22%, decrease from
$12.9 million for 1998. This decrease was primarily due to continued weakness in
the oil and gas industry.
GROSS PROFIT
Gross profit for 1999 was $38.2 million, a $2.7 million, or 7%, decrease
from $40.9 million for 1998. As a percentage of revenues, gross profit for 1999
declined to 48% from 53% in 1998. The decrease in implantable power source gross
profit amounted to 9% of revenue, while capacitor start-up costs totaled 6% of
revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 1999 were $9.9 million, a
$1.6 million, or 14%, decrease from $11.5 million for 1998. As a percentage of
revenues, selling, general and administrative expenses for 1999 declined to 12%
from 15% in 1998. These decreases were due to a temporary reduction in salaries,
the deferral of annual merit increases, a reduction in incentive compensation, a
general cutback in discretionary expenses and a reduction in the number of our
employees.
The temporary reduction in salaries was in effect from April 1999 through
December 1999 and reduced selling, general and administrative expenses by
$0.3 million in 1999. The reduction in incentive compensation, including both
management bonuses and broad-based profit sharing, reduced expenses by
$1.0 million compared to 1998. Discretionary expenses in 1999 were $0.3 million
lower than in 1998. Three employees accounted for in selling, general and
administrative expenses were terminated as part of the 1999 cost reductions,
with total cost savings of less than $0.1 million, net of severance benefits.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
Research, development and engineering expenses for 1999 were $9.3 million, a
$2.9 million, or 23%, decrease from $12.2 million for 1998. As a percentage of
total revenues, research, development and engineering expenses in 1999 declined
to 12% from 16% in 1998. Beginning in 1999, as we
29
<PAGE>
anticipated achieving production volumes of our capacitors, we accounted for
costs associated with our capacitor program as cost of goods sold, selling,
general and administrative expenses and research, development and engineering
expenses. In prior years, these costs were recognized only as research,
development and engineering expenses. This had the effect of lowering research,
development and engineering expenses in 1999 by $1.4 million as compared to
1998. In addition, in 1999, we had no research, development and engineering
expenses for Greatbatch Scientific, one of our product lines, which we sold in
1998. The amount of the decrease in research, development and engineering
expenses resulting from the sale of Greatbatch Scientific was $0.8 million.
Greatbatch Scientific was a developer of battery-powered surgical tools that
were magnetic resonance imaging, or MRI, compatible and incurred $0.8 million in
research, development and engineering expenses in 1998.
Costs were also reduced in 1999 for the same programs as were discussed
above under the caption "--Selling, general and administrative expenses." The
temporary reduction in salaries reduced costs in 1999 by $0.3 million. The
reduction in incentive compensation reduced expenses by $0.6 million. Four
employees accounted for in research, development and engineering expenses were
terminated as part of the 1999 cost reductions, with total cost savings of
$0.1 million, net of severance benefits. Non-refundable engineering fees, which
serve to offset expenses, declined by $0.3 million in 1999 compared to 1998.
OTHER OPERATING EXPENSES
Intangible amortization expense for 1999 was $6.5 million, an increase of
$1.3 million, or 25%, from $5.2 million in 1998. This increase was primarily due
to incurring a full year of amortization of intangible assets associated with
the Hittman acquisition in 1998. Interest expense was $13.4 million in 1999, an
increase of $2.8 million, or 27%, from $10.6 million in 1998. This increase was
due to the combination of a full year of interest expense in 1999 related to the
1998 acquisition of Hittman and higher interest rates in 1999 as compared to
1998. Other expense was $1.3 million in 1999, an increase of $0.9 million from
$0.4 million in 1998. The increase resulted primarily from a write down of our
investment in an unaffiliated company that we acquired in conjunction with our
sale of Greatbatch Scientific.
PROVISION FOR INCOME TAXES
Our effective tax rate declined to 26% in 1999 from 37% in 1998. Our
recapture of federal alternative minimum tax credits at a 20% tax rate resulted
in a rate differential of 15% from the federal statutory rate. We also benefited
from state tax credits.
NET INCOME (LOSS)
Net loss was $2.3 million for 1999, a $3.0 million decrease from net income
of $0.7 million for 1998. This decrease was primarily due to an increase in cost
of goods sold and higher other expenses, as described above, as well as the
nonrecurring cumulative effect of an accounting change which resulted in a
charge of $0.6 million, net of taxes.
FISCAL 1998 COMPARED TO FISCAL 1997
The following table summarizes consolidated statement of operations data for
Wilson Greatbatch Ltd. for the period from January 1, 1997 to July 10, 1997 and
for Wilson Greatbatch Technologies, Inc. for the period from July 11, 1997 to
January 2, 1998 and, fiscal 1998 and unaudited pro forma fiscal 1997 as if the
July 1997 leveraged buyout had occurred on January 1, 1997. These pro forma
amounts were derived by combining financial data from the audited historical
financial statements of both Wilson Greatbatch Ltd. and Wilson Greatbatch
Technologies, Inc. for fiscal 1997. Pro forma 1997 data
30
<PAGE>
excludes a $23.8 million write-off of in-process research, development and
engineering expense and $11.1 million of transaction related expenses associated
with the leveraged buyout. In addition, pro forma 1997 data reflects additional
interest of $3.9 million and amortization of $1.8 million incurred in connection
with the leveraged buyout. Income tax benefit was calculated at a statutory rate
of 38%.
<TABLE>
<CAPTION>
WILSON GREATBATCH TECHNOLOGIES, INC.
WILSON GREATBATCH LTD. -------------------------------------------
JANUARY 1, 1997 JULY 11, 1997
TO TO PRO FORMA
JULY 10, 1997 JANUARY 2, 1998 FISCAL 1997 FISCAL 1998
---------------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenues......................... $ 30,468 $ 27,193 $ 57,661 $ 77,361
Cost of goods sold..................... 14,922 12,241 27,163 36,454
-------- -------- -------- --------
Gross profit........................... 15,546 14,952 30,498 40,907
Selling, general and administrative
expenses............................. 6,729 5,412 12,141 11,484
Research, development and engineering
expenses............................. 4,400 4,619 9,019 12,190
Intangible amortization................ -- 1,810 3,620 5,197
Transaction related expenses........... 11,097 -- -- --
Write-off of purchased in-process
research, development and engineering
costs, net........................... -- 23,779 -- --
-------- -------- -------- --------
(6,680) (20,668) 5,718 12,036
Interest expense....................... 252 4,128 8,256 10,572
Other.................................. (117) 74 -- 364
-------- -------- -------- --------
Income (loss) before income taxes...... (6,815) (24,870) (2,538) 1,100
Income tax expense (benefit)........... 1,053 (9,468) (964) 410
-------- -------- -------- --------
Net income (loss)...................... $ (7,868) $(15,402) $ (1,574) $ 690
======== ======== ======== ========
EBITDA (1)............................. N/A $(17,345) $ 12,346 $ 20,543
======== ======== ======== ========
</TABLE>
------------------------
(1) When we refer to EBITDA, we mean net earnings or loss before interest
expense, income taxes, depreciation and amortization. We have included
EBITDA because our management and industry analysts generally consider it
to be a measurement of the financial performance of our company that
provides a relevant basis for comparison among companies. EBITDA is not a
measurement of financial performance under accounting principles generally
accepted in the United States and should not be considered a substitute for
net income or loss as a measure of performance, or to cash flow as a
measure of liquidity. Investors should note that this calculation of EBITDA
might differ from similarly titled measures for other companies.
The following analysis compares historical fiscal 1998 results to the
combined historical fiscal 1997 amounts for revenues, gross profit, selling,
general and administrative expenses and research, development and engineering
expenses. The results of the combined 1997 historical amounts include no pro
forma adjustments. Other expenses, provision for income taxes and net income
(loss) compares historical fiscal 1998 to the period from July 11, 1997 to
January 2, 1998, and compares the July 11, 1997 to January 2, 1998 historical
data to the January 1, 1997 to July 10, 1997 historical data.
REVENUES
Total revenues for 1998 were $77.4 million, a $19.7 million, or 34%,
increase from $57.7 million for 1997. Implantable power source revenues for 1998
were $50.3 million, a $10.1 million, or 25%, increase from $40.2 million for
1997. This increase was primarily due to increased sales of implantable power
sources due to the introduction of a new generation of ICDs by our customers.
Medical components revenues for 1998 were $14.0 million, an $8.3 million, or
145%, increase from $5.7 million for 1997. This increase was primarily due to
the inclusion of results of operations from our Hittman acquisition beginning in
August 1998. Commercial power source revenues for 1998 were $12.9 million, a
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<PAGE>
$1.1 million, or 10%, increase from $11.8 million for 1997. This increase was
primarily due to increased demand for our products for pipeline inspection
gauges and measurement while drilling equipment.
GROSS PROFIT
Gross profit for 1998 was $40.9 million, a $10.4 million, or 34%, increase
from $30.5 million for 1997. As a percentage of total revenues, gross profit was
53% in both 1998 and 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 1998 were $11.5 million, a
$0.6 million, or 5%, decrease from $12.1 million for 1997. As a percentage of
total revenues, selling, general and administrative expenses in 1998 decreased
to 15% from 21% in 1997. These decreases were primarily due to a reduction in
corporate office costs and the inclusion of a partial year of Greatbatch
Scientific's selling, general and administrative expenses in 1998 compared to a
full year of those expenses in 1997.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
Research, development and engineering expenses for 1998 were $12.2 million,
a $3.2 million, or 35%, increase from $9.0 million for 1997. This increase was
primarily due to start-up expenses incurred in establishing our line of
capacitor products. As a percentage of total revenues, research, development and
engineering expenses were 16% for both periods.
OTHER OPERATING EXPENSES
Intangible amortization for 1998 was $5.2 million, a $1.6 million, or 44%,
increase from $3.6 million in 1997. This increase was primarily due to incurring
a full year of amortization of intangible assets in 1998 related to the
July 1997 leveraged buyout and also related to additional amortization of
intangible assets as a result of the Hittman acquisition in 1998.
Transaction related expenses of $11.1 million were incurred by our
predecessor, Wilson Greatbatch Ltd. These nonrecurring costs were recognized by
Wilson Greatbatch Ltd. for the period from January 1, 1997 to July 10, 1997.
The write-off of purchased in-process research, development and engineering
costs of $23.8 million were incurred by the Company as a result of the 1997
leveraged buyout. These nonrecurring costs were immediately charged to expense
upon acquisition and recognized in the period from July 11, 1997 to January 2,
1998.
Interest expense for 1998 was $10.6 million, a $2.3 million, or 28%,
increase from $8.3 million in 1997. This increase was primarily due to incurring
a full year of interest expense in 1998 related to the July 1997 leveraged
buyout and also related to additional debt being incurred as a result of the
Hittman acquisition in 1998.
PROVISION FOR INCOME TAXES
Our effective tax rate for 1998 was 37%, or a 1% decrease from 38% for the
period from July 11, 1997 to January 2, 1998. Our effective tax rate for both
periods approximated the combined federal and state statutory rates. The federal
and state taxes for the period from January 1, 1997 to July 10, 1997 are
directly attributable to the acquisition of Wilson Greatbatch Ltd., which
incurred only minimal state taxes as a former subchapter S corporation.
NET INCOME (LOSS)
Net income was $0.7 million for 1998, a $16.1 million increase over a net
loss of $15.4 million for the period from July 11, 1997 to January 2, 1998. This
increase in net income in 1998 was primarily attributable to a full year of
operating results, increased gross profit and the absence of any write-off of
purchased in-process research, development and engineering. Net loss was $15.4
million for the period from July 11, 1997 to January 2, 1998, a $7.5 million
increase from a net loss of $7.9 million for the
32
<PAGE>
period from January 1, 1997 to July 10, 1997. This increase in net loss for the
period from July 11, 1997 to January 2, 1998 was primarily attributable to the
absence of significant interest expense, amortization expense and the write-off
of purchased in-process research, development and engineering costs in the
period January 1, 1997 to July 10, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily from cash generated
by our operations. We have financed our acquisitions, including the July 1997
leveraged buyout, through a combination of borrowings and private sales of our
common stock. Net proceeds from financing activities from January 1, 1997
through June 30, 2000 included:
- In connection with the LBO, in July 1997 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 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.
- In connection with our August 1998 acquisition of Hittman, we borrowed an
additional $60.0 million of 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.
As of July 1, 2000, there was $25.0 million principal amount outstanding
under our 13% senior subordinated notes, $43.8 million outstanding under the
Term A loan facility and $58.9 million outstanding under the Term B loan
facility. As of July 1, 2000, the interest rate for our Term A loans was 10.31%
and the interest rate for our Term B loans was 10.15%.
Our revolving line of credit is with the same lending syndicate that
provided financing for the Hittman transaction 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 July 1, 2000, $1.1 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. We have
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 July 1, 2000, we were in full
compliance with the financial covenants under the line of credit.
In August 1998, we sold the assets of one of our product lines, Greatbatch
Scientific, to a third party in exchange for stock of that company valued at
$2.4 million. Our 1998 results reflect revenues of $0.1 million and an operating
loss of $1.3 million from Greatbatch Scientific's operations. In 1997, when we
accounted for Greatbatch Scientific as a business development program, our total
costs were $3.2 million.
As of June 30, 2000, we had cash and cash equivalents of $2.5 million. We
have historically generated positive cash flow from operations. Cash generated
by operating activities for the six months ended June 30, 2000 was $8.4 million
as compared to $4.1 million for the six months ended July 2, 1999. Cash was
positively impacted in the six month period of 2000 by the receipt of state tax
credits and lower incentive compensation payments relative to the first six
months of 1999. Additionally, cash was positively impacted in 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
33
<PAGE>
fourth quarter of 1999 and lowering cash interest payments in the first quarter
of 2000. Cash generated by operating activities was $6.9 million in 1999 and
$8.9 million in 1998 and cash used in operating activities was $0.6 million in
1997. Cash generated by operating activities in 1999 was positively impacted by
lower incentive compensation payments and interest payments compared to payments
made in 1998. Cash generated by operating activities in 1998 was negatively
impacted by an increase in accounts receivable in 1998, almost completely offset
by higher incentive compensation and interest accruals in 1998 versus 1997.
Cash used in investing activities was $3.5 million and $3.9 million for the
six months ended June 30, 2000 and July 2, 1999, respectively. Capital
expenditures were $3.2 million and $3.6 million for the six months ended
June 30, 2000 and July 2, 1999, respectively.
Cash used in investing activities was $8.8 million, $83.4 million and
$5.6 million in 1999, 1998 and 1997, respectively. The large increase in 1998
was attributable to our acquisition of Hittman. Capital expenditures were
$8.5 million, $6.2 million and $4.6 million in 1999, 1998 and 1997,
respectively.
Cash used in financing activities was $6.3 million and $2.9 million for the
six months ended June 30, 2000 and July 2, 1999, respectively. Repayments of
borrowings under our line of credit and prepayments or repayments of
regularly-scheduled long-term debt payments were $6.3 million and $3.0 million
for the six months ended June 30, 2000 and July 2, 1999, respectively.
Cash provided by financing activities was $1.7 million, $76.3 million and
$6.9 million in 1999, 1998 and 1997, respectively. The increases and decreases
in net cash provided by financing activities during these periods were
attributable to our acquisition of Hittman.
We expect to incur capital expenditures of approximately $6.6 million in
2000, $2.8 million of which we anticipate will be used for continued development
of our capacitor product line and $3.8 million of which we anticipate will be
used for routine recurring capital expense obligations. As of July 1, 2000, we
had incurred $3.2 million of capital expenditures in 2000.
We intend to use the proceeds of this offering to repay a portion of our
Term A and Term B loans. Although it is difficult for us to predict future
liquidity requirements, we believe that our existing cash balances and cash
equivalents and cash from operations 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our major market risk exposure is to changing interest rates. Our policy is
to manage interest rates through a combination of variable rate debt and through
use of interest rate cap agreements to manage our exposure to fluctuations in
interest rates. As of July 1, 2000, 82% of our long-term debt consisted of
variable rate instruments that accrue interest at floating rates. As of July 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 U.S. 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.
34
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In 1999, we adopted AICPA Statement of Position 98-5, "Reporting the Costs
of Start-Up Activities," an accounting standard which required that organization
and other start-up costs that we capitalized prior to January 2, 1999 be written
off and any future start-up costs be expensed as incurred. In accordance with
this Statement, in 1999 we wrote off $0.6 million, net of tax, of start-up costs
that had been deferred in conjunction with the July 1997 leveraged buyout and
our acquisition of Hittman's assets and liabilities in August 1998.
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 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.
35
<PAGE>
BUSINESS
OVERVIEW
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, and we
believe that we are a preferred supplier of power sources and components. We
offer technologically advanced, highly reliable and long lasting products for
implantable medical devices and enable our customers to introduce implantable
medical devices that are progressively smaller, longer lasting, more efficient
and more functional. We leverage our core competencies in technology and
manufacturing to develop and produce power sources for commercial applications
that demand high performance and reliability, including aerospace, oil and gas
exploration and oceanographic equipment. Our customers utilize our specially
designed, proprietary power sources and components in their products. We believe
that our proprietary technology, close customer relationships, market leadership
and dedication to quality provide us with significant competitive advantages
over our competitors and create a barrier to entry for potential market
entrants.
Mr. Wilson Greatbatch patented the implantable pacemaker in 1962. In 1970,
Mr. Greatbatch founded Wilson Greatbatch Ltd., our predecessor. In July 1997,
DLJ Merchant Banking led a leveraged buyout of Wilson Greatbatch Ltd. Our
company was incorporated in connection with the 1997 leveraged buyout to acquire
Wilson Greatbatch Ltd., which is now our wholly-owned subsidiary. We acquired
Hittman in August 1998 to expand and complement our product lines. Hittman, a
medical components manufacturer, produces feedthroughs and electrode components
for implantable medical devices. Feedthroughs are among the most critical
components used in implantable medical devices and both feedthroughs and
electrodes are key component technologies.
In August 1998, we also sold the assets of our Greatbatch Scientific product
line to focus on the newly-acquired Hittman product lines. Greatbatch Scientific
was formed in 1996 to develop, manufacture and sell a line of battery-powered,
magnetic resonance imaging, or MRI, compatible surgical instruments. In 1998, we
concluded that this product line and customer base was not essential to our core
operations and that instead we wanted to concentrate our efforts on integrating
Hittman and completing the development of its capacitor program. We sold the
assets of Greatbatch Scientific to an unrelated medical device company in
exchange for approximately 12% of that company's stock in an investment valued
at $2.4 million. This ended our expenditures on Greatbatch Scientific, which in
1998 were $1.3 million. In 1999 we wrote down our investment in this company by
$0.9 million.
In August 2000, we acquired all of the capital stock of Battery
Engineering, Inc., a small specialty battery manufacturer, from
Hitachi-Maxell, Ltd. in exchange for 339,856 shares of our common stock and
assumption of approximately $2.7 million of indebtedness. The acquisition will
be accounted for as a purchase. Battery Engineering, Inc. has approximately 90
full time employees and is part of our commercial power source operations. In a
separate transaction, Hitachi-Maxell, Ltd. also purchased 200,000 shares of our
common stock for $15.00 per share.
36
<PAGE>
IMPLANTABLE MEDICAL DEVICE INDUSTRY
OVERVIEW
The following table sets forth the main categories of battery-powered
implantable medical devices and the principal illness or symptom treated by each
device:
<TABLE>
<CAPTION>
DEVICE PRINCIPAL ILLNESS OR SYMPTOM
------ ----------------------------
<S> <C>
Pacemakers.............................. Abnormally slow heartbeat
ICDs.................................... Rapid and irregular heartbeat
Left ventricular assist devices......... Heart failure
Hearing assist devices.................. Hearing loss
Neurostimulators........................ Tremors or chronic pain
Drug pumps.............................. Diabetes or chronic pain
</TABLE>
The implantable medical device industry is expected to grow primarily as a
result of:
- advances in medical technology that will allow physicians to use
implantable medical devices as a substitute for, or in conjunction
with, prescription drugs, to treat a wider range of heart diseases,
such as atrial fibrillation and congestive heart failure;
- increased use of recently developed implantable medical devices,
including left ventricular assist devices, hearing assist devices,
neurostimulators and drug pumps;
- expansion of indications, or uses, for implantable medical devices;
- the aging population, which is expected to require an increasing number
of pacemakers, ICDs and other implantable medical devices;
- a combination of smaller, lighter, more efficient and more functional
devices and longer-lasting power sources which will be easier for
physicians to implant and will be less intrusive to recipients; and
- increased market penetration beyond the United States and other
developed countries.
Medical Data International predicts that ICD revenues will grow more than
four times faster than pacemaker revenues through 2004. The faster growth
predicted for the ICD market is predicated on anticipated new applications for,
and greater acceptance of, ICDs and an increased penetration of the ICD market.
MARKET OPPORTUNITY
The market for our power sources and components benefits directly from the
growth of the implantable medical device industry. Manufacturers are dependent
on advances in power sources and component technology to make their devices
smaller, longer lasting, more efficient and more functional. In addition,
manufacturers of implantable medical devices must be approved by the FDA, and
have significant exposure to product liability claims and damages. To minimize
risk and facilitate the FDA approval process, which can be lengthy,
manufacturers of implantable medical devices generally require the highest
quality, most reliable power sources and components available from proven
suppliers. As a result, manufacturers generally enter into long term contracts
with their suppliers and often collaborate with them on power source and
component development. We believe that our proprietary technology, close
customer relationships, market leadership and dedication to quality provide us
with significant competitive advantages over our competitors and create a
barrier to entry for potential market entrants.
37
<PAGE>
STRATEGY
Our objective is to enhance our position as a leading developer and
manufacturer of power sources and other components for implantable medical
devices. We intend to:
- EXPAND OUR PROPRIETARY TECHNOLOGY PORTFOLIO THROUGH CONTINUOUS
TECHNOLOGICAL INNOVATION AND CONTINUE TO FOCUS OUR RESEARCH, DEVELOPMENT
AND ENGINEERING EFFORTS ON PIONEERING POWER SOURCES AND ADVANCED
COMPONENTS FOR IMPLANTABLE MEDICAL DEVICES. We commit substantial
resources to research, development and engineering and believe that this
commitment has enabled us to be at the forefront of the new technologies
that are expected to drive the growth of the implantable medical device
market in the foreseeable future. In 1999, we introduced a line of
capacitors utilizing proprietary wet tantalum technology. Our innovative
use of this technology enables us to produce capacitors that are
significantly smaller than those currently used and offer improved
electrical performance. We believe that our focus on technology has led to
strong relationships with our customers and provides us significant
advantages in maintaining our continued leadership within our markets.
- ENHANCE OUR POSITION AS AN INTEGRATED COMPONENT SUPPLIER TO THE
IMPLANTABLE MEDICAL DEVICE INDUSTRY BY BROADENING OUR PRODUCT LINE TO
INCLUDE A MORE COMPREHENSIVE RANGE OF POWER SOURCES AND COMPONENTS. We
believe that there is a significant opportunity to provide our customers
with substantially all of the key components for their products, other
than microelectronics. Our position as a leading manufacturer of
implantable medical device components allows us to provide a broader range
of product components than any of our competitors. As a result of our 1998
acquisition of Hittman and the internal expansion of our components
business, we are able to provide a major implantable medical device
manufacturer with most of the components used in its pacemakers. We intend
to continue to expand our product line. We believe that our customers
value the benefits of a stable, reliable, quality-driven supplier which is
able to provide a broad range of components to meet their product
requirements.
- CONTINUE TO COLLABORATE WITH OUR CUSTOMERS TO JOINTLY DEVELOP NEW
TECHNOLOGIES THAT ENABLE THEM TO DEVELOP AND MARKET INCREASINGLY MORE
EFFECTIVE AND TECHNOLOGICALLY INNOVATIVE PRODUCTS. Our close relationships
with our customers gives us significant advantages in anticipating and
meeting their requirements and needs. We intend to continue to work
closely with our customers to develop innovative medical devices that
utilize our specially designed, proprietary power sources and components.
We are currently collaborating with two leading manufacturers of ICDs to
incorporate customized configurations of our new capacitors into their
most advanced product programs. We believe that by integrating our
development efforts with those of our customers, we can continue to create
innovative and technologically superior products and strengthen our
position as a single source supplier.
- ENTER INTO STRATEGIC ALLIANCES AND MAKE SELECTIVE ACQUISITIONS THAT
COMPLEMENT OUR CORE COMPETENCIES IN TECHNOLOGY AND MANUFACTURING FOR BOTH
IMPLANTABLE MEDICAL DEVICES AND OTHER DEMANDING COMMERCIAL
APPLICATIONS. We regularly review strategic opportunities to acquire or
license technologies. Through our 1998 acquisition of Hittman, we added
two key component technologies, feedthroughs and electrodes, to our
product offerings. We are currently working with strategic partners to
develop rechargeable battery systems and technology for automatic external
defibrillators. We believe that strategic alliances and selective
acquisitions will enable us to accelerate the development of new
technologies and grow our leading market share position.
PRODUCTS
We design and manufacture a variety of power sources, capacitors and
components, such as feedthroughs, electrodes and precision components for
implantable medical devices. Our technology is also used in a number of
demanding commercial applications, including aerospace, oil and gas exploration
and oceanographic equipment. The table set forth on page 3 of this prospectus
provides more detailed information about our principal products.
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IMPLANTABLE POWER SOURCES
The power sources that we produce are batteries. A battery is an
electrochemical device that stores energy and releases it in the form of
electricity. To generate an electrical current, electrons are first released
from one part of the battery, called the anode or negative electrode. This flow
of electrons, known as a current, travels to a load or device outside the
battery. After powering the device, the electron flow reenters another part of
the battery, called the cathode or positive electrode. As electrons flow from
the anode to the device being powered by the battery, ions released from the
anode cross through an electrolyte, which consists of one or more chemical
compounds that facilitate the flow of ions to the cathode. The ions react with
the cathode in order to complete the circuit. Separators are typically used
inside the battery as electrical insulators to divide the anode and the cathode
to prevent mechanical contact between them, which would result in the rapid
depletion of the battery cell.
The following diagram illustrates the battery process described in the
paragraph above:
[BATTERY PROCESS DIAGRAM]
From the late 1950s to the early 1970s, implantable medical devices, such as
pacemakers, were powered by zinc/mercuric oxide batteries. These batteries
typically lasted two to three years, often failed without warning, were large
and bulky and generated hydrogen gas, making it impossible to seal the battery.
In the early 1970s, we introduced lithium/iodine batteries as power sources for
pacemakers. Lithium batteries manufactured by us and manufactured by others
under license from us are now a principal power source for pacemakers. Pacemaker
batteries utilizing our technology last approximately six years and provide high
reliability and predictability. In the mid 1980s, we introduced lithium/silver
vanadium batteries for powering ICDs. These batteries provide the higher power
levels required by an ICD with a high degree of reliability and at least a five
year battery life. Our lithium/silver vanadium oxide batteries have become a
principal power source of ICDs.
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In 1996, we introduced a lighter weight titanium-encased lithium/carbon
monofluoride battery as the next generation pacemaker battery. These batteries
offer improved pacemaker performance in several areas, including:
- pacemaker weight reduction of up to 25%;
- improved electrical performance, which is more suitable for use with the
latest pacemaker microelectronics; and
- 10-15% longer battery life than comparable products.
In 1996, we introduced a new process for cathode manufacturing that enabled
the production of significantly thinner cathodes than previously possible. As a
result of this new cathode manufacturing process and other design improvements,
our newest generation of ICD batteries is the thinnest commercially available
and is up to 50% thinner than many existing models. Over the past few years, the
decrease in battery size has contributed significantly to decreases in the size
of ICDs, making these devices easier to implant.
CAPACITORS
Capacitors, which are used in ICDs, perform the critical function of storing
electrical pulses before delivery to the heart. An ICD typically has two
capacitors. Historically, ICDs utilized aluminum-based capacitors. In the fourth
quarter of 1999, we introduced wet tantalum hybrid capacitors commercially for
use in ICDs, which provide a number of advantages over aluminum-based
capacitors. Our wet tantalum hybrid capacitors, which combine liquid
electrolytes and ruthenium oxide cathode material with a tantalum anode
component, provide a unique combination of high voltage and high energy storage
capacity. This combination enables energy density not achievable with competing
technologies. Our capacitors can be manufactured in many sizes and shapes to
meet the specific needs of our customers.
To produce our capacitors, we have licensed wet tantalum technology from the
Evans Capacitor Company. We are the exclusive licensee for implantable medical
applications of this technology. We have also developed our own portfolio of
patents and patent applications covering improvements that we have made to
Evans' capacitor technology. We believe that we are the only supplier of wet
tantalum capacitors for the implantable medical device industry. In 1997, we
entered into an agreement with a major ICD manufacturer to use our capacitor
technology in their next generation of ICDs. We currently supply all of the
capacitors used in the new generation of ICDs manufactured by this customer.
MEDICAL COMPONENTS
We manufacture feedthroughs, electrodes and other precision components that
are utilized in implantable medical devices. Feedthroughs and electrodes are
critical components of these devices that deliver electrical energy to the
heart.
FEEDTHROUGHS. Feedthroughs are components that transmit electrical signals
from inside an implantable medical device to the electrodes that transmit the
signals to the body. Feedthroughs consist of an outer metallic structure called
a flange, an electrical insulator made of ceramic or glass material, and wire
connectors called poles that carry electrical signals from within the device.
Our feedthroughs use a ceramic to metal seal that is substantially more durable
than a traditional glass to metal seal. We also manufacture a feedthrough that
includes a filtering capacitor that can filter out electromagnetic interference,
such as signals from other implantable medical devices or cellular phones.
We design and manufacture 35 types of feedthroughs. Each of our feedthroughs
is designed specifically for a particular customer device. We are often the sole
source of feedthroughs for our
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customers. In 1999, approximately 95% of our feedthroughs were used in
pacemakers and ICDs, with the balance used primarily in left ventricular assist
devices, hearing assist devices, drug pumps and neurostimulators. We are
currently working with a number of medical device manufacturers to develop
hermetic feedthroughs for the next generation of implantable medical devices and
applications, including neurostimulators, middle ear devices, oxygen sensors and
muscle stimulation devices.
ELECTRODES. Electrodes are components used in pacemakers and ICDs that
deliver the electrical signal from the feedthrough to the heart to restore its
normal rhythm. By coating the electrode with chemical compounds, we can enhance
its electrical properties and therefore better deliver energy to the heart. Some
electrode tips are designed to contain medication, such as steroids, to prevent
scarring of the heart tissue following electrode implantation.
We design and manufacture a variety of coated electrodes, some of which have
tips that can contain medication. We believe that our experience with physical
deposition processes, such as sputtering and powder metallurgic techniques, has
enabled us to produce high quality coated surfaces utilizing almost any
combination of biocompatible coating surfaces. We believe that our coating
technology can also be applied to future generation cardiovascular and
non-cardiovascular implantable medical products, such as vascular stents, which
are cynlindrical scaffolds used in cardiology procedures to help keep arteries
open.
PRECISION COMPONENTS. We design and manufacture miniature precision
components and subassemblies primarily for pacemaker and ICD manufacturers. Our
precision components are machined or molded to adhere to tolerances up to one
ten-thousandth of an inch. To manufacture precision components, we typically use
various alloys of stainless steel, platinum, titanium, aluminum and brass, as
well as plastics and composites. We also are the exclusive supplier of a
critical drug pump subassembly for a manufacturer of implantable drug pumps.
Although our primary focus is to develop and manufacture precision components
for implantable medical devices, we also serve the general medical equipment
market and the aerospace, oil and gas exploration and oceanographic industries.
COMMERCIAL POWER SOURCES
We have developed specialized power source technologies that are functional
in high temperatures or under high shock and vibration. The majority of the
commercial power sources that we sell are used in oil and gas exploration,
including recovery equipment, pipeline inspection gauges, down-hole pressure
measurement systems and seismic surveying equipment. We also supply power
sources to NASA for its space shuttle program. In addition, our commercial power
sources have been used for emergency position locating beacons and locator
transmitters, classified governmental uses, electronic circuit breakers for
industrial applications, weather balloon instrumentation, electricity
transmission cable lighting detectors, wear monitors for train cables and
scientific equipment used in Antarctica.
PRODUCT LINES UNDER DEVELOPMENT
RECHARGEABLE LITHIUM ION BATTERIES. We are currently developing a line of
rechargeable lithium ion batteries that is expected to broaden and complement
our current lines of lithium batteries. A number of new medical devices require
rechargeable batteries, including:
- LEFT VENTRICULAR ASSIST DEVICES that are being developed to treat heart
failure use external and internal batteries as power sources, both of
which must be rechargeable. We are developing lithium ion rechargeable
technology to produce lighter batteries with increased power and longer
life.
- IMPLANTABLE HEARING ASSIST DEVICES that are used to treat patients who
cannot use conventional hearing aids. These batteries are compact and are
capable of providing low levels of current with infrequent recharging.
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- NEUROSTIMULATORS AND DRUG PUMPS that are used for indications such as
tremors, diabetes and chronic pain. Since these devices are sometimes
implanted in young patients, the use of our rechargeable battery
technology with extended device life should reduce the number of
replacement implants needed throughout the life of the patient.
IMPLANTABLE PUMP TECHNOLOGY. We have developed proprietary technology that
has applications in implantable devices that are designed to deliver small
quantities of drugs or other fluids to a patient. Several of our technologies
are critical to these devices, including the power source, the feedthroughs and
the pumping mechanism that moves the fluid. Currently, one of our customers is
seeking regulatory approval in Europe for a device that utilizes our implantable
pump technology.
RESEARCH, DEVELOPMENT AND ENGINEERING
Our position as a leading developer and manufacturer of power sources for
implantable medical devices is largely the result of our long history of
technological innovation. We invest substantial resources in research,
development and engineering. Our scientists, engineers and technicians focus on
improving existing products, expanding the use of our products and developing
new products. In addition to our internal technology and product development
efforts, we maintain close relationships with leading research organizations,
including Alfred University, Clarkson University, the Jet Propulsion Laboratory,
the applied physics department of Johns Hopkins University, NASA,
Sandia-National Laboratories, the State University of New York at Buffalo and
Villanova University. These relationships include funding research efforts,
licensing researchers' technology and assisting in building prototypes. Our
research, development and engineering team is responsible for a number of
pioneering developments in the implantable medical device industry including:
<TABLE>
<CAPTION>
YEAR COMMERCIAL INTRODUCTION INDUSTRY IMPACT
---- ------------------------------------- ------------------------------------
<C> <S> <C>
1972 First lithium anode battery Industry standard for pacemakers
1974 First ceramic-to-metal seal for Industry standard for sealing of
implantable devices devices
1980 First oxyhalide/interhalogen Enabled commercial batteries to
batteries perform at lower temperatures with
very high energy density
1981 First implantable pump capable of Enabled implantable drug delivery
passing bubbles system
1987 First implantable lithium/silver Enabled commercial viability of ICDs
vanadium oxide battery
1996 First titanium-encased lithium/carbon Enabled weight reduction and
monofluoride pacemaker batteries improved electrical performance for
advanced microelectronics
1999 First wet tantalum capacitors Enabled smaller sizes of ICDs and
increased design flexibility
</TABLE>
PATENTS AND PROPRIETARY TECHNOLOGY
We rely on a combination of patents, licenses, trade secrets and know-how to
establish and protect our proprietary rights to our technologies and products.
To date, we have been granted 125 U.S. patents and 196 foreign patents. We also
have 132 U.S. and 125 foreign pending patent applications at various stages of
approval. During the past three years, we have received 39 new U.S. patents, of
which 13 were received in 1999. Corresponding foreign patents have been issued
or are expected to be issued
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in the near future. Often, a single product is protected by several patents
covering various aspects of the design. We believe this provides broad
protection of the concepts employed.
The following table provides a breakdown of our patents as of July 1, 2000
by product type:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
PRODUCT PATENTS GRANTED ACTIVE PATENTS
------- --------------- --------------
<S> <C> <C>
Batteries--Pacemakers............................. 164 23
Batteries--ICDs................................... 78 69
Capacitors........................................ 3 3
Feedthroughs...................................... 2 2
Pumps............................................. 8 8
Batteries--Commercial............................. 11 11
Batteries--Rechargeable........................... 2 2
Batteries--Lithium/carbon monofluoride............ 5 5
Other products.................................... 48 14
--- ---
Total......................................... 321 137
=== ===
</TABLE>
The following table sets forth the expiration dates of our material patents
as of July 1, 2000:
<TABLE>
<CAPTION>
DESCRIPTION OF PATENT EXPIRATION DATE
--------------------- ---------------
<S> <C>
Anode assembly for lithium-halogen cell..................... January 2001
Lithium-halogen cell........................................ January 2001
Anode assembly for lithium-halogen cell..................... January 2001
Defibrillator cell design................................... May 2006
Defibrillator cell design................................... May 2006
Serpentine electrode design for prismatic cell.............. May 2011
Butterfly electrode assembly................................ September 2011
Butterfly electrode assembly................................ September 2011
Multiplate electrode design connected by bridge............. September 2011
Insulating upper bag for increased cell reliability......... May 2012
Halogenated polymer fiber separator for electrochemical
cell...................................................... October 2013
Sheet cathode............................................... November 2013
Sheet cathode............................................... November 2013
High shock and vibration resistant cell design.............. February 2015
Aqueous blended electrode material.......................... March 2015
Carbonate electrolyte additives for defibrillator cells..... March 2015
Separator insert for oxyhalide cell......................... February 2016
Dual connection tab current collector for carbon
monofluoride cells........................................ July 2016
Hermetic seal using a single close ball..................... October 2016
Improved electrolyte/cathode ratio for carbon monofluoride
cells..................................................... November 2016
Ultrasonically coated substrate for use in a capacitor and
method of manufacture..................................... May 2017
Hermetically sealed wet tantalum capacitor.................. May 2017
Separator for use in carbon monofluoride cells.............. June 2017
Electrode edge design for increased energy density for
carbon monofluoride cells................................. August 2017
Insulating upper bag for increased cell reliability......... April 2018
</TABLE>
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 third parties. We have also granted
rights in our own patents to others under license agreements. We use our
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three material patents that expire in January 2001 in connection with our
production of pacemaker batteries. The primary impact on our business as a
result of the expiration of these patents will be the termination of the related
royalties paid by Medtronic. Otherwise, we expect the impact of the expiration
of these patents on our product line to be immaterial.
We license the basic capacitor technology used in our defibrillator
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.
We license the anode technology we use in our rechargeable lithium ion
batteries from AT&T. The license extends throughout the lives of the related
patents, which expire in 2000 and 2002. The license can be cancelled if we
default under the license agreement and fail to cure the default. A cancellation
of the license may impair our ability to produce our entire line of rechargeable
lithium ion batteries. We do not expect the expiration of the license, as a
result of the expiration of the patents underlying it, to have a material effect
on any of our product lines.
It is our policy to require our executive and technical employees,
consultants and other parties to execute confidentiality agreements. These
agreements prohibit disclosure of confidential information to third parties
except in specified circumstances. In the case of employees and consultants, the
agreements generally provide that all confidential information relating to our
business is the exclusive property of our company.
MANUFACTURING AND QUALITY CONTROL
Our principal manufacturing facilities are in Clarence, New York,
Cheektowaga, New York, Canton, Massachusetts and Columbia, Maryland. Our three
New York manufacturing facilities produce implantable power sources, capacitors,
commercial power sources and components. Our Canton, Massachusetts facility
produces commercial power sources. Our Columbia, Maryland facility produces
feedthroughs, electrodes and other components. We test our implantable power
sources at our Wheatfield, New York facility.
During the past two years, we have modernized our facilities and a number of
our manufacturing lines, processes and equipment. These manufacturing
improvements have enabled us to increase the quality and service life of our
power sources and other components and increase our manufacturing capacity. Key
resources that allow us to manufacture subassemblies include a full model shop,
a precious metals machining area, injection molding equipment and a
Class 10,000 clean room.
We primarily manufacture small lot sizes, as most customer orders range from
a few hundred to thousands of units. As a result, our ability to remain flexible
is an important factor in maintaining high levels of productivity. Each of our
production teams receives assistance from a manufacturing support team, which
typically consists of representatives from our quality control, engineering,
manufacturing, materials and procurement departments.
Our quality system is based upon an ISO documentation system and is driven
by a master validation plan that requires rigorous testing and validation of all
new processes or process changes that directly impact our products. Our New York
facilities are ISO-9001 certified, which requires compliance with regulations
regarding quality systems of product design, supplier control, manufacturing
processes and management review. This certification can only be achieved after
completion of an audit conducted by an independent authority. Our New York
facilities are audited by the British Standards Institute and are also certified
by the British Standards Institute to the more rigorous EN-46001 standard that
is usually reserved for manufacturers of medical devices. Our Columbia, Maryland
facility is ISO-9002 certified and is audited by TUV Rheinland of North America,
an independent auditing firm that
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specializes in evaluating ISO quality standards. To maintain certification, all
facilities must be reexamined every six months by their respective certifying
bodies.
SALES AND MARKETING
We utilize a combination of direct and indirect sales methods, depending on
the particular product. In 1999, approximately 73% of our products were sold in
the United States.
We market and sell our implantable power sources and capacitors directly to
manufacturers of implantable medical devices. The majority of our implantable
power source customers contract with us to develop custom batteries or
capacitors 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 power source products and technologies at
industry meetings and trade shows, including CardioStim and the North American
Society of Pacing and Electrophysiology or NASPE.
We sell feedthroughs, electrodes and other precision components directly to
manufacturers. Two internal sales managers support all activity, and involve
engineers and materials professionals in the sales process to appropriately
address customer requests. As in the implantable power source and capacitor
sales process, we have established relationships directly with leading
manufacturers of implantable medical devices. We market our precision
components, feedthroughs and electrodes by participating in the annual Medical
Design and Manufacturing trade show and by producing printed and electronic
marketing materials for distribution to prospective customers.
We sell our commercial power sources either directly to the end user,
directly to manufacturers that incorporate our products into other devices for
resale, or to distributors who sell our products to manufacturers and end users.
Our sales managers are trained to assist our customers in selecting appropriate
battery chemistries and configurations. We market our commercial power sources
at various technical trade meetings, including the annual Petroleum Offshore
Technology Conference and Offshore Europe. We also place print advertisements in
relevant trade publications.
Firm backlog orders at December 31, 1999 and 1998 were $16.2 million and
$24.6 million, respectively. Most of these orders were expected to be shipped
within one year. As more of our customers move to "just in time" manufacturing
systems, the amount of firm orders placed for delivery for more than a three or
four month period has declined in recent years. This is a significant reason for
the 34% reduction in backlog between December 31, 1999 and 1998.
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 products customers include leading implantable
medical device manufacturers such as Guidant, St. Jude Medical and Medtronic. In
1999, Guidant accounted for approximately 33% of our revenues and St. Jude
Medical accounted for approximately 31% of our revenues. Our commercial products
customers are primarily companies involved in the aerospace, oil and gas
exploration and oceanographic industries.
In February 1999, we entered into a supply agreement with Guidant. Pursuant
to the agreement, Guidant purchases batteries and components from us for use in
its implantable medical devices. Our supply agreement with Guidant expires on
December 31, 2001 and can be renewed for additional one year periods upon mutual
agreement.
In April 1997, we entered into a supply agreement with St. Jude Medical. In
accordance with this agreement, we are the primary supplier of many components
used in their pacemakers and ICDs, except for microprocessors and capacitors. We
will also be the exclusive supplier of batteries to St.
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Jude Medical. This agreement was renegotiated in July 2000 and expires on
December 31, 2003, subject to provisions for two one-year extensions.
In March 1976, we entered into a technology transfer agreement and license
agreement with Medtronic. Our license agreement provides Medtronic with the
nonexclusive right to use our proprietary technology to manufacture its own
batteries. The license agreement allows Medtronic to manufacture lithium/iodine
or lithium/halide batteries, but does not permit Medtronic to manufacture
batteries using our new titanium lithium/carbon monofluoride technology.
In accordance with the license agreement, Medtronic pays us a royalty for each
battery produced by it for use in each medical device that it sells. At the time
we entered into the license agreement with Medtronic, there were a number of
competing battery technologies. Our management believed that licensing our
proprietary technology to Medtronic, which was the industry leader at that time,
would help make our technology the industry standard. Our license agreement does
not terminate so long as Medtronic uses any of our patented technology. However,
we do not expect to receive significant royalties from Medtronic after 2000.
In July 1991, we entered into a defibrillator battery supply agreement with
Medtronic. In accordance with the agreement, we provide Medtronic with
lithium/silver vanadium oxide batteries for their ICDs. Our supply agreement
with Medtronic expires on July 31, 2001.
SUPPLIERS AND RAW MATERIALS
Lithium, iodine and metal cases are the most significant raw materials that
we use to manufacture our batteries. In the past, we have not experienced any
significant interruptions or delays in obtaining raw materials. We seek to
minimize inventory levels, which provides us with a reduced risk of
obsolescence. Minimizing our inventory levels also enables us to stock materials
based on firm order requirements, rather than forecasts and anticipated sales.
However, we maintain minimum safety stock levels of critical raw materials. We
seek to improve our supply purchase pricing by using bulk purchases, precious
metal pool buys and blanket orders and by entering into long term contracts.
Annual minimum purchase levels under these contracts have historically been well
below our expected annual usage, and therefore present little risk of liability.
We have long standing relationships with most of our significant suppliers
and have conducted business with them for an average of 13 years. Our supply
agreements typically have three year terms. Our significant suppliers of raw
materials and components accounted for approximately 31% of our purchases in
1999. We believe that there are alternative suppliers or substitute products
available for each of the materials we purchase, at competitive prices. Our
material supply agreements may be terminated prior to their scheduled expiration
dates if there is a material breach by us that remains uncured.
COMPETITION
We currently supply implantable power sources, capacitors, feedthroughs,
electrodes and precision components to the implantable medical device market.
Our existing or potential competitors include:
- leading implantable medical device manufacturers, such as Guidant, St.
Jude Medical and Medtronic, which have vertically integrated operations or
may become vertically integrated in the future; and
- smaller companies that concentrate on niche markets.
Medtronic produces power sources for use in implantable medical devices that
it manufactures. However, to our knowledge Medtronic does not sell power sources
to third parties. Our company and Medtronic are the two major manufacturers of
power sources for implantable medical devices. We also compete in the intensely
competitive commercial power source market. Our principal competitors in
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this market are Eagle-Picher Industries and ECO-Tracer. While we believe that
the industry perceives our products to be of the highest quality, there are
suppliers whose products are perceived to be of comparable quality. Moreover,
the commercial power source market is subject to volatility in oil and gas
exploration activity. When oil and gas exploration activity has slowed, a number
of our competitors have historically reduced battery prices to maintain or gain
market share. Quality and technology are the principal bases upon which we
compete in both the implantable medical devices market and the commercial power
sources market.
GOVERNMENT REGULATION
Except as described below, our business is not subject to direct
governmental regulation other than the laws and regulations generally applicable
to businesses in the jurisdictions in which we operate, including those federal,
state and local environmental laws and regulations governing the emission,
discharge, use, storage and disposal of hazardous materials and the remediation
of contamination associated with the release of these materials at our
facilities and at off-site disposal locations. Our research, development and
engineering activities involve the controlled use of, and our products contain,
small amounts of hazardous materials. Liabilities associated with hazardous
material releases arise principally under the Comprehensive Environmental
Response, Compensation and Liability Act and analogous state laws which impose
strict, joint and several liability on owners and operators of contaminated
facilities and parties that arrange for the off-site disposal of hazardous
materials. We are not aware of any material noncompliance with the environmental
laws currently applicable to our business and we are not subject to any material
claim for liability with respect to contamination at any company facility or any
off-site location. We cannot assure you, however, that we will not be subject to
such environmental liabilities in the future as a result of historic or current
operations.
As a component manufacturer, our products are not subject to FDA pre-market
approval. However, the FDA and related state and foreign governmental agencies
regulate many of our customers' products as medical devices. In many cases, the
FDA must approve those products prior to commercialization. In addition, because
some of the products produced by our engineered components division may be
considered finished medical devices, some of the operations within that division
are subject to FDA inspection and must comply with current good manufacturing
practices (CGMP) requirements.
RECRUITING AND TRAINING
We dedicate significant resources to our recruiting efforts. Our internal
recruiting efforts primarily focus on supplying quality personnel to our
business. We also seek to meet our hiring needs through outside sources. We
believe that a strong human resources and recruiting effort is necessary to
expand our current employee base and maintain our high employee retention rates.
We have established a number of programs that are designed to challenge and
motivate our employees and we encourage our employees to be proactive in
contributing ideas and regularly survey them to collect feedback on ways that
our business and operations can be improved.
We provide an intensive training program to our new employees which is
designed to educate them on safety, quality, our business strategy and the
methodologies and technical competencies that are required for our business and
our corporate culture. Our safety training programs focus on such areas as basic
industrial safety practices and emergency response procedures to deal with fires
or chemical spills. All of our employees are required to participate in a
specialized training program that is designed to provide an understanding of our
quality objectives. We also have formal, mandatory training for all of our
employees in their core competencies on an annual basis. We offer our employees
a tuition reimbursement program and encourage them to continue their education
at local colleges. Many of our professionals attend seminars on topics that are
related to our corporate
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objectives and strategies. We believe that comprehensive training is necessary
to ensure that our employees work in a uniform and consistent manner and that
best practices are effectively utilized.
EMPLOYEES
As of July 1, 2000, we had 750 employees, including 135 research,
development and engineering personnel, 448 manufacturing personnel and 167
support personnel. We also employ a number of temporary employees to assist us
with various projects and service functions. In addition, Battery Engineering,
Inc., which we acquired in August 2000, has approximately 90 full time
employees. Our employees are not represented by any union and, except for
executive officers of our company and our subsidiaries, are retained on an
at-will basis. We believe that we have a good relationship with our employees.
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:
<TABLE>
<CAPTION>
LOCATION SQ. FT. OWN/LEASE USE
-------- -------- --------- ------------------------------------
<S> <C> <C> <C>
Clarence, NY........................ 70,400 Own Battery manufacturing, development
Clarence, NY(1)..................... 20,800 Own Machining and assembly of components
Clarence, NY(1)..................... 18,550 Lease Machining and assembly of components
Clarence, NY........................ 45,305 Lease Offices and warehouse
Wheatfield, NY...................... 2,600 Lease Battery testing
Cheektowaga, NY..................... 19,900 Lease Capacitor manufacturing
Canton, MA.......................... 32,000 Own Battery manufacturing
Columbia, MD........................ 30,000 Lease Feedthroughs, electrodes and
components manufacturing
</TABLE>
------------------------
(1) We own and rent space in part of the same facility.
We believe these facilities are adequate for our current and foreseeable
purposes and that additional space will be available when needed.
LEGAL PROCEEDINGS
We are involved in various lawsuits and claims incidental to our business.
In the opinion of our management, the ultimate liabilities, if any, resulting
from these lawsuits and claims will not materially affect our financial position
or results of operations.
48
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our directors, executive officers and certain key employees, and their
respective ages and positions as of July 1, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Edward F. Voboril......................... 57 President, Chief Executive Officer and Chairman of
the Board
Larry T. DeAngelo......................... 53 Vice President, Administration and Secretary
Curtis F. Holmes, Ph.D.................... 57 President, Greatbatch-Hittman, Inc.
Arthur J. Lalonde......................... 45 Vice President, Finance and Treasurer
Richard W. Mott........................... 41 Group Vice President
Susan M. Bratton.......................... 43 General Manager, Electrochem Battery
Robert C. Rusin........................... 42 Vice President, Corporate Quality
Esther S. Takeuchi, Ph.D.................. 46 Vice President, Research and Development
David L. Jaffe............................ 41 Director
Robert E. Rich, Jr........................ 59 Director
Douglas E. Rogers......................... 45 Director
Henry Wendt............................... 66 Director
David M. Wittels.......................... 35 Director
</TABLE>
EDWARD F. VOBORIL has served as President and Chief Executive Officer of our
company and our predecessor since December 1990. Mr. Voboril became Chairman of
our Board of Directors in July 1997. Mr. Voboril's career spans over 25 years in
the medical device industry. Prior to joining our predecessor in 1990,
Mr. Voboril was Vice President and General Manager of the Biomedical Division of
PPG Industries. He was previously Vice President and General Manager of the
Medical Electronics Division of Honeywell, which was acquired by PPG in 1986.
Mr. Voboril currently serves on the board of directors of Analogic Corporation,
an electronics company. Mr. Voboril served as President of the Health Care
Industries Association of Western New York from July 1995 to July 1998 and
currently serves as a member of the board of directors of the Health Industries
Manufacturers Association, where he is a member of the executive committee and
chairs the small company council.
LARRY T. DEANGELO has served as Vice President, Administration of our
company and our predecessor since November 1991 and has served as our Secretary
since July 1997. Prior to joining our predecessor, Mr. DeAngelo was the Director
of International Human Resources of Rockwell International Corporation.
Mr. DeAngelo is currently a member of the Payment and Health Care Delivery
Committee of the Health Industry Manufacturers Association and chairman of the
operating board for the Buffalo Hearing and Speech Center.
CURTIS F. HOLMES, PH.D. has served as President of our subsidiary,
Greatbatch-Hittman, Inc., since January 2000. Dr. Holmes served as Senior Vice
President and Chief Operating Officer of Greatbatch-Hittman, Inc. from July 1999
to December 1999 and as our Senior Vice President from January 1999 to July
1999. From November 1980 to January 1999, Dr. Holmes served as our Vice
President, Technology.
ARTHUR J. LALONDE has served as our Vice President, Finance and Treasurer
since July 1997 and previously served as the Controller of our predecessor from
August 1988 to July 1997. Mr. Lalonde is a Certified Public Accountant and a
member of the New York State Society of Certified Public
49
<PAGE>
Accountants and the American Institute of Certified Public Accountants. Mr.
Lalonde is also a member of the Investments Committee of HealthNow NY, Inc., the
local Blue Cross/Blue Shield affiliate.
RICHARD W. MOTT has served as our Group Vice President since August 1998.
Mr. Mott served as our Vice President, Batteries from July 1997 to August 1998
and previously served as the Vice President, Batteries of our predecessor from
September 1993 to December 1996 and from November 1997 to July 1997. Mr. Mott
also served as Vice President and General Manager of Greatbatch Scientific from
December 1996 to August 1998.
SUSAN M. BRATTON has served as the General Manager, Electrochem Battery
since July 1998 and previously served as the Director of Procurement for our
company and our predecessor from June 1991 to July 1998. Ms. Bratton has held
various positions with us since 1976.
ROBERT C. RUSIN has served as our Vice President, Corporate Quality since
July 1999. From August 1998 to July 1999, Mr. Rusin served as President and
Chief Operating Officer of BioVector, Inc. From January 1997 to August 1998,
Mr. Rusin served as Director, Sales and Distribution, of Greatbatch Scientific
and previously served as Director, Greatbatch Surgical Products for our
predecessor from January 1995 to January 1997.
ESTHER S. TAKEUCHI, PH.D. has served as our Vice President, Research and
Development since May 1999. Dr. Takeuchi served as our Director of
Electrochemical Research from July 1997 to May 1999 and previously served as
Director of Electrochemical Research of our predecessor from August 1991 to
July 1997. The Electrochemical Society Inc. conferred the Battery Division
Technology Award upon Dr. Takeuchi in 1995 and in 1998, the Western New York
Section of the American Chemical Society presented Dr. Takeuchi with the 68th
Jacob F. Schoellkopf Medal. Dr. Takeuchi was elected a Fellow of the American
Institute for Medical and Biological Engineering in 1999.
DAVID L. JAFFE has served as a director since December 1999. Mr. Jaffe is a
Managing Director of DLJ Merchant Banking, Inc. Mr. Jaffe joined DLJ Merchant
Banking, Inc. in 1984 and became a Managing Director in 1995. Mr. Jaffe serves
on the boards of directors of Brand Scaffold Services, Inc., Duane Reade Inc.,
Shoppers Drug Mart, Inc. and Target Media Partners.
ROBERT E. RICH, JR. has served as a director since July 1997. Mr. Rich has
served as President of Rich Products Corporation, a frozen foods manufacturer,
since 1978. Mr. Rich is a member of the board of directors of the Uniform Code
Council and Grocery Manufacturers of America, Inc.
DOUGLAS E. ROGERS has served as a director since July 1997. Since January
1997, Mr. Rogers has served as Managing Director of Global Health Care Partners,
a unit of DLJ Merchant Banking specializing in private equity investment in
health care businesses worldwide. Mr. Rogers previously served as head of U.S.
Investment Banking at Baring Brothers and as a Senior Vice President at Lehman
Brothers. Mr. Rogers serves on the board of directors of Charles River
Laboratories Corp. and Computerized Medical Systems, Inc.
HENRY WENDT has served as a director since July 1997. Since January 1997,
Mr. Wendt has served as Chairman of Global Health Care Partners, a unit of DLJ
Merchant Banking specializing in private equity investment in healthcare
businesses worldwide. Mr. Wendt retired as Chairman of SmithKline Beecham p.l.c.
in 1994 after completing a career of nearly 40 years in the pharmaceutical,
healthcare products and services industries. Mr. Wendt is Chairman of the Board
of Computerized Medical Systems, Inc., and serves on the board of directors of
Charles River Laboratories Corp., The Egypt Investment Company and West
Marine, Inc., and also is a Trustee of the Trilateral Commission and Trustee
Emeritus of the American Enterprise Institute.
DAVID M. WITTELS has served as a director since July 1997. Mr. Wittels has
been a Principal of DLJ Merchant Banking, Inc. since January 1997. For the past
five years, Mr. Wittels has held various
50
<PAGE>
positions with DLJ Merchant Banking, Inc. He serves on the boards of AKI Holding
Corp., AKI Inc., Mueller Holdings (N.A.), Inc. and Ziff Davis Holdings Inc.
In accordance with the stockholders agreements described below, all of the
parties to the stockholders agreements have agreed to cause our Chief Executive
Officer, presently Mr. Voboril, to be a member of our Board of Directors. DLJ
Merchant Banking nominated Messrs. Jaffe, Rich, Rogers, Wendt and Wittels to be
directors.
BOARD OF DIRECTORS
Our directors are elected annually to serve until the next annual meeting of
stockholders or until their successors are duly elected and qualified. Our Board
of Directors elects our executive officers annually to serve until the next
annual meeting of the Board of Directors, or until their successors are duly
elected and qualified, or until their earlier death, resignation,
disqualification or removal from office.
BOARD COMMITTEES
Our Board of Directors has established a Compensation Committee, which
consists of Messrs. Voboril, Wendt and Wittels. The Compensation Committee makes
recommendations to the Board of Directors with respect to our general and
specific compensation policies and administers our 1997 and 1998 stock option
plans.
The Board of Directors has established an Audit Committee, which consists of
Mr. Rich. The Board of Directors intends to name two additional independent
directors to the Audit Committee after consummation of this offering. The Audit
Committee reviews and reports to the Board of Directors on the scope and results
of audits by our independent auditors and recommends a firm of certified
independent public accountants to serve as our independent auditors, subject to
nomination by the Board of Directors and approval by the stockholders. The Audit
Committee also authorizes all audit and other professional services rendered by
our independent auditors and periodically reviews the independence of the
auditors. Membership on the Audit Committee is restricted to directors who are
independent of management and free from any relationship that, in the opinion of
the Board of Directors, would interfere with the exercise of independent
judgment as a committee member.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, our Compensation Committee consisted of Messrs. Voboril, Wendt
and Wittels and Lawrence A. Maciariello, a former director. Mr. Voboril served
as our President, Chief Executive Officer and Chairman of the Board during 1999.
In November 1997, we issued a loan to Mr. Voboril in the amount of $570,000,
which matures on November 1, 2007, in connection with his purchase of shares of
our common stock. Mr. Wittels is a Principal of DLJ Merchant Banking, Inc. and
from June 1997 to July 1997, prior to our acquisition of Wilson Greatbatch Ltd.,
he served as our President.
COMPENSATION OF DIRECTORS
Directors do not receive compensation for service as directors but are
reimbursed for travel expenses and other out-of-pocket costs incurred in
connection with their attendance at meetings.
51
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation for
the year ended December 31, 1999 earned by our President, Chief Executive
Officer and Chairman, and our four other most highly compensated executive
officers as of December 31, 1999. In this prospectus, we refer to these
individuals as our named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------------ ------------- ----------
OTHER SECURITIES
ANNUAL UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION(2) OPTIONS PAYOUTS(3) COMPENSATION(4)
--------------------------- ----------------- --------- ---------------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Edward F. Voboril.............. $ 271,500 $253,078 $ -- 40,940 $ -- $ 23,297
President, Chief Executive
Officer and Chairman
Larry T. DeAngelo.............. 128,571 36,924 -- 6,487 179,410 18,435
Vice President,
Administration and
Secretary
Curtis F. Holmes, Ph.D......... 147,166 38,373 37,967 8,935 184,050 185,655
President,
Greatbatch-Hittman, Inc.
Richard W. Mott................ 138,332 39,740 -- 8,855 179,410 18,652
Group Vice President
Fred Hittman................... 193,569 -- -- 1,267 -- 3,370
Former President, Greatbatch-Hittman,
Inc. (5)
</TABLE>
------------------------------
(1) Represents payments we made in fiscal 1999 for bonuses earned in prior
years.
(2) Includes reimbursement of $31,397 of relocation expenses for Dr. Holmes. No
other annual compensation is reported for Mr. Voboril, Mr. DeAngelo,
Mr. Mott or Mr. Hittman because perquisites and personal benefits did not
exceed the lesser of $50,000 and 10% of the total annual salary and bonus
reported for these named executive officers.
(3) Represents payments we made in fiscal 1999 pursuant to our long term
compensation plan, which was terminated in 1997. The final payment under the
plan will be payable in 2001.
(4) Represents payments of term life insurance premiums of $3,497 for
Mr. Voboril, $1,134 for Mr. DeAngelo and $1,761 for Dr. Holmes; our matching
contributions to the 401(k) plan of $3,360 for Mr. Voboril, $2,744 for
Mr. DeAngelo, $3,360 for Dr. Holmes, $2,923 for Mr. Mott and $3,370 for
Mr. Hittman; our contributions under the ESOP plan of $8,440 for
Mr. Voboril, $7,847 for Mr. DeAngelo, $8,147 for Dr. Holmes and $8,479 for
Mr. Mott, which contributions represent 563, 523, 543 and 565 shares of our
common stock, respectively; our contributions under our defined contribution
pension plan of $8,000 for Mr. Voboril, $6,710 for Mr. DeAngelo, $6,965 for
Dr. Holmes and $7,250 for Mr. Mott; and a payout of $165,422 to Dr. Holmes
made in fiscal 1999 in respect of stock appreciation rights granted in prior
years.
(5) Mr. Hittman served as the President of Greatbatch-Hittman, Inc. until his
retirement on December 31, 1999.
STOCK OPTION GRANTS
The following table sets forth the stock options we granted during the
fiscal year ended December 31, 1999 to each of the named executive officers,
including the potential realizable value over the 10 year term of the options,
based on assumed rates of stock appreciation of 5% and 10%, compounded annually.
These assumed rates of appreciation are mandated by the rules of the Securities
and Exchange Commission and do not represent our estimate of future stock price
performance. Actual gains, if any, on stock option exercises will be dependent
on the future performance of our common stock.
52
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED IN EXERCISE
NAME OPTIONS GRANTED FISCAL 1999 PRICE ($/SHARE)
---- ------------------------- ---------------------- ------------------------
<S> <C> <C> <C>
Edward F. Voboril.... 1,900 1.4% $ 15.00
Edward F. Voboril.... 18,000 13.0 15.00
Edward F. Voboril.... 21,040 15.2 15.00
Larry T. DeAngelo.... 907 0.7 15.00
Larry T. DeAngelo.... 5,580 4.0 15.00
Curtis F.
Holmes, Ph.D....... 1,055 0.8 15.00
Curtis F.
Holmes, Ph.D....... 7,880 5.7 15.00
Richard W. Mott...... 976 0.7 15.00
Richard W. Mott...... 7,880 5.7 15.00
Fred Hittman......... 1,267 0.9 15.00
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------ RATES OF STOCK
PRICE APPRECIATION
FOR OPTIONS TERM(1)
----------------------------------------
NAME EXPIRATION DATE 5% 10%
---- ------------------------------------ ------------------- ------------------
<S> <C> <C> <C>
Edward F. Voboril.... September 23, 2009 $ 46,423 $ 73,922
Edward F. Voboril.... March 10, 2009 439,802 700,310
Edward F. Voboril.... December 31, 2009 514,079 818,585
Larry T. DeAngelo.... September 23, 2009 22,161 35,288
Larry T. DeAngelo.... December 31, 2009 136,338 217,096
Curtis F.
Holmes, Ph.D....... September 23, 2009 25,777 41,046
Curtis F.
Holmes, Ph.D....... December 31, 2009 192,535 306,580
Richard W. Mott...... September 23, 2009 23,847 37,972
Richard W. Mott...... December 31, 2009 192,535 306,580
Fred Hittman......... December 31, 2000 30,957 49,294
</TABLE>
------------------------------
(1) Computed using the fair market value on the date of grant of $15.00, as
determined by our Board of Directors.
FISCAL YEAR END OPTION VALUES
The table below provides information about the number and value of options
held by the named executive officers at December 31, 1999. In the absence of a
regular, active public market for our common stock, and based in part on
consideration of comparable companies, the Compensation Committee estimated the
fair value of the stock options granted in fiscal 1999 to have been $15.00 per
share. The values of in-the-money options have been calculated on the basis of a
$15.00 per share fair market value of our common stock as of that date, less the
applicable exercise price.
YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------- -----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Edward F. Voboril.............................. 30,632 121,448 $239,116 $689,684
Larry T. DeAngelo.............................. 12,695 40,432 107,392 309,408
Curtis F. Holmes, Ph.D......................... 13,248 44,368 112,426 324,774
Richard W. Mott................................ 13,880 45,608 112,426 324,774
Fred Hittman................................... 1,267 -- -- --
</TABLE>
EMPLOYMENT AGREEMENT
On July 9, 1997, we entered into an employment agreement with Mr. Voboril,
our President, Chief Executive Officer and Chairman. The agreement currently
expires on June 30, 2001 and automatically extends for additional one year
periods until we or Mr. Voboril gives notice to terminate not less than
12 months prior to the proposed termination date. We currently pay Mr. Voboril
$320,000 per year and our Compensation Committee, along with our Board of
Directors, has the right to increase Mr. Voboril's salary. Under the agreement,
Mr. Voboril is entitled to a bonus equal to 75% of his
53
<PAGE>
current base salary if our company achieves financial targets set by our Board
of Directors and reflected in our annual budget.
If we terminate Mr. Voboril's employment without cause or if Mr. Voboril
terminates his employment for good reason, we have agreed to pay to Mr. Voboril
the greater of $285,000 or his current annual base salary and a bonus for the
year of termination equal to a percentage of his base salary. If we terminate
his employment without cause within six months before, or twelve months after, a
change in control of our company, we will pay Mr. Voboril an amount equal to his
current annual salary and a bonus equal to 75% of his current base salary. In
addition, all performance stock options held by Mr. Voboril will automatically
vest and he will have the right to exercise all unexercised options.
If we terminate Mr. Voboril's employment for cause or if Mr. Voboril
terminates his employment without good reason, we will pay him his accrued base
salary and other compensation that has accrued as of the termination date.
However, we will not pay Mr. Voboril an annual bonus if we terminate his
employment with cause, and any stock options granted to Mr. Voboril that have
not vested will be forfeited and canceled. If we terminate Mr. Voboril for
cause, we may, at our election, purchase all of his shares and vested stock
options at the lesser of the shares' cost or fair market value.
So long as Mr. Voboril is not terminated without cause, he has agreed not to
compete, directly or indirectly, against us during his employment and for two
years after his employment ends. In addition, Mr. Voboril has agreed not to
solicit any of our employees for two years after his employment ends.
We have not entered into employment agreements with our other named
executive officers.
STOCK PLANS
We have two stock option plans that provide for the issuance of nonqualified
and incentive stock options to our key employees and key employees of our
subsidiaries. The terms of our 1997 stock option plan and 1998 stock option plan
are substantially the same and both plans are administered by our Compensation
Committee. Our 1997 stock option plan authorizes the issuance of options to
acquire up to 480,000 shares of our common stock and our 1998 stock option plan
authorizes the issuance of options to acquire up to 1,220,000 shares of our
common stock. Options granted under our 1997 and 1998 stock option plans
generally vest over a three to five year period and the vesting period can be
accelerated depending upon the achievement by our company of performance
standards, including earnings targets. Options expire 10 years from the date of
the grant, except that incentive stock options granted to key employees expire
five years from the date of grant. Options are granted with exercise prices
equal to the fair market value of our common stock on the date of the grant.
Options generally are non-transferable, other than by will or the laws of
descent and distribution and are exercisable only by the grantee while the
grantee is alive. Both of our stock option plans contain a change in control
provision. If a change in control of our company occurs, at the discretion of
our Compensation Committee, each option granted under our stock option plans may
be terminated. If this occurs, we are to pay each optionholder an amount equal
to the difference between the fair market value of each share and the exercise
price per share. This amount would be payable upon the closing of a transaction
that results in a change in control.
As of August 15, 2000, 584,683 shares of our common stock were issuable upon
exercise of outstanding stock options, subject in some cases to vesting
conditions, and 1,086,689 options were available for future grants under our
1997 and 1998 stock option plans. The weighted average remaining contractual
life of granted options is seven years. The average weighted exercise price per
share of the options outstanding as of August 15, 2000 was $8.95.
54
<PAGE>
INCENTIVE COMPENSATION PLANS
We sponsor various incentive compensation programs, which provide for the
payment of cash to key employees based upon achievement of specific earnings
goals before incentive compensation expense. The scheduled aggregate payment
amounts relating to our deferred compensation plans as of June 30, 2000 were as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------
<S> <C>
2000........................................................ $ 56
2001........................................................ 631
2002........................................................ 14
------
701
Less current maturities of deferred compensation (included
in accrued liabilities)................................... (56)
------
Long-term portion of deferred compensation.................. $ 645
======
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN
We sponsor an employee stock ownership plan, or ESOP, and related trust as a
long-term benefit for substantially all of our employees. There are two
components to contributions under the ESOP. The first component is a defined
contribution pension plan whose annual contribution equals 5% of each employee's
compensation. Contributions to the ESOP are in the form of our common stock. The
second component is a discretionary profit sharing contribution determined by
the Board of Directors. This profit sharing contribution is also contributed to
the ESOP in the form of shares of our common stock. The ESOP is subject to
contribution limitations and vesting requirements.
55
<PAGE>
RELATED PARTY TRANSACTIONS
We describe below some of the transactions we have entered into with parties
that are related to our company. We believe that each of the transactions
described below was on terms no less favorable to us than we could have obtained
from unrelated parties.
LEVERAGED BUYOUT
In July 1997, DLJ Merchant Banking and members of our management acquired
our predecessor company, Wilson Greatbatch Ltd., in a leveraged buyout
transaction. The Greatbatch family members who were the former controlling
shareholders received a net aggregate amount of $93.25 million as the sellers in
the leveraged buyout transaction. The Greatbatch family members also purchased
1,665,064 shares of our common stock at $5.00 per share for a total purchase
price of $8,325,321. As a result of the leveraged buyout and transactions
entered into in connection with it:
- DLJ Merchant Banking acquired 86.4% of our common stock;
- Greatbatch family members, who were the former controlling shareholders of
our predecessor company, acquired 9.2% of our common stock;
- members of our management acquired 2.2% of our common stock; and
- holders of our 13% senior subordinated notes not affiliated with DLJ
Merchant Banking acquired the remaining 2.2% of our common stock.
SALES OF COMMON STOCK TO MANAGEMENT
In July 1997, in connection with the leveraged buyout, we sold 8,346,364
shares of our common stock to DLJ Merchant Banking for an aggregate purchase
price of $41,731,818. At that time, we also issued the following number of
shares of common stock for the following purchase price to some of our executive
officers:
<TABLE>
<CAPTION>
NUMBER OF SHARES PURCHASE PRICE
---------------- --------------
<S> <C> <C>
Edward F. Voboril........................................... 57,000 $285,000
Tim H. Belstadt............................................. 22,200 111,000
Larry T. DeAngelo........................................... 25,600 128,000
Curtis F. Holmes, Ph.D...................................... 26,800 134,000
Arthur J. Lalonde........................................... 18,000 90,000
Richard W. Mott............................................. 26,800 134,000
Susan M. Bratton............................................ 14,200 71,000
</TABLE>
In November 1997, we sold 336,800 shares of our common stock, for an
aggregate purchase price of $1,684,000, to some of our executive officers and
issued loans to them in the amount of their respective purchase price, as
further described below.
In August 1998, we sold 2,849,384 shares of our common stock to DLJ Merchant
Banking for an aggregate purchase price of $14,246,919. At that time we also
sold the following number of shares of common stock for the following purchase
price to some of our executive officers:
<TABLE>
<CAPTION>
NUMBER OF SHARES PURCHASE PRICE
---------------- --------------
<S> <C> <C>
Edward F. Voboril........................................... 60,822 $304,110
Tim H. Belstadt............................................. 20,000 99,999
Larry T. DeAngelo........................................... 27,316 136,381
Curtis F. Holmes, Ph.D...................................... 28,597 142,986
Arthur J. Lalonde........................................... 20,299 101,493
Richard W. Mott............................................. 6,000 30,000
Susan M. Bratton............................................ 16,000 80,001
</TABLE>
56
<PAGE>
In September 1999, we sold 50,000 shares of our common stock for an
aggregate purchase price of $750,000 to Fred Hittman, who at that time was
serving as President of Greatbatch-Hittman, Inc.
DIRECTOR AND OFFICER LOANS
On November 1, 1997, we issued loans to a number of our executive officers
and key employees in connection with their purchases of shares of our common
stock. Each loan bears interest at an annual rate of 6.42%, is evidenced by a
full recourse promissory note and secured by a pledge of the shares purchased
with the proceeds of the loan and matures on November 1, 2007. The following
table sets forth, with respect to our current and former executive officers and
directors, the purchase price for the common stock, which is equal to the amount
of indebtedness owed to us by each individual as of July 1, 2000 and the largest
aggregate amount of indebtedness outstanding during the year ended December 31,
1999, and the number of shares of our common stock purchased and pledged by each
individual to secure that indebtedness:
<TABLE>
<CAPTION>
INDEBTEDNESS SHARES PURCHASED
------------ ----------------
<S> <C> <C>
Edward F. Voboril........................................... $ 570,000 114,000
Larry T. DeAngelo........................................... 256,000 51,200
Curtis F. Holmes, Ph.D...................................... 268,000 53,600
Arthur J. Lalonde........................................... 180,000 36,000
Richard W. Mott............................................. 268,000 53,600
Susan M. Bratton............................................ 142,000 28,400
---------- -------
Total................................................. $1,684,000 336,800
========== =======
</TABLE>
The borrowers will have the option to repay their respective loans by
tendering to us, at the time of the offering, a number of their shares of our
common stock equal to their indebtedness, based on a price per share equal to
the initial public offering price per share.
SECURITIES PURCHASE AGREEMENT
In July 1997, we and WGL Acquisition Corp., a company formed by DLJ Merchant
Banking to acquire all of the shares of our predecessor, which later merged into
our predecessor, entered into a securities purchase agreement with DLJ
Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C.
and Donaldson, Lufkin & Jenrette Securities Corporation, all of which are
entities affiliated with DLJ Merchant Banking, and The Northwestern Mutual Life
Insurance Company. In accordance with the agreement, we issued and sold 637,663
shares which at the time of issuance represented approximately 7% of our common
stock. At the same time as the share issuance, WGL Acquisition Corp. issued 13%
senior subordinated notes in the aggregate principal amount of $25.0 million,
which have since become obligations of our company. Our senior subordinated
notes mature on July 1, 2007. Affiliates of DLJ Merchant Banking originally
purchased $22.5 million of the principal amount of the notes. In October 1997,
an affiliate of DLJ Merchant Banking transferred $5.0 million of the principal
amount of the notes to an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
REGISTRATION AND ANTI-DILUTION AGREEMENT
We entered into a registration and anti-dilution agreement with DLJ
Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C.
and Donaldson, Lufkin & Jenrette Securities Corporation, all of which are
entities affiliated with DLJ Merchant Banking, and The Northwestern Mutual Life
Insurance Company in July 1997. The agreement provides for adjustments to the
numbers of shares held by the purchasers to prevent dilution from issuance of
shares for less than fair market price. If we propose to register any of our
common stock under the Securities Act, either for our own account or for the
account of other securityholders, the purchasing parties are entitled to include
their
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<PAGE>
shares in the registration. In addition, parties holding more than 25% of the
securities entitled to registration may require us to prepare and file a
registration statement under the Securities Act at any time after this offering.
We are not obligated to effect more than two of these demand registrations. The
managing underwriter of the offering has the right to limit the number of shares
in any registration relating to the agreement if the underwriter believes that
the success of the offering would be materially and adversely affected because
of its size or kind. If more than half of the securities entitled to
registration are excluded by the managing underwriter, the holders of the
registration rights are to be given an additional demand registration.
NOTE REGISTRATION RIGHTS AGREEMENT
We entered into a registration and anti-dilution agreement with DLJ
Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C.
and Donaldson, Lufkin & Jenrette Securities Corporation, all of which are
entities affiliated with DLJ Merchant Banking, and The Northwestern Mutual Life
Insurance Company in July 1997. The agreement provides that the parties will
receive sufficient shares to prevent dilution if we issue shares at less than
market value on the date of issuance or if we issue any securities convertible
into shares at less than market value on the date of issuance and grants the
parties registration rights with respect to the 13% senior subordinated notes.
No conditions or options currently exist that would obligate us to issue more
shares under the anti-dilution agreement.
AMENDED AND RESTATED CREDIT AGREEMENT
We entered into a credit agreement with a syndicate of financial
institutions led by DLJ Capital Funding, Inc. on July 10, 1997. DLJ Capital
Funding, Inc. is an affiliate of DLJ Merchant Banking. The parties to the credit
agreement amended and restated it on August 7, 1998. On November 15, 1999, the
parties to the credit agreement entered into a waiver and amendment which, among
other things, waived compliance with financial covenants contained in the credit
agreement. On February 10, 2000, the parties to the credit agreement again
amended provisions of the credit agreement governing the applicable interest
margins and financial covenants. The credit agreement includes the following
commitments:
- a Term A loan commitment, under which:
- there is a maximum principal amount of $50.0 million;
- loan amounts bear interest, at our option, at prime plus 2.25% or LIBOR
plus 3.50%;
- we had $43.8 million outstanding as of July 1, 2000; and
- loans mature on September 30, 2004.
- a Term B loan commitment, under which:
- there is a maximum principal amount of $60.0 million;
- loan amounts bear interest, at our option, at prime plus 2.50% or LIBOR
plus 3.75%;
- we had $58.9 million outstanding as of July 1, 2000; and
- loans mature on September 30, 2006.
- a revolving line of credit commitment, under which:
- there is a maximum principal amount of $13.0 million, which may increase
to $20.0 million after December 31, 2000, in each case if we meet our
financial targets, including the debt to EBITDA ratio set forth in the
credit agreement;
- we had $1.1 million outstanding and $11.9 million available, subject to
customary borrowing conditions, as of July 1, 2000;
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- loan amounts bear interest at prime plus 2.25% or LIBOR plus 3.50%;
- we pay a commitment fee equal to 0.50% per year, calculated on the
unused portion on the revolving loan commitment; and
- loans mature on September 30, 2004.
The credit agreement also includes a letter of credit commitment in the
maximum aggregate stated amount of $10.0 million and a swing line loan
commitment in a maximum aggregate outstanding principal amount of $2.0 million.
Our swing line loan facility is a subfacility of the revolving line of credit in
which the agent advances funds on the same day, following timely notice by
telephone, on behalf of the revolving credit lenders as a convenience for us and
as an administrative convenience for the revolving credit lenders. The revolving
credit lenders are required to fund their pro rata share of any swing line loan
at the request of the agent if we do not repay the swing line loan.
The credit agreement is subject to conditions precedent, financial
covenants, representations and warranties, as well as affirmative and negative
covenants. Borrowings under the credit agreement are secured by our shares and
shares of one of our affiliates, balances, credits and deposits and monies held
by the lenders and substantially all of our assets. In connection with the
credit agreement, we pledged all of the issued and outstanding shares of common
stock of our subsidiary, WGL Intermediate Holdings, Inc., and that company
pledged all of the issued and outstanding common shares of its subsidiary,
Wilson Greatbatch Ltd., to Fleet National Bank, as administrative agent under
the credit agreement.
The credit agreement provides that a change in control of our company
constitutes an event of default. The failure of DLJ Merchant Banking to own in
excess of 50% of the capital stock of our company and the failure of DLJ
Merchant Banking to have the right to elect a majority of our Board of Directors
constitute change in control events.
The credit agreement, in connection with the pledge agreements we entered
into, entitles the holders of shares pledged under those agreements to require
us to register the shares under the Securities Act if the administrative agent
determines to exercise his right to sell the pledged shares upon the occurrence
of an event of default under the credit agreement. In the event that we fail to
register the pledged shares pursuant to the credit agreement, we will pay, as
liquidated damages, an amount equal to the pledged shares' value as of the date
that the administrative agent demanded registration.
In connection with the credit agreement, we have paid the following amounts
to affiliates of DLJ Merchant Banking in the periods indicated for interest and
various fees, including commitment, waiver and amendment and debt financing
fees:
<TABLE>
<CAPTION>
YEAR INTEREST PAID FEES PAID
---- ------------- ----------
<S> <C> <C>
1997................................................. $423,886 $1,102,500
1998................................................. 52,246 1,709,189
1999................................................. -- --
2000................................................. -- --
</TABLE>
STOCKHOLDERS AGREEMENTS
In July 1997, we entered into three separate stockholders agreements with
DLJ Merchant Banking and other parties, including members of our management who
participated in the leveraged buyout and are stockholders of our company.
Holders of an aggregate of 13,152,814 shares of our common stock are party to
the three stockholders agreements. The terms of the three stockholders
agreements are substantially the same. In the agreements, the parties agreed to
elect our Board of Directors, transfer securities governed by the agreements and
conduct and participate in registrations of securities governed by the
agreements according to the terms of the agreements. The stockholders agreements
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<PAGE>
prohibit most transfers of securities governed by the agreements unless the
proposed transferor offers to include in the proposed transfer the other
parties' pro rata share of securities subject to the agreement, or the transfer
is made in connection with a party's exercise of its right of participation in
such a transfer or DLJ Merchant Banking's exercise of its right of forced sale
under the agreements. Most transfer restrictions under the stockholders
agreements will terminate upon the consummation of this offering, or, in the
case of the management stockholders agreement, one year after that date. The
stockholders agreements will survive the closing of this offering. The
agreements provide that the parties to the agreements and our company will take
all action required to cause our Board of Directors to consist of seven
directors, one of whom shall be our Chief Executive Officer. So long as they
collectively beneficially own at least 3% of the fully-diluted shares of our
common stock, members of the Greatbatch family, who are the former controlling
stockholders of our company, have the right to nominate one director to our
Board of Directors. DLJ Merchant Banking has the right to nominate all other
members of our Board of Directors. The parties to the stockholders agreements
have agreed to vote in favor of nominees selected by DLJ Merchant Banking and,
if applicable, the Greatbatch family nominee. The members of our Board of
Directors elected pursuant to the agreements include Mr. Voboril, our Chief
Executive Officer, and Messrs. Jaffe, Rich, Rogers, Wendt and Wittels, each of
whom was nominated by DLJ Merchant Banking. There is currently one vacancy on
our Board of Directors, which we anticipate will be filled in the fall of 2000.
All the stockholders party to the stockholders agreements agree to vote
their shares in elections of directors in accordance with the terms of the
stockholders agreements. Therefore, each party may be deemed to share beneficial
ownership of all shares subject to each stockholders agreement to which it is a
party. Entities affiliated with DLJ Merchant Banking II, L.P. are party to all
three stockholders agreements and consequently may be deemed to beneficially own
the aggregate of all 12,562,958 shares subject to the three agreements. This
number includes all of the 10,228,214 shares of common stock held directly by
the entities affiliated with DLJ Merchant Banking II, L.P. Members of our
management are party to two of the three agreements, the stockholders agreement
dated as of July 16, 1997 and the management stockholders agreement dated as of
July 10, 1997, and consequently may be deemed to beneficially own the aggregate
of all 11,949,772 shares subject to those two agreements, in addition to the
shares held by them directly.
Subject to pro rata and underwriter exceptions, if we propose to file a
registration statement relating to an offering of any of our equity securities,
the parties to the agreements have the right to have their shares of our common
stock registered and sold as part of the offering.
DLJ FINANCIAL ADVISORY AGREEMENT
On July 10, 1997, we appointed Donaldson, Lufkin & Jenrette Securities
Corporation, or DLJ, to act as our exclusive financial advisor with respect to
reviewing and analyzing financial alternatives for our company. Under the
agreement, DLJ assists us from time to time in analyzing our operations and
historical performance as well as our future prospects, with a view to meeting
our long term strategic objectives. The agreement expires on July 10, 2002. In
accordance with this agreement, we pay DLJ $100,000 annually and as further
compensation, DLJ has the right to act as our exclusive financial advisor and
sole managing underwriter for any underwritten public offering of our stock and
other financial transactions consummated by our company during the engagement
period. DLJ is an affiliate of DLJ Merchant Banking and is one of the joint
book-running managers for this offering.
HITTMAN AGREEMENTS
In August 1998, we purchased all of the outstanding capital stock of Hittman
from Fred Hittman, the sole shareholder, for $71.8 million. Fred Hittman
subsequently served as the President of our subsidiary Greatbatch-Hittman, Inc.
until his retirement on December 31, 1999. We paid $69.0 million of the purchase
price at the time of the acquisition and an additional $2.8 million after
Hittman
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achieved financial targets in 1998. We paid DLJ a fee of approximately
$2.8 million for acting as our financial advisor in connection with the
acquisition, for its underwriting fee and for a bond consent fee.
We lease our Columbia, Maryland facility from Mr. Hittman under an agreement
that expires in 2006. In accordance with the agreement, we made payments to
Mr. Hittman of $83,655 for the period from August 8, 1998 to the end of fiscal
1998 and $210,600 in 1999. The annual rental payment under the lease is $210,600
until 2003, at which time it increases annually until the termination of the
lease. The average annual rental payment throughout the term of the lease is
$219,600. In addition, we have an option to purchase the leased property for the
agreed fair market value at the time when the lease expires.
In August 1999, we entered into a stockholders agreement with Fred Hittman,
then President of Greatbatch-Hittman, Inc., and DLJ Merchant Banking. In the
agreement, we and Fred Hittman agreed to elect our Board of Directors and
conduct and participate in registrations of securities governed by the
agreements according to the terms of the agreement. The stockholders agreement
generally prohibits Mr. Hittman from transferring securities governed by the
agreement unless the transfer is made in connection with an exercise of his
right of participation in transfers made by DLJ Merchant Banking or DLJ Merchant
Banking's exercise of its right of forced sale under the agreement. Most
transfer restrictions under the stockholders agreement will terminate upon the
consummation of this offering. The stockholders agreement will survive the
closing of this offering. The stockholders agreement provides that Fred Hittman
will take all action within his power required to cause our Board of Directors
to include all of the directors designated by DLJ Partners II or its successor
in interest. Therefore, because an entity affiliated with DLJ Merchant Banking
II, L.P. has the power to direct the voting of Mr. Hittman's shares in this
respect, the entities affiliated with DLJ Merchant Banking II, L.P. may be
deemed to share beneficial ownership of all of Mr. Hittman's 50,000 shares that
are subject to the stockholders agreement. However, because Mr. Hittman does not
have the power to direct the voting of shares owned by the entities affiliated
with DLJ Merchant Banking II, L.P. under the terms of the stockholders
agreement, Mr. Hittman does not share voting power with respect to those shares
and consequently is not deemed to beneficially own any of such shares as a
result of the stockholders agreement.
GREATBATCH LEASE AGREEMENT
We lease approximately 18,550 square feet at one of our Clarence, New York
facilities from Warren Greatbatch, as trustee under an irrevocable trust
agreement for the benefit of Ericka Dee Greatbatch, who is the niece of Lawrence
A. Maciariello, a former director. Warren Greatbatch is the brother-in-law of
Mr. Maciariello. In accordance with the lease agreement, which will expire on
March 31, 2018, we made payments to the trust of $86,400 per year in each of
fiscal 1997, 1998 and 1999. This lease provides that the rental rate is to be
adjusted in 2003, 2008 and 2013 to reflect the fair market rental value at that
time.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
our common stock as of August 15, 2000, and as adjusted to reflect the sale of
shares of our common stock in this offering, by:
- each person who owns more than 5% of our outstanding shares of common
stock;
- each of our named executive officers;
- each of our directors; and
- all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
OUTSTANDING
NUMBER OF SHARES -------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------ --------------------------- -------- --------
<S> <C> <C> <C>
Entities affiliated with DLJ Merchant
Banking Partners II, L.P. (1)(2)............................ 13,152,814 100.0% 72.5%
277 Park Avenue
New York, New York 10172
Edward F. Voboril (3)(4).................................... 11,980,404 91.1 66.0
Larry T. DeAngelo (3)(5).................................... 11,962,467 90.9 65.9
Curtis F. Holmes, Ph.D. (3)(6).............................. 11,963,020 91.0 65.9
Richard W. Mott (3)(7)...................................... 11,963,640 91.0 65.9
Fred Hittman(8)............................................. 51,267 * *
David L. Jaffe (2)(9)....................................... 13,152,814 100.0 72.5
Robert E. Rich, Jr.(3)(10).................................. 11,949,772 90.9 65.8
Douglas E. Rogers (2)(9).................................... 13,152,814 100.0 72.5
Henry Wendt (2)(9).......................................... 13,152,814 100.0 72.5
David M. Wittels (2)(9)..................................... 13,152,814 100.0 72.5
All directors and executive officers as a
group (10 persons) (2)(3)(4)(5)(6)(7)(9)(10)(11)............ 13,223,257 100.0 72.6
</TABLE>
--------------------------
* Less than one percent
(1) Consists of shares held directly by DLJ Merchant Banking Partners II, L.P.
and the following related investors: DLJ Merchant Banking Partners II-A,
L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJ
Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ Millennium
Partners-A, L.P., DLJMB Funding II, Inc., DLJ Investment Partners, L.P., DLJ
Investment Funding, Inc., UK Investment Plan 1997 Partners, DLJ EAB
Partners, L.P., DLJ First ESC, L.P. and DLJ ESC II, L.P. In the aggregate,
these entities have sole investment power with respect to 10,228,214 shares
of common stock, which is equivalent to 77.8% of the common stock
outstanding before this offering and 56.3% of the common stock outstanding
after this offering.
(2) Voting power with respect to the shares reported is shared, pursuant to the
stockholders agreements entered into in July 1997, August 1999 and
August 2000, with the other parties to the stockholders agreements.
Therefore, the various entities affiliated with DLJ Merchant Banking and
Messrs. Jaffe, Rogers, Wendt and Wittels each may be deemed to beneficially
own all of the 13,152,814 shares of common stock with respect to which
voting power is shared pursuant to the stockholders agreements. Such
13,152,814 shares are comprised of the 12,562,958 shares that are subject to
the three stockholders agreements entered into in July 1997, including the
10,228,214 shares held directly by the entities affiliated with DLJ Merchant
Banking and the shares held directly by Messrs. Voboril, DeAngelo, Holmes,
Mott and Rich; the 50,000 shares held directly by Mr. Hittman that are
subject to the stockholders agreement entered into in August 1999; and the
539,856 shares held directly by Hitachi-Maxell, Ltd. that are subject to the
stockholders agreement entered into in August 2000. In addition, the other
parties to the stockholders agreement dated as of July 16, 1997, who,
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<PAGE>
under the agreement, share voting power with respect to the shares owned by
the entities affiliated with DLJ Merchant Banking, may be deemed to
beneficially own the 10,228,214 shares of common stock held by the entities
affiliated with DLJ Merchant Banking, which is equivalent to 77.8% of the
common stock outstanding before this offering and 56.3% of the common stock
outstanding after this offering. Those other parties, each of whom disclaims
beneficial ownership of such shares held by the entities affiliated with DLJ
Merchant Banking, include the following persons: Tim H. Belstadt, Susan M.
Bratton, Larry T. DeAngelo, Curtis F. Holmes, Arthur J. Lalonde, Richard W.
Mott, Edward F. Voboril, Jack A. Belstadt, Richard J. Boos, William H.
Bruns, Curtis A. Cashmore, William D.K. Clark, Steven J. Ebel, Douglas P.
Eberhard, Gayle E. Fairchild, Stuart S. Ferguson, John T. Fordyce, Frank J.
Forkl, Jr., Dominick J. Frustaci, Christine A. Frysz, Richard M. Garlapow,
Robert W. Hammell, Robert C. Jackson, Ricky S. Kline, Randolph A. Leising,
Bruce E. Meyer, Charles L. Mozeko, Barry C. Muffoletto, Michael R. Nowaczyk,
William M. Paulot, Joseph M. Probst, Michael F. Pyszczek, Janice E. Remigio,
Robert C. Rusin, Gary J. Sfeir, Robert W. Siegler, Joseph E. Spaulding,
Esther S. Takeuchi, Mark Visbisky, Gary R. Whitcher and Robert C. Weigand.
(3) Voting power with respect to the shares reported is shared, pursuant to
stockholders agreements entered into in July 1997, with the other parties to
the stockholders agreements. Therefore, Messrs. Voboril, DeAngelo, Holmes,
Mott and Rich each may be deemed to beneficially own all of the 11,949,772
shares of common stock with respect to which voting power is shared pursuant
to the stockholders agreements. Messrs. Voboril, DeAngelo, Holmes, Mott and
Rich disclaim beneficial ownership of such shares, other than the 262,453
shares, 116,811 shares, 122,245 shares, 96,865 shares and 20,000 shares held
directly by Messrs. Voboril, DeAngelo, Holmes, Mott and Rich, respectively.
(4) Includes 30,632 shares Mr. Voboril has the right to acquire pursuant to
options exercisable within 60 days after August 15, 2000. Including such
shares, Mr. Voboril directly holds 262,453 shares of common stock, which is
equivalent to 2.0% of the common stock outstanding before this offering and
1.4% of the common stock outstanding after this offering.
(5) Includes 12,695 shares Mr. DeAngelo has the right to acquire pursuant to
options exercisable within 60 days after August 15, 2000. Including such
shares, Mr. DeAngelo directly holds 116,811 shares of common stock, which is
equivalent to less than one percent of the common stock outstanding both
before and after this offering.
(6) Includes 13,248 shares Mr. Holmes has the right to acquire pursuant to
options exercisable within 60 days after August 15, 2000. Including such
shares, Mr. Holmes directly holds 122,245 shares of common stock, which is
equivalent to less than one percent of the common stock outstanding both
before and after this offering.
(7) Includes 866 shares held by Mr. Mott as trustee of the Sarah E. Mott Trust,
866 shares held by Mr. Mott as trustee of the Lindsay Mott Trust, 866 shares
held by Mr. Mott as trustee of the Rachel Mott Trust and 13,868 shares
Mr. Mott has the right to acquire pursuant to options exercisable within
60 days after August 15, 2000. Including such shares, Mr. Mott directly
holds 96,865 shares of common stock, which is equivalent to less than one
percent of the common stock outstanding both before and after this offering.
(8) Includes 1,267 shares Mr. Hittman has the right to acquire pursuant to
options exercisable within 60 days after August 15, 2000. Voting power with
respect to the shares reported is shared, pursuant to a stockholders
agreement entered into in August 1999, with the entities affiliated with
DLJ Merchant Banking Partners II, L.P.
(9) Consists of shares held by entities affiliated with DLJ Merchant Banking
Partners II, L.P., all of which are funds managed by DLJ Merchant Banking.
Messrs. Jaffe, Rogers, Wendt and Wittels disclaim beneficial ownership of
such shares.
(10) Mr. Rich directly holds 20,000 shares of common stock, which is equivalent
to less than one percent of the common stock outstanding both before and
after this offering.
(11) All directors and executive officers as a group directly hold 10,929,803
shares of common stock, which is equivalent to 83.1% of the common stock
outstanding before this offering and 60.2% of the common stock outstanding
after this offering.
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DESCRIPTION OF CAPITAL STOCK
Immediately following the consummation of this offering, the authorized
capital stock of our company will consist of 100,000,000 shares of common stock,
par value $.001 per share, and 100,000,000 shares of preferred stock, par value
$.001 per share, the rights and preferences of which may be established from
time to time by our Board of Directors. As of August 15, 2000, there were
13,152,814 shares of common stock outstanding that were held of record by
approximately 100 stockholders. Upon completion of this offering, there will be
18,152,814 outstanding shares of common stock, no outstanding shares of
preferred stock and options to purchase 584,683 shares of common stock.
The following discussion summarizes the material provisions of our capital
stock and the anti-takeover provisions that will be contained in our certificate
of incorporation and bylaws upon consummation of this offering. This summary is
qualified by our restated certificate of incorporation and bylaws, copies of
which have been filed as exhibits to the registration statement of which this
prospectus is a part.
Our restated certificate of incorporation and bylaws contain provisions,
such as the authorization of "blank check" preferred stock, limiting who may
call special meetings of our stockholders and advance notice procedures that are
required for stockholders to nominate candidates for election to our Board of
Directors or propose matters to be acted upon at stockholder meetings, which are
intended to enhance the likelihood of continuity and stability in the
composition of our Board of Directors. "Blank check" preferred stock could be
issued by our Board of Directors, without the delay that would be required to
obtain stockholder approval, to increase the number of outstanding shares and
thwart a takeover attempt. Limitations on who may call special meetings of our
stockholders make it difficult for minority stockholders to call special
meetings in which a new Board of Directors could be elected, among other things.
Advance notice requirements for nominations of candidates for election to our
Board of Directors or to propose matters to be acted upon by stockholders at
stockholder meetings make it more difficult for stockholders to nominate new
directors or submit stockholder proposals to be acted upon at stockholder
meetings. These provisions may have the effect of delaying, deferring or
preventing a future takeover or change in control of our company, unless such
takeover or change in control is approved by our Board of Directors.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Because holders of common stock do
not have cumulative voting rights, the holders of a majority of the shares of
common stock can elect all of the members of our Board of Directors. Subject to
preferences of any preferred stock that may be issued in the future, the holders
of common stock are entitled to receive dividends as may be declared by our
Board of Directors. The common stock is entitled to receive pro rata all of the
assets of our company available for distribution to our stockholders. There are
no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and non-assessable.
PREFERRED STOCK
Our Board of Directors will be authorized, without further action by our
stockholders, to issue shares of preferred stock in one or more series. The
Board will have discretion to determine the rights, preferences, privileges and
limitations of each series, including voting rights, dividend rights, conversion
rights, redemption privileges and liquidation preferences. Satisfaction of any
dividend preference of outstanding shares of preferred stock would reduce the
amount of funds available for the payment of dividends on shares of common
stock. In some circumstances, the issuance of shares of preferred stock may
render more difficult or tend to discourage a merger, tender offer or proxy
contest, the
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assumption of control by a holder of a large block of our securities or the
removal of incumbent management. We have no current intention to issue any
shares of preferred stock.
OPTIONS
As of August 15, 2000, options to purchase a total of 584,683 shares of our
common stock were outstanding, and options to acquire up to 1,086,689 shares of
common stock may be available for future issuance under our existing stock
option plans. The average weighted exercise price per share of the options
outstanding as of August 15, 2000 was $8.95.
REGISTRATION RIGHTS
After this offering, the holders of 13,152,814 shares of our common stock
will be entitled to registration rights. If we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, these holders
are entitled to notice of registration and are entitled to include shares of
common stock, subject to pro rata and underwriting exceptions. Additionally,
some of our stockholders have demand registration rights pursuant to which they
may require us on up to two occasions, to file a registration statement under
the Securities Act at our expense. The registration rights are subject to the
right of the underwriters of an offering to limit the number of shares included
in the registration and our right not to effect a required registration within
180 days following an offering of our securities pursuant to a registration
statement in connection with an underwritten public offering, including this
offering. If more than half of the securities entitled to demand registration
are excluded by the underwriters, the holders of demand registration rights are
to be given an additional demand registration right. These registration rights
are also subject to our right not to effect a requested registration, for no
more than one 120 day period during any calendar year, if our Board of Directors
determines in good faith to delay the filing to allow our company to include
financial statements in the registration statement or if our Board of Directors
reasonably determines that effectiveness of the registration statement or an
offering would materially adversely affect a pending or proposed acquisition,
merger or other significant corporate transaction.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
Our restated certificate of incorporation limits the liability of directors
to the fullest extent permitted by Delaware law. The effect of these provisions
is to eliminate the rights of our company and our stockholders, through
stockholders' derivative suits on behalf of our company, to recover monetary
damages against a director for breach of fiduciary duty as a director, including
breaches resulting from grossly negligent behavior. However, our directors will
be personally liable to us and our stockholders for monetary damages if they
acted in bad faith, knowingly or intentionally violated the law, authorized
illegal dividends or redemptions or derived an improper benefit from their
actions as directors. In addition, our restated certificate of incorporation
provides that we will indemnify our directors and officers to the fullest extent
permitted by Delaware law. We expect to enter into indemnification agreements
with our current directors and executive officers prior to the completion of
this offering. We also maintain directors and officers insurance.
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation law which
regulates corporate acquisitions. This law provides that specified persons who,
together with affiliates and associates, own, or within three years did own, 15%
or more of the outstanding voting stock of a corporation may not engage in
business combinations with the corporation for a period of three years after the
date on which the person became an interested stockholder. The law does not
include interested stockholders prior to the time our common stock is listed on
The New York Stock Exchange. The law defines the
65
<PAGE>
term "business combination" to include mergers, asset sales and other
transactions in which the interested stockholder receives or could receive a
financial benefit on other than a pro rata basis with other stockholders. This
provision has an anti-takeover effect with respect to transactions not approved
in advance by our Board of Directors, including discouraging takeover attempts
that might result in a premium over the market price for the shares of our
common stock. With approval of our stockholders, we could amend our certificate
of incorporation in the future to avoid the restrictions imposed by this
anti-takeover law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 18,152,814 outstanding shares
of common stock and outstanding options to purchase 584,683 shares of our common
stock, assuming no exercise of the underwriters' over-allotment option and no
additional option grants or exercises after August 15, 2000. We expect that the
5,000,000 shares to be sold in this offering, plus any shares issued upon
exercise of the underwriters' over-allotment option, will be freely tradable
without restriction under the Securities Act, unless purchased by our
"affiliates," as that term is defined in Rule 144 under the Securities Act. The
remaining 13,152,814 shares outstanding and 584,683 shares subject to
outstanding options are "restricted securities" within the meaning of Rule 144
under the Securities Act. Restricted securities may be sold in the public market
only if the sale is registered or if it qualifies for an exemption from
registration, such as under Rule 144, Rule 144(k) or Rule 701 promulgated under
the Securities Act, which are summarized below.
LOCK-UP AGREEMENTS
We, our executive officers and directors and substantially all of our
stockholders, including DLJ Merchant Banking, have agreed, for a period of
180 days after the date of this prospectus, not to, without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of our common stock or any securities convertible
into or exercisable or exchangeable for our common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock, regardless of whether any of the transactions described in these
clauses are to be settled by the delivery of common stock, or such other
securities, in cash or otherwise.
RULE 144
In general, under Rule 144 as currently in effect, beginning 180 days after
the date of this prospectus, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 181,528 shares immediately after this offering; and
- the average weekly trading volume of our common stock on The New York
Stock Exchange during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice and the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.
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<PAGE>
RULE 701
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell these shares in reliance upon Rule 144, but without
compliance with holding period and in some cases volume limitation and other
restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares
under Rule 144, 90 days after the effective date of this offering without
complying with the holding period requirement contained in Rule 144 and that
non-affiliates may sell such shares in reliance on Rule 144 90 days after the
effective date of this offering without complying with the holding period,
public information, volume limitation or notice requirements of Rule 144.
REGISTRATION RIGHTS
After this offering, the holders of approximately 13,152,814 shares of
common stock will be entitled to rights with respect to registration of these
shares under the Securities Act. Registration of these shares under the
Securities Act would result in these shares, except for shares purchased by
affiliates of our company, becoming freely tradable without restriction under
the Securities Act immediately on the effective date of this offering.
STOCK OPTIONS
Following expiration of the 180 day lock-up period described above, we
intend to file a registration statement on Form S-8 under the Securities Act to
register all shares of common stock subject to outstanding stock options and
common stock issued or issuable under our stock option plans. Shares of common
stock registered under any registration statement will, subject to Rule 144
volume limitations applicable to affiliates, be available for sale in the open
market.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement dated
September 28, 2000, the underwriters named below, who are represented by
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., have severally agreed to purchase from us the
number of shares of common stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,146,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................... 1,146,000
Banc of America Securities LLC.............................. 764,000
U.S. Bancorp Piper Jaffray Inc.............................. 764,000
DLJDIRECT Inc............................................... 100,000
Bear, Stearns & Co. Inc..................................... 40,000
CIBC World Markets Corp..................................... 40,000
Chase Securities Inc........................................ 40,000
Credit Suisse First Boston Corporation...................... 40,000
Deutsche Bank Securities Inc................................ 40,000
A.G. Edwards & Sons, Inc.................................... 40,000
First Union Securities, Inc................................. 40,000
Goldman, Sachs & Co......................................... 40,000
HSBC Securities (USA) Inc................................... 40,000
Morgan Stanley & Co. Incorporated........................... 40,000
PaineWebber Incorporated.................................... 40,000
Prudential Securities Incorporated.......................... 40,000
Salomon Smith Barney Inc.................................... 40,000
Thomas Weisel Partners LLC.................................. 40,000
Robert W. Baird & Co. Incorporated.......................... 20,000
George K. Baum & Company.................................... 20,000
Burnham Securities Inc...................................... 20,000
Crowell, Weedon & Co........................................ 20,000
Fahnestock & Co. Inc........................................ 20,000
Gerard Klauer Mattison & Co., Inc........................... 20,000
Gruntal & Co., L.L.C........................................ 20,000
Janney Montgomery Scott LLC................................. 20,000
Johnston, Lemon & Co. Incorporated.......................... 20,000
C. L. King & Associates, Inc................................ 20,000
Ladenburg Thalmann & Co. Inc................................ 20,000
McDonald Investments Inc., A KeyCorp Company................ 20,000
Needham & Company, Inc...................................... 20,000
Parker/Hunter Incorporated.................................. 20,000
Pennsylvania Merchant Group................................. 20,000
Ragen MacKenzie Incorporated................................ 20,000
Raymond James & Associates, Inc............................. 20,000
The Robinson-Humphrey Company, LLC.......................... 20,000
Sanders Morris Harris....................................... 20,000
Sands Brothers & Co., Ltd................................... 20,000
Stephens Inc................................................ 20,000
Sutro & Co. Incorporated.................................... 20,000
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Tucker Anthony Incorporated................................. 20,000
C.E. Unterberg, Towbin...................................... 20,000
Wachovia Securities, Inc.................................... 20,000
The Williams Capital Group, L.P............................. 20,000
---------
Total................................................... 5,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of our common stock
offered by this prospectus are subject to the approval by their counsel of legal
matters and other conditions. The underwriters must purchase and accept delivery
of all the shares of our common stock offered by this prospectus, other than
those shares covered by the over-allotment option described below, if any are
purchased.
The underwriters propose initially to offer some of the shares of our common
stock directly to the public at the public offering price on the cover page of
this prospectus and some of the shares of our common stock to dealers, including
the underwriters, at the public offering price less a concession not in excess
of $.66 per share. The underwriters may allow, and these dealers may re-allow, a
concession not in excess of $.10 per share on sales to other dealers. After the
initial offering of our shares to the public, the representatives of the
underwriters may change the public offering price and other selling terms.
We have granted to the underwriters an option, exercisable within 30 days
after the date of the underwriting agreement, to purchase up to 750,000
additional shares of our common stock at the initial public offering price less
underwriting discounts and commissions. The underwriters may exercise this
option solely to cover over-allotments, if any, made in connection with this
offering. To the extent that the underwriters exercise this option, each
underwriter will become obligated, subject to certain conditions, to purchase a
number of additional shares approximately proportionate to their initial
purchase commitment.
The following table shows the underwriting fees to be paid by us in this
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional shares of our common stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share............................................ $ 1.12 $ 1.12
Total................................................ $5,600,000 $6,440,000
</TABLE>
We will pay the offering expenses, estimated to be $1,550,000.
We have agreed to indemnify the underwriters against specified civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make because of those
liabilities.
We, our executive officers and directors and substantially all of our
stockholders have agreed, for a period of 180 days after the date of this
prospectus, not to, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of our common stock or any securities convertible
into or exercisable or exchangeable for our common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock, regardless of whether any of
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<PAGE>
the transactions described in these clauses are to be settled by the
delivery of common stock, or such other securities, in cash or otherwise.
The underwriting agreement contains limited exceptions to these lock-up
agreements.
In addition, during this 180 day period, we have agreed not to file any
registration statement with respect to, and each of our executive officers and
directors and a substantially all of our stockholders have agreed not to make
any demand for, or exercise any right with respect to, the registration of any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation.
Prior to this offering, there was no established trading market for our
common stock. The initial public offering price for our common stock was
determined by negotiation among us and the representatives of the underwriters.
The factors considered in determining the initial public offering price
included:
- the history of and the prospects for the industry in which we compete;
- the ability of our management;
- our past and present operations;
- our prospects for future earnings;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of securities of generally comparable companies.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of our common
stock offered in this prospectus in any jurisdiction where action for that
purpose is required. The shares of our common stock offered in this prospectus
may not be offered or sold, directly or indirectly, nor may this prospectus or
any other offering material or advertisements in connection with the offer and
sale of any shares of our common stock be distributed or published in any
jurisdiction, except under circumstances that will result in compliance with the
applicable rules and regulations of the jurisdiction. Persons other than in the
United States who receive this prospectus are advised to inform themselves about
and to observe any restrictions relating to the offering of our common stock and
the distribution of this prospectus. This prospectus is not an offer to sell or
a solicitation of an offer to buy any shares of our common stock included in
this offering in any jurisdiction where that would not be permitted or legal.
In connection with this offering, some underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may create a syndicate short
position by making short sales of our common stock and may purchase our common
stock on the open market to cover syndicate short positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares of common stock than they are required to purchase in the offering. Short
sales can be either "covered" or "naked." "Covered" short sales are sales made
in an amount not greater than the underwriters' over-allotment option to
purchase additional shares in the offering. "Naked" short sales are sales in
excess of the over-allotment option. A naked short position is more likely to be
created if the underwriters are concerned that there may be downward pressure on
the price of the common stock in the open market after pricing that could
adversely affect investors who purchase in the offering. The underwriters may
close out any covered short positions by either exercising their over-allotment
option or purchasing shares in the open market. The underwriters must close out
any naked short position by purchasing shares in the open market. In determining
the source of shares to close out the covered short position, the underwriters
will consider, among other things, the price of shares available for purchase in
the open market as compared to the price at which they may purchase shares
through the over-allotment option. The
71
<PAGE>
underwriting syndicate may reclaim selling concessions if the syndicate
repurchases previously distributed shares of our common stock in syndicate
covering transactions, in stabilizing transactions or in some other way if
Donaldson, Lufkin & Jenrette Securities Corporation receives a report that
indicates clients of such syndicate members have "flipped" the common stock.
These activities may have the effect of raising or maintaining the market price
of our common stock or preventing or retarding a decline in the market price of
our common stock. As a result, the price of our common stock may be higher than
the price that might otherwise exist in the open market. The underwriters are
not required to engage in these activities and may end any of these activities
at any time.
At our request, certain of the underwriters have reserved up to 5% of the
shares offered by this prospectus for sale at the initial public offering price
to our employees, officers, directors and other individuals associated with us
and members of their families. The number of shares of common stock available
for sale to the general public will be reduced to the extent any reserved shares
are purchased. Any reserved shares not so purchased will be offered by the
underwriters on the same basis as the other shares of our common stock. Reserved
shares will not be subject to lock-up agreements.
Our common stock has been approved for listing on The New York Stock
Exchange under the symbol "GB." In connection with the listing of our common
stock on The New York Stock Exchange, the underwriters have undertaken to sell
round lots of 100 shares or more to a minimum of 2,000 beneficial owners.
An electronic prospectus is available on the web sites maintained by Merrill
Lynch and DLJDIRECT Inc., an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation, respectively. Other than the prospectus in electronic
format, the information on the Merrill Lynch and DLJDIRECT Inc. web sites
relating to this offering is not a part of this prospectus. All final
prospectuses will be delivered to Merrill Lynch's and DLJDIRECT's brokerage
customers by regular mail. In addition, DLJDIRECT will be facilitating a portion
of the electronic distribution of information relating to this offering through
the Internet.
DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking Partners II-A,
L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJ
Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ Millennium
Partners-A, L.P., DLJMB Funding II, Inc., DLJ Investment Partners, L.P., DLJ
Investment Funding, Inc., UK Investment Plan 1997 Partners, DLJ EAB Partners,
L.P., DLJ First ESC, L.P. and DLJ ESC II, L.P., each of which is an affiliate of
Donaldson, Lufkin & Jenrette Securities Corporation, are stockholders of our
company. In addition, an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated owns 127,532 shares of our common stock.
In addition, DLJ Merchant Banking Partners II, L.P and its affiliates have
the right to nominate a majority of the members of our Board of Directors. DLJ
Capital Funding, Inc. acted as syndication agent and is a lender under our bank
credit facility. In addition, DLJ Capital Funding, Inc. will receive proceeds
from this offering upon repayment of this indebtedness. Prior to this offering,
Donaldson, Lufkin & Jenrette Securities Corporation and its affiliates owned an
aggregate of approximately 78% of the issued and outstanding shares of our
common stock.
The offering is being conducted in accordance with Rule 2720 of the Conduct
Rules of the NASD, which provides that, among other things, when an NASD member
distributes securities of a company in which it owns 10% or more of the
company's outstanding voting securities, the initial public offering price can
be no higher than that recommended by a "qualified independent underwriter"
meeting specified standards. In accordance with this requirement, Merrill Lynch,
Pierce, Fenner & Smith Incorporated served in this role and recommended a price
in compliance with the requirements of Rule 2720. In connection with this
offering, Merrill Lynch, Pierce, Fenner & Smith Incorporated, in its role as
qualified independent underwriter, exercised its usual standards of "due
diligence" and reviewed and participated in the preparation of this prospectus
and the registration statement of which this prospectus forms a part and
recommended the maximum price at which our common stock is being
72
<PAGE>
offered hereby. As compensation for serving as the qualified independent
underwriter, we have agreed to pay Merrill Lynch, Pierce, Fenner & Smith
Incorporated $5,000.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed on for us by Weil, Gotshal & Manges LLP, Houston,
Texas. Certain legal matters relating to the common stock offered by this
prospectus will be passed on for the underwriters by Akin, Gump, Strauss,
Hauer & Feld, L.L.P., New York, New York.
EXPERTS
The consolidated balance sheets of Wilson Greatbatch Technologies, Inc. and
subsidiary as of January 1, 1999 and December 31, 1999 and the consolidated
statements of operations, stockholders' equity and cash flows for the period
from July 11, 1997 to January 2, 1998 and for each of the two years in the
period ended December 31, 1999 and the statements of operations, stockholders'
equity and cash flows of Wilson Greatbatch Ltd. for the period from January 1,
1997 to July 10, 1997 included in this prospectus and the related financial
statement schedule included elsewhere in the registration statement of which
this prospectus is a part have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of Hittman Materials and Medical Components, Inc.
at August 7, 1998 and December 31, 1997 and for the period from January 1, 1998
through August 7, 1998 and for the year ended December 31, 1997 have been
included herein in reliance upon the report of Grant Thornton LLP, independent
public accountants, appearing elsewhere herein and given on the authority of
said firm as experts in auditing and accounting in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act relating to the common stock
being sold in this offering. This prospectus constitutes a part of that
registration statement. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules to the
registration statement because some parts have been omitted in accordance with
the rules and regulations of the Commission. For further information about us
and the common stock being sold in this offering, you should refer to the
registration statement and the exhibits and schedules filed as a part of the
registration statement. Statements contained in this prospectus regarding the
contents of any agreement, contract or other document referred to are not
necessarily complete. Reference is made in each instance to the copy of the
contract or document filed as an exhibit to the registration statement. Each
statement is qualified by reference to the exhibit. The registration statement,
including related exhibits and schedules, may be inspected without charge at the
Commission's principal office in Washington, D.C. Copies of all or any part of
the registration statement may be obtained after payment of fees prescribed by
the Commission from:
- the Commission's Public Reference Room at the Commission's principal
office, 450 Fifth Street, N.W., Washington, D.C. 20549; or
- the Commission's regional offices in:
- New York, located at 7 World Trade Center, Suite 1300, New York, New
York 10048; or
- Chicago, located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
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<PAGE>
You may obtain information regarding the operation of the Public Reference
Room by calling the Commission at 1-800-SEC-0330. The Commission maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants, including us, that file electronically with
the Commission. The address of the web site is WWW.SEC.GOV.
We intend to furnish holders of our common stock with annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports containing unaudited condensed financial
information for the first three quarters of each fiscal year. We intend to
furnish other reports as we may determine or as may be required by law.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY AND
WILSON GREATBATCH LTD.:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of January 1, 1999 and
December 31, 1999....................................... F-3
Statement of Operations for the period from January 1,
1997 to July 10, 1997 and Consolidated Statements of
Operations for the period from July 11, 1997 to January
2, 1998 and the years ended January 1, 1999 and December
31, 1999................................................ F-4
Statement of Stockholders' Equity for the period from
January 1, 1997 to July 10, 1997 and Consolidated
Statements of Stockholders' Equity for the period from
July 11, 1997 to January 2, 1998 and for the years ended
January 1, 1999 and December 31, 1999................... F-5
Statement of Cash Flows for the period from January 1,
1997 to July 10, 1997 and Consolidated Statements of
Cash Flows for the period from July 11, 1997 to January
2, 1998 and for the years ended January 1, 1999 and
December 31, 1999....................................... F-6
Notes to Financial Statements for the period from January
1, 1997 to July 10, 1997 and Consolidated Financial
Statements for the period from July 11, 1997 to January
2, 1998 and for the years ended January 1, 1999 and
December 31, 1999....................................... F-7
HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.:
Report of Independent Certified Public Accountants........ F-28
Balance Sheets as of August 7, 1998 and December 31,
1997.................................................... F-29
Statements of Operations for the period from January 1,
1998 through August 7, 1998 and for the year ended
December 31, 1997....................................... F-30
Statements of Stockholder's Equity for the period from
January 1, 1998 through August 7, 1998 and for the year
ended December 31, 1997................................. F-31
Statements of Cash Flows for the period from January 1,
1998 through August 7, 1998 and for the year ended
December 31, 1997....................................... F-32
Notes to Financial Statements for the period from January
1, 1998 through August 7, 1998 and for the year ended
December 31, 1997....................................... F-33
</TABLE>
F-1
<PAGE>
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 subsidiary (the "Company") as of December 31,
1999 and January 1, 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the period from July 11, 1997 (date of
organization) to January 2, 1998 and for each of the two years in the period
ended December 31, 1999. We have also audited the statements of operations,
stockholders' equity and cash flows of Wilson Greatbatch Ltd. (the
"Predecessor") for the period from January 1, 1997 to July 10, 1997. Our audits
also included the financial statement schedule listed in the Index at
Item 16(B) of the registration statement. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 subsidiary as of December 31, 1999 and January 1, 1999,
and the results of their operations and their cash flows for the period from
July 11, 1997 to January 2, 1998 and for each of the two years in the period
ended December 31, 1999 and the results of operations and cash flows of Wilson
Greatbatch Ltd. for the period from January 1, 1997 to July 10, 1997 in
conformity with generally accepted accounting principles. 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 1999,
the Company changed its method of accounting for the costs of start-up
activities.
DELOITTE & TOUCHE LLP
Buffalo, New York
January 21, 2000
(March 14, 2000 as to Note 18 and August 15, 2000 as to the effects
of the reverse stock splits described in Note 1)
F-2
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, JUNE 30,
1999 1999 2000
---------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 4,140 $ 3,863 $ 2,453
Accounts receivable, net of allowance for doubtful
accounts of $197 and $219 as of January 1, 1999 and
December 31, 1999, respectively........................ 11,963 11,016 11,677
Inventories.............................................. 13,291 13,583 13,770
Prepaid expenses and other assets........................ 227 868 1,093
Refundable income taxes.................................. 698 2,520 727
Deferred tax asset....................................... 1,669 1,520 1,520
-------- -------- --------
Total current assets................................... 31,988 33,370 31,240
PROPERTY, PLANT AND EQUIPMENT, NET......................... 29,495 33,557 34,180
INTANGIBLE ASSETS, NET..................................... 120,900 112,902 109,255
DEFERRED TAX ASSET......................................... 8,988 7,828 7,828
OTHER ASSETS............................................... 3,019 2,122 1,858
-------- -------- --------
TOTAL ASSETS............................................... $194,390 $189,779 $184,361
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 2,134 $ 2,385 $ 2,484
Accrued liabilities...................................... 14,148 7,139 8,798
Current maturities of long-term obligations.............. 2,950 6,225 7,475
-------- -------- --------
Total current liabilities.............................. 19,232 15,749 18,757
LONG-TERM OBLIGATIONS...................................... 128,336 126,988 119,398
DEFERRED COMPENSATION...................................... 1,227 635 645
-------- -------- --------
Total liabilities...................................... 148,795 143,372 138,800
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 13)
STOCKHOLDERS' EQUITY:
Common stock............................................. 12 12 12
Subscribed common stock.................................. 1,684 1,684 1,684
Capital in excess of par value........................... 60,295 63,488 63,488
Retained deficit......................................... (14,712) (16,984) (17,760)
-------- -------- --------
Subtotal............................................... 47,279 48,200 47,424
Less treasury stock, at cost............................. -- (109) (179)
Less subscribed common stock receivable.................. (1,684) (1,684) (1,684)
-------- -------- --------
Total stockholders' equity............................. 45,595 46,407 45,561
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................................. $194,390 $189,779 $184,361
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WILSON
GREATBATCH LTD.
(PREDECESSOR)
(NOTE 1) WILSON GREATBATCH TECHNOLOGIES, INC.
--------------- -----------------------------------------------------------------------
SIX MONTHS
JANUARY 1, YEAR ENDED ENDED
1997 JULY 11, 1997 ------------------------- -------------------------
TO TO JANUARY 1, DECEMBER 31, JULY 2, JUNE 30,
JULY 10, 1997 JANUARY 2, 1998 1999 1999 1999 2000
--------------- --------------- ---------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $30,468 $ 27,193 $77,361 $79,235 $38,318 $46,584
COST OF GOODS SOLD................... 14,922 12,241 36,454 41,057 19,385 26,385
------- -------- ------- ------- ------- -------
GROSS PROFIT......................... 15,546 14,952 40,907 38,178 18,933 20,199
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 6,729 5,412 11,484 9,880 5,124 5,132
RESEARCH, DEVELOPMENT AND ENGINEERING
COSTS, NET......................... 4,400 4,619 12,190 9,339 5,130 5,046
INTANGIBLE AMORTIZATION.............. -- 1,810 5,197 6,510 3,266 3,267
TRANSACTION RELATED EXPENSES......... 11,097 -- -- -- -- --
WRITE-OFF OF PURCHASED IN-PROCESS
RESEARCH, DEVELOPMENT AND
ENGINEERING........................ -- 23,779 -- -- -- --
------- -------- ------- ------- ------- -------
(6,680) (20,668) 12,036 12,449 5,413 6,754
INTEREST EXPENSE..................... 252 4,128 10,572 13,420 6,519 7,787
OTHER (INCOME) EXPENSE............... (117) 74 364 1,343 129 71
------- -------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE............................. (6,815) (24,870) 1,100 (2,314) (1,235) (1,104)
INCOME TAX EXPENSE (BENEFIT)......... 1,053 (9,468) 410 (605) (321) (328)
------- -------- ------- ------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE........ (7,868) (15,402) 690 (1,709) (914) (776)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF TAX (Note 2)........ -- -- -- (563) (563) --
------- -------- ------- ------- ------- -------
NET INCOME (LOSS).................... $(7,868) $(15,402) $ 690 $(2,272) $(1,477) $ (776)
======= ======== ======= ======= ======= =======
BASIC EARNINGS (LOSS) PER SHARE
Before cumulative effect of
accounting change................ $ (874) $ (1.74) $ 0.07 $ (0.14) $ (0.07) $ (0.06)
Basic earnings (loss) per share.... $ (874) $ (1.74) $ 0.07 $ (0.18) $ (0.12) $ (0.06)
DILUTED EARNINGS (LOSS) PER SHARE
Before cumulative effect of
accounting change................ $ (874) $ (1.74) $ 0.06 $ (0.14) $ (0.07) $ (0.06)
Diluted earnings (loss) per
share............................ $ (874) $ (1.74) $ 0.06 $ (0.18) $ (0.12) $ (0.06)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic.............................. 9 8,855 10,461 12,491 12,406 12,615
Diluted............................ 9 8,855 10,677 12,491 12,406 12,615
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
SUBSCRIBED CAPITAL TREASURY SUBSCRIBED
COMMON STOCK COMMON STOCK IN EXCESS RETAINED STOCK COMMON
------------------ --------------- OF PAR EARNINGS -------------- STOCK
SHARES AMOUNT SHARES AMOUNT VALUE (DEFICIT) SHARES AMOUNT RECEIVABLE
---------- ------ ------- ------ --------- --------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wilson Greatbatch Ltd.
(Predecessor) (Note 1):
BALANCE, JANUARY 1, 1997........... 8,839 $ 9 -- $ -- $ -- $ 12,235 -- $ -- $ --
Net loss......................... -- -- -- -- -- (7,868) -- -- --
Dividends declared............... -- -- -- -- -- (1,130) -- -- --
Cash distributions to
shareholders................... -- -- -- -- -- (1,119) -- -- --
Other distribution to
shareholders................... -- -- -- -- -- (2,182) -- -- --
---------- ---- ------- ------ ------- -------- ------ ---- ------
BALANCE, JULY 10, 1997............. 8,839 $ 9 -- $ -- $ -- $ (64) -- $ -- $ --
========== ==== ======= ====== ======= ======== ====== ==== ======
--------------------------------------------------------------------------------------------------------------------------
Wilson Greatbatch Technologies, Inc.:
BEGINNING BALANCE, JULY 10,
1997............................. -- $ -- -- $ -- $ -- $ -- -- $ -- $ --
Capitalization of the Company.... 8,594,662 9 -- -- 42,964 -- -- -- --
Common stock issued.............. 133,600 -- -- -- 668 -- -- -- --
Subscribed common stock.......... -- -- 336,800 1,684 -- -- -- -- 1,684
Net loss......................... -- -- -- -- -- (15,402) -- -- --
---------- ---- ------- ------ ------- -------- ------ ---- ------
BALANCE, JANUARY 2, 1998........... 8,728,262 9 336,800 1,684 43,632 (15,402) -- -- 1,684
Shares issued in connection with
the financing of Greatbatch-
Hittman........................ 3,300,000 3 -- -- 16,497 -- -- -- --
Shares issued under Employee
Stock Ownership Plan............. 25,231 -- -- -- 126 -- -- -- --
Exercise of stock options........ 7,960 -- -- -- 40 -- -- -- --
Net income....................... -- -- -- -- -- 690 -- -- --
---------- ---- ------- ------ ------- -------- ------ ---- ------
BALANCE, JANUARY 1, 1999........... 12,061,453 12 336,800 1,684 60,295 (14,712) -- -- 1,684
Common stock issued.............. 66,537 -- -- -- 998 -- -- -- --
Shares issued under Employee
Stock Ownership Plan........... 139,470 -- -- -- 2,092 -- -- -- --
Exercise of stock options........ 20,668 -- -- -- 103 -- -- -- --
Purchase of common stock from
former employees............... -- -- -- -- -- -- 7,285 109 --
Net loss......................... -- -- -- -- -- (2,272) -- -- --
---------- ---- ------- ------ ------- -------- ------ ---- ------
BALANCE, DECEMBER 31, 1999......... 12,288,128 $ 12 336,800 $1,684 $63,488 $(16,984) 7,285 $109 $1,684
========== ==== ======= ====== ======= ======== ====== ==== ======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WILSON
GREATBATCH LTD.
(PREDECESSOR)(NOTE 1) WILSON GREATBATCH TECHNOLOGIES, INC.
--------------------- ---------------------------------------------------------------------------
PERIOD FROM PERIOD FROM YEAR YEAR SIX MONTHS SIX MONTHS
JANUARY 1, 1997 JULY 11, 1997 ENDED ENDED ENDED ENDED
TO TO JANUARY 1, DECEMBER 31, JULY 2, JUNE 30,
JULY 10, 1997 JANUARY 2, 1998 1999 1999 1999 2000
--------------------- --------------- ---------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)........... $(7,868) $ (15,402) $ 690 $(2,272) (1,477) (776)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Purchased in-process
research and
development............. -- 23,779 -- -- -- --
Depreciation and
amortization............ 1,456 3,548 9,190 11,363 5,911 6,243
Deferred financing
costs................... -- 248 699 972 448 465
Deferred compensation..... (1,616) 1,164 (824) (592) (302) (339)
Deferred income taxes..... -- (9,750) (907) 1,685 103 --
Loss on disposal of
assets.................. 530 6 194 146 -- --
Valuation loss on
investment held at
cost.................... -- -- -- 859 -- --
Cumulative effect of
accounting change....... -- -- -- 563 563 --
Reserve for disposal of
property................ -- -- 300 -- -- --
Changes in operating assets
and liabilities:
Accounts receivable....... (1,132) 1,766 (4,223) 947 2,026 (661)
Inventories............... 1,082 (1,871) (629) (292) 558 (187)
Prepaid expenses and other
assets.................. 202 119 (57) (663) (686) 1,568
Accounts payable.......... 688 68 (103) 251 (886) 99
Accrued liabilities....... 1,073 1,097 5,507 (4,241) (2,318) 2,347
Income taxes.............. -- 222 (910) (1,826) 120 (342)
------- --------- ------- ------- ------- -------
Net cash (used in)
provided by operating
activities............ (5,585) 4,994 8,927 6,900 4,060 8,417
------- --------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of property,
plant and equipment..... (1,934) (2,656) (6,207) (8,452) (3,578) (3,240)
Proceeds from sale of
property, plant and
equipment............... -- -- 80 5 -- --
Increase in intangible
assets.................. -- (850) (1,741) (570) (304) (267)
Decrease (increase) in
other long term
assets.................. -- (147) (2,569) 170 -- --
Acquisition of subsidiary,
net of cash acquired.... -- -- (72,938) -- -- --
------- --------- ------- ------- ------- -------
Net cash used in
investing
activities............ (1,934) (3,653) (83,375) (8,847) (3,882) (3,507)
------- --------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings (repayments)
under line of credit,
net..................... 11,677 200 (700) 4,300 -- (3,200)
Proceeds from long-term
debt.................... (488) (1,800) 61,853 -- -- --
Proceeds from debt and
equity financing
(Note 1)................ -- 115,285 -- -- -- --
Payments to acquire
Predecessor (Note 1).... -- (115,285) -- -- -- --
Equity investment in
Company................. -- 668 -- -- -- --
Scheduled payments of
long-term debt.......... -- -- (775) -- -- (3,050)
Prepayments of long-term
debt.................... -- -- (775) (2,950) (2,950) --
Acquisition earnout
payment................. -- -- -- (2,764) -- --
Cash dividends paid....... (920) -- -- -- -- --
Cash distributions to
shareholders............ (2,419) -- -- -- -- --
Purchase of treasury
stock................... -- -- -- (109) -- (70)
Issuance of capital
stock................... -- -- 16,666 3,193 92 --
------- --------- ------- ------- ------- -------
Net cash provided by
(used in) financing
activities............ 7,850 (932) 76,269 1,670 (2,858) (6,320)
------- --------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............... 331 409 1,821 (277) (2,680) (1,410)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD....... 54 1,910 2,319 4,140 4,140 3,863
------- --------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF PERIOD............. $ 385 $ 2,319 $ 4,140 $ 3,863 1,460 2,453
======= ========= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS
THE ENTITY--The consolidated financial statements include the accounts of
Wilson Greatbatch Technologies, Inc., a holding company, and its wholly-owned
subsidiary Wilson Greatbatch Ltd. (collectively, the "Company"). The Company is
comprised of its operating companies, Wilson Greatbatch Ltd. and its
wholly-owned subsidiary, Greatbatch-Hittman, Inc. ("Hittman"). All significant
intercompany balances and transactions have been eliminated.
On July 10, 1997, the Company acquired all of the outstanding shares of
Wilson Greatbatch Ltd. (the "Predecessor") in a leveraged buyout. Equity
financing was provided by entities affiliated with DLJ Merchant Banking Partners
II, L.P. ("DLJMB"), an affiliate of Donaldson, Lufkin and Jenrette Securities
Corporation ("DLJ"). DLJMB acquired approximately 86.4% of the outstanding
capital stock of the Company. Debt financing was provided by a variety of
lenders, including DLJ Capital Funding, Inc., also an affiliate of DLJ.
The leveraged buyout was accounted for under the purchase method of
accounting. Accordingly, the $115.3 million purchase price was allocated to the
net assets acquired based on their estimated fair values. The excess of purchase
price over fair value of the net tangible assets acquired was $79.1 million of
which $23.8 million was allocated to purchased in-process research, development
and engineering and $55.3 million was allocated to other intangible assets. The
purchased in-process research, development and engineering were immediately
charged to expense upon acquisition. Other intangible assets included the
following (dollars in thousands):
<TABLE>
<S> <C>
Goodwill.................................................... $ 6,124
Trademark and Names......................................... 22,860
Patented Technology......................................... 13,990
License Agreement........................................... 6,190
Assembled Workforce......................................... 6,180
-------
Total................................................... $55,344
=======
</TABLE>
F-7
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS (CONTINUED)
In-process research, development and engineering included the following
(dollars in thousands):
<TABLE>
YEAR WHEN
MATERIAL NET RISK-
CASH IN-FLOWS ADJUSTED
EXPECTED TO DISCOUNT
BEGIN RATE
---- -------
<S> <C> <C> <C>
Medical:
Capacitor..................................... 1998 20% $4,036
Next Generation ICD........................... 1998 35% 7,004
Titanium Carbon Monofluoride.................. 1998 20% 1,204
High Value Carbon Monofluoride Cell........... 1999 20% 397
Lithium Ion Products.......................... 1999 35% 3,216
Pharmatarget & Minimed
Project (09 Pump)........................... 1998 35% 2,253
Other......................................... 1999 N/A 640
Commercial:
200 Degree Cell & MWD DD Cell................. 1998 20% 305
Greatbatch Scientific:
Medical Products.............................. 1998 35% 4,724
-------
$23,779
=======
</TABLE>
A brief description of the nature of the significant acquired in-process
research, development and engineering projects are as follows:
Capacitors--The objective of this project was to develop capacitors that
deliver twice the energy density of aluminum electrolytic capacitors to
facilitate a significant reduction in the size of ICDs.
Next Generation ICD--The objective of this project was to develop several
proprietary process improvements to reduce the size of the ICD battery, while at
the same time delivering more energy density than products sold at the time.
Titanium Carbon Monofluoride--The objective of this project was to reduce
the size and weight of batteries used in pacemaker devices.
Lithium Ion Products--The objective of this project was to develop and
manufacture rechargeable lithium ion batteries, suitable for use in implantable
medical devices.
Pharmatarget & Minimed Project (09 Pump)--The objective of this project was
to develop a more efficient and less costly pump for implantable medical
devices.
Greatbatch Scientific--The objective of this project was the development of
battery-powered surgical devices, which were magnetic resonance imaging, or MRI,
compatible, to develop a new product line, a new customer base and a new outlet
for our already-existing batteries.
F-8
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS (CONTINUED)
The above-noted technology refers to the product development activities
related to the design and manufacture of future Company products. It includes
those products or product enhancements which management believes were currently
in development and were part of the Company's strategy to increase its dominance
of the implantable defibrillators and pacemaker battery market. Such in-process
technology was determined by management to have no alternative future use. To
value the in-process technology, management of the Company utilized the
discounted cash flow method.
The statements of operations, stockholders' equity and cash flows and the
notes to the financial statements include activity separately identified for the
period from January 1, 1997 to July 10, 1997 that pertain to the Predecessor.
In connection with the leveraged buyout, approximately $11.1 million of
nonrecurring costs and expenses were incurred and charged to expense by
Predecessor for the period from January 1, 1997 to July 10, 1997. These
nonrecurring costs and expenses include the following: (a) payments totaling
$4.9 million made to employees and Board members pursuant to the leveraged
buyout agreement; (b) payments totaling $5.6 million representing commissions
and fees as a result of the sale of Predecessor; and (c) the write-off of $0.6
million of construction in progress.
NATURE OF OPERATIONS--The Company operates 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. The commercial power sources segment designs and manufactures
non-medical power sources for use in aerospace, oil and gas exploration and
oceanographic equipment.
On May 18, 2000, the Board of Directors authorized a one for three reverse
stock split to holders of record on May 19, 2000. On August 15, 2000, the Board
of Directors authorized a three for five reverse stock split to holders of
record on August 15, 2000. All share and per share data, including stock option
information for the Company, has been restated to reflect the reverse stock
splits.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS--The accompanying consolidated balance sheet as
of June 30, 2000, statements of operations and cash flows for the six months
ended July 2, 1999 and June 30, 2000 are unaudited but, in the opinion of
management, include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation for results of these interim
periods. The results of operations for the six months ended June 30, 2000 are
not necessarily indicative of results to be expected for the entire year or for
any other period.
ACCOUNTING CHANGE--In April 1998, the AICPA issued Statement of Position
("SOP") 98-5, "Reporting the Costs of Start-Up Activities." This statement
requires that start-up costs, including organization costs, capitalized by the
Company prior to January 2, 1999, be written off and any future start-up costs
be expensed as incurred. The Company adopted this SOP in 1999. The total amount
of deferred start-up costs reported as a cumulative effect of change in
accounting principle was $939,000, net of tax benefits of $376,000.
F-9
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS--Cash and cash equivalents consist of cash and
highly liquid, short-term investments with maturities of three months or less.
INVENTORIES--Inventories include raw materials, work-in-process and finished
goods and are stated at the lower of cost (as determined by the first-in,
first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment is carried at
cost. Depreciation is computed primarily by the straight-line method over the
estimated useful lives of the assets, which are as follows: buildings and
building improvements 7-40 years; machinery and equipment 3-10 years; office
equipment 3-10 years; and leasehold improvements over the remaining lives of the
improvements or the lease term, if less.
The cost of repairs and maintenance is charged to expense as incurred.
Renewals and betterments are capitalized. Upon retirement or sale of an asset,
its cost and related accumulated depreciation or amortization are removed from
the accounts and any gain or loss is recorded in income or expense. The Company
continually reviews plant and equipment to determine that the carrying values
have not been impaired.
INTANGIBLE ASSETS--Intangible assets include goodwill and other identifiable
intangible assets, which were derived in connection with the Company's
acquisition of the Predecessor and Hittman. Goodwill represents the excess of
the purchase price over the fair value of the net assets acquired. Goodwill is
being amortized on a straight-line basis over 40 years. Other identifiable
intangible assets are being amortized on a straight-line basis over their
estimated useful lives ranging from 6 to 40 years, except for deferred financing
costs which are being amortized using the effective yield method over the life
of the underlying debt. The Company continually reviews these intangible assets
for potential impairment by assessing significant decreases in the market value,
a significant change in the extent or manner in which an asset is used or a
significant adverse change in the business climate. The Company measures
expected future cash flows and compares to the carrying amount of the asset to
determine whether any impairment loss is to be recognized.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of financial instruments
is determined by reference to various market data and other valuation
techniques, as appropriate. Unless otherwise disclosed, the fair value of cash
and cash equivalents approximates their recorded values due to the nature of the
instruments. The floating rate debt carrying value approximates the fair value
based using the floating interest rate resetting on a regular basis. The fixed
rate long-term debt carrying value approximates fair value.
The fair value of the interest rate cap agreements are estimated by
obtaining quotes from brokers and represents the cash requirement if the
existing contract has been settled at year end. The notional amount, fair value
and carrying amount of the Company's interest rate cap agreements were
approximately $54.1 million and $79.1 million; $196,000 and $515,300; and
$254,500 and $229,100, as of January 1, 1999 and December 31, 1999,
respectively.
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 industry, and, as such, the Company is directly
F-10
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
affected by the condition of that industry. However, the credit risk associated
with trade receivables is minimal due to the Company's stable customer base and
ongoing control procedures, which monitor the creditworthiness of customers.
The credit risk associated with the Company's interest rate cap agreements
is not considered significant due to the creditworthiness of the counterparties.
DERIVATIVE FINANCIAL INSTRUMENTS--The Company has only limited involvement
with derivative financial instruments and does not enter into financial
instruments for trading purposes. Interest rate cap agreements are used to
reduce the potential impact of increases in interest rates on floating-rate
long-term debt. Premiums paid for purchased interest rate cap agreements are
amortized over the terms of the caps and recognized as interest expense.
Unamortized premiums are included in other assets in the consolidated balance
sheets. Amounts receivable under interest rate cap agreements are accrued as a
reduction of interest expense. At December 31, 1999, the Company was a party to
three interest rate cap agreements (see Note 8).
STOCK OPTION PLAN--The Company accounts for stock-based compensation in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." 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. In the absence of a
"regular, active public market," the fair market value of the common stock has
been determined by the Board of Directors. The most recent independent valuation
of the Company stock was performed in May 1999 as of December 31, 1998.
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--Revenues are recognized when the products are shipped
to customers.
RESEARCH, DEVELOPMENT AND ENGINEERING COSTS--Research, development and
engineering costs are expensed as incurred. The Company recognizes cost
reimbursements from customers for whom the Company designs products upon
achieving milestones related to designing batteries and capacitors for their
products. The cost reimbursements charged to customers represent actual costs
incurred by the Company in the design and testing of prototypes built to
customer specifications. This cost reimbursement includes no mark-up and is
recorded as an offset to research, development and engineering costs.
F-11
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net research, development and engineering costs for the periods from
January 1, 1997 to July 10, 1997 and July 11, 1997 to January 2, 1998 and the
years ended January 1, 1999 and December 31, 1999 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR
---------------
JANUARY 1, 1997 JULY 11, 1997
TO TO
JULY 10, 1997 JANUARY 2, 1998 1998 1999
--------------- --------------- -------- --------
<S> <C> <C> <C> <C>
Gross research, development and engineering
costs........................................... $5,980 $5,765 $15,580 $11,885
Less cost reimbursements.......................... (1,580) (1,146) (3,390) (2,546)
------ ------ ------- -------
Research, development and engineering costs,
net............................................. $4,400 $4,619 $12,190 $ 9,339
====== ====== ======= =======
</TABLE>
EARNINGS (LOSS) PER SHARE ("EPS")--Basic earnings per share is calculated by
dividing net income (loss) by the 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. During the period from
July 11, 1997 to January 2, 1998 there were no dilutive stock options. During
the year ended December 31, 1999, there were approximately 0.2 million stock
options that were not included in the computation of diluted EPS because to do
so would have been antidilutive. Diluted earnings per share for the year ended
January 1, 1999 includes the potentiality dilutive effect of stock options. All
shares held in the Employee Stock Ownership Plan are considered outstanding for
both basic and diluted earnings (loss) per share calculations. For the period
from January 1, 1997 to July 10, 1997, the Predecessor was a subchapter S
corporation and therefore EPS has not been included.
COMPREHENSIVE INCOME--Comprehensive income includes all changes in
stockholders' equity during a period except those resulting from investments by
owners and distribution to owners. For all periods presented, the Company's only
component of comprehensive income is its net income (loss) for those periods.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS--The Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," in 1999.
SFAS No. 131 establishes standards for reporting information about operating and
related disclosures about products and services, geographical areas and major
customers. The adoption of SFAS No. 131 did not effect the Company's financial
position, results of operations or cash flows, but did affect the disclosure of
segment information.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activity," which, as amended,
is required to be adopted by the Company in 2001. The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges of underlying transactions must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in
F-12
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Management has not yet determined the effect
SFAS No. 133 will have, if any, on the Company's consolidated financial
position, results of operations or cash flows.
SUPPLEMENTAL CASH FLOW INFORMATION--Cash paid for interest from January 1,
1997 to July 10, 1997, from July 11, 1997 to January 2, 1998, in 1998 and 1999
was approximately $275,000, $1,992,000, $9,150,000 and $13,790,000,
respectively. Cash paid for income taxes from January 1, 1997 to July 10, 1997,
from July 11, 1997 to January 2, 1998, in 1998 and 1999 was approximately
$17,000, $-0-, $1,482,000 and $186,000, respectively.
FINANCIAL STATEMENT YEAR END--The Company's year end is the closest Friday
to December 31. Fiscal 1999 and 1998 included 52 weeks.
3. ACQUISITION
On August 7, 1998, Wilson Greatbatch Ltd. acquired all of the issued and
outstanding shares of Hittman, formerly Hittman Materials and Medical
Components, Inc., for a total purchase price of $71.8 million. Of the total
purchase price, $69.0 million was paid in cash at the date of acquisition. The
remaining purchase price was contingent upon Hittman achieving certain financial
targets in 1998 and 1999. Approximately $2.8 million of the contingent
consideration was incurred in fiscal 1998, paid in 1999, and allocated to the
purchase price. There is no additional contingent consideration to be incurred.
The acquisition was recorded under the purchase method of accounting and
accordingly, the results of the operations of Hittman have been included in the
consolidated financial statements from the date of acquisition. The purchase
price has been allocated to assets acquired and liabilities assumed based on the
fair value at the date of acquisition. The excess of the purchase price over
fair value of the net assets acquired was approximately $67.7 million, of which
$17.4 million was allocated to identifiable intangible assets and $50.3 million
was allocated to goodwill. Identifiable intangible assets included the following
(dollars in thousands):
<TABLE>
<S> <C>
Hittman Trademark........................................... $ 6,800
Proprietary Technology...................................... 3,200
Noncompetition/Employment Agreements........................ 5,600
Assembled Workforce......................................... 1,200
Other....................................................... 600
-------
Total................................................... $17,400
=======
</TABLE>
F-13
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
4. INVENTORIES
Inventories consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, JUNE 30,
1999 1999 2000
---------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw material............................... $ 6,033 $ 7,099 $ 6,913
Work-in-process............................ 6,016 5,089 5,088
Finished goods............................. 1,242 1,395 1,769
------- ------- -------
Total...................................... $13,291 $13,583 $13,770
======= ======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant, and equipment consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1999 1999
---------- ------------
<S> <C> <C>
Land and land improvements............................ $ 2,227 $ 2,227
Buildings and building improvements................... 4,974 5,226
Leasehold improvements................................ 1,348 2,243
Machinery and equipment............................... 20,630 26,153
Furniture and fixtures................................ 1,552 1,628
Computers and information technology.................. 1,893 2,259
Other................................................. 1,749 2,863
------- -------
34,373 42,599
Less accumulated depreciation......................... (4,878) (9,042)
------- -------
Total................................................. $29,495 $33,557
======= =======
</TABLE>
Depreciation expense for the period from January 1, 1997 to July 11, 1997,
from July 11, 1997 to January 2, 1998 in 1998 and 1999 was approximately
$1,441,000, $1,586,000, $3,532,000 and $4,240,000, respectively.
F-14
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
6. INTANGIBLE ASSETS, NET
Intangible assets consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1999 1999
---------- ------------
<S> <C> <C>
Goodwill, net of accumulated amortization of $824 and
$2,229.................................................... $ 55,028 $ 53,944
Trademark and names, net of accumulated amortization of $944
and $1,685................................................ 28,817 27,975
Patented technology, net of accumulated amortization of
$1,696 and $2,824......................................... 11,734 10,606
License agreement, net of accumulated amortization of $1,548
and $2,579................................................ 4,642 3,611
Assembled workforce, net of accumulated amortization of $833
and $1,468................................................ 6,548 5,912
Noncompete/employment agreement, net of accumulated
amortization of $467 and $1,400........................... 5,133 4,200
Unpatented proprietary technology, net of accumulated
amortization of $340 and $976............................. 3,060 2,224
Patent licenses, net of accumulated amortization of $142 and
$312...................................................... 198 295
Deferred financing costs, net of accumulated amortization of
$922 and $1,746........................................... 4,730 3,906
Organizational costs, net of accumulated amortization of
$286 at January 1, 1999 (Note 2).......................... 939 --
Interest rate cap agreements................................ 71 229
-------- --------
Total....................................................... $120,900 $112,902
======== ========
</TABLE>
The estimated useful lives of the significant intangible assets are as
follows:
<TABLE>
<CAPTION>
IN YEARS
--------
<S> <C>
Goodwill.................................................... 40
Trademark and names......................................... 40
Patented technology......................................... 12
Assembled workforce......................................... 10-12
Other intangibles........................................... 3-10
</TABLE>
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1999 1999
---------- ------------
<S> <C> <C>
Profit sharing...................................... $ 2,749 $ 1,105
Interest............................................ 2,350 931
Salaries and benefits............................... 4,688 3,832
Contingent consideration for Hittman acquisition
(Note 3).......................................... 2,764 --
Other............................................... 1,597 1,271
-------- --------
Total............................................... $ 14,148 $ 7,139
======== ========
</TABLE>
F-15
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
8. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
JANUARY 1, DECEMBER 31, 2000
1999 1999 (UNAUDITED)
---------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term Debt:
Term A Facility, $50.0 million, due September 30, 2004.
Quarterly principal installments due of $0.625 million
in December 1998 through September 1999, $1.25 million
through September 2000, $1.875 million through September
2002, $3.125 million through September 2003, and $3.75
million through September 2004. Interest payments are
due quarterly and charged, at the Company's option,
based on either prime plus 1.50% or LIBOR plus 2.75% as
per the credit agreement (prime was 8.50% and LIBOR was
7.69% at January 1, 2000). Interest rate requirements
varied from the above through the Waiver Period, as
discussed below......................................... $ 48,750 $ 46,250 $ 43,750
Term B Facility, $60.0 million, due September 30, 2006.
Quarterly principal installments due of $150,000 through
September 2005 and $1.395 million through September
2006. Interest payments are due quarterly and charged,
at the Company's option, based on either prime plus
1.75% or LIBOR plus 3.00% as per the credit agreement.
Interest rate requirements varied from the above through
the Waiver Period, as discussed below................... 59,700 59,250 58,950
Revolving Facility, up to $20.0 million, due September 30,
2004. Borrowing limited to $8 million through waiver
period. Interest payments are due quarterly on any
outstanding loans and charged, at the Company's option,
based on either prime plus 1.50% or LIBOR plus 2.75% as
per the credit agreement. Interest rate requirements
varied from the above through the Waiver Period, as
discussed below......................................... -- 4,300 1,100
Senior Subordinated Notes, principal amount of Notes of
$25.0 million due July 1, 2007. Semi-annual interest
installments are due to note holders on January 1 and
July 1 of each year..................................... 22,283 22,602 22,762
-------- -------- --------
Total long-term debt.................................... 130,733 132,402 126,562
Other long-term obligations................................. 553 811 311
-------- -------- --------
Total long-term obligations............................. 131,286 133,213 126,873
Less current maturities of long-term obligations............ (2,950) (6,225) (7,475)
-------- -------- --------
Long-term obligations....................................... $128,336 $126,988 $119,398
======== ======== ========
</TABLE>
In July 1997, the Company entered into a Credit Agreement with various
financial institutions providing a maximum of $60.0 million in senior,
first-secured financing. In August 1998, this agreement was amended and restated
to facilitate the Greatbatch-Hittman acquisition, and the maximum senior, first
secured financing was increased to $130.0 million (the "Agreement"). The
Agreement provides for
F-16
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
8. LONG-TERM OBLIGATIONS (CONTINUED)
two term facilities ("Term A Facility" and "Term B Facility") and a revolving
credit facility ("Revolving Facility"). No gain or loss was recorded as a result
of the amended and restated Agreement.
Also, in July 1997, the Company issued $25.0 million, 13% Senior
Subordinated Notes (the "Senior Subordinated Notes") to various affiliates of
DLJ and third parties and received $25.0 million related to the issuance. At
maturity, July 1, 2007, the entire principal amount of the Senior Subordinated
Notes, $25.0 million, will be payable to the holders of the Senior Subordinated
Notes. At the date of inception, the Company recorded $21,811,688 as its
obligation due to lenders and $3,188,312 for shares issued to the lenders. The
difference between the face amount of the Senior Subordinated Notes and the
recorded book value is amortized under the effective yield method and will be
charged to interest expense over the term of the Senior Subordinated Notes. The
effect of this transaction resulted in an effective interest rate of 14.3% for
the period from July 11, 1997 to January 2, 1998, 1998 and 1999. Payments are
subordinated to amounts due under the Agreement. In connection with the issuance
of the Senior Subordinated Notes, the Company issued 637,663 shares to the
holders of the Senior Subordinated Notes.
The Revolving Facility includes the availability to the Company of up to
$20.0 million in the form of either revolving loans, swing-line loans, or
letters of credit. The swing-line loans and letters of credit may not exceed
$2.0 million and $5.0 million, respectively. The Revolving Facility is due
September 30, 2004. There was $4.3 million outstanding at December 31, 1999 and
no balance outstanding at January 1, 1999.
Interest is payable quarterly on any outstanding loans and charged, at the
Company's option, based on either prime or LIBOR plus an interest rate add-on
("Applicable Margin"). For the Term A Facility and the Revolving Facility, the
Applicable Margin is 1.50% for prime rate loans and 2.75% for LIBOR rate loans.
For the Term B Facility, the Applicable Margin is 1.75% and 3.00% for prime rate
and LIBOR rate loans, respectively (see Note 18).
The Applicable Margin with respect to the Term A Facility and the Revolving
Facility may be reduced, depending upon the Company's degree of leverage, as
defined. The Applicable Margin is reduced in accordance with a matrix setting
forth leverage ratios and corresponding Applicable Margins.
The Agreement for the Term A Facility, Term B Facility and the Revolving
Facility contains, among other covenants, quarterly and annual financial
covenants pertaining to minimum earnings, interest coverage, leverage and other
ratios. In November 1999, the Agreement was amended to change and waive
compliance with covenants. The Company was not in compliance at December 31,
1999 with the financial covenants relating to the Leverage Ratio and Interest
Coverage Ratio contained in Section 7.2.4 (b) and Section 7.2.4 (c),
respectively, of the Agreement. The Company has obtained waivers from the
lending institutions for the aforementioned financial covenants for the period
from November 15, 1999 to February 15, 2000 (the "Waiver Period"). In addition,
during the Waiver Period, the Applicable Margins referred to above were all
increased prospectively by 75 basis points and the Revolving Facility was
limited to a maximum outstanding of $8.0 million. During the Waiver Period, the
Company was restricted from making loans, investments and capital stock
redemptions (see Note 18).
F-17
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
8. LONG-TERM OBLIGATIONS (CONTINUED)
The Company has three outstanding interest rate cap agreements with three
financial institutions. The Credit Agreement requires the Company to provide
interest rate protection on at least 50% of the related senior credit facility.
To meet this requirement, in December 1997, December 1998, and January 1999, the
Company hedged $24.1 million, $30.0 million, and $25.0 million respectively of
the outstanding Term A Facility and Term B Facility. The 1997 agreement caps
LIBOR for a portion of the Term A Facility and the Term B Facility at 7% through
December 2000. The 1998 and 1999 agreements cap LIBOR for a portion of the Term
A Facility and the Term B Facility at 6% through January 2002.
Maturities of long-term obligations subsequent to December 31, 1999 are as
follows (dollars in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 6,225
2001........................................................ 8,600
2002........................................................ 9,350
2003........................................................ 13,725
2004........................................................ 16,150
Thereafter.................................................. 81,561
--------
Total of long-term maturities............................... 135,611
Amount to be amortized to debt on the Senior Subordinated
Notes..................................................... (2,398)
--------
Total....................................................... $133,213
========
</TABLE>
9. INCENTIVE COMPENSATION AND EMPLOYEE BENEFIT PLANS
INCENTIVE COMPENSATION PLANS--The Company sponsors various incentive
compensation programs, which provide for the payment of cash to key employees
based upon achievement of specific earnings goals before incentive compensation
expense.
The scheduled payment terms of the deferred compensation plans subsequent to
December 31, 1999 are as follows (dollars in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 680
2001........................................................ 621
2002........................................................ 14
------
1,315
Less current maturities of deferred compensation (included
in accrued liabilities)................................... (680)
------
Long-term portion of deferred compensation.................. $ 635
======
</TABLE>
F-18
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
9. INCENTIVE COMPENSATION AND EMPLOYEE BENEFIT PLANS (CONTINUED)
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 as defined in the plan documents. Under the
ESOP, there are two components to ESOP contributions. The first component is a
defined contribution pension plan whose annual contribution equals five percent
of each employee's compensation. Contributions to the ESOP are in the form of
Company stock.
The second component is a discretionary profit sharing contribution as
determined by the Board of Directors. This profit sharing contribution is to be
contributed to the ESOP in the form of Company stock. The ESOP is subject to
contribution limitations and vesting requirements as defined in the plan.
Compensation cost recognized by the Company was approximately $2.2 million
in 1998 and $1.1 million in 1999. There was no compensation cost prior to 1998.
As of December 31, 1999, the Company had issued 164,701 shares under the ESOP
and 72,467 committed-to-be-released shares under the ESOP, which equals the
number of shares to settle the liability based on the fair value of shares as of
December 31, 1999. Under the terms of the ESOP, the participant has a right to
require the Company to repurchase the Company stock. The number of shares
subject to the put options depends upon the number of terminated employees and
is deemed to be DE MINIMIS at any point in time.
SAVINGS PLAN--The Company sponsors a defined contribution 401(k) plan, which
covers substantially all of its employees. The plan provides for the deferral of
employee compensation under Section 401(k) and a Company match. Net pension
costs related to this defined contribution pension plan were approximately
$57,000, $51,000, $477,500 and $429,000 from January 1, 1997 to July 10, 1997,
from July 11, 1997 to January 2, 1998, in 1998 and 1999, respectively.
Total costs to the Company for all of the above plans were approximately
$1,908,000, $1,384,000, $4,118,000 and $1,946,000 from January 1, 1997 to
July 10, 1997, from July 11, 1997 to January 2, 1998, in 1998 and 1999,
respectively.
10. STOCK OPTION PLANS
The Company has two stock option plans, which 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 common stock of the Company. 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 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
of common stock of the Company, 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 the fair
value of the Company's common stock at the date of the grant.
F-19
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
10. STOCK OPTION PLANS (CONTINUED)
As of December 31, 1999, options for 1,161,115 shares were available for
future grants under the two plans. The weighted average remaining contractual
life is seven years.
The Compensation Committee of the Board of Directors has determined the fair
value of the stock options granted in 1999 and 1998. In the absence of a
"regular, active public market," and based in part on an independent valuation
of the Company's stock as of December 31, 1998 and consideration of comparable
companies, the fair value of the common stock underlying stock options granted
in fiscal 1999 was estimated to be $15.00 per share. The fair value of the
common stock underlying stock options granted in fiscal 1998 was estimated to be
$5.00 per share.
A summary of the transactions under the 1997 Plan and 1998 Plan for the
period from July 11, 1997 to January 2, 1998 and the years ended January 1, 1999
and December 31, 1999 follows (there were no options prior to July 11, 1997):
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Balance at July 11, 1997.................................... -- $ --
Options granted........................................... 423,600 5.00
Options exercised......................................... -- --
Options forfeited......................................... -- --
-------- ------
Balance at January 2, 1998.................................. 423,600 5.00
Options granted........................................... 57,307 5.00
Options exercised......................................... (7,960) 5.00
Options forfeited......................................... (17,040) 5.00
-------- ------
Balance at January 1, 1999.................................. 455,907 5.00
Options granted........................................... 138,457 15.00
Options exercised......................................... (20,668) 5.00
Options forfeited......................................... (63,440) 5.75
-------- ------
Balance at December 31, 1999................................ 510,257 $ 7.60
======== ======
Options exercisable at:
January 1, 1999........................................... 137,412 $ 5.00
December 31, 1999......................................... 133,325 $ 7.05
</TABLE>
Of the options outstanding as of December 31, 1999, 435,239 options were
outstanding at a range of exercise prices of $5.00 to $5.75, which approximated
their weighted average exercise price. As of June 30, 2000, there were 584,683
options outstanding.
No compensation cost has been recognized in the financial statements because
the option exercise price was equal to the estimated fair market value of the
underlying stock on the date of grant. The weighted average grant date fair
value of options granted was $5.00 for the period from July 11, 1997 to
January 2, 1998, $15.00 for the year ended January 1, 1999 and $15.00 for the
year ended December 31, 1999.
F-20
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
10. STOCK OPTION PLANS (CONTINUED)
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 123. The
binomial option pricing model was used with the following weighted average
assumptions for fiscal 1999: risk free interest rate of 6.55%; no dividend
yield; expected common stock market price volatility factor of effectively zero;
and a weighted average expected life of the options of 7 years. As prescribed by
SFAS 123, pro forma net income (loss), basic and diluted earnings (loss) per
share would have been $(15,480,000), $(1.75), $(1.75); $600,000, $0.06, $0.06;
and $(2,975,000), $(0.24), $(0.24) for the period from July 11, 1997 to
January 2, 1998 and for 1998 and 1999, respectively. These pro forma
calculations assume the common stock is freely tradeable and as such, the impact
is not necessarily indicative of the effects on reported net income of future
years.
11. INCOME TAXES
The components of income tax expense (benefit) attributable to continuing
operations for the periods from January 1, 1997 to July 10, 1997 and July 11,
1997 to January 2, 1998 and the years ended January 1, 1999 and December 31,
1999, consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
---------------
JANUARY 1, 1997 JULY 11, 1997
TO TO
JULY 10, 1997 JANUARY 2, 1998 1998 1999
--------------- --------------- -------- --------
<S> <C> <C> <C> <C>
Federal:
Current........................ $ 412 $ 222 $ 580 $ (702)
Deferred....................... -- (8,514) (129) 685
------ ------- ----- -------
412 (8,292) 451 (17)
------ ------- ----- -------
State:
Current........................ 641 60 142 (1,588)
Deferred....................... -- (1,236) (183) 1,000
------ ------- ----- -------
641 (1,176) (41) (588)
------ ------- ----- -------
Income tax expense (benefit)..... $1,053 $(9,468) $ 410 $ (605)
====== ======= ===== =======
</TABLE>
The Federal and state taxes associated with the Predecessor (a former S
corporation) are directly attributable to the sale of its assets to the Company
(see Note 1).
The net deferred tax asset includes the following (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1999 1999
---------- ------------
<S> <C> <C>
Deferred tax asset--current........................... $ 1,669 $1,520
Deferred tax asset--non current....................... 8,988 7,828
------- ------
Net deferred tax asset................................ $10,657 $9,348
======= ======
</TABLE>
F-21
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
11. INCOME TAXES (CONTINUED)
The tax effect of major temporary differences that give rise to the
Company's net deferred tax asset are as follows (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1999 1999
---------- ------------
<S> <C> <C>
Allowance for obsolete inventory and Uniform
Capitalization...................................... $ 677 $ 687
Accrued liabilities and deferred compensation......... 859 751
Amortization of intangible assets..................... 7,775 7,249
Depreciation.......................................... (731) (1,507)
Restructuring reserves................................ 230 153
Tax credits........................................... 1,761 559
Net operating loss carryforward....................... -- 1,430
Other................................................. 86 26
------- -------
Net deferred tax asset................................ $10,657 $ 9,348
======= =======
</TABLE>
The net deferred tax asset of $7,775,000 at January 1, 1999 and $7,249,000
at December 31, 1999 ascribed to the amortization of intangible assets is
primarily attributable to the July 11, 1997 to January 2, 1998 expensing of
purchased in-process research, development and engineering costs.
The provision for income taxes differs in each of the periods and years from
the federal statutory rate due to the following:
<TABLE>
<CAPTION>
JULY 11, 1997
TO
JANUARY 2,
1998 1998 1999
------------- -------- --------
<S> <C> <C> <C>
Statutory rate....................................... 35% 35% 35%
State taxes.......................................... 3 15 (30)
Federal and state tax credits........................ -- (14) 20
Other................................................ -- 1 1
--- --- ---
Effective tax rate................................... 38% 37% 26%
=== === ===
</TABLE>
12. CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of common stock, $.001 par value per share. Dividends are not permitted until
conditions under the senior secured debt agreement are satisfied, including
payment in full of such senior debt obligations. Holders of common stock have
one vote per share.
Subscribed common stock receivable consists of promissory notes, bearing
interest at 6.4% (the "Applicable Federal Rate" at the time the notes were
issued) extended by the Company to management stockholders to facilitate the
purchase of 336,800 shares of common stock. The amounts under this arrangement
are due November 2007.
F-22
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
12. CAPITAL STOCK (CONTINUED)
On the date of the acquisition of Hittman (See Note 3), existing
stockholders, who had participated in the leveraged buyout, purchased 3,300,000
additional shares of common stock at $5.00 per share.
13. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal actions arising in the normal course
of business. The Company does not believe that any such pending activities
should have a material adverse effect on its results of operations or financial
position.
The Company is a party to various license agreements through 2003 to
manufacture and sell components for use in medical implants and various
commercial applications.
OPERATING LEASES--The Company is a party to various operating lease
agreements for office and manufacturing space. The Company incurred operating
lease expense of $53,000, $53,000, $621,000 and $807,000 the period January 1,
1997 to July 10, 1997 and July 11, 1997 to January 2, 1998 and in 1998 and 1999,
respectively. Included in this amount is $43,000, $43,000, $83,655 and $211,000
paid in the period January 1, 1997 to July 10, 1997 and July 11, 1997 to
January 2, 1998 and in 1998 and 1999, respectively to a related party under a
non-cancelable operating lease which expires in 2006.
If all lease extension options are exercised as expected by Company
management, minimum future annual operating lease payments over the next five
years for the Company are $724,000 in 2000; $704,000 in 2001; $702,000 in 2002;
$477,000 in 2003; and $405,000 in 2004.
14. 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. Non-segment specific selling, general and administrative, research,
development and engineering, interest expense, intangible amortization and
non-recurring items are not allocated to reportable segments. Revenues from
transactions between the two segments are not
F-23
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
14. BUSINESS SEGMENT INFORMATION (CONTINUED)
significant. The accounting policies of the segments are the same as those
described in Note 2. All dollars are in thousands.
<TABLE>
<CAPTION>
WILSON
GREATBATCH LTD.
(PREDECESSOR) WILSON GREATBATCH TECHNOLOGIES, INC.
--------------- -----------------------------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, JULY 11,
1997 1997 YEAR YEAR SIX MONTHS SIX MONTHS
TO TO ENDED ENDED ENDED ENDED
JULY 10, JANUARY 2, JANUARY 1, DECEMBER 31, JULY 2, JUNE 30,
1997 1998 1999 1999 1999 2000
--------------- ----------- ---------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Medical.......................... $25,091 $ 20,819 $ 64,449 $ 69,224 $ 33,354 $ 41,746
Commercial power sources......... 5,377 6,374 12,912 10,011 4,964 4,838
------- -------- -------- -------- -------- --------
Total revenues................... $30,468 $ 27,193 $ 77,361 $ 79,235 $ 38,318 $ 46,584
======= ======== ======== ======== ======== ========
Segment income from operations:
Medical.......................... $11,213 $ 10,213 $ 26,834 $ 26,359 $ 13,037 $ 13,037
Commercial power sources......... 1,560 2,590 4,303 2,711 1,249 1,251
------- -------- -------- -------- -------- --------
Total segment income from
operations..................... 12,773 12,803 31,137 29,070 14,286 14,558
Unallocated...................... (19,588) (37,673) (30,037) (31,384) (15,521) (15,662)
------- -------- -------- -------- -------- --------
Income (loss) before income
taxes............................ $(6,815) $(24,870) $ 1,100 $ (2,314) $ (1,235) $ (1,104)
======= ======== ======== ======== ======== ========
Expenditures for tangible
long-lived assets:
Medical.......................... $ 1,112 $ 994 $ 2,129 $ 6,700
Commercial power sources......... 24 79 136 72
------- -------- -------- --------
Total reportable segments........ 1,136 1,073 2,265 6,772
Unallocated long-lived tangible
assets......................... 798 1,583 3,942 1,680
------- -------- -------- --------
Consolidated expenditures........ $ 1,934 $ 2,656 $ 6,207 $ 8,452
======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1999 1999
---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Identifiable assets, net:
Medical.......................... $ 34,481 $ 42,236
Commercial power sources......... 5,959 5,068
-------- --------
Total reportable segments........ 40,440 47,304
Unallocated assets............... 153,950 142,475
-------- --------
Consolidated total assets........ $194,390 $189,779
======== ========
</TABLE>
F-24
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
14. BUSINESS SEGMENT INFORMATION (CONTINUED)
Net revenues by geographic area are presented by attributing revenues based
upon the location from external customers on the basis of where the products are
sold. All dollars are in thousands.
<TABLE>
<CAPTION>
WILSON
GREATBATCH LTD.
(PREDECESSOR) WILSON GREATBATCH TECHNOLOGIES, INC.
--------------- ---------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, JULY 11,
1997 1997 YEAR YEAR
TO TO ENDED ENDED
JULY 10, JANUARY 2, JANUARY 1, DECEMBER 31,
1997 1998 1999 1999
--------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues by geographic area:
United States................................... $23,854 $20,946 $ 60,917 $ 58,644
Foreign countries............................... 6,614 6,247 16,444 20,591
------- ------- -------- --------
Consolidated net revenues....................... $30,468 $27,193 $ 77,361 $ 79,235
------- ------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1999 1999
---------- ------------
<S> <C> <C> <C> <C>
Long-lived assets:
United States............................................................ $162,402 $156,409
Foreign countries.......................................................... -- --
-------- --------
Consolidated long-lived assets............................................. $162,402 $156,409
======== ========
</TABLE>
Two customers accounted for approximately 26%, 44%, 36% and 64% of sales for
the period from January 1, 1997 to July 10, 1997, the period from July 11, 1997
to January 2, 1998 and the years ended January 1, 1999 and December 31, 1999,
respectively. As of December 31, 1999, two customers accounted for approximately
62% of the outstanding accounts receivable.
15. SALE OF ASSETS
In August 1998, the Company sold the assets of a product line,
Greatbatch-Scientific, to a third party in exchange for shares of stock of the
third party. Greatbatch-Scientific sales were not significant to the
consolidated financial statements. As a result of this transaction, the Company
recorded the shares of stock acquired as an investment carried at cost, which
approximated $2.4 million. Cost of the assets sold approximated fair value and
accordingly, no gain or loss was recorded in the accompanying consolidated
financial statements as of the date of sale. The investment is included in other
assets on the consolidated balance sheet. The cost method is used to account for
the Company's investment because the Company does not have the ability to
exercise significant influence over the investee's operating and financial
policies. Management intends for this investment to be long-term. As of
December 31, 1999, a $859,000 impairment of this investment was recorded in
fiscal 1999. The write-down of the investment represents an other than temporary
decline and was based upon the Company's monitoring of this investment and other
publicly available information.
F-25
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
16. RESTRUCTURING
In October 1998, management of the Company initiated a plan to restructure
Engineered Components ("EC"), a product line of the Company's medical segment.
EC ceased the production of non-medical products to concentrate on its core
customer base. The restructuring is not expected to significantly impact future
operations. A total of $825,000 in restructuring costs were charged to
operations in fiscal 1998. Such restructuring costs included the following
(dollars in thousands):
<TABLE>
<S> <C>
Asset Impairment Charges:
Estimated unsaleable inventory............................ $350
Losses from the planned disposal of equipment............. 300
----
$650
====
Other Restructuring Costs:
Losses on equipment leases................................ $100
Severance pay and benefits to employees................... 75
----
$175
====
</TABLE>
Approximately $49,000 for terminated EC employees and $5,000 for lease exit
costs were paid in 1998. The future cash liability at January 1, 1999
approximated $26,000 for terminated EC employees and $95,000 for lease exit
costs. Approximately $121,000, including all severance and benefits, was paid in
cash, in 1999. In addition, approximately $80,000 of inventory was disposed of.
The remaining assets are anticipated to be disposed of during the fourth quarter
of 2000.
17. RELATED PARTY TRANSACTIONS
The Company had amounts due from related parties totaling $1,684,000 at
January 1, 1999 and December 31, 1999, respectively. Amounts due from related
parties is composed of notes receivable from executive officers and key
employees in connection with their purchase in 1997 of shares of the Company's
common stock. The notes receivable are due in November 2007 and bear interest at
6.42% per annum. Payments of interest commenced on May 1, 1998 and are due on
each May 1 thereafter until the maturity date. The notes are full recourse notes
that are collateralized by the 336,800 shares of common stock they purchased
with the proceeds of the loans. The notes receivable is shown on the
consolidated balance sheets as a reduction in stockholders' equity (see
Note 12).
On July 10, 1997, the Company acquired all of the outstanding shares of
Predecessor. Equity financing was provided by entities affiliated with DLJ
Merchant Banking Partners II, L.P., an affiliate of DLJ. DLJ Capital
Funding, Inc., an affiliate of DLJ, received a customary funding fee of
approximately $1.5 million related to the issuance of the 1997 Credit Agreement.
DLJ received a customary funding fee of approximately $1.9 million related to
the issuance of the Senior Subordinated Notes and reimbursement for reasonable
out-of-pocket expenses. Such amounts were capitalized as deferred financing fees
and are being amortized over the life of the underlying debt. In August 1998,
the Credit Agreement was amended and restated to facilitate the Hittman
acquisition (see Note 3). DLJ received a fee of approximately $2.8 million
related to acting as a financial advisor to the Company in connection with the
acquisition, for its underwriting fee and a bond consent fee. Approximately
F-26
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997
TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
17. RELATED PARTY TRANSACTIONS (CONTINUED)
$1.8 million was capitalized as deferred financing fees and is being amortized
over the life of the underlying debt. The remaining $1.0 million was included as
part of the direct cost of the Hittman acquisition.
The Company may from time to time enter into other investment banking
relationships with DLJ or one of its affiliates pursuant to which DLJ or its
affiliates will receive customary fees and will be entitled to reimbursement of
reasonable disbursements and out-of-pocket expenses incurred in connection
therewith. The Company expects that any such arrangement will include provisions
for the indemnification of DLJ against liability, including liabilities under
the federal securities laws.
The Company is a party to an operating lease to a related party under a
non-cancelable operating lease which expires in 2006 (see Note 13).
18. SUBSEQUENT EVENTS
In February 2000, the Agreement referred to in Note 8 was amended to change
the financial covenants. The Company believes that it will be in compliance with
the new covenants in fiscal 2000. The 75 basis point increase in Applicable
Margin (as defined in Note 8) was made permanent. The Revolving Facility was set
to a maximum of $13.0 million through December 31, 2000. After that time, if the
leverage targets are met, the Revolving Facility will increase to
$20.0 million.
On March 14, 2000, the Company signed a letter of intent to acquire the
stock of a battery manufacturer. Closing of the transaction, along with final
determination of a purchase price, will not occur prior to the second half of
2000 and is subject to customary conditions, including due diligence and the
execution of a definitive purchase agreement.
19. SUBSEQUENT EVENT AFTER ISSUANCE (UNAUDITED)
On August 7, 2000, the Company completed the acquisition of all of the
capital stock of Battery Engineering, Inc. ("BEI"), a small specialty battery
manufacturer, in exchange for 339,856 shares of Company stock and assumption of
approximately $2.7 million of indebtedness. The acquisition will be accounted
for as a purchase. In a separate transaction, on August 7, 2000, the former
parent of BEI purchased 200,000 shares of common stock at $15.00 per share.
* * * * * *
F-27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Hittman Materials and Medical Components, Inc.
We have audited the accompanying balance sheets of Hittman Materials and
Medical Components, Inc. (the "Company") as of August 7, 1998 and December 31,
1997 and the related statements of operations, stockholder's equity and cash
flows for the period from January 1, 1998 through August 7, 1998 and year ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Hittman Materials and
Medical Components, Inc. as of August 7, 1998 and December 31,1997, and the
results of its operations and its cash flows for the period and year then ended
in conformity with generally accepted accounting principles.
/S/ GRANT THORNTON LLP
Baltimore, Maryland
September 22, 1998
F-28
<PAGE>
HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
BALANCE SHEETS
AUGUST 7, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
AUGUST 7, DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 839,272 $ 800,392
Accounts receivable....................................... 2,023,195 1,709,351
Inventories............................................... 1,986,096 2,339,210
Prepaid expenses.......................................... 44,245 27,340
----------- ----------
Total current assets.................................. 4,892,808 4,876,293
PROPERTY AND EQUIPMENT--AT COST
Furniture, fixtures and equipment......................... 2,115,414 1,856,253
Equipment under capital lease............................. -- 574,117
----------- ----------
2,115,414 2,430,370
Less accumulated depreciation and amortization............ 1,558,736 1,748,887
----------- ----------
556,678 681,483
OTHER ASSETS................................................ 52,382 52,382
----------- ----------
$ 5,501,868 $5,610,158
=========== ==========
LIABILITIES
CURRENT LIABILITIES
Current maturities of capital lease obligation............ $ -- $ 45,938
Accounts payable.......................................... 402,640 278,746
Accrued compensation and employee benefits................ 536,234 874,572
Accrued expenses.......................................... 94,995 161,429
----------- ----------
Total current liabilities............................. 1,033,869 1,360,685
CAPITAL LEASE OBLIGATION, less current maturities........... -- 306,154
COMMITMENTS................................................. -- --
STOCKHOLDER'S EQUITY
Common stock--par value, $.10 per share; authorized, 1,000
shares;
issued and outstanding, 500 shares...................... 50 50
Additional paid-in capital................................ 5,858,834 299,950
Retained (deficit) earnings............................... (1,390,885) 3,643,319
----------- ----------
4,467,999 3,943,319
----------- ----------
$ 5,501,868 $5,610,158
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
STATEMENTS OF OPERATIONS
PERIOD FROM JANUARY 1, 1998 THROUGH AUGUST 7, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
AUGUST 7, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
NET SALES................................................... $11,394,951 $18,507,437
COST OF SALES............................................... 5,072,595 7,769,408
----------- -----------
Gross profit.......................................... 6,322,356 10,738,029
SELLING AND ADMINISTRATIVE EXPENSES......................... 2,202,100 2,829,658
----------- -----------
Operating profit...................................... 4,120,256 7,908,371
OTHER INCOME (EXPENSE)
Share value plan termination costs........................ (4,907,802) --
Gain on termination of capital lease...................... 93,940 --
Interest income........................................... 25,448 27,477
Interest expense.......................................... (20,524) (37,496)
Other..................................................... 16,777 29,258
----------- -----------
(4,792,161) 19,239
----------- -----------
NET (LOSS) EARNINGS................................... $ (671,905) $ 7,927,610
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
PERIOD FROM JANUARY 1, 1998 THROUGH AUGUST 7, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
-------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997..................... $50 $ 299,950 $ 2,665,709 $ 2,965,709
Net earnings................................. -- -- 7,927,610 7,927,610
Dividends to stockholder..................... -- -- (6,950,000) (6,950,000)
--- ---------- ----------- -----------
BALANCE AT DECEMBER 31, 1997................... 50 299,950 3,643,319 3,943,319
Net loss..................................... -- -- (671,905) (671,905)
Contributions from stockholder............... -- 5,558,884 -- 5,558,884
Dividends to stockholder..................... -- -- (4,362,299) (4,362,299)
--- ---------- ----------- -----------
BALANCE AT AUGUST 7, 1998...................... $50 $5,858,834 $(1,390,885) $ 4,467,999
=== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM JANUARY 1, 1998 THROUGH AUGUST 7, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings....................................... $ (671,905) $ 7,927,610
Adjustments to reconcile net (loss) earnings to net cash
(used in) provided by operating activities
Gain on lease termination............................. (93,940) --
Depreciation and amortization......................... 152,958 323,541
Changes in assets and liabilities
Accounts receivable................................. (313,844) (177,286)
Inventories......................................... 353,114 (758,891)
Prepaid expenses.................................... (16,905) (13,340)
Accounts payable and accrued expenses............... (280,877) (56,390)
----------- -----------
(199,494) (682,366)
----------- -----------
Net cash (used in) provided by operating
activities...................................... (871,399) 7,245,244
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (28,154) (133,964)
Other..................................................... -- (10,277)
----------- -----------
Net cash used in investing activities............. (28,154) (144,241)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital lease obligation..................... (27,144) (41,584)
Stockholder contributions................................. 5,327,876 --
Dividends paid............................................ (4,362,299) (6,950,000)
----------- -----------
Net cash provided by (used in) financing
activities...................................... 938,433 (6,991,584)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 38,880 109,419
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 800,392 690,973
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD/YEAR............. $ 839,272 $ 800,392
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 20,524 $ 37,496
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment contributed by stockholder...................... 231,008 --
Capital lease obligation retired.......................... 324,948 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 1998 AND DECEMBER 31, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hittman Materials and Medical Components, Inc. (the Company) is principally
engaged in the manufacturing of components for medical devices, primarily
implantables, such as pacemakers and defibrillators. Components are sold
worldwide.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. RECEIVABLES
The Company charges off doubtful receivables as bad debts in the year they
are deemed to be uncollectible. Management believes that substantially all
remaining receivables will be collected in the ordinary course of business and,
accordingly, has not provided an allowance for doubtful accounts.
2. INVENTORIES
Inventories are valued at the lower of cost or market. Raw material costs
are determined using the first-in, first-out method. Work-in-process and
finished goods costs are determined based on accumulated average costs.
3. PROPERTY AND EQUIPMENT
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over the estimated service lives of the assets,
principally using an accelerated method.
Equipment under a capitalized lease is depreciated over the lease term,
which approximates the service lives of the equipment, using the straight-line
method.
4. REVENUE RECOGNITION
Revenues are recognized at the time finished products are shipped.
5. RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred and amounted
to approximately $328,587 and $553,277 for the period ended August 7, 1998 and
year ended December 31,1997, respectively.
6. INCOME TAXES
The Company has elected to be treated as an S Corporation under the Internal
Revenue Code. As a result, income taxes on net earnings are payable personally
by the Company's stockholder and the Company is not taxed as a Corporation.
Accordingly, no provision has been made for income taxes. Had income taxes been
payable by the Company, the income tax benefit would have been approximately
$262,000 for the period ended August 7, 1998 and income tax expense of
approximately $3,092,000 for the year ended December 31, 1997.
F-33
<PAGE>
HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 7, 1998 AND DECEMBER 31, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
7. STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
8. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
9. RECLASSIFICATIONS
Certain reclassifications have been made to 1997 amounts to conform with
1998 presentation.
NOTE B--INVENTORIES
Inventories at August 7, 1998 and December 31, 1997 are comprised as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials........................................ $1,102,283 $1,475,330
Work-in-process...................................... 767,248 342,033
Finished goods....................................... 116,565 521,847
---------- ----------
$1,986,096 $2,339,210
========== ==========
</TABLE>
NOTE C--OTHER ASSETS
In 1993, the Company purchased a split dollar, joint life insurance policy
with a last to die provision, on the lives of the Company's sole stockholder and
his wife. The Company is the beneficiary to the extent of premiums paid.
NOTE D--CAPITAL LEASE OBLIGATION
The Company leased certain equipment from a related party under an agreement
classified as a capital lease, which expired in 2003. The related asset and
obligation were recorded using a 10% imputed interest rate. The lease was
terminated as of August 7, 1998
F-34
<PAGE>
HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 7, 1998 AND DECEMBER 31, 1997
NOTE D--CAPITAL LEASE OBLIGATION (CONTINUED)
The following is a schedule of equipment under capital lease.
<TABLE>
<CAPTION>
AUGUST 7, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Equipment under capital lease.......................... $ -- $574,117
Less accumulated depreciation.......................... -- 316,501
---- --------
$ -- $257,616
==== ========
</TABLE>
NOTE E--COMMITMENTS
The Company leases its facility from a related party under a non-cancelable
operating lease agreement which expires in 2006. The Company is responsible for
the payment of property taxes, insurance, maintenance and all other expenses
associated with the operation of the facility. Rent expense of $79,277 and
$131,520 was charged to operations for the period ended August 7, 1998 and the
year ended December 31, 1997, respectively.
The Company also leases equipment under operating lease agreements which
expire at various times over the next two to five years. Rent expense of $10,958
and $16,351 was charged to operations for the period ended August 7, 1998 and
the year ended December 31, 1997, respectively.
At August 7, 1998, future minimum annual operating lease payments are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ---------
<S> <C>
1998........................................................ $ 91,482
1999........................................................ 220,974
2000........................................................ 215,916
2001........................................................ 215,916
2002........................................................ 212,372
2003........................................................ 210,600
Thereafter.................................................. 1,739,405
</TABLE>
NOTE F--RETIREMENT PLAN
The Hittman Retirement Plan covers substantially all employees who have
reached the age of eighteen and completed six months of service. Eligible
employees may execute a written agreement with the Company whereby the employee
agrees to accept a salary reduction of not less than 1% nor more than 10% in
exchange for the Company's contribution to the plan. The Company must contribute
an amount based on the employee's percentage salary reduction. Additional
employer contributions are allowed within certain limitations. The Company's
contribution was approximately $112,000 in 1998 and $154,000 in 1997.
NOTE G--SHARE VALUE PLAN
In 1989, the Company instituted a share value plan wherein certain employees
can receive compensation based on the earnings of the Company and under certain
circumstances acquire shares of
F-35
<PAGE>
HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 7, 1998 AND DECEMBER 31, 1997
NOTE G--SHARE VALUE PLAN (CONTINUED)
the Company's common stock. Compensation expense of $5,241,428 and $500,000 was
charged to operations for the period ended August 7, 1998 and the year ended
December 31, 1997, respectively, pursuant to the plan. The plan was terminated
as of August 7, 1998.
NOTE H--CONCENTRATIONS
MAJOR CUSTOMERS
During the period ended August 7, 1998, approximately 59% of sales were
derived from four major customers and in 1997, approximately 80% of sales were
derived from six major customers.
CASH BALANCES
The Company maintains its cash balances in several financial institutions
located in Maryland, which at times may exceed federally insured limits. The
Company has not experienced any losses and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
NOTE I--STOCK SALE
Effective with the close of business on August 7, 1998, all of the Company's
outstanding stock was sold to Wilson Greatbatch Ltd.
F-36
<PAGE>
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SEPTEMBER 29, 2000
[LOGO]
WILSON GREATBATCH TECHNOLOGIES
5,000,000 SHARES OF COMMON STOCK
---------------------
PROSPECTUS
---------------------
DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH & CO.
----------------
BANC OF AMERICA SECURITIES LLC
U.S. BANCORP PIPER JAFFRAY
DLJDIRECT INC.
------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT
WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF WILSON
GREATBATCH TECHNOLOGIES HAVE NOT CHANGED SINCE THE DATE HEREOF.
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UNTIL OCTOBER 24, 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
THAT EFFECT TRANSACTIONS IN THESE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND REGARDING THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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