<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 27, 2000
REGISTRATION NO.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
UTI CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MARYLAND 3317 91-2090934
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
---------------------
200 W. 7TH AVENUE
COLLEGEVILLE, PA 19426-2470
(610) 489-0300
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
---------------------
ANDREW D. FREED
CHIEF EXECUTIVE OFFICER
UTI CORPORATION
200 W. 7TH AVENUE
COLLEGEVILLE, PA 19426-2470
(610) 489-0300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
STEVEN A. COHEN ALLISON R. SCHNEIROV
HOGAN & HARTSON L.L.P. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
1200 SEVENTEENTH STREET, SUITE 1500 FOUR TIMES SQUARE
DENVER, CO 80202 NEW YORK, NY 10036
(303) 899-7300 (212) 735-3000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------
\
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM
AGGREGATE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE PER SHARE(1) REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value.............................. $115,000,000 $28,750
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 27, 2000
SHARES
[UTI CORPORATION LOGO]
COMMON STOCK
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $ and $ per share. We intend to apply to have our common stock
approved for quotation on The Nasdaq National Market under the symbol "UTIC."
The underwriters have an option to purchase an aggregate of additional
shares to cover over-allotments of shares.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE
7.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS UTI
-------- ------------- -----------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total....................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
2001.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CREDIT SUISSE FIRST BOSTON BANC OF AMERICA SECURITIES LLC
LEHMAN BROTHERS
SALOMON SMITH BARNEY
The date of this prospectus is , 2001.
<PAGE> 3
[Inside front cover art: UTI logo centered at the top of the page with the
statement "A Part of Your Solution" below the logo. The logo will be encircled
with pictures of the following components and assemblies we manufacture:
- breast biopsy device,
- guidewires for interventional cardiology and neurology devices,
- synthetic pyrolitic carbon heart valve,
- titanium alloy hip replacement,
- orthopedic bone drills and screws, and
- saphenous vein cutting and ligating device.
Below each picture will be the text above identifying the component or
assembly. At the bottom of the page will be the statement "High Precision
Components, Subassemblies and Finished Medical Devices we Design and
Manufacture". The background of the page will include a shadow of a human
figure.]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 20
Selected Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 35
Management.................................................. 46
Related Party Transactions.................................. 55
Principal Stockholders...................................... 61
Description of Capital Stock................................ 65
Shares Eligible for Future Sale............................. 71
Underwriting................................................ 73
Notice to Canadian Residents................................ 76
Legal Matters............................................... 77
Experts..................................................... 77
Change in Accountants....................................... 78
Where You Can Find More Information......................... 78
Index To Consolidated Financial Statements.................. F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
"UTI" along with the UTI logo are trademarks of UTI Corporation. Other
trademarks and trade names appearing in this prospectus are the property of
their holders.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2001 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, 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 WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
i
<PAGE> 5
PROSPECTUS SUMMARY
The information below is only a summary of more detailed information
included in other sections of this prospectus. This summary may not contain all
the information that is important to you or that you should consider before
buying shares in the offering. The other information is important, so please
read this entire prospectus carefully.
UTI CORPORATION
OUR BUSINESS
We provide precision manufacturing and related services to medical device
companies. Our services include the design and manufacture of custom components,
subassembly of components and assembly of finished medical devices. Our
objective is to provide medical device companies with a comprehensive
outsourcing solution that includes designing, engineering and manufacturing
their specialized, high precision medical devices. Our customers include many of
the world's leading medical device companies such as Boston Scientific
Corporation, Guidant Corporation, Johnson & Johnson, Medtronic, Inc., Smith &
Nephew plc and Stryker Corporation. Our engineers work closely with our
customers in the design of their products. As a result, our components and
technologies are used extensively in our customers' medical devices.
We have focused our capabilities on the segments of the medical device
industry that use complex medical devices, including interventional cardiology
or IC, cardiac rhythm management or CRM, orthopedics and minimally invasive
surgical procedures, particularly in the field of endoscopy. Growth in these
market segments is being driven by an increase in selected medical conditions
related to aging as well as significant technological innovation.
We believe our customers have a growing need to identify and use companies
such as ours to respond to the multiple challenges they face in bringing medical
devices to market in a cost-effective and timely manner. In particular, medical
device companies must respond to the following:
- need to accelerate new product innovation and market introduction as
product life cycles become shorter;
- pressure to fund and develop more advanced manufacturing capabilities to
produce sophisticated devices that are smaller and more complex;
- significant difficulties and costs in assembling and maintaining state of
the art manufacturing facilities and related engineering personnel;
- pressure to reduce inventory costs while having ready access to
commercial production and distribution of their devices; and
- limited infrastructure of emerging medical device manufacturers.
We believe our range of capabilities and market experience position us as
an ideal strategic partner for medical device companies. By partnering with us,
our customers can reduce their need for multiple suppliers, improve efficiency
and enhance quality. This also allows our customers to focus their resources on
their core capabilities in research and development and marketing. Our
manufacturing capabilities include seamless and welded tube forming and drawing,
wire drawing and grinding, laser welding, traditional and non-traditional
machining of precision metal components, plastic injection molding, as well as
assembly of metal and plastic components into finished medical devices. We hold
our processes to extreme standards and achieve tolerances within 0.0001". We
currently have over 549,000 square feet of manufacturing and assembly capacity
at eight facilities in the U.S. and two in Europe, with a third expected to be
operational in the first quarter of 2001.
1
<PAGE> 6
We have over 100 engineers available to help design, prototype and test the
feasibility and manufacturability of new product designs. We help our customers
move products from the design phase to commercial scale component manufacturing
in a cost-effective and timely manner while eliminating unnecessary trial and
error in the manufacturing and assembly process. Because of our engineering and
manufacturing expertise, adherence to strict quality standards and ability to
provide comprehensive services to our customers, we are a "Preferred" or
"Qualified" supplier of the components we produce for a majority of our
customers.
Our customers also include non-medical companies such as Dover Corporation,
General Electric Company and Metem Corporation. Our non-medical customers use
our products and services in their products that demand high quality, complex
components including high density discharge lamps, fiber optics, motion sensors
and power generators.
BUSINESS STRATEGY
Our objective is to provide medical device companies with a comprehensive
outsourcing solution that includes designing, engineering and manufacturing of
their specialized, high precision medical devices. To achieve this we intend to:
- use our capabilities, personnel and experience to target opportunities in
high growth, high technology medical device markets, which often
experience the shortest product life-cycles and require the most
technical innovation;
- continue to build our engineering and technical expertise by expanding
our engineering force and focusing our research and development spending
on proprietary manufacturing processes;
- add new resources and expand our product engineering capabilities in
order to offer our customers more assistance with the initial designing
and prototyping of next generation products; and
- pursue strategic acquisitions and alliances that offer complementary
manufacturing capabilities and expanded service offerings.
2
<PAGE> 7
THE OFFERING
Common stock offered....... shares
Common stock outstanding
after the offering......... shares
Use of proceeds............ Repay a portion of our outstanding borrowings under
our credit facility as well as general corporate
purposes.
Proposed Nasdaq National
Market Symbol............ UTIC
The number of shares outstanding after this offering is based on our shares
outstanding as of , 2000. The number of shares outstanding excludes:
- 673,900 shares underlying options at a weighted average exercise price
per share of $12.41.
- shares reserved for future issuance under our stock option plan
and employee stock purchase plan
- 88,656 shares underlying warrants at an exercise price per share of
$0.01.
ASSUMPTIONS ABOUT THIS PROSPECTUS
Unless we indicate otherwise, all information in this prospectus assumes:
- conversion of our outstanding preferred stock on a one-to-one basis;
- our reincorporation merger in Maryland and our related name change prior
to the closing of this offering;
- an increase in the number of our authorized shares of common stock from
50,000,000 to to be effected concurrently with this offering;
- no exercise by the underwriters of their over-allotment option to
purchase up to additional shares of common stock; and
- no exercise by any of our security holders of any outstanding options or
warrants.
We organized our company as a Colorado corporation on July 2, 1999. We will
be reincorporated by merger in Maryland prior to the closing of this offering.
In connection with the reincorporation, we will change our corporate name from
MDMI Holdings, Inc. to UTI Corporation. Our corporate headquarters is located in
Collegeville, Pennsylvania at 200 W. 7th Avenue, Collegeville, Pennsylvania
19426-2470. Our telephone number at that location is (610) 489-0300. Our other
facilities in the United States are located in Arvada, Colorado; Miramar,
Florida; Salem, Virginia; South Plainfield, New Jersey; Upland, California;
Watertown, Connecticut; and Wheeling, Illinois. Our facilities in Europe are
located in Aura, Germany and Manchester, England, and we are developing a
facility in Galway, Ireland. Our internet address is www.uticorporation.com. The
information contained on our website is not part of this prospectus.
3
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Below is our summary financial data and summary financial data for our
predecessor, UTI Corporation, referred to as UTI Pennsylvania. You should read
this summary data together with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the consolidated financial
statements of MDMI Holdings, Inc., referred to as our company, the consolidated
financial statements of UTI Pennsylvania, and the related notes appearing
elsewhere in this prospectus.
Our statement of operations data for the period from July 2, 1999
(inception) through December 31, 1999 and balance sheet data as of December 31,
1999 are derived from our audited consolidated financial statements included
elsewhere in this prospectus.
Our statement of operations data for the period from July 2, 1999
(inception) through September 30, 1999 and for the nine months ended September
30, 2000, and balance sheet data as of September 30, 1999 and 2000, respectively
are derived from the unaudited consolidated financial statements included
elsewhere in this prospectus.
Our statement of operations data includes the results of operations of G&D,
Inc. d/b/a Star Guide Corporation from July 6, 1999, Noble-Met Ltd. from January
11, 2000 and UTI Pennsylvania from June 1, 2000.
The pro forma and adjusted pro forma statement of operations data for the
year ended December 31, 1999 and the nine months ended September 30, 1999 and
2000, respectively, and the pro forma and adjusted pro forma balance sheet data
as of September 30, 2000 are derived from the unaudited pro forma combined
condensed statements of operations and unaudited combined condensed balance
sheets included elsewhere in this prospectus. The pro forma statement of
operations data gives effect to our acquisitions of Star Guide in July 1999,
Noble-Met, Ltd. in January 2000, Medical Engineering Resources, Ltd. in May
2000, UTI Pennsylvania in June 2000 and American Technical Molding, Inc. in
December 2000 as if the transactions had occurred on January 1, 1999, and the
pro forma balance sheet data gives effect to the American Technical Molding
acquisition as if it had occurred on September 30, 2000. The adjusted pro forma
statement of operations data gives effect to the acquisitions described above
and the offering as if the transactions had occurred on January 1, 1999, and the
adjusted pro forma balance sheet data gives effect to the American Technical
Molding acquisition and the offering as if they had occurred on September 30,
2000.
The statement of operations data for UTI Pennsylvania for the three years
ended December 31, 1999, 1998 and 1997 are derived from the consolidated
financial statements of UTI Pennsylvania included elsewhere in this prospectus,
which have been audited by Arthur Andersen LLP.
The statement of operations data for the five months ended May 31, 2000 for
UTI Pennsylvania are derived from the unaudited consolidated financial
statements of UTI Pennsylvania. These unaudited financial statements, in the
opinion of management, have been prepared on the same basis as the audited
consolidated financial statements and reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
results of operations and financial position. The historical results presented
are not necessarily indicative of the results to be expected for any future
fiscal year.
4
<PAGE> 9
Summary Financial Data ($ in 000s, except per share amounts)
OUR COMPANY
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 2, 1999 JULY 2, 1999 NINE MONTHS
(INCEPTION) TO YEAR ENDED (INCEPTION) TO ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
----------------- ------------------------ ------------------ ------------------
ACTUAL PRO FORMA ADJUSTED PF ACTUAL PRO FORMA
----------------- ---------- ----------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................. $ 5,739 $ 113,122 $ 113,122 $ 2,757 $ 83,977
Cost of sales(1).......... 3,140 70,085 70,085 1,462 52,949
---------- ---------- ---------- ---------- ----------
Gross profit.............. 2,599 43,037 43,037 1,295 31,028
SG&A expense(2)........... 839 27,985 27,985 329 15,413
R&D expense............... 1 2,387 2,387 1 1,801
Amortization of
intangibles............. 512 8,966 8,966 257 6,725
---------- ---------- ---------- ---------- ----------
Operating income (loss)... 1,247 3,699 3,699 708 7,089
========== ========== ========== ========== ==========
Interest expense, net..... (804) (16,759) (7,636) (380) (12,515)
========== ========== ========== ========== ==========
Net income (loss)......... $ 109 $ (9,095) $ (3,557) $ 120 $ (4,279)
Preferred stock
dividends............... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)
attributable to common
stockholders............ $ 109 $ (9,095) $ (3,557) $ 120 $ (4,279)
========== ========== ========== ========== ==========
Basic net income (loss)
per share............... $ .11 $ (1.23) $ (.48) $ .12 $ (.58)
Diluted net income (loss)
per share............... $ .10 $ (1.23) $ (.48) $ .11 $ (.58)
Weighted average number of
shares outstanding:
Basic................... 1,018,372 7,408,741 7,408,741 1,018,372 7,408,741
Diluted................. 1,103,294 7,408,741 7,408,741 1,103,294 7,408,741
OTHER FINANCIAL DATA:
EBITDA(3)(5).............. $ 1,934 $ 17,248 $ 17,248 $ 1,042 $ 17,311
Cash provided by (used
in):
Operating activities.... 1,092 818
Investing activities.... (21,421) (21,261)
Financing activities.... 21,173 21,757
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------------------------
ADJUSTED
ACTUAL PRO FORMA PRO FORMA
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................. $ 49,209 $ 94,824 $ 94,824
Cost of sales(1).......... 36,017 59,700 59,700
---------- ---------- ----------
Gross profit.............. 13,192 35,124 35,124
SG&A expense(2)........... 13,003 17,548 17,548
R&D expense............... 806 1,508 1,508
Amortization of
intangibles............. 3,539 6,725 6,725
---------- ---------- ----------
Operating income (loss)... (4,156) 9,343 9,343
========== ========== ==========
Interest expense, net..... (7,157) (12,347) (5,648)
========== ========== ==========
Net income (loss)......... $ (7,401) $ (2,700) $ 1,366
Preferred stock
dividends............... (2,026) (2,026) --
---------- ---------- ----------
Net income (loss)
attributable to common
stockholders............ $ (9,427) $ (4,726) $ 1,366
========== ========== ==========
Basic net income (loss)
per share............... $ (2.31) $ (.64) $ .18
Diluted net income (loss)
per share............... $ (2.31) $ (.64) $ .17
Weighted average number of
shares outstanding:
Basic................... 4,089,125 7,408,741 7,408,741
Diluted................. 4,089,125 7,408,741 7,676,915
OTHER FINANCIAL DATA:
EBITDA(3)(5).............. $ 2,320 $ 21,048 $ 21,048
Cash provided by (used
in):
Operating activities.... 3,874
Investing activities.... (186,070)
Financing activities.... 185,595
</TABLE>
UTI PENNSYLVANIA
<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS
------------------------------------------ ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
1997 1998 1999 2000
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $61,610 $ 73,129 $75,334 $ 35,661
Cost of sales............................................... 39,503 46,696 48,012 23,567
------- -------- ------- --------
Gross profit................................................ 22,107 26,433 27,322 12,094
SG&A expense(4)............................................. 14,281 16,960 21,920 27,732
R&D expense................................................. 1,600 1,979 2,051 702
Amortization of intangibles................................. 222 388 422 188
------- -------- ------- --------
Operating income (loss)..................................... $ 6,004 $ 7,106 $ 2,929 $(16,528)
======= ======== ======= ========
Interest expense............................................ $ 122 $ 464 $ 592 $ 257
======= ======== ======= ========
Net income (loss)........................................... $ 7,176 $ 5,825 $ 1,894 $(17,074)
======= ======== ======= ========
OTHER FINANCIAL DATA:
EBITDA(3)(6)................................................ $10,390 $ 10,464 $ 6,758 $(14,913)
Cash provided by (used in):
Operating activities...................................... 9,598 15,326 10,559 5,472
Investing activities...................................... (6,531) (4,541) (9,876) 1,333
Financing activities...................................... (4,403) (11,589) (616) (6,580)
</TABLE>
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<PAGE> 10
OUR COMPANY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (at period end):
Cash and cash
equivalents.............
Total assets..............
Total debt................
Stockholders' equity......
<CAPTION>
SEPTEMBER 30, 2000
------------------------------------
ADJUSTED
ACTUAL PRO FORMA PRO FORMA
---------- ---------- ----------
<S> <C> <C> <C>
BALANCE SHEET DATA (at period end):
Cash and cash
equivalents............. $ 4,243 $ 5,218 $
Total assets.............. 228,637 256,316
Total debt................ 126,130 140,381
Stockholders' equity...... 76,561 89,311
</TABLE>
---------------
(1) Actual costs of sales include the write-off of the adjustment to fair value
of inventory required in purchase accounting of $6,453 for the nine months
ended September 30, 2000.
(2) Pro forma selling, general and administration (S,G&A) expenses include
$5,952 related to UTI Pennsylvania's Employee Phantom Stock Program for the
year ended December 31, 1999. Actual and pro forma S,G&A expenses in 2000
include $1,500, principally related to the Noble-Met earnout. Actual 2000
S,G&A expenses include $2,300 of in-process research and development related
to the Noble-Met acquisition.
(3) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. We have included financial information concerning EBITDA,
which is not a measure of financial performance under generally accepted
accounting principles, because we believe that it is used by certain
investors as one measure of financial performance. EBITDA should not be
construed as an alternative to operating income, as determined in accordance
with generally accepted accounting principles, or as a measure of liquidity.
(4) Selling, general and administrative expenses for the five months ended May
31, 2000 includes $21.0 million related to the termination of UTI
Pennsylvania's Employee Phantom Stock Program and $0.4 million of
professional fees incurred in connection with our acquisition of UTI
Pennsylvania. In addition, selling, general and administrative expenses
included $6.0 million and $2.8 million of expenses associated with this
stock program in 1999 and 1998, respectively.
(5) Excluding the inventory adjustment, UTI Pennsylvania phantom stock charge,
Noble-Met earnout and the in-process research and development charges, pro
forma EBITDA would have been $23,200 and $22,525 for 1999 and the nine
months ended September 30, 2000, respectively. In addition, actual EBITDA
would have been $12,535 for the nine months ended September 30, 2000.
(6) Excluding the phantom stock charges, UTI Pennsylvania's EBITDA would have
been $12,710 and $6,474 for 1999 and for the five months ended May 31, 2000,
respectively.
6
<PAGE> 11
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 HAVE BEEN OPERATING ON A CONSOLIDATED BASIS FOR A LIMITED TIME, AND OUR
SUCCESS DEPENDS ON OUR ABILITY TO INTEGRATE OUR SUBSIDIARIES AND OPERATE THEM
SUCCESSFULLY ON A COMBINED BASIS.
Our operating companies, including our predecessor, UTI Corporation and its
divisions and subsidiaries, referred to as UTI Pennsylvania, Noble-Met, Star
Guide and American Technical Molding previously operated independent of one
another. The integration of the operations, technologies, systems, processes,
products, services and marketing of these previously independently operating
entities has required and continues to require significant managerial,
technical, financial and other resources. The process is complex and challenging
and will continue for the foreseeable future. A failure by us to integrate these
businesses effectively or to operate them profitably on a combined basis could
have a material adverse effect on our business, financial condition and results
of operations. In addition, because we have been operating on a consolidated
basis for a limited time, the historical financial information presented in this
prospectus is of limited relevance in understanding what our results of
operations, financial position or cash flows would have been for the historical
periods presented had we owned all of our current subsidiaries. See "Pro Forma
Financial Information," "Selected Historical Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
WE ARE SUBJECT TO THE UNPREDICTABLE PRODUCT CYCLES OF THE MEDICAL DEVICE
MANUFACTURING INDUSTRY AND UNCERTAIN DEMAND FOR OUR MANUFACTURING CAPABILITIES
AND RELATED SERVICES.
Our business depends on the medical device manufacturing industry, which is
subject to rapid technological changes, short product life-cycles, frequent new
product introductions and evolving industry standards. If the market for our
manufacturing capabilities and related services does not grow as rapidly as
forecasted by industry experts, our revenues could be less than expected. We
also face the risk that changes in the medical device industry could cause our
manufacturing capabilities and related services to lose widespread market
acceptance. In addition, we cannot assure you that a market will exist for our
developing manufacturing and engineering capabilities or that we will develop
the capabilities to successfully compete in the market in the future.
Furthermore, our customers' markets and our markets are subject to economic
cycles and are likely to experience periods of economic decline in the future.
Adverse economic conditions affecting the medical device manufacturing industry,
in general, or the market for our manufacturing capabilities and services, in
particular, could adversely affect our operating results. If our customers do
not proceed with the production of devices in development because of their
inability to obtain approval for such devices, changing market conditions or
other reasons, our results could suffer. Also, slower growth rates for our
products and services or market saturation due to increased competition could
negatively affect our revenues.
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 in the future due to a variety of factors. Prospective
investors should not rely on results of operations in any past period
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to indicate what our results will be for any future period. Our operating
results may fluctuate as a result of many 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, which could result in reductions in our profits if the relative
portion of our revenue represented by lower margin products increases;
- introduction and market acceptance of our customers' new products and
changes in demand for our customers' existing products;
- the accuracy of our customers' forecasts of future production
requirements;
- timing of orders placed by our principal customers that account for a
significant portion of our revenues;
- timing of payments by customers;
- price concessions as a result of pressure to compete;
- cancellations by customers as a result of which we may recover only our
costs plus our target markup;
- availability of raw materials, including nitinol, Elgiloy, tantalum,
stainless steel, columbium, zirconium, titanium, gold, silver and
platinum;
- increased costs of raw materials, supplies or skilled labor;
- effectiveness in managing our manufacturing processes; and
- changes in competitive and economic conditions generally or in our
customers' markets.
OUR INDUSTRY IS VERY COMPETITIVE; WE MAY FACE COMPETITION FROM OUR CUSTOMERS AND
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST NEW ENTRANTS AND ESTABLISHED
COMPANIES WITH GREATER RESOURCES.
The medical device component manufacturing industry is very competitive and
includes thousands of companies, several of which have achieved substantial
market share. In addition, as more medical device companies seek to outsource
more of the design, prototyping and manufacturing of their products, we will
face increasing competitive pressures to grow our business in order to maintain
our competitive position, and we may encounter competition from other companies
with design, technological and manufacturing capabilities similar to ours.
Current and prospective customers also evaluate our capabilities against the
merits of internal production. A majority of our customers are medical device
companies for whom we design and produce components for their finished medical
devices that they will ultimately market and distribute. If any of our customers
decide to design or produce in their own facilities the types of products and
medical device components that we manufacture, we would lose business and our
financial results could suffer. For example, Smith & Nephew has decided to
manufacture in-house a burr assembly that was previously manufactured by us.
Furthermore, many of our potential competitors, which include some of our
customers, have greater name recognition, larger operating revenues, larger
customer bases, longer customer relationships and greater financial, technical,
personnel and marketing resources than we have.
THE TREND BY MEDICAL DEVICE COMPANIES TO OUTSOURCE THEIR MANUFACTURING
ACTIVITIES MAY NOT CONTINUE AT CURRENT RATES.
Our design, manufacturing and assembly business has grown significantly as
a result of the increase over the past several years in medical device companies
outsourcing these activities. We view the increasing use of outsourcing by
medical device companies as an important component of our future growth
strategy. While industry analysts expect the outsourcing trend to increase, a
substantial slowing of
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growth rates or decreases in outsourcing by medical device companies could cause
our business, financial condition and results of operations to suffer.
IF WE ARE NOT SUCCESSFUL IN MAKING ACQUISITIONS TO EXPAND OUR BUSINESS, OUR
FUTURE BUSINESS MAY SUFFER.
An important facet of our strategy is to make selective acquisitions of
component manufacturers and suppliers that complement our core competencies.
These acquisitions should enable us to provide our customers comprehensive
services related to the design, manufacture and assembly of medical devices,
manufacture and sell additional products to our existing customers and expand
our business into related markets. Our continued growth will depend on our
ability to identify and acquire companies that complement or enhance our
capabilities and service offerings on acceptable terms, including targets that
provide injection molding and mold manufacturing capabilities for metals. We
face substantial competition in our industry for attractive acquisition
candidates, and we may not be able to identify or complete future acquisitions
on acceptable terms. Some of the risks that we may encounter include expenses
associated with, and difficulties in identifying suitable targets, the costs
associated with incomplete acquisitions and higher prices for acquired companies
because of competition for attractive acquisition targets. Also, if we are not
able to successfully complete acquisitions, we may not be able to compete with
other companies in our industry that are able to provide more complete
outsourcing capabilities and services to medical device companies, which could
cause our business, financial condition and results of operations to suffer.
OUR ACQUISITION STRATEGY CARRIES INHERENT RISKS.
Our strategy to grow our business in part through selective acquisitions
carries a number of inherent risks, including:
- difficulties in integrating the operations, technologies, systems,
processes, products, services and marketing of acquired businesses or in
realizing projected efficiencies and cost savings;
- diversion of our management's attention from our core businesses;
- potential loss of key employees or customers of acquired businesses;
- difficulties in managing our expansion, including the strain on
managerial, technical, financial and other resources, the need to enhance
our financial controls, and the management of geographically dispersed
enterprises;
- lack of management and marketing experience with the operations,
technologies, systems, processes, products, services and markets involved
with the acquired businesses;
- entering markets where competitors may have stronger market positions;
- increased expenses and working capital requirements; and
- financial risks, such as:
- inaccurate assessments of liabilities associated with the acquired
businesses;
- amortization expenses related to goodwill and other intangible assets;
- increases in our indebtedness and a limitation in our ability to access
additional capital when needed; and
- the dilutive effect of the issuance of additional equity securities.
WE DEPEND ON 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 and other
personnel. Our manufacturing processes are highly technical in nature. In
general, only highly qualified and trained engineers have the necessary skills
to design and develop the components we manufacture. The loss or unavailability
to us of any member of our
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senior management team or key technical and other personnel could significantly
harm us. We face intense competition for these professionals from our
competitors, our customers and other companies operating in our industry. In
addition, our successful integration of acquired companies depends in part on
our ability to retain senior management of the acquired companies and key
technical and other personnel. To the extent that the services of members of our
senior management team and key technical and other personnel would be
unavailable to us for any reason, we would be required to hire other personnel
to manage and operate our business 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 EMPLOYEES
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. We aggressively compete to recruit
and hire employees who have technology and engineering experience that applies
to our industry. High levels of skilled employee attrition characterize the
industry in which we compete for employees. Although we believe we offer
competitive salaries and benefits, we may have to increase spending in order to
retain personnel. Our business, financial condition and results of operations
could be harmed by our inability to attract, train, retain and motivate
employees or by the loss of these employees to a competitor, including any
resulting loss of existing or potential clients.
QUALITY PROBLEMS WITH OUR PROCESSES, PRODUCTS AND SERVICES COULD HARM OUR
REPUTATION FOR PRODUCING HIGH QUALITY PRODUCTS AND ERODE OUR COMPETITIVE
ADVANTAGE.
Our success depends in part on our ability to manufacture to exact
tolerances precision engineered components, subassemblies and finished devices
from multiple materials. If our components fail to meet these standards or fail
to adapt to rapidly evolving standards, our reputation could be harmed and our
competitive advantage could be damaged. In addition, our quality certifications
are critical to the marketing success of our products and services. If we fail
to maintain our quality certifications or comply with the United States Food and
Drug Administration regulations for marking, packaging and labeling medical
devices, our reputation could be damaged and our business, financial condition
and results of operations could suffer.
IF WE ARE NOT SUCCESSFUL IN IDENTIFYING AND WORKING WITH QUALITY SUPPLIERS AND
SUBCONTRACTORS, OUR BUSINESS MAY SUFFER.
Our current manufacturing and production capabilities do not include all
elements that may be required to satisfy our customers' requirements; for
example, we do not have metal injection molding or mold manufacturing
capabilities. To meet these requirements and to provide those components of a
medical device that we cannot produce, we use suppliers, subcontractors and
other outside sources. Manufacturing problems may occur with these third
parties. A supplier may fail to develop and supply products and components to us
on a timely basis, or may supply us with products and components that do not
meet our quality, quantity or cost requirements. If any of these problems occur,
we may be unable to obtain substitute sources of these products and components
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,
if the processes that our suppliers use to manufacture products and components
are proprietary, we may be unable to obtain comparable components from
alternative suppliers.
IF WE DO NOT RESPOND TO CHANGES IN TECHNOLOGY, OUR MANUFACTURING PROCESSES MAY
BECOME OBSOLETE, AND WE MAY EXPERIENCE REDUCED SALES AND LOSS OF CUSTOMERS.
We use highly engineered, proprietary processes and highly sophisticated
machining equipment to meet the critical specifications of our customers.
Without the timely incorporation of new processes and enhancements, particularly
relating to quality standards and cost-effective production, our manufacturing
capabilities will likely become outdated, which could cause us to lose
customers. In addition, new or
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revised technologies could render our existing technology less competitive or
obsolete or could reduce demand for our products and services. It is also
possible that finished medical device products introduced by our customers may
require fewer of our components or may require components that we lack the
capabilities to manufacture or assemble. In addition, we cannot assure you that
any investment that we make in new technologies will result in commercially
viable processes for our business.
INABILITY TO OBTAIN SUFFICIENT QUANTITIES OF RAW MATERIALS COULD CAUSE DELAYS IN
OUR PRODUCTION.
Our business depends on a continuous supply of raw materials. The principal
raw materials used in our business include stainless steel, tantalum, columbium,
zirconium, titanium, nitinol, Elgiloy, gold, silver and platinum. Raw materials
needed for our business are susceptible to fluctuations in price and
availability due to transportation costs, government regulations, price
controls, change in economic climate or other unforeseen circumstances. In
addition, tantalum and nitinol are in limited supply. For wire fabrication, we
purchase nearly 100% of our stainless steel wire from an independent,
third-party supplier. The loss of this supplier could interrupt production. We
cannot assure you that we will be able to continue to procure raw materials
critical to our business. In addition, the cost of raw materials may fluctuate
and may affect our operating results.
RISKS RELATING TO OUR INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.
We have substantial international manufacturing operations in Europe. We
also receive a significant portion of our revenues from international sales,
approximately half of which is generated by exports from our facilities in the
United States and the other half of which is generated by sales from our
international facilities. Pro forma revenue generated from products shipped to
locations outside of the United States was approximately 27% of total revenue in
the nine-months ended September 30, 2000. Although we take certain measures to
minimize risks inherent to our international operations, the following risks may
adversely affect us:
- fluctuations in the value of currencies and high levels of inflation;
- changes in labor conditions and difficulties in staffing and managing
foreign operations, including labor unions;
- greater difficulty in collecting accounts receivable and longer payment
cycles;
- burdens and costs of compliance with a variety of foreign laws;
- increases in duties and taxation;
- changes in export duties and limitations on imports or exports;
- expropriation of private enterprises; and
- unexpected changes in foreign regulations.
WE MAY EXPAND INTO NEW MARKETS AND PRODUCTS AND OUR EXPANSION MAY NOT BE
SUCCESSFUL.
We may expand into new markets through the development of new product
applications based on our existing specialized manufacturing capabilities and
services. These efforts could require us to make substantial investments,
including significant research, development, engineering and capital
expenditures for new, expanded or improved manufacturing facilities. We cannot
assure you that we will be successful in expanding into new markets and
products. 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 in new
markets.
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WE ARE SUBJECT TO A VARIETY OF ENVIRONMENTAL LAWS THAT COULD BE COSTLY FOR US TO
COMPLY WITH AND COULD ADVERSELY AFFECT OUR BUSINESS OPERATIONS.
Federal, state and local laws impose various environmental controls on the
management, handling, generation, manufacturing, transportation, storage, use
and disposal of hazardous chemicals and other materials used or generated in the
manufacturing of our products. If we fail to comply with any present or future
environmental laws, we could be subject to future liabilities or the suspension
of production, which could harm our business, financial condition and results of
operations. We have in the past paid civil penalties for violations of
environmental laws. We cannot assure you that conditions relating to our
operations that may require expenditures for clean-up will not arise in the
future. For example, our predecessor, UTI Pennsylvania, has in the past entered
into settlements for liability for certain cleanup matters. In addition, we may
have continuing liabilities with respect to potential contamination at our
current and former properties. We have also undertaken and are continuing to
perform remediation efforts as a result of leaks from underground tanks at our
Collegeville, Pennsylvania facility. Although we do not anticipate that these
remediation efforts will be material, we cannot assure you that the costs
associated with these efforts will not have an adverse effect on our business,
financial condition or results of operations.
Changes in environmental laws may impose costly compliance requirements on
us or otherwise subject us to future liabilities or that additional laws
relating to the management, handling, generation, manufacture, transportation,
storage, use and disposal of materials used in or generated by the manufacture
of our products will not be imposed. In addition, we cannot predict the effect
that these potential requirements may have on us or our customers.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY OR INFRINGEMENT CLAIMS BY
THIRD PARTIES COULD ADVERSELY AFFECT OUR BUSINESS.
We rely on a combination of patent, trade secret and trademark laws,
confidentiality procedures and contractual provisions to protect our
intellectual property. We cannot guarantee that the steps we have taken or will
take to protect our proprietary rights will adequately deter unauthorized
disclosure or misappropriation of our intellectual property, technical
knowledge, practice or procedures. We may be required to spend significant
resources to monitor our intellectual property rights, we may be unable to
detect infringement of these rights and we may lose our competitive advantage
associated with our intellectual property rights before we do so. Although we do
not believe that any of our products, services or processes infringe the
intellectual property rights of third parties, we may in the future be notified
that we are infringing certain patent or other intellectual property rights of
third parties. We cannot assure you that in the event of such infringement,
licenses could be obtained on commercially reasonable terms, if at all, or that
litigation would not occur. The failure to obtain necessary licenses or other
rights or the occurrence of litigation arising out of such claims could
materially adversely affect our business, financial condition and results of
operations. Infringement claims, even if not substantiated, could result in
significant legal and other costs and may be a distraction to management. We
also may be subject to significant damages or injunctions against development
and sale of our products. In addition, any infringement claims, significant
charges or injunctions against our customers' products that incorporate our
components may adversely affect our business, financial condition and results of
operations.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, OUR EARNINGS AND FINANCIAL
CONDITION COULD SUFFER.
The manufacture and sale of products that incorporate components
manufactured or assembled by us exposes us to potential product liability claims
and product recalls, including those which may arise from misuse or malfunction
of, or design flaws in, our components or use of our components with components
or systems not manufactured or sold by us. Product liability claims or product
recalls with respect to our components or the end-products of our customers into
which our components are incorporated, regardless of their ultimate outcome,
could require us to spend significant time and money in litigation or require us
to pay significant damages. We have never been subject to a product liability
claim or product recall. However, finished medical devices into which our
components were incorporated have been subject to
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product recalls. We have product liability insurance in the amount of $2,000,000
per occurrence with an umbrella policy in the amount of $25,000,000. We cannot
guarantee that this amount will be sufficient to cover any costs we may incur or
damages we may be required to pay if we are subject to product liability claims
or product recalls.
WE AND OUR CUSTOMERS ARE SUBJECT TO VARIOUS POLITICAL, ECONOMIC AND REGULATORY
CHANGES IN THE HEALTHCARE INDUSTRY THAT COULD FORCE US TO MODIFY HOW WE DEVELOP
AND PRICE OUR COMPONENTS, MANUFACTURING CAPABILITIES AND SERVICES.
The healthcare industry is highly regulated and is influenced by changing
political, economic and regulatory factors. Federal and state legislatures have
periodically considered programs to reform or amend the United States healthcare
system at both the federal and state levels. Regulations affecting the
healthcare industry in general, and the medical device industry in particular,
are complex, change frequently and have tended to become more stringent over
time. 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, including
medical device companies, operate. Any failure by us to comply with applicable
government regulations could also result in the cessation of portions or all of
our operations, impositions of fines and restrictions on our ability to carry on
or expand our operations.
CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD HAVE AN ADVERSE EFFECT ON OUR
REVENUES AND RESULTS OF OPERATIONS.
Many healthcare industry companies, including medical device 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 medical devices that incorporate components produced by us. If we are forced
to reduce our prices because of consolidation in the healthcare industry, our
revenues would decrease and our business, financial condition and results of
operations would suffer.
OUR BUSINESS IS INDIRECTLY SUBJECT TO HEALTHCARE INDUSTRY COST CONTAINMENT
MEASURES THAT COULD RESULT IN REDUCED SALES OF MEDICAL DEVICES CONTAINING OUR
COMPONENTS.
Our customers and the healthcare customers of our 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 medical devices
that incorporate components manufactured or assembled by us 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 finished medical devices that include our components may
decline significantly, and our customers may reduce or eliminate purchases of
our components. The cost containment measures that healthcare providers are
instituting, both in the United States and internationally, could harm our
ability to operate profitably.
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 could result in
significant manufacturing delays, disruption of operations or claims for damages
resulting from injuries, which could harm our business, financial condition and
results of operations. The potential liability resulting from any such accident
or death, to the extent not covered by insurance, could cause our business to
suffer.
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OUR INABILITY TO ACCESS ADDITIONAL CAPITAL COULD HAVE A NEGATIVE IMPACT ON OUR
GROWTH STRATEGY.
Our growth strategy will require additional capital for, among other
purposes, completing acquisitions, managing acquired companies, acquiring new
equipment and maintaining the condition of existing equipment. In connection
with this offering, we intend to repay certain outstanding borrowings and obtain
a new credit facility that we will use to, among other things, repay certain
other debt obligations. If cash generated internally is insufficient to fund
capital requirements, or if we are unable to obtain a new credit facility or
cash is not available under our existing or any new facility, we will require
additional debt or equity financing. We cannot assure you, however, that such
financing will be available or, if available, will be available on terms
satisfactory to us. If we fail to obtain sufficient additional capital in the
future, we could be forced to curtail our growth strategy by reducing or
delaying capital expenditures and acquisitions, selling assets or restructuring
or refinancing our indebtedness. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
OUR INDEBTEDNESS COULD HAVE NEGATIVE CONSEQUENCES ON OUR BUSINESS.
As of September 30, 2000 our total debt was $126.1 million and our interest
expense for the period then ended was $7.2 million. Failure to comply with the
covenants under our credit agreements may result in an event of default. If an
event of default occurs and is not cured or waived, substantially all of our
indebtedness could become immediately due and payable. In addition, we may
experience variable financial results as a consequence of floating interest rate
debt. As interest rates fluctuate, we may experience increases in interest
expense, which may materially affect financial results. We had approximately
$89.3 of floating interest rate debt as of September 30, 2000. If interest rates
were to increase or decrease by 1%, the result would be an annual increase or
decrease of interest expense of approximately $500,000 after consideration of
the interest rate swap. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." Levels
of indebtedness may result in increased interest and amortization expense,
increased leverage and decreased income available to fund further acquisitions
and expansion, and may limit our ability to withstand competitive pressures and
render us more vulnerable to economic downturns.
WE ARE STRUCTURED AS A HOLDING COMPANY AND WE DEPEND ON OUR SUBSIDIARIES IN
ORDER TO SERVICE OUR DEBT.
We are now, and will continue to be, structured as a holding company. As a
holding company, we conduct all of our business through our subsidiaries,
including UTI Pennsylvania, Noble-Met, Star Guide and American Technical
Molding. Our only significant asset is the capital stock of our operating
subsidiaries. Consequently, our cash flow and ability to service our debt
obligations depend on the earnings of our operating subsidiaries and the
distribution of those earnings to us, or upon loans, advances or other payments
made by our subsidiaries to us. The ability of our subsidiaries to pay dividends
or make other payments or advances to us will depend upon their operating
results and will be subject to applicable laws and contractual restrictions,
including those contained in our credit facilities. We cannot assure you that
the earnings of our operating subsidiaries will be adequate for us to service
our debt obligations.
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 September 30, 2000, on a pro forma basis for the American Technical
Molding acquisition we had $162.2 million of intangible assets, representing 63%
of our total assets and 182% of our stockholders' equity. These intangible
assets consist primarily of goodwill, developed technology and acquired
workforce arising from our acquisitions of Star Guide, Noble-Met, UTI
Pennsylvania and American Technical Molding. We expect to incur amortization
expenses relating to these intangible assets of approximately $9.0 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.
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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 Nasdaq
National Market, 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. 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, financial
condition and results of operations.
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 7,325,223 shares, representing
approximately %, or % 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.
YOUR INTERESTS AS A HOLDER OF OUR COMMON STOCK MAY CONFLICT WITH THOSE OF OUR
CONTROLLING STOCKHOLDER, KRG CAPITAL PARTNERS, L.L.C. THROUGH ITS AFFILIATED
FUNDS.
As of December 22, 2000, KRG Capital Partners, L.L.C., through its
affiliated funds, owned approximately 35.6% of our outstanding shares of common
stock, and after the offering, will continue to own approximately % of our
common stock. Following the closing of this offering, KRG will have two
representatives on our board of directors. In addition, through a management
agreement, KRG provides advisory services to us and is compensated for the
completion of acquisitions by us. These relationships create the potential for
conflicts of interest in circumstances where our interests and KRG's interests
are not aligned. KRG has sufficient representation on our board of directors and
votes as a stockholder to affect decisions that may adversely affect the market
price of our common stock or otherwise be detrimental to us. We cannot assure
you that any conflicts will be resolved in our favor.
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 articles of incorporation and bylaws and
in Maryland corporate law may discourage, delay or prevent a change in control
or takeover attempt of our company by a third party that our management and
board of directors opposes. Public stockholders who might desire to participate
in such a transaction may not have the opportunity to do so. These anti-takeover
provisions could impede
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the ability of public stockholders to benefit from a change of control or change
in our management and board of directors. These provisions include:
- the ability of our board of directors, without stockholder approval, to
issue additional shares of common stock or preferred stock and to
classify or reclassify unissued common stock or preferred stock;
- limits on who may call special meetings of our stockholders; and
- 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.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) in this document and in
documents that are incorporated by reference in this document that are subject
to risks and uncertainties. Forward-looking statements include the information
concerning our possible or assumed future results of operations. Also,
statements including words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates," or similar expressions are forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about the growth of our business, our financial
performance and the development of our industry. Because these statements
reflect our current views concerning future events, these forward-looking
statements involve risks and uncertainties. Stockholders should note that many
factors, as more fully described in "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this prospectus could affect our future financial results and could
cause our actual results to differ materially from those expressed in forward-
looking statements contained in this prospectus. Important factors that could
cause our actual results to differ materially from the expectations reflected in
the forward-looking statements in this prospectus include, among others:
- risks relating to our business;
- other risks and uncertainties set forth under the caption "Risk Factors"
and
- general economic, business and market conditions, changes in laws and
increased competitive pressure in the medical device industry.
We do not undertake any obligation to update our forward-looking statements
after the date of this prospectus for any reason, even if new information
becomes available or other events occur in the future.
In this prospectus, we rely on and refer to information and statistics
regarding the medical device industry. We obtained this information and
statistics from various third party sources, discussions with our customers and
our own internal estimates. We believe that these sources and estimates are
reliable, but we have not independently verified them.
16
<PAGE> 21
USE OF PROCEEDS
We estimate our net proceeds from the sale of shares of common stock
in this offering will be approximately $91,250,000, or approximately
$105,200,000 if the underwriters exercise their over-allotment option in full,
based on an assumed initial public offering price of $ per share, the
midpoint of the offering price range set forth on the cover of this prospectus,
and after deducting the underwriting discount and our estimated offering
expenses.
Currently, we plan to use the net proceeds to repay a portion of our
outstanding borrowings under our credit facility as follows:
- $ million of our revolving line of credit which bears an annual
interest rate, at our option, of LIBOR plus 3.25% or prime plus 2.00% and
is due and payable on June 30, 2005. As of December 22, 2000, the
interest rate for our revolving line of credit was 11.50%;
- $ million of our Term A Loan, which bears an annual interest rate, at
our option, of LIBOR plus 3.25% or prime plus 2.00% and is due and
payable on June 30, 2005. As of December 22, 2000, the interest rate for
our Term A Loan was 9.99%; and
- $ million of our Term B Loan which bears an annual interest rate, at
our option, of LIBOR plus 3.75% or prime plus 2.50% and is due and
payable on February 15, 2006. As of December 22, 2000, the interest rate
for our Term B Loan was 10.49%.
The credit facility was used to:
- refinance our outstanding debt and debt of UTI Pennsylvania existing at
the time we acquired it;
- pay a portion of the cash portion of the purchase price we paid for UTI
Pennsylvania; and
- pay fees and expenses related to our purchase of UTI Pennsylvania.
Concurrent with the closing of this offering and upon the repayment of a
portion of the outstanding borrowings under this facility, we intend to enter
into a new credit facility and draw on that facility to repay the remaining
balance under our existing credit facility and to repay our 15.6% senior notes
and 13.5% senior subordinated notes. We also may use the proceeds for general
corporate purposes, including working capital requirements.
The foregoing represents our current intentions based upon our present
plans and business conditions. Our management will have broad discretion in the
application of the net proceeds from this offering, and the occurrence of
unforeseen events or changed business conditions could result in the application
of the net proceeds from this offering in a manner other than as described in
this prospectus.
DIVIDEND POLICY
We intend to make a one-time payment of the dividends accrued on our Class
A-1 5% Convertible Preferred Stock, Class A-2 5% Convertible Preferred Stock,
Class A-3 5% Convertible Preferred Stock, Class A-4 5% Convertible Preferred
Stock, Class A-5 5% Convertible Preferred Stock and phantom stock issued under
our phantom stock plans upon the closing of this offering. After the payment of
those dividends we do not intend to pay any cash dividends with respect to our
capital stock in the foreseeable future. We currently intend to retain any
earnings for use in the operation of our business and to fund future growth.
17
<PAGE> 22
CAPITALIZATION
The following table sets forth our cash and cash equivalents position,
long-term debt including current portion and total capitalization as of
September 30, 2000, presented:
- on an actual basis;
- on a pro forma basis giving effect to the American Technical Molding
acquisition; and
- on a pro forma as adjusted basis to give effect to the automatic
conversion of all outstanding shares of our preferred stock into shares
of our common stock at a conversion rate of one-to-one, as if these
events had occurred as of September 30, 2000 and to the sale of
shares of common stock offered by us at an assumed initial public
offering price of $ per share, which represents the midpoint of the
offering price range set forth on the cover of this prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
-----------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 4,243 $ 5,218 $ --
======== ======== ========
Long-term Debt:
Credit Facility
Term Loans(1)........................................... $ 89,325 $ 89,325 --
Revolving Credit Facility............................... -- 14,250 --
Senior Notes(2)........................................... 17,380 17,380 --
Senior Subordinated Notes(3).............................. 19,050 19,050 --
Other..................................................... 375 375 --
-------- -------- --------
Total Long-term Debt...................................... 126,130 140,380 --
-------- -------- --------
Accrued Dividends........................................... 2,026 2,026 --
-------- -------- --------
Redeemable Preferred Stock.................................. 40 40 --
-------- -------- --------
Stockholders' equity:
Convertible preferred stock:
Class A-1 5% Convertible Preferred Stock, par value $.01;
2,500,000 shares authorized, 868,372 shares issued and
outstanding (actual and pro forma); no shares
authorized, issued and outstanding (pro forma as
adjusted)............................................... $ 9 9 $ --
Class A-2 5% Convertible Preferred Stock, par value $.01;
1,400,000 shares authorized, 1,125,000 issued and
outstanding (actual and pro forma); no shares
authorized, issued and outstanding (pro forma as
adjusted)............................................... 11 11 --
Class A-3 5% Convertible Preferred Stock, par value $.01;
26,456 shares authorized, issued and outstanding (actual
and pro forma); no shares authorized, issued and
outstanding (pro forma as adjusted)..................... -- -- --
Class A-4 5% Convertible Preferred Stock, par value $.01;
6,250,000 shares authorized, 3,437,500 shares issued and
outstanding (actual and pro forma); no shares
authorized, issued and outstanding (pro forma as
adjusted)............................................... 34 34 --
Class A-5 5% Convertible Preferred Stock, par value $.01;
1,500,000 shares authorized, 0 shares issued and
outstanding (actual), 995,469 shares issued and
outstanding (pro forma); no shares authorized, issued
and outstanding (pro forma as adjusted)(4).............. -- 10 --
Class AA Convertible Preferred Stock, par value $.01;
1,000,000 shares authorized, 515,882 shares issued and
outstanding (actual and pro forma); no shares
authorized, issued and outstanding (pro forma as
adjusted)............................................... 5 5 --
Common stock, par value $.01; 50,000,000 shares
authorized; 150,000 shares of voting common stock
authorized, issued and outstanding (actual and pro
forma); shares authorized, shares issued and
outstanding (pro forma as adjusted); 88,656 shares of
nonvoting common stock authorized, 0 issued and
outstanding (actual and pro forma); shares
authorized, shares issued and outstanding (pro forma
as adjusted)............................................ 2 2 --
Additional paid in capital.................................. 83,962 99,980 --
Cumulative translation adjustment........................... (170) (170) --
Accumulated deficit......................................... (7,292) (7,292) --
-------- -------- --------
Total stockholders' equity.......................... 76,561 92,489
-------- -------- --------
Total capitalization................................ $204,757 $234,935
======== ======== ========
</TABLE>
18
<PAGE> 23
---------------
(1) Term loans on an actual and pro-forma basis includes outstanding Term A
Loans of $44.4 million and Term B Loans of $44.9 million. Term loans on a
pro forma as adjusted basis includes outstanding Term A Loans of $ and
Term B Loans of $ million.
(2) $21.5 million of proceeds from the senior notes was initially allocated
between $17.3 million of senior notes and $4.2 million of Class AA
Convertible Preferred Stock issued to holders of the senior notes. The
difference between the principal amount of the senior 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 notes.
(3) $21.5 million of proceeds from the senior subordinated notes was initially
allocated between $19.0 million of senior subordinated notes and $2.5
million of Class AA Convertible Preferred Stock issued to holders of the
senior subordinated notes. The difference between the principal amount of
the senior subordinated 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.
(4) Class A-5 5% Convertible Preferred Stock outstanding includes 796,875 shares
issued in connection with our acquisition of American Technical Molding,
7,969 shares issued to one of our directors as a fee in connection with the
American Technical Molding transaction and 190,625 shares issued to fund the
payment of any earn-out required under the Noble-Met earn-out.
19
<PAGE> 24
DILUTION
As of , 2000, our pro forma net tangible book value would have
been $ million, or $ per share of common stock. Pro forma net tangible
book value per share is equal to our total net tangible book value, which is
total tangible assets less total liabilities, divided by the number of shares of
common stock outstanding on , 2000 and the conversion of all
outstanding shares of our preferred stock. Dilution in pro forma net tangible
book value per share equals the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the pro forma net
tangible book value per share of shares of common stock offered by us in this
offering. Without taking into account any other changes in our pro forma net
tangible book value per share after , 2000, other than to give
effect to the sale of the shares of common stock offered by this prospectus
at an assumed initial public offering price of $ per share, which represents
the midpoint of the offering price range, set forth on the cover of this
prospectus, and after deducting the underwriting discount and estimated offering
expenses payable by us, our pro forma as adjusted net tangible book value as of
, 2000 would have been $ million, or $ per share. This
represents an immediate increase in pro forma as adjusted net tangible book
value to existing stockholders of $ per share, and an immediate dilution to
purchasers in this offering of $ per share. The following table illustrates
the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
--------
Pro forma net tangible book value per share as of ,
2000................................................... $
--------
Increase per share attributable to existing investors..... $
--------
Pro forma net tangible book value per share after this
offering.................................................. $
--------
Pro forma dilution per share to new investors............... $
========
</TABLE>
The following table illustrates, on a pro forma basis, as of , 2000,
the difference between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid (1) by
existing common and preferred stockholders, and (2) by the purchasers at an
assumed initial public offering price of $ per share and before deducting
the underwriting discount and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...................... $
New investors..............................
Total............................ 100.0%
</TABLE>
As of December 22, 2000, there were options outstanding to purchase a total
of 673,900 shares of common stock at a weighted average price of $12.41 per
share. As of the same date, there were warrants to purchase a total of 88,656
shares of non-voting common stock at a weighted average exercise price of $0.01
per share. New investors will experience further dilution to the extent any of
our outstanding options or warrants are exercised or if the underwriters
exercise their over-allotment option.
20
<PAGE> 25
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected consolidated financial data as of and for the dates
and periods indicated have been derived from our consolidated financial
statements and the consolidated financial statements of our predecessor, UTI
Corporation, referred to as UTI Pennsylvania. The selected consolidated
financial data should be read in conjunction with the consolidated financial
statements and the related notes of MDMI Holdings, Inc., referred to as our
company, and UTI Pennsylvania and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The selected data in this section is not intended to replace the
consolidated financial statements.
Our statement of operations data for the period from July 2, 1999
(inception) through December 31, 1999 and balance sheet data as of December 31,
1999 are derived from our audited consolidated financial statements included
elsewhere in this prospectus.
The statement of operations data for UTI Pennsylvania for the three years
ended December 31, 1999, 1998 and 1997 and balance sheet data as of December 31,
1999 and 1998 are derived from the consolidated financial statements of UTI
Pennsylvania included elsewhere in this prospectus, which have been audited by
Arthur Andersen LLP. The statement of operations data for the years ended
December 31, 1996 and 1995 and balance sheet data as of December 31, 1997, 1996
and 1995 are derived from the consolidated financial statements of UTI
Pennsylvania, which are not included in this prospectus.
The statement of operations data for the period ended September 30, 1999
and the nine months ended September 30, 2000 and balance sheet data as of
September 30, 2000 are derived from our unaudited consolidated financial
statements. The statement of operations for the five months ended May 31, 2000
and balance sheet data for the five months ended May 31, 2000 for UTI
Pennsylvania are derived from the unaudited consolidated financial statements of
UTI Pennsylvania. These unaudited financial statements, in the opinion of
management, have been prepared on the same basis as the audited consolidated
financial statements and reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the results of
operations and financial position. The historical results presented are not
necessarily indicative of the results to be expected for any future fiscal year.
Our statement of operations data includes the results of operations of Star
Guide from July 6, 1999, Noble-Met Ltd. from January 11, 2000 and UTI
Pennsylvania from June 1, 2000.
21
<PAGE> 26
Selected Financial Data ($ in 000s, except per share amounts)
OUR COMPANY
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 2, 1999 JULY 2, 1999
(INCEPTION) TO (INCEPTION) TO NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 2000
-------------- -------------- -----------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $ 5,739 $ 2,757 $ 49,209
Cost of sales(1)............................................ 3,140 1,462 36,017
---------- -------- ---------
Gross profit................................................ 2,599 1,295 13,192
Selling, general and administrative expenses(2)............. 839 329 13,003
Research and development expenses........................... 1 1 806
Amortization of Intangibles................................. 512 257 3,539
---------- -------- ---------
Operating income (loss)..................................... 1,247 709 (4,156)
Interest expense, net....................................... (804) (380) (7,157)
Other....................................................... 23 10 109
---------- -------- ---------
Pretax income............................................... 466 338 (11,204)
Income taxes................................................ 356 218 (3,803)
---------- -------- ---------
Net income (loss)........................................... 109 120 (7,401)
========== ======== =========
Preferred Stock Dividends................................... -- -- (2,026)
---------- -------- ---------
Net income (loss) attributable to common stockholders....... 109 120 (9,427)
========== ======== =========
Basic net income (loss) per share........................... $ .11 $ .12 $ (2.31)
Diluted net income (loss) per share......................... $ .10 $ .11 $ (2.31)
Weighted average number of shares outstanding:
Basic..................................................... 1,018,372 1,018,372 4,089,125
Diluted................................................... 1,103,294 1,103,294 4,089,125
OTHER FINANCIAL DATA:
EBITDA(3)(5)................................................ $ 1,934 $ 1,042 $ 2,320
Cash provided by (used in):
Operating activities...................................... 1,092 818 3,874
Investing activities...................................... (21,421) (21,261) (186,070)
Financing activities...................................... 21,173 21,757 185,595
BALANCE SHEET DATA (at period end):
Cash and cash equivalents................................. 845 1,314 4,243
Total assets.............................................. 25,165 25,713 228,637
Total debt................................................ 16,116 16,450 126,130
Stockholders' equity...................................... 6,348 6,388 76,561
</TABLE>
UTI PENNSYLVANIA
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------ MAY 31,
1995 1996 1997 1998 1999 2000
------- ------- ------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales(4)......................................... $50,181 $56,251 $61,610 $ 73,129 $75,334 $ 35,661
Cost of sales........................................ 31,913 36,020 39,503 46,696 48,012 23,567
------- ------- ------- -------- ------- --------
Gross profit......................................... 18,268 20,231 22,107 26,433 27,322 12,094
Selling, general and administrative expenses(4)...... 12,708 14,059 14,281 16,960 21,920 27,732
Research and development expenses.................... 1,508 1,925 1,600 1,979 2,051 702
Amortization of Intangibles.......................... 92 200 222 388 422 188
------- ------- ------- -------- ------- --------
Operating income (loss).............................. 3,960 4,045 6,004 7,106 2,929 (16,528)
------- ------- ------- -------- ------- --------
Interest expense, net................................ 380 469 122 464 592 257
Other................................................ (2,080) (1,623) (1,573) 224 210 55
------- ------- ------- -------- ------- --------
Pretax income (loss)................................. 5,660 5,199 7,455 6,418 2,127 (16,840)
Income taxes......................................... 295 197 280 593 233 234
------- ------- ------- -------- ------- --------
Net income (loss).................................... $ 5,364 $ 5,002 $ 7,176 $ 5,825 $ 1,894 $(17,074)
======= ======= ======= ======== ======= ========
OTHER FINANCIAL DATA:
EBITDA(3)(6)......................................... $ 7,636 $ 7,524 $10,390 $ 10,464 $ 6,758 $(14,913)
Cash provided by (used in):
Operating activities............................... 2,436 4,041 9,598 15,326 10,559 5,472
Investing activities............................... (7,369) (1,960) (6,531) (4,541) (9,876) 1,333
Financing activities............................... 5,168 (2,004) (4,403) (11,589) (616) (6,580)
BALANCE SHEET DATA (at period end):
Cash and cash equivalents.......................... 1,001 4,189 481 2,049 2,117 2,341
Total assets....................................... 40,071 45,375 53,053 51,053 58,358 55,454
Total debt......................................... 551 7,415 7,927 8,258 10,808 5,483
Total stockholders' equity......................... 15,857 18,368 28,234 22,931 21,136 29,492
</TABLE>
22
<PAGE> 27
---------------
(1) Costs of sales includes the write-off of the adjustment to fair value of
inventories required in purchase accounting of $6,453 for the nine months
ended September 30, 2000.
(2) SG&A expenses in 2000 include $1,500 principally related to the Noble-Met
earnout and $2,300 of in-process research and development related to the
Noble-Met acquisition.
(3) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. We have included financial information concerning EBITDA,
which is not a measure of financial performance under generally accepted
accounting principles, because we believe that it is used by certain
investors as one measure of financial performance. EBITDA should not be
construed as an alternative to operating income, as determined in accordance
with generally accepted accounting principles, or as a measure of liquidity.
(4) Selling, general and administrative expenses for the five months ended May
31, 2000 includes $21.0 million related to the termination of UTI
Pennsylvania's Employee Phantom Stock Program and $0.4 million of
professional fees incurred in connection with our acquisition of UTI
Pennsylvania. In addition, selling, general and administrative expenses
included $6.0 million and $2.8 million of expenses associated with this
stock program in 1999 and 1998, respectively.
(5) Excluding the inventory adjustments, Noble-Met earn-out and the in-process
research and development charge, actual EBITDA would have been $12,535 for
the nine months ended September 30, 2000.
(6) Excluding the phantom stock charges relating to the termination of UTI
Pennsylvania's Employee Phantom Stock Program, EBITDA would have been
$12,710 and $6,474 for 1999 and for the five months ended May 31, 2000,
respectively.
23
<PAGE> 28
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 provide precision manufacturing and related services to medical device
companies. Our services include the design and manufacture of custom components,
subassembly of components and assembly of finished medical devices. Our
manufacturing capabilities include seamless and welded tube forming and drawing,
wire drawing and grinding, laser welding, traditional and non-traditional
machining of precision metal components and plastic injection molding, as well
as assembly of metal and plastic components into finished medical devices. Our
non-medical customers use our products and services in their products that
demand high quality, complex components, including high density discharge lamps,
fiber optics, motion sensors and power generators.
We believe our range of capabilities and market experience position us as
an ideal strategic partner for medical device companies. By partnering with us,
our customers can reduce their need for multiple suppliers, improve efficiency
and enhance quality. We have over 100 engineers available to help design,
prototype and test the feasibility and manufacturability of new product designs.
We currently have over 549,000 square feet of manufacturing and assembly
capacity at eight facilities in the United States and two in Europe. We are
developing a third European facility that we expect will be operational in the
first quarter of 2001.
In June 2000, we combined our operations with UTI Corporation, our
predecessor, referred to as UTI Pennsylvania. We have accounted for the
combination under the purchase method of accounting. UTI Pennsylvania was
established in Collegeville, Pennsylvania. We were established in Denver,
Colorado in 1999. Our combination with UTI Pennsylvania provided us with
increased strategic and operating resources and greater breadth of precision
manufacturing capabilities. Prior to our combination with UTI Pennsylvania, in
June 1999, we acquired Star Guide, a precision wire fabricator with assembly
services focused on the IC and CRM markets and, in January 2000, we acquired
Noble-Met, a manufacturer of precious metal tubular and wire products with raw
materials conversion capabilities. Collectively, these transactions have
positioned us to benefit from the trend in the medical device industry of
customers seeking to outsource engineering and manufacturing functions to
suppliers that provide complete manufacturing solutions.
We seek acquisition candidates that are best in class suppliers with
complementary services and manufacturing capabilities. By expanding the services
and manufacturing capabilities we offer, we believe that we will be able to
expand our business with existing customers and develop new opportunities with
potential customers. Consistent with our past practices and ordinary course of
business, we engage from time to time in discussions with potential acquisition
targets that provide strategic technology or capabilities. In December 2000, we
completed the acquisition of American Technical Molding, Inc. or ATM, a plastic
injection molding company focused on the medical industry. We have identified
several other potential acquisition opportunities, but are not currently in an
advanced stage of discussions or party to any letter of intent or other
contractual arrangement.
24
<PAGE> 29
REVENUE AND EXPENSE COMPONENTS
Revenues
We derive revenues from the sale of precision manufacturing and related
services for medical devices and non-medical products that require high quality,
complex components. The majority of our customers contract with us to develop
and produce custom components to fit their device specifications. Our operations
are based on purchase orders that typically provide for 30 to 90 days delivery
from the time the purchase order is received, but which can provide for delivery
within 30 days or up to 180 days, depending on the product and the customer's
ability to forecast requirements. For each of our products, we recognize revenue
when the products are shipped, or, if products are shipped on consignment to a
particular customer, we recognize revenue when the customer uses the product.
Expenses
Cost of goods sold includes raw materials, labor and other manufacturing
costs associated with the products we sell. Some products incorporate precious
metals, such as gold, silver and platinum. Changes in prices for those
commodities are generally passed through to our customers.
Selling, general and administrative expenses include salaries, sales
commissions, and other selling and administrative costs. Selling, general and
administration expenses also include incentive program payments due to
employees, including payments under the following programs:
- The 2000 Retention Plan for Employees, established at the time of our
acquisition of Noble-Met, which is based on the achievement by Noble-Met
of certain earnings objectives. This program ceases after 2001.
- UTI Pennsylvania's Employee Phantom Stock Program, pursuant to which UTI
Pennsylvania recognized expenses in 1997, 1998, 1999 and 2000. This
program ceased with our acquisition of UTI Pennsylvania.
- The Star Guide Phantom Stock Plan, established at the time of our
acquisition of Star Guide. Star Guide employees will receive a one-time
payment upon completion of this offering.
Research and development expenses include costs associated with the design,
development, testing, deployment and enhancement of our products and
manufacturing capabilities. Amortization of intangible assets is primarily
related to our acquisitions of Star Guide, Noble-Met, UTI Pennsylvania and ATM.
Interest expense is primarily related to indebtedness incurred to finance our
acquisitions.
RESULTS OF OPERATIONS
Pro Forma Results of Operations
The following table, and the period-to-period comparisons that follow, set
forth unaudited pro forma financial data for the periods indicated. This
financial data gives pro forma effect to those transactions described under the
heading "Unaudited Pro Forma Financial Statements," as if those transactions had
occurred at the beginning of 1999. See "Unaudited Pro Forma Financial
Statements." For purposes of the discussion below, we have included unaudited
pro forma financial data because we believe it provides a more meaningful basis
for period-to-period comparisons than actual historical financial data. Due to
the significance of the acquisitions we have made, our historical financial
statements are not reflective of our ongoing operations. We have thus provided
this pro forma information for informational purposes to improve the
comparability of the information for the periods set forth below. This pro forma
financial data should not be viewed as a substitute for our results of
operations determined in accordance with generally accepted accounting
principles. In addition, the following pro forma financial data does not purport
to be indicative of future results of operations.
25
<PAGE> 30
OUR COMPANY
PRO FORMA RESULTS OF OPERATIONS
($ IN 000S)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
-------------------- DECEMBER 31,
1999 2000 1999
-------- -------- ------------
<S> <C> <C> <C>
Net sales................................................. $ 83,977 $ 94,824 $113,122
Cost of sales............................................. 52,949 59,700 70,085
-------- -------- --------
Gross profit.............................................. 31,028 35,124 43,037
Selling, general and administrative expenses.............. 15,414 17,548 27,985
Research & development expenses........................... 1,801 1,508 2,387
Amortization of intangibles............................... 6,725 6,725 8,966
-------- -------- --------
Operating income.......................................... 7,089 9,343 3,699
-------- -------- --------
Other income (expense):
Interest expense........................................ (12,515) (12,347) (16,759)
Other................................................... (14) 19 (254)
-------- -------- --------
Total other expense.................................. (12,530) (12,328) (17,013)
-------- -------- --------
Income (loss) before income taxes......................... (5,440) (2,985) (13,314)
Income tax expense (benefit).............................. (1,161) (285) (4,219)
-------- -------- --------
Net income (loss)......................................... $ (4,279) $ (2,700) $ (9,095)
======== ======== ========
</TABLE>
PRO FORMA NINE MONTHS OF 2000 COMPARED TO PRO FORMA NINE MONTHS OF 1999
Pro Forma Revenues
Total pro forma revenues for the first nine months of 2000 were $94.8
million, a $10.8 million, or 12.9%, increase from $84.0 million for the first
nine months of 1999. Revenues from products used in medical markets for the
first nine months of 2000 were $65.1 million, a $8.3 million, or 14.6%, increase
from $56.8 million for the first nine months of 1999. This increase was
principally due to higher sales to two of our IC customers that benefited from
market share gains. Additionally, this growth was driven by new products
manufactured for CRM devices and an increase in various orthopedic applications
such as bone screws and drill sales. Our sales of components for other medical
devices such as heart valves and invasive heart bypass components also
increased. This increase was partially offset by a decline in sales to an IC
customer due to its loss of market share. In addition, sales to a specific
customer decreased due to an August 1999 FDA product recall of a finished
medical device for which we supplied various subassemblies. Shipments of
subassemblies to this customer re-commenced in April 2000. Revenues from
products used in non-medical markets for the first nine months of 2000 were
$29.7 million, a $2.5 million, or 9.2%, increase from $27.2 million for the
first nine months of 1999. The increase was principally due to an increase in a
customer's sales of power generators and gas turbines that incorporate our
products and an increase in sales of our circuit board probes.
Pro Forma Gross Profit
Pro forma gross profit for the first nine months of 2000 was $35.1 million,
a $4.1 million, or 13.2%, increase from $31.0 million for the first nine months
of 1999. As a percentage of total revenues, gross profit for the first nine
months of 2000 increased to 37.1% from 36.9% for the first nine months of 1999,
due to increased volumes.
Pro Forma Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first nine months of
2000 were $17.6 million, a $2.1 million, or 13.8%, increase from $15.4 million
for the first nine months of 1999. As a percentage of
26
<PAGE> 31
total revenues, selling, general and administrative expenses for the first nine
months of 2000 increased to 18.5% from 18.4% for the first nine months of 1999.
This increase, as a percentage of revenues, was primarily due to expenses
associated with the 2000 Retention Plan for Employees at Noble-Met of $1.3
million during the first nine months of 2000. Excluding this impact, selling,
general and administrative expenses for the first nine months of 2000 would have
been $16.3 million, or 17.1%, of revenues.
Pro Forma Other Operating Expenses
Research and development expenses for the first nine months of 2000 were
$1.5 million, a $0.3 million, or 15.7%, decrease from $1.8 million for the first
nine months of 1999. This decrease was due to reductions in research and
development staff at acquired facilities, improvements in efficiency and the
progression of a major project from development to commercial shipments.
Intangible amortization expense for both the first nine months of 2000 and 1999
was $6.7 million.
Pro Forma Other Income (Expense)
Interest expense for the first nine months of 2000 and 1999 was $12.3
million and $12.5 million, respectively.
Pro Forma Provision for Income Taxes
Our effective tax rate for the first nine months of 2000 and the first nine
months of 1999 are different than the United States statutory corporate tax rate
due to nondeductible goodwill, principally related to our acquisitions of Star
Guide and ATM, and certain non-deductible expenses at UTI Pennsylvania.
Pro Forma Net Loss
The net loss for the first nine months of 2000 was $2.7 million, a $1.6
million decrease from the net loss of $4.3 million for the first nine months of
1999.
PRO FORMA YEAR ENDED DECEMBER 31, 1999
Total pro forma revenues for the year ended December 31, 1999 were $113.1
million. Revenues from products used in medical and non-medical applications
were $76.5 million and $36.6 million, respectively. Pro forma gross profit for
1999 was $43.0 million, or 38.0%, of revenues. Selling, general and
administrative expenses for 1999 were $28.0 million, or 24.7%, of revenues, and
included $6.0 million of expenses associated with the Employee Phantom Stock
Program at UTI Pennsylvania. Excluding this expense, selling, general and
administrative expenses would have been $22.0 million, or 19.4%, of revenues.
Research and development expenses for 1999 were $2.4 million. Intangible
amortization expense for 1999 was $9.0 million. Interest expense for 1999 was
$16.8 million. Our effective tax rate for 1999 was 31.4%, which is different
than the United States statutory corporate tax rate due to nondeductible
goodwill, principally related to our acquisitions of Star Guide and ATM, and
certain non-deductible expenses at UTI Pennsylvania.
HISTORICAL RESULTS
In connection with our acquisition of UTI Pennsylvania, we, together with
our subsidiaries Star Guide and Noble-Met, acquired control of UTI Pennsylvania.
Although we were the acquiring corporation, UTI Pennsylvania, which was
substantially larger than us at the time of the acquisition, is viewed as the
corporate predecessor for financial accounting purposes. You should read the
following discussion in connection with "Our Selected Historical Financial Data"
and our consolidated financial statements and the "Selected Historical Financial
Data" and consolidated financial statements of UTI Pennsylvania included
elsewhere in this prospectus.
27
<PAGE> 32
OUR RESULTS OF OPERATIONS
($ IN 000S)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 2, 1999 NINE MONTHS JULY 2, 1999
(INCEPTION) TO ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1999 2000 1999
--------------------- ------------------- --------------------
<S> <C> <C> <C>
Net sales................................ $2,757 $49,209 $5,739
Cost of sales............................ 1,462 36,017 3,140
------ ------- ------
Gross profit............................. 1,295 13,192 2,599
Selling, general and administrative
expenses............................... 329 13,003 839
Research & development................... 1 806 1
Amortization of intangibles.............. 257 3,539 512
------ ------- ------
Operating Income......................... 708 (4,156) 1,247
------ ------- ------
Other income (expense):
Interest expense....................... (380) (7,157) (804)
Other.................................. 10 109 23
------ ------- ------
Total other expense................. (370) (7,048) (781)
------ ------- ------
Income before income taxes............... 338 (11,204) 466
Income tax expense (benefit)............. 218 (3,803) 356
------ ------- ------
Net income (loss)........................ $ 120 $(7,401) $ 109
====== ======= ======
</TABLE>
NINE MONTHS OF 2000 COMPARED TO PERIOD ENDED SEPTEMBER 30, 1999
Revenues
Historical revenues for the first nine months of 2000 were $49.2 million.
This includes revenues from Star Guide for the entire nine month period and
revenues from Noble-Met and UTI Pennsylvania from the dates we acquired them, on
January 11, 2000 and June 1, 2000, respectively. Revenues from July 2, 1999
through September 30, 1999 were $2.8 million and represent Star Guide only.
Gross Profit
Gross profit for the first nine months of 2000 was $13.2 million, or 26.8%,
of revenues as compared to $1.3 million, or 46.9%, of revenues for the period
from July 2, 1999 through September 30, 1999. This increase was principally due
to acquisitions completed during 2000. The increase was partially offset by
adjustments to the fair value of acquired inventories, as required by the
purchase method of accounting, of $6.5 million for the first nine months of
2000, as compared to $0.1 million for the period from July 2, 1999 through
September 30, 1999. Without these charges, gross profit would have been $19.6
million, or 39.9%, of sales for the first nine months of 2000 and $1.4 million,
or 50.6%, of sales for the period from July 2, 1999 through September 30, 1999.
This decrease in gross profit as a percent of revenues, is principally due to
changes in our overall sales mix as a result of our acquisition of UTI
Pennsylvania.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first nine months of
2000 were $13.0 million, or 26.4%, of revenues as compared to $0.3 million, or
11.9%, of revenues for the period from July 2, 1999 through September 30, 1999.
This increase in selling, general and administrative expenses was due to
acquisitions completed during 2000. In addition, expenses of $1.3 million,
associated with the 2000 Retention Plan for Employees at Noble-Met, were
recognized during the first nine months of 2000 as well as a $2.3 million
write-off for purchased in-process research and development related to our
acquisition of Noble-Met. Excluding this impact, selling, general and
administrative expenses for the first nine months of 2000 would have been $9.4
million, or 19.1%, of revenues.
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<PAGE> 33
Other Operating Expenses
Research and development expenses for the first nine months of 2000 were
$0.8 million, as compared to $1,000 for the period from July 2, 1999 through
September 30, 1999. Intangible amortization expense for the first nine months of
2000 was $3.5 million as compared to $0.3 million for the period from July 2,
1999 through September 30, 1999.
Other Income (Expense)
Interest expense for the first nine months of 2000 was $7.2 million as
compared to $0.4 million for the period from July 2, 1999 through September 30,
1999, principally due to acquisitions completed during the period and related
financing activities.
Provision for Income Taxes
Our effective tax rate for the first nine months of 2000 and the first nine
months of 1999 is different than the United States statutory corporate tax rate
due to non-deductible goodwill, principally related to our acquisition of Star
Guide and non-deductible expense at UTI Pennsylvania.
Net Income (Loss)
As a result of the reasons described above, the net loss for the first nine
months of 2000 was $7.4 million as compared to net income of $0.1 million for
the period from July 2, 1999 through September 30, 1999.
PERIOD FROM INCEPTION TO DECEMBER 31, 1999
The 1999 period includes the results of Star Guide only. Total revenues for
1999 were $5.7 million. Gross profit for 1999 was $2.6 million, or 45.2%, of
revenues. Selling, general and administrative expenses for 1999 were $0.8
million, or 14.6%, of revenues. Research and development expenses for 1999 were
$1,000. Intangible amortization expense for 1999 was $0.5 million. Interest
expense for 1999 was $0.8 million. Our effective tax rate for 1999 was 76.4%,
which is higher than the United States statutory corporate tax rate due
primarily to non-deductible goodwill.
29
<PAGE> 34
UTI PENNSYLVANIA -- OUR PREDECESSOR
RESULTS OF OPERATIONS
($ IN 000S)
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------- MAY 31,
1997 1998 1999 2000
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Net sales............................................ $61,610 $73,129 $75,334 $ 35,661
Cost of sales........................................ 39,503 46,696 48,012 23,567
------- ------- ------- --------
Gross profit......................................... 22,107 26,433 27,322 12,094
Selling, general and administrative expenses......... 14,281 16,960 21,920 27,732
Research & development and expenses.................. 1,600 1,979 2,051 702
Amortization of intangibles.......................... 222 388 422 188
------- ------- ------- --------
Operating income..................................... 6,004 7,106 2,929 (16,528)
------- ------- ------- --------
Other income (expense):
Interest expense................................... (122) (464) (592) (257)
Other.............................................. 1,574 (224) (210) (55)
------- ------- ------- --------
Total other income (expense).................... 1,452 (688) (802) (312)
------- ------- ------- --------
Income before income taxes........................... 7,456 6,418 2,127 (16,840)
Income tax expense (benefit)......................... 280 593 233 234
------- ------- ------- --------
Net income (loss).................................... $ 7,176 $ 5,825 $ 1,894 $(17,074)
======= ======= ======= ========
</TABLE>
FIVE MONTHS ENDED MAY 31, 2000
Total revenues for the five months ended May 31, 2000 were $35.7 million.
Gross profit for the period was $12.1 million, or 33.9%, of revenues. Selling,
general and administrative expenses for the period were $27.7 million, or 77.8%,
of revenues, and included $21.0 million of expenses associated with the 2000
Employee Phantom Stock Plan at UTI Pennsylvania. Excluding this expense,
selling, general and administrative expenses would have been $6.7 million, or
18.9%, of revenues. Research and development expenses for the period were $0.7
million. Intangible amortization expense for the period was $0.2 million.
Interest expense for the period was $0.3 million. Our effective tax rate for the
period was different than the United States statutory corporate tax rate because
the shareholders of UTI Pennsylvania elected to be treated as an S Corporation
and thus received flow-through tax treatment on United States operations.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
Total revenues for 1999 were $75.3 million, a $2.2 million, or 3.0%,
increase from $73.1 million for 1998. The increase was principally due to our
acquisition of SFM in June 1999 and an increase in our sales of an endoscopic
device to a customer. In addition, sales of arthroscopic device components to
several customers increased as they outsourced production to us. This increase
was largely offset by decreases in sales to a customer resulting from a
September 1999 FDA product warning on one of that customer's products. Sales of
this product resumed in early 2000. Additionally, we had decreased sales to
orthopedic customers, to a dental implant customer and to a non-medical
customer.
Gross Profit
Gross profit for 1999 was $27.3 million, a $0.9 million, or 3.3%, increase
from $26.4 million for 1998, principally related to increased sales volume. As a
percentage of total revenues, gross profit for 1999 increased to 36.3% from
36.1% for 1998. This increase in volume was partially offset by temporary
inefficiencies related to the mid-1999 relocation of one of our facilities and
our acquisition of SFM, which sells comparatively lower margin products.
30
<PAGE> 35
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1999 were $21.9 million, a
$4.9 million, or 29.3%, increase, from $17.0 million for 1998. As a percentage
of total revenues, selling, general and administrative expenses for 1999
increased to 29.1% from 23.2% for 1998. This increase, as a percentage of
revenues, was primarily due to $6.0 million of expenses associated with UTI
Pennsylvania's Employee Phantom Stock Program in 1999 compared to $2.8 million
in 1998. Excluding this expense, selling, general and administrative expenses
would have been $15.9 million, or 21.1%, of revenues in 1999 and $14.2 million,
or 19.4%, of revenues in 1998, respectively. In addition, $0.9 million of
expenses were incurred in 1999 for professional fees and expenses.
Other Operating Expenses
Research and development expenses for 1999 and 1998 were $2.1 million and
$2.0 million, respectively. Intangible amortization expense for both 1999 and
1998 was $0.4 million.
Other Income (Expense)
Interest expense for 1999 and 1998 was $0.6 million and $0.5 million,
respectively.
Provision for Income Taxes
The shareholders of UTI Pennsylvania elected to be treated as an S
Corporation under the provisions of the Internal Revenue Code and thus received
flow-through tax treatment on United States operations. The tax provision
represents the tax due on the income of UTI Pennsylvania's international
operations and Spectrum Manufacturing, Inc. or Spectrum until we acquired the
remaining 15% of Spectrum.
Net Income
The net income for 1999 was $1.9 million, a $3.9 million decrease from the
net income of $5.8 million for 1998. $3.2 million of this decrease was related
to UTI Pennsylvania's Employee Phantom Stock Program, as discussed above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Total revenues for 1998 were $73.1 million, a $11.5 million, or 18.7%,
increase from $61.6 million for 1997. This increase was principally due to our
acquisition of 85% of Spectrum in November 1997, which contributed $8.1 million
of incremental revenues to 1998 over 1997. In addition, we commenced shipments
of a new minimally invasive product to a significant customer. This increase was
partially offset by an orthopedic customer moving the manufacturing and assembly
of a product in-house in early 1998.
Gross Profit
Gross profit for 1998 was $26.4 million, a $4.3 million, or 19.6%, increase
from $22.1 million for 1997. As a percentage of total revenues, gross profit for
1998 increased to 36.1% from 35.9% for 1997. This increase was principally due
to an increase in sales volume.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1998 were $17.0 million, a
$2.7 million, or 18.9% increase, from $14.3 million for 1997. As a percentage of
total revenues, selling, general and administrative expenses was 23.2% in 1998
and 1997. Selling, general and administrative expenses included $2.8 million of
expenses associated with UTI Pennsylvania's Employee Phantom Stock Program in
1998 compared to $5.3 million in 1997. 1997 also included a $2.4 million benefit
from a reduction in our estimated environmental liability. Excluding these
events, selling, general and administrative expenses would have been $14.2
million, or 19.4%, of revenues in 1998 and $11.4 million, or 18.5%, of revenues
in 1997.
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<PAGE> 36
Other Operating Expenses
Research and development expenses for 1998 and 1997 were $2.0 million and
$1.6 million, respectively. Intangible amortization expense for 1998 and 1997
was $0.4 million and $.2 million, respectively.
Other Income (Expense)
Interest expense for 1998 and 1997 was $0.5 million and $0.1 million,
respectively.
Provision for Income Taxes
The shareholders of UTI Pennsylvania elected to be treated as an S
Corporation under the provisions of the Internal Revenue Code and thus received
flow-through tax treatment on United States operations. The tax provision
represents the tax due on the income of UTI Pennsylvania's international
operations and Spectrum.
Net Income
As a result of the reasons described above, the net income for 1998 was
$5.8 million, a $1.4 million decrease from the net income of $7.2 million for
1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily from cash
generated by our operations. We have financed our acquisitions and related
acquisition costs through a combination of borrowings and private sales of our
stock as follows:
- Our acquisition of Star Guide was financed by existing cash, bank debt
and the issuance of $10.5 million of new preferred and common equity,
including $4.4 million issued to owners and management of Star Guide.
- Our acquisition of Noble-Met was financed by existing cash, bank debt and
$13.5 million of new preferred equity, including $3.5 million issued to
management of Noble-Met.
- Our acquisition of UTI Pennsylvania was financed by existing cash, bank
debt, $21.5 million of 13.5% senior subordinated notes due 2007, $21.5
million of 15.6% senior notes due 2008, and $58.2 million of new
preferred equity, including $3.2 million of equity issued to UTI
Pennsylvania management.
- Our acquisition of American Technical Molding was financed by bank debt
and $12.8 million of new preferred equity, including $2.5 million of
equity issued to American Technical Molding management.
In connection with our acquisition of UTI Pennsylvania, we entered into a
$115.0 million credit facility that includes:
- $25.0 million five year revolving line of credit. Borrowings under the
line of credit bear interest at LIBOR plus 3.25% or prime plus 2.00% at
our option. As of September 30, 2000, $0.7 million of the line was being
used to support letters of credit, leaving $24.3 million available. In
December 2000, in connection with our acquisition of ATM, we drew $14.3
million on our line of credit.
- $45.0 million Term A loan due 2005. The Term A loan bears interest at
LIBOR plus 3.25% or prime plus 2.00% at our option. As of September 30,
2000, the effective rate was 10.0% and $44.4 million was outstanding.
- $45.0 million Term B loan due 2006. The Term B Loan bears interest at
LIBOR plus 3.75% or prime plus 2.50% at our option. As of September 30,
2000, the effective rate was 10.5% and $44.9 million was outstanding.
32
<PAGE> 37
The credit facility is secured by our assets and requires us to comply with
various quarterly financial covenants, including covenants related to EBITDA and
ratios of leverage and fixed charges as they relate to EBITDA and levels of
capital expenditures. As of September 30, 2000, we were in full compliance with
our covenants.
We intend to use the proceeds of this offering to repay a portion of the
indebtedness outstanding under our credit facility. Simultaneous with this
offering, we intend to enter into a new credit facility and draw upon this
facility to repay the remaining balance of our credit facility and repay our
$21.5 million 15.6% senior notes and $21.5 million 13.5% senior subordinated
notes as well as estimated prepayments penalties of $3.1 million.
As of September 30, 2000, we had cash and cash equivalents of $4.2 million.
We have historically generated positive cash flow from operations. Cash
generated by operating activities for the nine months ended September 30, 2000
was $3.9 million as compared to $0.8 million in cash generated from operations
for the period from inception to September 30, 1999. This increase is due to
higher earnings before amortization and depreciation from the acquisitions,
offset by increased investments in accounts receivable and inventories in 2000.
Cash used in investing activities, including the acquisitions described
above, was $186.1 million and $21.3 million for the nine months ended September
30, 2000 and the period from inception to December 31, 1999, respectively.
Net cash provided by financing activities was $185.6 million and $21.8
million for the nine months ended September 30, 2000 and the period from
inception to December 31, 1999, respectively.
We have agreed to make earn-out payments to the former owners of Noble-Met,
UTI Pennsylvania and American Technical Molding. We expect that these payments
could amount to approximately $9 million if expected earnings levels are
achieved.
We expect to incur capital expenditures of approximately $3.6 million in
2000. In the first nine months of 2000, we had incurred $1.5 million of capital
expenditures in 2000 as compared to $0.3 million in 1999. On a pro forma basis,
capital expenditures are expected to be $5.6 million in 2000.
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 and we believe that we will remain in
compliance of the covenants of our credit facility. 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.
ENVIRONMENTAL MATTERS
In July 1988, UTI Pennsylvania received an Administrative Consent Order
from the United States Environmental Protection Agency known as the EPA that
required UTI Pennsylvania to test and study the groundwater and soil beneath and
around its plant in Collegeville, Pennsylvania, and to provide the EPA with a
proposal to remediate this groundwater and soil. In 1991, UTI Pennsylvania
completed its testing and submitted a corrective measures study, known as a CMS,
to the EPA. The EPA reviewed the CMS and has recommended specific measures and
UTI Pennsylvania has agreed to these measures to remediate the groundwater and
soil. Since 1991, UTI Pennsylvania has been negotiating with the EPA for a final
CMS. In 1995, UTI Pennsylvania submitted a revised CMS for EPA approval. In
addition, UTI Pennsylvania has been involved as a de minimus contributor in
other environmental matters.
33
<PAGE> 38
In 1995, UTI Pennsylvania updated its environmental site assessment based
on negotiations with the EPA, and the updated assessment indicated that
additional environmental accruals were necessary. In addition, in 1995, UTI
Pennsylvania entered into a Settlement Agreement and Release with UTI
Pennsylvania's former insurance company which required the insurance company to
pay UTI Pennsylvania a specified amount based on expenses incurred by UTI
Pennsylvania for environmental matters during the period from 1964 to 1979. UTI
Pennsylvania had recorded a long-term liability representing discounted future
costs related to these matters of $4.5 million as of September 30, 2000. These
estimates are based on facts known at the current time; however, changes in EPA
standards, improvement in cleanup technology and discovery of additional
information concerning other environmental matters could affect the estimated
costs in the future. The discount rate used in calculating the environmental
liability was 7% at September 30, 2000. The aggregate gross liability at
September 30, 2000 is $10.6 million.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our term loan facilities bear interest at a floating rate. To reduce our
exposure to interest rate risk we have entered into swap agreements to hedge
$36.0 million of our term loans. Under the terms of our current swap agreement,
expiring on July 10, 2003, the maximum annual rate we will pay on the $36.0
million of our debt is 7.13% plus 3.25% to 3.75%. The remainder of our term loan
debt of $53.3 million bears interest based on LIBOR plus 3.25% to 3.75%. At
September 30, 2000, the rate on this debt averaged 10.25%. If this rate
increased by 100 basis points, our interest expense would increase by
approximately $0.5 million in 2000.
The revolving line of credit facility bears interest at a spread to LIBOR
or prime, at our option. We did not have an outstanding balance on this facility
at September 30, 2000. However, in December 2000, we drew $14.3 million on this
facility in connection with our acquisition of ATM.
Foreign Currency Exchange Risk
Most of our sales and purchases are denominated in United States dollars
and as a result, we have relatively little exposure to foreign currency exchange
risk with respect to sales made. We have facilities in Germany and the United
Kingdom, representing less than 10% of our total revenues, which are subject to
foreign currency fluctuations. As currency rates change, translation of income
statements of these subsidiaries, from local currencies to U.S. dollars, affects
year-over-year comparability of our operating results. Gains and losses on
translation are recorded as a separate component of stockholders' equity.
We do not use forward exchange contracts to hedge exposures denominated in
foreign currencies or any other derivative financial instrument for trading or
speculative purposes. Therefore, the effect of a 10.0% change in exchange rates
as of September 30, 2000, would not have a material impact on our operating
results for the year ending December 31, 2000.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Financial Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and hedging, requiring recognition of all derivatives as either
assets or liabilities in the statement of financial position measured at fair
value, as well as identifying the conditions for which a derivative may be
specifically designed as a hedge. SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of Effective Date of SFAS No.
133," deferred the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000, which is fiscal year 2001 for us. The effects on our
financial condition, results of operations or cash flows of adopting SFAS No.
133 are not expected to be significant.
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<PAGE> 39
BUSINESS
OVERVIEW
We provide precision manufacturing and related services to medical device
companies. Our services include the design and manufacture of custom components,
subassembly of components and assembly of finished medical devices. Our
objective is to provide medical device companies with a comprehensive
outsourcing solution that includes designing, engineering and manufacturing of
their specialized, high precision medical devices. We work with our customers in
the design and development of their medical devices using our proprietary
manufacturing processes and technologies. Our manufacturing capabilities have
been developed through our extensive experience with complex medical device
components that use a variety of metals and metal alloys. Our key products are
used in devices in such fields as interventional cardiology or IC, endoscopy,
orthopedics and cardiac rhythm management or CRM. Currently, we manufacture over
20,000 custom products and components for our medical device customers.
Our customers include many of the world's leading medical device companies
such as Boston Scientific Corporation, Guidant Corporation, Johnson & Johnson,
Medtronic, Inc., Smith & Nephew plc and Stryker Corporation. Our engineers work
closely with our customers in the design phase of their products. As a result,
our components and technologies are used extensively in our customers' medical
devices. Through our strong customer relationships and reputation for quality,
we often become our customers' primary supplier for the highly customized
products and related services we provide.
Our customers also include non-medical companies such as Dover Corporation,
General Electric Company and Metem Corporation. Our non-medical customers use
our products and related engineering services in their products that demand high
quality, complex components including high density discharge lamps, fiber
optics, motion sensors and power generators.
We operate eight facilities in the United States and two in Europe, with a
third expected to be operational in the first quarter of 2001. Our facilities
represent over 549,000 square feet of engineering, manufacturing and assembly
space. All of our established facilities are either ISO 9001 or ISO 9002
registered and two maintain assembly areas registered and in compliance with the
Good Manufacturing Practices or GMP standards established by the United States
Food and Drug Administration or FDA. We operate two Class 10,000 clean rooms and
one Class 100,000 clean room in which we provide cleaning, assembly and
customized packaging of medical products. We are also developing another Class
100,000 clean room.
Our continued investment in our manufacturing technology, facilities and
personnel, as well as selective acquisitions, enable us to offer what we believe
is the most comprehensive range of component manufacturing capabilities and
related services available to medical device companies. We currently provide our
customers with design, testing, prototyping, production and assembly services on
a wide array of projects. We believe our capabilities enable our customers to
accelerate their devices' time to market in a cost-effective manner while
maintaining the highest precision and quality standards.
INDUSTRY BACKGROUND
Medical Devices Market Overview
Frost & Sullivan estimates the United States market for medical devices is
$43 billion. Complex medical devices are used extensively in several large
segments of the medical device industry, including interventional cardiology and
neurology, cardiac rhythm management, endoscopy and orthopedics. Growth in these
market segments is being driven by an increase in selected medical conditions
related to aging as well as significant technological innovation.
35
<PAGE> 40
The following table highlights market size according to Frost & Sullivan
and Millennium Research Group and market growth drivers for selected segments of
the medical device industry.
<TABLE>
<CAPTION>
MARKET SIZE
MARKET ($ IN BILLIONS) DEVICES/PRODUCTS INDICATIONS GROWTH DRIVERS
------ --------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
INTERVENTIONAL CARDIOLOGY $ 2.3 Stents Arterial blockages; Newer devices such as
Rotational artherectomy improperly peripheral stents
devices functioning heart
valves
CARDIAC RHYTHM MANAGEMENT 3.0 Pacemakers Irregular heart rate Use of pacing devices
Implantable to treat congestive
cardioverter heart failure; new
defibrillators treatment for atrial
fibrillation
ENDOSCOPY 2.7 Scopes Conditions affecting Advances in minimally
Trocars respiration and the invasive techniques;
- Arthroscopy Shaver blades digestive tract; shortened recovery
tumors; breast tissue time
- Laparoscopy abnormalities
ORTHOPEDICS 4.0 Fixation plates and Deterioration of, or New procedures and
screws Orthopedic trauma to, the human technologies for
implants Joint skeletal system spinal implants
replacement systems
Burr assembly blanks
Drills
</TABLE>
MEDICAL DEVICE DESIGN AND PRODUCTION
Engineering, designing, developing and manufacturing complex medical
devices and components involves a significant number of steps and challenges
that vary depending on the development stage of a particular product. Many of
these tasks are common to a large number of medical devices and include:
DESIGN & PRODUCT DEFINITION. Product design begins with the process of
understanding a device's critical functions and desirable features. Product
engineers develop multiple design concepts that satisfy those requirements,
while optimizing functionality, ease of use and safety. These proposed designs
are evaluated to select the best design concepts to be detailed in engineering
drawings and specifications. The specifications established include material and
manufacturing process requirements. Material selection is critical to
compatibility, manufacturability, assembly, reliability, corrosion, wear, safety
and regulatory compliance of the device.
PROTOTYPING AND TESTING. Once a design is selected, it must be analyzed,
prototyped and tested. Assessment begins with computer simulation and failure
analysis. Based on successful computer simulations, prototypes of the design are
built and tested to understand mechanical issues over the life-cycle of the
device. The device and design are evaluated for compatibility with living
tissue, tested for safety and effectiveness prior to use in humans and assessed
based on human clinical trials.
REGULATORY APPROVAL AND PRODUCT LAUNCH. Following successful clinical
testing, the selected design moves to production. This includes obtaining
regulatory approval for device distribution, establishing production processes
and organizing procurement of raw materials. The devices must be produced in
accordance with regulatory standards using fully tested manufacturing processes.
FULL-SCALE PRODUCTION. Once a device gains market acceptance, a medical
device company must meet customer expectations with respect to quality,
quantity, price and timing. This requires understanding the anticipated demand
for the device and meeting requirements to stock finished product in the
distribution chain, while strictly adhering to the procedures established during
product development.
OUTSOURCING TREND
Over 3,000 companies provide manufacturing and design services to medical
device companies. Most of these companies are focused on a particular niche and
offer only limited capabilities. Over the past several years, medical device
companies have been increasingly using these third party suppliers as they
36
<PAGE> 41
face multiple challenges in bringing medical devices to market in a
cost-effective and timely manner. In particular, medical device companies must
respond to the following pressures:
NEED TO ACCELERATE NEW PRODUCT INNOVATION. Competitive pressures in the
medical device industry are causing increasingly shorter product life-cycles. As
a result, medical device companies must reduce the time required to bring new
products to market in order to maximize the economic return achieved on any
particular device.
INCREASED COMPLEXITY HAS LED TO MORE STRINGENT MANUFACTURING
REQUIREMENTS. As medical device companies seek to provide additional
functionality in products that are easier to implant and less intrusive to
patients, finished medical devices are becoming smaller and more complex.
Consequently, the components of finished medical devices have become more
difficult to manufacture. Precision and tolerance have become increasingly
important and more sophisticated and diverse materials are being used.
HIGH COST OF MAINTAINING MANUFACTURING, DESIGN AND ENGINEERING EXPERTISE.
The complexity of the technologies and processes involved in producing finished
medical devices requires a broad range of manufacturing, design and engineering
expertise. Medical device companies face significant difficulties and costs in
assembling and maintaining state of the art facilities and experienced
personnel.
PRESSURE TO MANAGE SUPPLY CHAIN. In order to remain competitive, medical
device companies are continually seeking to reduce the number of third party
suppliers they use. Additionally, medical device companies desire to maintain
fewer devices in inventory while having ready access to commercial production
and distribution of their devices.
EMERGING DEVICE MANUFACTURERS DO NOT HAVE RESOURCES TO ESTABLISH IN-HOUSE
MANUFACTURING INFRASTRUCTURES. The medical device industry includes many
companies that develop new technologies for medical devices but do not have
sufficient infrastructure to manufacture them efficiently in-house.
To meet these challenges, medical device companies are increasingly seeking
to reduce the number of third parties that they use and to concentrate their
manufacturing work with a limited number of third parties that offer a
comprehensive range of capabilities including design and engineering services
and manufacturing expertise. Working with a supplier that can offer a complete
manufacturing solution gives medical device companies the ability to achieve the
following economies and efficiencies in their business:
- significant improvement in product development cycles and shortening time
to introduce new products to market;
- relief from the burden and cost of investing in, maintaining and updating
the specialized equipment and facilities necessary to meet stringent
manufacturing requirements; and
- access to manufacturing, design and engineering expertise that would be
difficult and expensive to achieve in-house or with a fragmented group of
suppliers or component manufacturers.
THE UTI APPROACH
We believe our range of capabilities and market experience position us as
an ideal strategic partner for medical device companies. By partnering with us,
our customers can reduce their need for multiple suppliers, improve efficiency
and enhance quality.
Our manufacturing capabilities include seamless and welded tube forming and
drawing, wire drawing and grinding, laser welding, traditional and
non-traditional machining of precision metal components and plastic injection
molding, as well as assembly of metal and plastic components into finished
medical devices. We hold our processes to extreme standards and achieve
tolerances within 0.0001". We currently have over 549,000 square feet of
manufacturing and assembly capacity at eight facilities in the United States and
two in Europe. We have over 100 engineers available to help design, prototype
and test the feasibility and manufacturability of each design. These
capabilities and resources enable us to work with medical device companies from
the early design phases of a new device project and ultimately to
37
<PAGE> 42
commercial scale production, while eliminating unnecessary trial and error in
the manufacturing and assembly process. In addition, they position us to work in
almost any medical device market.
Because of our engineering and manufacturing expertise, adherence to strict
quality standards and ability to provide a comprehensive solution to our
customers, we serve as a "Preferred" or "Qualified" supplier of the components
we produce to a majority of our customers.
Examples of our full service capabilities include:
- our ability to provide the complete manufacturing solution to the end
customer of a medical device used simultaneously to tie and cut the
saphenous vein located in the leg for grafting purposes. We assisted the
customer in the initial design of the device, including prototyping and
testing. The device contains in excess of 30 formed and machined
components, all of which we produce and then build into subassemblies. We
then laser weld, electropolish, laser mark and assemble the subassemblies
into finished devices; and
- our role in developing and manufacturing a single-use, disposable cutting
device for cataract removal and lens replacement. We assisted the
customer in developing a design that would meet stringent functional
requirements while being producible at the target cost mandated by a
disposable device. This instrument contains a subassembly of two
miniature, complex, formed and machined metal components both of which we
produce and then build into subassemblies. Our customer completes the
final assembly into a plastic hand piece.
OUR BUSINESS STRATEGY
Our objective is to provide medical device companies with a comprehensive
outsourcing solution that includes designing, engineering and manufacturing
their specialized, high precision medical devices. Our strategy to achieve this
objective includes the following key elements:
TARGET NEW OPPORTUNITIES IN HIGH GROWTH, HIGH TECHNOLOGY MEDICAL DEVICE
MARKETS. We believe that medical device markets that are experiencing the most
growth also often experience the shortest product life-cycles and require the
most technical innovation. In addition, a significant portion of innovation in
high growth medical device markets occurs in smaller or start-up companies. We
believe the capabilities and personnel we have assembled, combined with our
experience working with a wide variety of raw materials and complex technologies
position us well to respond effectively to these companies' stringent design and
manufacturing scale-up time frames. In particular, we are targeting new device
opportunities in the high-growth fields of brachyatherapy, congestive heart
failure, spinal trauma and urology, and as new device markets emerge, we will
determine and pursue our optimal level of involvement.
ENHANCE EXISTING AND DEVELOP NEW PROPRIETARY MANUFACTURING
CAPABILITIES. We believe that an additional key component of developing full
service manufacturing relationships is investing significant personnel and
financial resources to enhance our design and manufacturing technologies,
manufacturing processes and raw materials expertise. We employ over 100
engineers, whose focus includes metallurgy, design, process engineering and
quality assurance.
INCREASE OUR INVOLVEMENT IN THE INITIAL DESIGN OF NEW MEDICAL DEVICES. We
believe that being involved in the initial design and prototyping of medical
devices enables us to effectively develop and scale up the manufacturing process
to commercially viable production levels. In addition to improving the
efficiencies of our customers' design and manufacturing processes, our early
involvement also positions our components to be designed into their new medical
devices. To maximize this opportunity, we intend to add new resources and expand
our product engineering capabilities.
EXPAND PORTFOLIO CAPABILITIES THROUGH STRATEGIC ACQUISITIONS AND
ALLIANCES. We intend to pursue strategic acquisitions and alliances that offer
complementary manufacturing capabilities and expanded service offerings. We
believe these activities will enhance our opportunity to capture more revenue by
reducing our use of subcontractors. We believe this will enable us to
manufacture a diverse range of components and assemble finished medical devices
for an expanded group of customers. We believe that our leadership standing in a
fragmented industry positions us well to consolidate smaller competitors and to
38
<PAGE> 43
acquire selected assets from leading manufacturers that they no longer consider
core to their business strategy. In particular, we intend to pursue targets that
provide plastic molding, metal molding, design and clean room assembly
capabilities. While we are currently in discussions with several potential
acquisition candidates, we do not have any agreement or understanding with
respect to any of them.
OUR CAPABILITIES AND SERVICES
We have used our combined manufacturing and engineering capabilities to
manufacture over 20,000 custom components and medical device products for our
customers. The following table illustrates several of the components we produce
the finished devices that use our components, and their target markets:
<TABLE>
<CAPTION>
MARKET FINISHED MEDICAL DEVICES/PRODUCTS OUR REPRESENTATIVE COMPONENTS
------ --------------------------------- -----------------------------
<S> <C> <C>
INTERVENTIONAL TECHNOLOGIES
- Cardiology Angioplasty catheters Marker bands and guidewires
Artherectomy devices Rotational coupling assemblies
Cardiopulmonary bypass components Venous tips
Heart valves Valve subassemblies
Stent delivery systems Coronary and peripheral stents
- Peripheral neurology Neuro-stimulators Electrode sheaths
CRM
Pacemakers Coils and leads
Implantable cardiac Electrode rings
defibrillators
ENDOSCOPY
- Arthroscopy Shaver blades Cutter tips
- Laparoscopy Laparoscopic surgical tools Tubular components and complete
instrument assemblies
ORTHOPEDICS
Reconstructive implants Fixation plates and screws
Orthopedic implants Femoral nails, hip screws and
suture anchors
Orthopedic joint replacement Hip and knee prosthetics
systems
OTHER
- Dentistry Orthodontics Dental implants
- Drug delivery Safe needle syringe assembly Cutter tips
- Opthamology Cataract removal device Cutter tip assemblies
- Oncology Radioactive seeds Titanium cases
Minimally invasive breast biopsy Tissue sampling devices
kit
</TABLE>
Our products draw on and integrate our core capabilities, including:
DESIGN, ENGINEERING AND PROTOTYPING. We offer a broad range of design,
engineering and prototyping capabilities to assist our customers in bringing new
products to market in a cost-effective and timely manner. Our team of over 100
engineers works with our customers in the design phase of a new product during
which we focus on optimizing the manufacturability of our customers' devices.
These efforts reduce both the products' time to market and associated research
and development expense by significantly shortening the prototyping and
re-design phase of development. At our Collegeville, Pennsylvania facility, we
are developing a dedicated prototyping center for our customers. In addition to
providing a valuable service to our clients, the involvement of our engineers in
the development cycle also facilitates our products being designed into our
customers' devices. We believe our breadth of engineering expertise focused on
early supplier involvement is a significant competitive advantage.
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<PAGE> 44
PRECISION MANUFACTURING. As medical device companies seek to provide
greater functionality in increasingly smaller and more complex devices, they
require advanced manufacturing technologies. We have developed several
proprietary processes that are flexible enough to work with over 100 different
metals and metal alloys while achieving tolerances of up to 0.0001". We use
highly sophisticated machining and forming equipment, many pieces of which we
designed and built in-house. We are a recognized industry leader in nearly all
precision metal applications based on our materials, cold forming and machining
expertise. Our capabilities include:
- PRECISION GRINDING -- Grinding of components using computer controlled
grinding machines is done to produce a desired shape or profile on the
surface of metal tubes or rods. Components or instruments produced by
grinding can be sharp, as in the case of cutting tools such as medical
drills, trocars, or burrs, or blunt as in the distal ends of guide wires
or catheters.
- ADVANCED MACHINING TECHNOLOGIES -- Ultra-precise cylindrical machining of
tubing or bar stock using computer controlled turning and milling
machines. Cylindrical machining produces components that are primarily
circular in cross-sections such as fixation screws and dental and
surgical implants.
- LASER CUTTING AND WELDING -- Cutting or welding of metal from tubes, bar
or strip stock using a laser beam as the energy source. Laser cutting is
used to cut intricate patterns in tubing or sheet stock using lasers
focused to a cutting width of less than 0.002" for such products as
stents and sutures. Laser welding is used to join metal components
together to form subassemblies.
- ELECTRIC DISCHARGE MACHINING OR EDM -- Using a high energy electrical
spark to disintegrate material in the cutting path. EDM, like grinding,
is used to produce a desired shape or profile on or within a metal
component. Because EDM cuts metal without physical contact, very small
and delicate parts may be machined without the deformation which occurs
from the pressure exerted by conventional cutting tools.
- PLASTIC INJECTION MOLDING -- Achieving a desired shape by injecting
heated plastic material into a customized mold.
We offer our customers manufacturing runs that are both small and large.
This flexibility allows us to meet the evolving needs of our customers over the
life of a device. For example, we perform short runs during the clinical testing
phase and then longer runs as the device achieves widespread commercial use.
We operate two facilities registered in accordance with FDA Good
Manufacturing Practices in which we manufacture components for Class III medical
devices. Class III medical devices are those that support or sustain human life,
are of substantial importance in preventing injury to human health or that
present a potential, unreasonable risk of illness or injury, such as artificial
joints for orthopedic procedures and heart valves.
SUBASSEMBLY, ASSEMBLY AND PACKAGING. We have increased the range of
services we provide to our customers to include certain finishing operations. We
perform assembly operations on medical components such as metering and
aspiration probes, heat exchangers, and surgical instruments. We also perform
sub-assembly operations such as press fitting, brazing, soldering, welding, and
mechanical joining. We operate two Class 10,000 clean rooms and one Class
100,000 clean room in which we provide cleaning, final assembly and customized
packaging of medical products. We are also developing an additional Class
100,000 clean room.
Other capabilities include:
SUPPLY CHAIN MANAGEMENT. We manage the supply chain by obtaining supplies
of raw material and subcontract services from suppliers and subcontractors that
we have evaluated and determined provide materials and services of sufficient
quality to meet our stringent requirements. In managing the supply chain, we
work with our customers, suppliers and subcontractors to establish orders and
forecasts of requirements for materials, services, subassemblies and finished
items. Close customer contacts ensure that
40
<PAGE> 45
their product demand requirements are accurately reflected in our planning
systems. Our software systems provide both time-phased raw material and capacity
requirements. Forecasts are monitored and compared with actual orders, which
enables us to make the adjustments necessary to meet customer delivery dates.
RAW MATERIALS CONVERSION. We convert precious metals and high strength
alloys used in medical devices by extruding and cold working tubes or rods.
Precious metals include platinum, silver and gold and high strength alloys
include Elgiloy and nitinol. The ability to convert these materials is crucial
to our business since it is often difficult to obtain these materials
economically or within the lead-times required by our customers. Implantable
alloys such as high-grade stainless steel or titanium are purchased as strips or
seamless tubing and are converted to finished parts in our manufacturing
facilities.
SALES & MARKETING
We market and sell most of our products directly to medical device
companies through our sales team of over 30 engineers, approximately 80% of
which is based in the United States and 20% of which is based in Europe. We also
use sales agents in select international markets. The engineering expertise of
our sales force allows us to provide technical expertise and advice to our
customers in the field. Our sales engineers work closely with our customers
beginning in the design phase of product development. As a result, we have
established close working relationships between our sales personnel and our
customers. To align the expertise of our sales personnel with our customers'
needs, our sales force is segmented into three areas of focus:
- orthopedic, arthroscopic, laparoscopic and endoscopic;
- IC, peripheral vascular, CRM and other medical; and
- non-medical.
Further, our executive staff plays an integral role in the marketing of our
products and technologies at industry meetings and trade shows, including: the
Medical Design and Manufacturing Show in Anaheim, California; the Medical Design
and Manufacturing Show in New York, New York; and the Medical Design and
Manufacturing Show in Minneapolis, Minnesota. In support of our non-medical
market segment, we attend the Engineering Design Show in Chicago, Illinois. We
also advertise in industry and trade journals and other print and electronic
media.
CUSTOMERS
We have built strong relationships with our customers by delivering highly
customized and engineered components for their finished medical devices. We have
customer relationships with over 200 medical device manufacturers. Our customers
are leaders in their respective medical markets. Our major customers include
Abbott Laboratories, Boston Scientific Corporation, Guidant Corporation, Johnson
& Johnson, Medtronic Inc., Smith & Nephew plc and Stryker Corporation. We also
have relationships with many emerging medical device companies. Our
relationships with these customers provide us with extensive knowledge of
emerging trends and position us to serve the next generation of medical device
companies.
We also have established customer relationships with companies outside of
the medical device market, including Dover Corporation, General Electric Company
and Metem Corporation. Our non-medical customers use our products and services
in their products that demand high quality, complex components including high
density discharge lamps, fiber optics, motion sensors and power generators.
We work with our customers on a product by product basis. The components we
manufacture are made to order based on the customer's specifications. In
addition, most of our new sales are made to existing customers that typically
order new products from us based upon their previous satisfactory experiences.
On a pro forma basis, no one customer of ours represented more than 10% of
our revenue in 1999.
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<PAGE> 46
MANUFACTURING AND QUALITY ASSURANCE
We have eight manufacturing facilities in the United States and two in
Europe. Our facility in Collegeville, Pennsylvania also serves as our corporate
headquarters. Our other facilities in the United States are located in Arvada,
Colorado; Miramar, Florida; Salem, Virginia; South Plainfield, New Jersey;
Upland, California; Watertown, Connecticut; and Wheeling, Illinois. Our
facilities in Europe are located in Aura, Germany and Manchester, England. We
are developing a third European facility in Galway, Ireland that we expect will
be operational in the first quarter of 2001.
As we manufacture components for implantable medical devices, it is
imperative that we hold our processes to extreme performance standards. For
example, our proprietary manufacturing processes enable us to manufacture
components to tolerances within 0.0001". Each of our facilities has incorporated
stringent, company-wide policies designed to monitor the quality and reliability
of its products. We will integrate these same policies with those existing at
our Upland, California facility, which we recently acquired in our acquisition
of American Technical Molding. Final inspection sampling procedures use a
stringent defect acceptance criteria. Our internal tracking system allows us to
trace our materials and components through the manufacturing and assembly
process both during and after their completion. Our quality system is based on
ISO standards and requires rigorous testing and validation of all new processes
or process changes. All of our facilities are either ISO 9001 or ISO 9002
registered in accordance with the standards established by the International
Organization for Standardization. ISO 9001 contains requirements for quality
assurance in design, development, production, installation and servicing. ISO
9002 contains quality assurance in production, installation and servicing. ISO
certification can only be achieved after completion of an audit conducted by an
independent auditor. Furthermore, to maintain certification, all facilities are
periodically audited by their respective certifying bodies. A full
recertification process is required every three years. In addition, two of our
facilities (Miramar, Florida and Wheeling, Illinois) in which we manufacture
components for Class III medical devices, are registered in accordance with Good
Manufacturing Practices or GMP regulations established by the FDA. At our
Collegeville, Pennsylvania facility we have a Class 10,000 clean room. At our
Upland, California facility we have both a Class 10,000 clean room and a Class
100,000 clean room. At our Arvada, Colorado facility we are developing a Class
100,000 clean room. At our Collegeville, Pennsylvania facility, we are
developing a dedicated prototyping center for our customers.
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<PAGE> 47
PROPERTY & FACILITIES
Certain information about our facilities as of December 22, 2000 is set
forth below:
<TABLE>
<CAPTION>
APPROXIMATE OWN/
LOCATION SQUARE FOOTAGE LEASE PRIMARY CAPABILITIES
-------- -------------- ----- --------------------
<S> <C> <C> <C>
Arvada, Colorado.................. 45,000 Lease Precision wire grinding and
forming and assembly for
guidewires, pacemaker and
catheter components
Collegeville, Pennsylvania........ 180,000 Own Corporate offices; metal tube
drawing, fabrication and assembly
Miramar, Florida.................. 37,000 Lease Machining and assembly of
consumable and implantable
orthopedic devices
Salem, Virginia................... 48,000 Lease Manufacturing metal tubing and
wire products for medical devices,
primarily marker bands and
electrode rings
South Plainfield, New Jersey...... 30,000 Own Shear cutting
Upland, California................ 50,000 Lease Plastic injection molding
Watertown, Connecticut............ 44,000 Lease Transfer and progressive deep
drawing
Wheeling, Illinois................ 55,000 Own Laser cutting, EDM and assembly of
endoscopic devices
Aura, Germany..................... 50,000 Lease Manufacturing small diameter metal
tubing
Galway, Ireland*.................. 11,000 Lease Precision grinding and forming of
guidewires and catheter
components
Manchester, England............... 10,000 Lease Metal cutting and fabrication
</TABLE>
---------------
* This facility is in the process of being developed. We expect it will be
operational in the first quarter of 2001.
We believe these facilities are adequate for our current and foreseeable
purposes and that additional space will be available when needed.
COMPETITION
Our existing or potential competitors in both the medical and non-medical
markets include suppliers with different subsets of our manufacturing
capabilities, suppliers that concentrate on niche markets, and suppliers that
have, are developing or may in the future develop broad manufacturing
capabilities and related services. We principally compete for new business both
at the beginning of development of new products and upon the redesign of
existing products by our customers. Competition is generally based on quality,
timeliness of delivery, price, design and engineering support, and increasingly,
an ability to deliver bulk packaged assemblies and completed devices rather than
individual components.
Estimates indicate that there are over 3,000 suppliers that provide
components to the medical device industry. Most of these suppliers offer limited
products, expertise and capabilities. This fragmentation and specialization
presents significant opportunities for suppliers that offer broad manufacturing
capabilities and related services. We believe very few companies offer the scope
of manufacturing capabilities and services that we provide, however, we may
compete in the future against companies that assemble broad manufacturing
capabilities and related services.
To an extent, we also compete with our medical device company customers
because they can produce their own components and assemblies if they so choose.
Over the past several years, however, medical device companies have been
increasingly outsourcing manufacturing functions.
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<PAGE> 48
RAW MATERIALS, SUPPLIERS AND SUB-CONTRACTORS
Generally, our raw material consists of traditional materials such as
stainless steel and plastic resin and some exotic materials such as Elgiloy,
tantalum, nitinol, columbium, titanium, zirconium, gold, silver and platinum. In
the past we have not experienced any significant interruptions or delays in
obtaining raw materials. Furthermore, we have the ability to manufacture
precious metal wire and tubing from raw stock and are currently developing the
capability to manufacture both tube and wire from raw stock using stainless
steel. High-grade implantable stainless steel is a material standard to many
medical devices, and we purchase it on blanket orders from qualified suppliers.
In the case of this raw material, the risk of excessive inventory is minimal
because of the broad applicability of the material across customers and
components. Because we are able to manufacture precious metal tubing from raw
stock, we are able to purchase these materials in relatively small quantities.
In addition, we generally have pass-through pricing arrangements with our
customers that purchase precious metal components. This allows us to charge our
customers for material on the day of sale, thereby reducing exposure. We have
some protection from precious metal price fluctuations through leasing
arrangements.
We have reduced risk of inventory obsolescence because we manufacture
strictly on a made-to-order basis and rarely consign or stock inventory for our
customers. If we consign or stock inventory for our customers, we typically
require a customer order or a letter of intent to purchase the materials.
When manufacturing subassemblies and assembled finished medical devices, we
may subcontract certain manufacturing services. We expect that our use of
manufacturing subcontractors will continue to decline as we increase the breadth
of our plastics manufacturing capabilities both internally and through
acquisition. We have not experienced any difficulty obtaining necessary raw
materials or subcontractor services.
GOVERNMENT REGULATION
Our business is subject to governmental requirements, 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
or from our facilities or off-site disposal locations. Many of our manufacturing
processes involve the use and subsequent regulated disposal 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 or treatment 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.
We have paid civil penalties for past violations of environmental laws. In
addition, we may have continuing liabilities with respect to potential
contamination at our current and former properties.
As a component manufacturer, the products we produce are not subject to FDA
approval. However, the FDA and related state and foreign governmental agencies
regulate many of our customers' products as medical devices. The FDA must
approve those products prior to commercialization. Although not required,
because we manufacture components for Class III medical devices at two of our
facilities, we have chosen to maintain and register those facilities in
compliance with the GMP regulations established by the FDA. Those facilities are
subject to FDA inspection and assessment at any time.
EMPLOYEES
As of September 30, 2000, we had 1,026 employees, including 104 engineers,
767 manufacturing and manufacturing support personnel and 155 administrative and
sales support personnel. We also employ a
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<PAGE> 49
number of temporary employees to assist with various projects. Other than some
employees at our facility in Aura, Germany, our employees are not represented by
any union. Except for certain executive officers, our employees are retained on
an "at-will" employment basis. We have never experienced a work stoppage or
strike and believe that we have good relationships with our employees.
COMPANY HISTORY
What is now the Uniform Tubes division of UTI Pennsylvania was founded in
the 1940s and primarily operated in the metal tubing fabrication business. In
the early 1990s, the management team of UTI Pennsylvania recognized the trend
toward outsourced contract manufacturing and the need to provide a comprehensive
solution to its customers. As such, UTI Pennsylvania embarked on a strategy to
build a company, internally and through strategic acquisitions, that could
provide a comprehensive solution to medical device and other companies. In July
1999, KRG Capital Partners, L.L.C. formed our company under the name Medical
Device Manufacturing, Inc. to complete the acquisition of Star Guide. In January
2000, we acquired Noble-Met, Ltd., and in May 2000, we acquired Medical
Engineering Resources, Ltd. In June 2000, we combined our operations with UTI
Pennsylvania. In December 2000, we acquired American Technical Molding.
LEGAL PROCEEDINGS
From time to time 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.
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<PAGE> 50
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Shown below are the names, ages and positions of our executive officers and
directors as of December 22, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Andrew D. Freed....................... 39 President, Chief Executive Officer and
Director
Barry Aiken........................... 52 Chief Operating Officer
Jeffrey M. Farina..................... 44 Vice President Engineering
Frank J. Cornwell..................... 56 Vice President Quality &
Organizational Development
William M. Gaffney.................... 50 Vice President International Sales &
Marketing
Paul L. Ashby......................... 57 Vice President U.S. Sales
Thomas F. Lemker...................... 52 Vice President of Finance
Ira Brind*............................ 49 Director
H. Stephen Cookston................... 52 Director
John R. Freeland+..................... 42 Director
Charles A. Hamilton+.................. 52 Director
Mark M. King.......................... 40 Director
Douglas M. Ladden+.................... 33 Director
Steven D. Neumann+.................... 33 Director
David B. Pinkerton*................... 39 Director
Eric M. Pollock....................... 37 Director
Bruce L. Rogers....................... 38 Director
</TABLE>
---------------
* Member of the audit and compensation committees of our board of directors.
+ These directors have tendered their resignations from our board of directors
to be effective immediately prior to the effectiveness of the registration
statement of which this prospectus forms a part.
ANDREW D. FREED has served as our President and Chief Executive Officer
since June 1, 2000. He served as the President and Chief Executive Officer of
UTI Pennsylvania since 1997. Mr. Freed joined UTI Pennsylvania in 1989 as Vice
President and General Manager of UTI Pennsylvania's Kleiner Metal Specialties
Division. In 1994 Mr. Freed became the President of the Uniform Tubes division.
Mr. Freed has a B.S. degree in metallurgical engineering from Lehigh University
and an M.B.A. degree from Carnegie Mellon University. Upon the effectiveness of
this registration statement, Mr. Freed will become our Chairman.
BARRY AIKEN has served as our Chief Operating Officer since October 2000.
Mr. Aiken joined UTI Pennsylvania in 1972, serving as accounting manager and
controller for its Uniform Tubes division and then its corporate controller and
vice president of finance. Mr. Aiken has a B.S. degree in accounting from Temple
University and an M.B.A. degree from St. Joseph's University.
JEFFREY M. FARINA has served as our Vice President of Engineering since
June 1, 2000. Mr. Farina joined UTI Pennsylvania in 1989, serving as a Project
Manager and Engineering Manager in its Uniform Tubes division and then as its
Vice President of Engineering. Mr. Farina has B.S. and M.S. degrees in
mechanical engineering from Drexel University.
FRANK J. CORNWELL became our Vice President of Quality and Organizational
Development in October 2000. Prior to that time, Mr. Cornwell served as an
Executive Vice President of our Uniform Tubes division and the same division of
UTI Pennsylvania. In 1981, Mr. Cornwell joined UTI Pennsylvania,
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<PAGE> 51
serving as the vice president of operations of the Uniform Tubes division. Mr.
Cornwell has B.S. and PhD degrees in metallurgical engineering from Manchester
University.
WILLIAM F. GAFFNEY became our Vice President of International Sales and
Marketing in October 2000. Prior to that time, he served as the Manager of
Marketing Services and International Sales for us and UTI Pennsylvania. Mr.
Gaffney joined UTI Pennsylvania in 1980, serving five years as a Field Sales
Representative for its Uniform Tubes division and then nine years as a sales
manager for its Kleiner Metals Specialities division. Mr. Gaffney has a B.S.
degree in management from Waynesberg University.
PAUL L. ASHBY became our Vice President of U.S. Sales in October 2000.
Prior to that time, he served as General Sales Manager for us and for UTI
Pennsylvania. Mr. Ashby joined UTI Pennsylvania in 1984, serving five years as a
Sales Engineer and seven years as the Eastern District Manager. Mr. Ashby has a
B.S. degree in mechanical engineering from Bradley University.
THOMAS F. LEMKER became our Vice President of Finance in May 2000. In 1997,
Mr. Lemker joined Noble-Met, which we acquired in January 2000, and served as
its Chief Financial Officer and Treasurer. Prior to joining Noble-Met from 1993
to 1997, Mr. Lemker served as Vice President, Chief Financial Officer and
Treasurer of RBX Holdings, a manufacturer of rubber and plastic products. Mr.
Lemker has a B.B.A. from the University of Notre Dame and an M.B.A. from
Shippensberg University. He is also a certified public accountant.
IRA BRIND has served as a director since September 2000. Since 1987 Mr.
Brind has served as the managing director of Private Equity for Brind-Lindsay &
Co., Inc., a management and consulting firm in Philadelphia, and since 1988 as
the Chairman of the Board of Trustees of Thomas Jefferson University Hospital.
Mr. Brind serves as a director of several private companies.
H. STEPHEN COOKSTON has served as a director since September 1999. Since
1987, Mr. Cookston has served as Chief Executive Officer of Hemaedics, Inc., a
private medical device and design company, and since 1985 he has served as
President of Cookston Cardiovascular, Inc., a private consulting company focused
on the medical device industry.
JOHN R. FREELAND has served as a director since January 2000. In 1989, Mr.
Freeland co-founded Noble-Met, which became our subsidiary in January 2000, and
served as its President. Mr. Freeland has tendered his resignation from our
board of directors to be effective immediately prior to the effectiveness of
this registration statement.
CHARLES A. HAMILTON has served as a director since August 1999. In 1999,
Mr. Hamilton joined KRG Capital Partners, L.L.C. and serves as a managing
director. Mr. Hamilton also serves as a Managing Director of First Analysis
Corporation, an investment and consulting firm, a position he has held since
1999. Prior to joining KRG and First Analysis, Mr. Hamilton served for eighteen
years as a Partner and Managing Director of Robertson Stephens. Mr. Hamilton
serves on the board of Modtech Holdings, Inc. and several private companies. Mr.
Hamilton has tendered his resignation from our board of directors to be
effective immediately prior to the effectiveness of this registration statement.
MARK M. KING has served as a director since July 1999. In 1996, Mr. King
co-founded KRG Capital Partners, L.L.C. of which he serves as a managing
director. From September 1994 to January 1996, Mr. King served as Vice President
of LM Capital Corporation, a registered investment advisor specializing in
private and public equity investments and strategic acquisitions. Mr. King
serves as a director of several private companies.
DOUGLAS M. LADDEN has served as a director since May 2000. Mr. Ladden
joined Donaldson, Lufkin & Jenrette in 1988, and joined DLJ's Merchant Banking
Group in 1995 as one of the founding members of DLJ Investment Partners. Mr.
Ladden serves on the Investment Committee of DLJ Investment Partners II and
serves as a director of several private companies. Mr. Ladden has tendered his
resignation from our board of directors to be effective immediately prior to the
effectiveness of this registration statement.
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<PAGE> 52
STEVEN D. NEUMANN has served as a director since July 1999. In 1998, Mr.
Neumann joined KRG Capital Partners, L.L.C. as a Senior Associate and became a
Partner in 1999. Prior to joining KRG, from 1996 to 1998 Mr. Neumann served as a
vice president for JD Ford & Company, a regional investment banking firm. From
1992 to 1996, Mr. Neumann served as a manager in the Corporate Finance Services
Group with the San Francisco office of Coopers & Lybrand. Mr. Neumann is a
director of several private companies. Mr. Neumann has tendered his resignation
from our board of directors to be effective immediately prior to the
effectiveness of this registration statement.
DAVID B. PINKERTON has served as a director since May 2000. Mr. Pinkerton
has managed AIG's Alternative Investment Portfolios, including the U.S. Private
Equity portfolio, since 1988. Mr. Pinkerton joined AIG in 1985 and is a general
partner of AIG Horizon Partners and the AIG Private Equity Portfolio L.P. and is
a special advisor to the AIG Highstar Fund, L.P. He serves on several private
equity advisory boards including Berkshire Partners, The Sprout Group Venture
Funds and Questor Partners Funds. Mr. Pinkerton also serves on a number of
private investment advisory boards and has served as a director on several
private and public company boards including, Savoy Pictures and Sports Holding
Corp.
ERIC M. POLLOCK has served as a director since July 1999. From July 1999
through May 2000, Mr. Pollock served as our Chief Executive Officer and
President. Since that time, he has served as our Chairman of the Board. From
1989 until he joined our company, Mr. Pollock served as Vice President of Star
Guide. Mr. Pollock will become the Vice-Chairman of our board of directors
immediately prior to the effectiveness of the registration statement.
BRUCE L. ROGERS has served as a director since July 1999. In 1996, Mr.
Rogers co-founded KRG Capital Partners, L.L.C. of which he serves as a managing
director. Prior to forming KRG, from 1995 to 1996, Mr. Rogers was a partner and
counsel with the law firm of Hogan & Hartson L.L.P. From 1993 to 1994, Mr.
Rogers was a partner with the law firm of Kirkland & Ellis. Mr. Rogers serves as
a director of several private companies.
BOARD COMPOSITION
Our board of directors currently consists of eleven directors. Upon the
closing of this offering, our board of directors will consist of seven
directors. We intend to elect an additional independent director to our board of
directors. Each director shall be elected annually and shall hold office until
the next annual meeting of stockholders or until his successor is duly elected
and qualified.
BOARD COMMITTEES
Our board of directors has established an audit committee and a
compensation committee.
The audit committee consists of Messrs. Brind and Pinkerton. The additional
independent director we elect to our board of directors will also be appointed
to the audit committee. The audit committee meets periodically with management
and our independent accountants to review their work and confirm that they are
properly discharging their respective responsibilities. The audit committee
also:
- recommends the appointment of independent accountants to audit our
financial statements and perform services related to the audit;
- reviews the scope and results of the audit with the independent
accountants;
- reviews with management and the independent accountants our annual
operating results;
- considers the adequacy of the internal accounting control procedures; and
- considers the independence of our accountants.
The compensation committee consists of Messrs. Brind and Pinkerton. The
compensation committee determines the salary and incentive compensation of our
officers and provides recommendations for the salaries and incentive
compensation of our other employees. The compensation committee also administers
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our stock option plan and employee stock purchase plan, including reviewing
management recommendations with respect to option grants and taking other
actions as may be required in connection with our compensation and incentive
plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.
DIRECTOR COMPENSATION
We reimburse our directors for reasonable out-of-pocket expenses related to
attending board or committee meetings. We intend to pay cash compensation in an
amount to be determined by our board of directors to non-employee directors for
serving on our board of directors and who are not serving on behalf of a
principal stockholder. We intend to grant non-employee directors non-qualified
stock options to purchase shares of our common stock on a yearly basis in an
amount and with a vesting schedule to be determined by our board of directors.
In conjunction with Mr. Cookston becoming one of our directors, we entered
into an arrangement under which we agreed to pay Mr. Cookston an annual
director's fee of $10,000, and we granted him a non-qualified stock option to
purchase 10,000 shares of our common stock at an exercise price of $10.94 per
share. We also entered into an indemnification agreement with respect to his
role as a director. In addition, our arrangement with Mr. Cookston entitles him
to fees in connection with the completion of acquisitions of targets identified
by Mr. Cookston. Under this transaction fee arrangement, we issued Mr. Cookston
7,969 shares of our Class A-5 5% Convertible Preferred Stock. Upon the closing
of this offering, this agreement will be amended to provide for a reduced annual
directors fee to be determined by our board of directors and for fees to Mr.
Cookston upon the completion of four previously identified acquisition targets.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation we paid during 1999 to our chief executive officer for the calendar
year ended December 31, 1999. We refer to this individual as our named executive
officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION OTHER
NAME AND PRINCIPAL POSITION SALARY COMPENSATION
--------------------------- ------------ ------------------
<S> <C> <C>
Eric M. Pollock
Former President & Chief Executive Officer.................. $74,330(a) $ 323(b)
</TABLE>
---------------
(a) Mr. Pollock became our Chief Executive Officer following our acquisition of
Star Guide on July 6, 1999. The salary reported for Mr. Pollock is the
salary paid for the period from July 6, 1999 through December 31, 1999. On
June 1, 2000 Mr. Pollock became and currently serves as our Chairman. Upon
completion of this offering, Mr. Pollock will become our Vice-Chairman.
(b) Our contribution for Mr. Pollock to his 401(k)account.
OPTION GRANTS IN 1999
We did not make any grants of stock options to our named executive officer
for the calendar year ended December 31, 1999.
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<PAGE> 54
OPTIONS EXERCISED
Our named executive officer did not hold options during the calendar year
ended December 31, 1999.
EMPLOYMENT AGREEMENTS
On May 31, 2000 we entered into an employment agreement with Mr. Freed to
serve as our president and chief executive officer. The term of the agreement is
five years. Under the agreement, Mr. Freed will be paid an annual salary of
$244,555, subject to subsequent annual adjustment. In addition, we granted Mr.
Freed an option to purchase 23,000 shares of our common stock, which option
vests over a five-year term and has an exercise price of $16.00 per share. Mr.
Freed is also eligible to receive a cash bonus each year based on our
performance and attainment of earnings objectives. The employment agreement
provides Mr. Freed with an automobile allowance and reimbursement for
association dues. If Mr. Freed is terminated without cause or decides to leave
his employment for good reason after the first year of employment, he is
entitled to a severance payment equal to his base salary then in effect through
the earlier of the date that Mr. Freed obtains other full-time employment or
twelve months from the date of termination of employment. Under those
circumstances, he is also entitled to receive, pro-rated to the date of
termination, any bonus he would have received for that year. If Mr. Freed
terminates his employment for good reason during the first year of his
employment, he is entitled to a severance payment equal to his base salary then
in effect for twenty-four months from the date of his termination. Mr. Freed is
also subject to a noncompete agreement under which he agrees not to compete with
us for the longer of the period beginning June 1, 2000 and ending on May 31,
2005 or one year after the termination of his employment.
Effective July 6, 1999, we entered into an employment agreement with Mr.
Pollock to serve as our chief executive officer. The term of the agreement was
for three years. Effective May 31, 2000 that agreement was terminated and we
entered into a new employment agreement with Mr. Pollock to serve as our
chairman of the board. The term of the existing agreement is five years. Under
the agreement, Mr. Pollock will be paid an annual salary of $300,000, subject to
subsequent annual adjustment. In addition we granted Mr. Pollock an option to
purchase 23,000 shares of our common stock which option vests over a five-year
term and has an exercise price of $16.00 per share. We also agreed to provide
Mr. Pollock with an automobile allowance, an office allowance and reimbursement
for association dues. If Mr. Pollock is terminated without cause or decides to
leave his employment for good reason, he is entitled to a severance payment
equal to his base salary then in effect for the longer of three years from the
date of the agreement or six months from the date of termination. Mr. Pollock is
also subject to a noncompete agreement under which he agrees not to compete with
us for the period beginning July 6, 1999 and ending July 6, 2004. Upon the
closing of this offering, Mr. Pollock's employment agreement will be terminated
in exchange for a cash payment by us of $750,000. Mr. Pollock will resign as
Chairman of our board of directors and as an employee and will become
Vice-Chairman of our board of directors.
EMPLOYEE BENEFIT PLANS
2000 STOCK OPTION AND INCENTIVE PLAN
The following is a summary description of our 2000 Stock Option and
Incentive Plan, which is referred to in this prospectus as the stock option
plan. The stock option plan was adopted by our board of directors on February 3,
2000 and will be submitted to by our stockholders for consideration on or prior
to February 2, 2000. The stock option plan was amended and restated by our board
of directors on , 2001 to be effective upon the initial public
offering. The amendment and restatement of the stock option plan was approved by
our stockholders on , 2001 . You may refer to the exhibits that are
part of the registration statement of which this prospectus is a part for a copy
of the stock option plan.
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<PAGE> 55
TYPES OF AWARDS. The stock option plan provides for grants of incentive
stock options, which are intended to qualify for favorable federal tax treatment
under Section 422 of the Internal Revenue Code of 1986, and nonqualified stock
options, which do not so qualify. The stock option plan also provides for grants
of restricted stock that are subject to restrictions and risks of forfeiture and
restricted stock units that represent the conditional right of the holder to
receive stock in the future and which are subject to restrictions and risks of
forfeiture.
SHARES SUBJECT TO THE STOCK OPTION PLAN. As of , 2000, the
total number of shares of common stock authorized for issuance under the stock
option plan was shares. These shares may be authorized but unissued common
stock. If an option grant expires or for any reason is terminated or
unexercised, the shares of common stock relating to that grant again become
available for issuance under the stock option plan. As of December 22, 2000,
there were nonqualified stock options to purchase 246,654 shares outstanding and
incentive stock options to purchase 427,246 shares outstanding.
MERGERS AND OTHER SIMILAR TRANSACTIONS. In the event of a merger,
consolidation, reorganization, stock dividend, stock split, or other similar
change affecting our capital structure, we have the authority to make
appropriate adjustments to the total number of shares available for issuance
under the stock option plan, the number of shares that may be purchased and the
exercise price applicable to outstanding stock options.
ELIGIBILITY. Grants may be made to any of our or any of our affiliates'
employees, officers, directors, consultants or to any consultant, independent
contractor or other person providing services to us or our affiliates', in each
case as determined by our board of directors.
ADMINISTRATION. Currently, our board of directors administers the stock
option plan. Upon completion of this public offering, our compensation committee
will administer the stock option plan.
SECTION 162(M). Section 162(m) of the Internal Revenue Code limits
publicly-held companies to an annual deduction for federal income tax purposes
of $1,000,000 for compensation paid to their chief executive officer and the
four highest compensated executive officers (other than the chief executive
officer) determined at the end of each year. However, performance-based
compensation is excluded from this limitation. The stock option plan is designed
to permit the compensation committee to grant awards that qualify as
performance-based for purposes of satisfying the conditions of Section 162(m) at
such time as the stock option plan becomes subject to Section 162(m).
ADDITIONAL LIMITATIONS. When we have any equity securities registered
under Section 12 of the Securities Exchange Act of 1934, the maximum number of
shares of stock subject to a stock option under the plan that we can awarded to
any eligible person is shares per year.
EMPLOYEE STOCK PURCHASE PLAN
We intend to adopt an Employee Stock Purchase Plan to be effective upon our
initial public offering. The following is a summary description of our proposed
Employee Stock Purchase Plan.
The purpose of the Employee Stock Purchase Plan is to permit eligible
employees to purchase at a discount shares of common stock of our company. The
Employee Stock Purchase Plan is administered by our compensation committee. All
of our employees who are employed by us or any of our domestic subsidiaries and
whose customary employment is more than 20 hours per week and for more at least
five months in any calendar year will be eligible to participate in this plan.
However, any employee who would own five percent or more of the total combined
voting power or value of our common stock immediately after any grant is not
eligible to participate.
We intend to reserve shares of common stock for issuance under the
Employee Stock Purchase Plan. We also intend that the Employee Stock Purchase
Plan meet the requirements for an "employee stock purchase plan" under Section
423 of the Code. The Employee Stock Purchase Plan was adopted by the board of
directors on , 200 and was approved by our stockholders on
, 200 , but will only become effective upon the occurrence of our
initial public offering.
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<PAGE> 56
The first offering period under the Employee Stock Purchase Plan will
commence on the date of the initial public offering. An offering period will
consist of one or more purchase periods. The duration of each offering and
purchase period will be determined by the compensation committee.
During a purchase period, we will withhold amounts through payroll
deductions for eligible employees who elect to participate in the Employee Stock
Purchase Plan. At the end of each purchase period, we will use the employee
contributions to the plan to purchase, on behalf of eligible employees who are
participating in the Employee Stock Purchase Plan, stock at a price equal to the
lesser of 85% of the market price of the common stock at either the beginning of
the offering period or the end of the purchase period.
STAR GUIDE PHANTOM STOCK PLAN
The following is a summary description of our Star Guide Phantom Stock
Plan, which is referred to as the Star Guide phantom stock plan in this
prospectus. This plan will be of no further effect after the closing of this
offering. Our board of directors approved this plan effective January 1, 2000.
You may refer to the exhibits that are part of the registration statement of
which this prospectus is a part for a copy of the Star Guide Phantom Stock Plan.
The Star Guide phantom stock plan provides for grants of up to 29,708
shares of phantom stock to eligible employees of Star Guide Corporation based on
our Class A-1 5% Convertible Preferred Stock. All 29,708 shares of phantom stock
have been granted. These shares are fully vested. Holders of phantom stock under
this plan have no voting rights, no stockholder rights and no employment rights.
Upon the closing of this offering, the holders of the phantom stock will be
entitled to receive payment for their phantom stock and dividends accrued and
paid to holders of shares of our Class A-1 5% Convertible Preferred Stock.
Payment for each share of phantom stock may be made in cash in an amount equal
to the fair market value of one share of our common stock, as determined based
on the offering price as set forth on this prospectus. We have the option to
make the payment for a holder's phantom stock in any combination of cash and
discounted options to purchase our common stock. If we elect to pay a portion of
the phantom stock payment due to a holder in discounted options, the exercise
price for those options cannot be less than 25% of the fair market value of our
common stock, as determined based on the offering price as set forth on this
prospectus.
2000 EMPLOYEE PHANTOM STOCK PLAN
The following is a summary description of our 2000 Employee Phantom Stock
Plan. Our board of directors approved this plan effective January 1, 2000. You
may refer to the exhibits that are part of the registration statement of which
this prospectus is a part for a copy of the 2000 Employee Phantom Stock Plan.
The 2000 Employee Phantom Stock Plan provides for grants of up to 229,167
shares of phantom stock to eligible employees of ours. When granted, all shares
of phantom stock will be fully vested. Holders of phantom stock under this plan
have no voting rights, no stockholder rights and no employment rights.
Upon the closing of this offering, the holders of the phantom stock will be
entitled to receive payment for their phantom stock and dividends accrued and
paid to holders of shares of our Class A-2 5% Convertible Preferred Stock.
Payment for each share of phantom stock may be made in cash in an amount equal
to the fair market value of one share of our common stock, as determined based
on the offering price of our common stock as set forth on this cover of this
prospectus. We have the option to make the payment for a holder's phantom stock
in any combination of cash, our common stock and discounted options to purchase
our common stock. If we elect to pay a portion of the phantom stock payment due
to a holder in discounted options, the exercise price for those options cannot
be less than 25% of the fair market value of our common stock. Phantom stock
that is issued after the closing of this
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<PAGE> 57
offering also may be redeemed for cash, our common stock or discounted options
to purchase our common stock.
2000 RETENTION PLAN FOR EMPLOYEES
The following is a summary description of our 2000 Retention Plan for
Employees. The plan became effective on January 12, 2000. You may refer to the
exhibits that are part of the registration statement of which this prospectus is
a part for a copy of the 2000 Retention Plan for Employees.
In conjunction with our purchase of Noble-Met, Ltd. and as part of the
calculation of the purchase price, we established a bonus plan for employees of
Noble-Met to motivate and reward the future efforts of those employees. The
maximum amount of the deferred purchase price and therefore the maximum amount
of benefits that may be paid under the plan is $10,000,000. Benefits under the
plan are calculated based on the achievement by Noble-Met of certain earnings
objectives in the year 2000 as compared to the year 1999 and in the year 2001 as
compared to the year 2000. Payments have been made for the year 2000 equal to
$ and phantom shares under the 2000 Employee Phantom Stock Plan.
For plan year 2001, each eligible employee may decide whether to receive
all of that employee's benefits, if any, under the plan in a cash payment or in
a combination of cash and up to 25% in phantom stock pursuant to the 2000
Employee Phantom Stock Plan. The number of shares of phantom stock an employee
is entitled to receive is determined by dividing the dollar amount of phantom
stock to be received by 12.
In order to receive payment under the plan, an eligible employee must be
employed by Noble-Met or an affiliate of Noble-Met on the payment date. Payments
under the plan are due on the earlier of 30 days after the delivery of our
audited financial statements for the fiscal year 2001 or April 15, 2002.
2000 RETENTION PLAN FOR MER CONSULTANTS AND EMPLOYEES
The following is a summary description of our 2000 Retention Plan for MER
Consultants and Employees. The plan became effective on May 12, 2000. You may
refer to the exhibits that are part of the registration statement of which this
prospectus is a part for a copy of the 2000 Retention Plan for MER Consultants
and Employees.
Prior to our acquisition of Noble-Met, Ltd., Noble-Met engaged the services
of a company known as Medical Engineering Resources, Ltd. for certain sales and
marketing services. In conjunction with our purchase of Noble-Met, we determined
that it was in our best interest and the best interest of Noble-Met to retain,
on an exclusive basis, the services of Medical Engineering Resources. We
purchased Medical Engineering Resources and entered into employment and
consulting arrangements with certain individuals affiliated with Medical
Engineering Resources. As part of the calculation of the purchase price for
Noble-Met and Medical Engineering Resources, we established a bonus plan for
employees of Medical Engineering Resources to motivate and reward the future
efforts of those employees. The maximum amount of the deferred purchase price
and therefore the maximum amount of benefits that may be paid under the plan is
$1,000,000. Benefits under the plan are calculated based on the achievement by
Noble-Met of certain earnings objectives in the year 2000 as compared to the
year 1999 and in the year 2001 as compared to the year 2000. Payments have been
made for the year 2000 equal to $ and phantom shares under the 2000
Employee Phantom Stock Plan.
For plan year 2001, each eligible employee may decide whether to receive
all of that employee's benefits, if any, under the plan in a cash payment or in
a combination of cash and up to 25% in phantom stock pursuant to the 2000
Employee Phantom Stock Plan. The number of shares of phantom stock an employee
is entitled to receive is determined by dividing the dollar amount of phantom
stock to be received by 12.
In order to receive payment under the plan, an eligible employee must be
employed by Noble-Met or an affiliate of Noble-Met on the payment date. Payments
under the plan are due on the earlier of 30 days after the delivery of our
audited financial statements for the fiscal year 2001 or April 15, 2002.
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DEFINED CONTRIBUTION RETIREMENT PLANS
Four of our subsidiaries, Spectrum Manufacturing, Inc., UTI Pennsylvania,
Noble-Met, and Star Guide Corporation, maintain for the benefit of their
eligible employees defined contribution plans intended to qualify under Section
401 of the Internal Revenue Code. Employees who participate in the plans may
make elective deferrals of a portion of their salary. In addition each year we
may make discretionary profit sharing or employer matching contributions to the
plans. These employer contributions become vested over time based on the
employee's continued employment with us. Our contributions, if any, are
generally deductible when made. All contributions are held in trust as required
by law.
Two of our subsidiaries, UTI Pennsylvania and Star Guide, maintain profit
sharing plans for the benefit of their eligible employees. These profit sharing
plans are defined contribution plans intended to qualify under Section 401 of
the Internal Revenue Code. Each year we may make discretionary profit sharing
contributions to the plans. These employer contributions become vested over time
based on the employee's continued employment with us. Our contribution, if any,
are generally deductible when made.
DEFINED BENEFIT RETIREMENT PLANS
Two of our divisions maintain defined benefit pension plans for the benefit
of their eligible employees. The two plans are the Pension Plan for Employees of
Uniform Tubes, Inc., and the Pension Plan for Employees of UTITEC, Inc. The
plans are noncontributory defined benefit pension plans which provide eligible
employees with retirement income, generally payable as annuity, for life.
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RELATED PARTY TRANSACTIONS
Since our inception, we have issued shares of common and preferred stock in
private placement transactions as follows:
- On July 6, 1999, we issued and sold 150,000 shares of our voting common
stock at a purchase price of $0.01 per share, 868,372 shares of our Class
A-1 5% Convertible Preferred Stock at a purchase price of $10.94 per
share and 300,000 shares of our Class B-1 Convertible Preferred Stock at
$0.10 per share.
- On January 11, 2000, we issued and sold 1,125,000 shares of our Class A-2
5% Convertible Preferred Stock at a purchase price of $12.00 per share.
- On May 12, 2000, we issued and sold 26,456 shares of our Class A-3 5%
Convertible Preferred Stock at a purchase price of $18.90 per share.
- On May 31, 2000, we issued and sold 3,437,500 shares of our Class A-4 5%
Convertible Preferred Stock at $16.00 per share and 515,882 shares of our
Class AA Convertible Preferred Stock at $13.00 per share.
- On June 1, 2000 we issued and sold 100,000 shares of our Class B-2
Convertible Preferred Stock at $0.10 per share.
- On December 21 and December 22, 2000 we issued and sold 995,469 shares of
our Class A-5 5% Convertible Preferred Stock at $16.00 per share.
Each share of Class A-1 5% Convertible Preferred Stock, Class A-2 5% Convertible
Preferred Stock, Class A-3 5% Convertible Preferred Stock, Class A-4 5%
Convertible Preferred Stock, Class A-5 5% Convertible Preferred Stock, Class AA
Convertible Preferred Stock, Class B-1 Convertible Preferred Stock and Class B-2
Convertible Preferred Stock currently converts into one share of voting common
stock, which conversion will occur upon the closing of this offering.
The following table identifies our executive officers, directors and five
percent stock holders who have made equity investments in our company, excluding
the exercise of options to purchase shares of our common stock. See "Principal
and Selling Stockholders" for additional information about the beneficial
ownership of shares of our preferred and common stock held by these holders.
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF SHARES OF SHARES OF SHARES OF
SHARES OF CLASS A-1 5% CLASS A-2 5% CLASS A-4 5% CLASS A-5 5% CLASS AA CLASS B-1
VOTING CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
COMMON PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
NAME STOCK STOCK STOCK STOCK STOCK STOCK STOCK
---- --------- ------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS
Andrew D. Freed(a)..... -- -- -- -- -- -- --
Barry Aiken............ -- -- -- -- 10,706 -- --
Jeffrey M. Farina...... -- -- -- -- 12,057 -- --
Thomas F. Lemker....... -- 531 -- -- -- --
DIRECTORS
Ira Brind.............. 1,875 4,571 -- -- 3,125 -- 1,250
H. Stephen Cookston.... -- -- -- -- 7,969 -- --
John R. Freeland....... -- -- 146,615 -- -- -- --
Charles A.
Hamilton(b),(c)...... 75,000 301,645 591,667 1,468,750 366,357 -- 50,000
Mark M. King(b)........ 75,000 210,237 550,000 1,375,000 338,486 -- 50,000
Douglas M. Ladden(d)... -- -- -- -- 57,522 479,890 --
David Pinkerton(e)..... -- -- -- 625,000 90,590 -- --
Eric M. Pollock(f)..... -- 367,915 210,416 -- 73,500 -- 5,000
Bruce L. Rogers(b)..... 75,000 210,237 550,000 1,375,000 338,486 -- 50,000
<CAPTION>
SHARES OF
CLASS B-2
CONVERTIBLE
PREFERRED
NAME STOCK
---- -----------
<S> <C>
EXECUTIVE OFFICERS
Andrew D. Freed(a)..... 50,000
Barry Aiken............ 25,000
Jeffrey M. Farina...... 25,000
Thomas F. Lemker....... --
DIRECTORS
Ira Brind.............. --
H. Stephen Cookston.... --
John R. Freeland....... --
Charles A.
Hamilton(b),(c)...... --
Mark M. King(b)........ --
Douglas M. Ladden(d)... --
David Pinkerton(e)..... --
Eric M. Pollock(f)..... --
Bruce L. Rogers(b)..... --
</TABLE>
55
<PAGE> 60
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF SHARES OF SHARES OF SHARES OF
SHARES OF CLASS A-1 5% CLASS A-2 5% CLASS A-4 5% CLASS A-5 5% CLASS AA CLASS B-1
VOTING CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
COMMON PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
NAME STOCK STOCK STOCK STOCK STOCK STOCK STOCK
---- --------- ------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
FIVE PERCENT
STOCKHOLDERS
7:22 Investors LLC..... -- 367,915 210,416 -- 73,500 -- --
Entities affiliated
with American
International Group,
Inc.(g).............. -- -- -- 625,000 90,590 -- --
Entities affiliated
with KRG Capital
Partners,
L.L.C.(h)............ 75,000 210,237 550,000 1,375,000 338,486 -- 50,000
Entities affiliated
with CMS
Companies(i)......... 71,250 173,673 -- 500,000 87,088 -- 47,500
Entities affiliated
with Credit Suisse
First Boston
Corporation(j)....... -- -- -- -- 57,522 479,890 --
<CAPTION>
SHARES OF
CLASS B-2
CONVERTIBLE
PREFERRED
NAME STOCK
---- -----------
<S> <C>
FIVE PERCENT
STOCKHOLDERS
7:22 Investors LLC..... --
Entities affiliated
with American
International Group,
Inc.(g).............. --
Entities affiliated
with KRG Capital
Partners,
L.L.C.(h)............ --
Entities affiliated
with CMS
Companies(i)......... --
Entities affiliated
with Credit Suisse
First Boston
Corporation(j)....... --
</TABLE>
---------------
(a) Mr. Freed also serves as a member of our board of directors.
(b) Includes shares purchased by or attributable to the KRG entities described
in note (h) below. Each of Messrs. Hamilton, King and Rogers disclaims
beneficial ownership in the shares held by the KRG entities except to the
extent of his respective pecuniary interest in such shares.
(c) Includes shares purchased by Infrastructure & Environmental Private Equity
Fund III, LP and Environmental & Information Technology Private Equity Fund
III, LP. First Analysis Corporation is a member of the general partner of
both funds and Mr. Hamilton serves as a managing director of First Analysis
Corporation. Mr. Hamilton disclaims beneficial ownership in the shares held
by the First Analysis entities except to the extent of his pecuniary
interest in such shares.
(d) Includes shares purchased by the Credit Suisse First Boston Corporation
entities described in note (j) below. Mr. Ladden disclaims beneficial
ownership in the shares held by the DLJ entities except to the extent of
his pecuniary interest in such shares.
(e) Includes shares purchased by the AIG entities described in note (g) below.
Mr. Pinkerton disclaims beneficial ownership in the shares held by the AIG
entities except to the extent of his pecuniary interest in such shares.
(f) Includes shares purchased by 7:22 Investors, LLC, of which Mr. Pollock is a
manager. Mr. Pollock disclaims beneficial ownership of the shares held by
7:22 Investors LLC except to the extent of his pecuniary interest in such
shares.
(g) Includes purchases by the following affiliates of American International
Group, Inc.: with respect to Class A-4 5% Convertible Preferred Stock:
531,250 shares purchased by Birmingham Fire Insurance Company of
Pennsylvania and 93,750 shares purchased by AIG Private Equity (Bermuda),
Ltd; and with respect to Class A-5 5% Convertible Preferred Stock: 77,002
purchased by Birmingham Fire Insurance Company and 13,558 shares purchased
by AIG Private Equity (Bermuda), Ltd.
(h) Includes purchases by the following affiliates of KRG Capital Partners,
L.L.C.: with respect to voting common stock 75,000 shares purchased by KRG
Capital Partners, L.L.C.; with respect to Class A-1 5% Convertible
Preferred Stock: 182,815 shares purchased by KRG Capital Partners, L.L.C.,
15,817 shares purchased by KRG Capital Fund I, L.P., 10,554 shares
purchased by KRG Capital Fund I (FF), L.P. and 1,051 shares purchased by
KRG Coinvestment, LLC; with respect to Class A-2 5% Convertible Preferred
Stock: 330,642 shares purchased by KRG Capital Fund I, L.P., 143,812 shares
purchased by KRG Capital Fund I (PA), L.P., 71,452 shares purchased by KRG
Capital Fund I (FF), L.P. and 4,094 shares purchased by KRG Coinvestment,
LLC; with respect to Class A-4 5% Convertible Preferred Stock: 803,815
shares purchased by KRG Capital Fund I, L.P., 355,671 shares purchased by
KRG Capital Fund I (PA), L.P., 169,711 shares purchased by KRG Capital Fund
I (FF), L.P., 35,567 shares purchased by KRG Capital Fund I (GER) and
56
<PAGE> 61
10,236 shares purchased by KRG Coinvestment, LLC; with respect to Class A-5
5% Convertible Preferred Stock: 197,970 shares of shares purchased by KRG
Capital Fund I, L.P., 41,798 shares purchased by KRG Capital Fund I (PA),
L.P., 87,598 shares purchased by KRG Capital Fund I (FF), L.P., 8,760
shares purchased by KRG Capital Fund I (GER) and 2,360 shares purchased by
KRG Coinvestment, LLC; and with respect to Class B-1 Convertible Preferred
Stock: 50,000 shares purchased by KRG Capital Partners, L.L.C. Subsequent
to the above-described purchase of our shares, the various KRG funds
effected various transfers of the shares among the funds.
(i) Includes purchases by the following affiliates of CMS Companies: with
respect to voting common stock 2,250 shares purchased by CMS Diversified
Partner, L.P. and 69,000 shares purchased by CMS Co-Investment
Subpartnership; with respect to Class A-1 5% Convertible Preferred Stock:
5,484 shares purchased by CMS Diversified Partner, L.P. and 168,189 shares
purchased by CMS Co-Investment Subpartnership; with respect to Class A-4 5%
Convertible Preferred Stock: 375,000 shares purchased by CMS Co-Investment
Subpartnership and 125,000 shares purchased by CMS PEP XIV Co-Investment
Subpartnership; with respect to Class A-5 5% Convertible Preferred Stock:
1,006 shares purchased by CMS Diversified Partner, L.P., 86,026 shares
purchased by CMS Co-Investment Subpartnership and 1,062 shares purchased by
CMS PEP XIV Co-Investment; and with respect to Class B-1 Convertible
Preferred Stock: 1,500 shares purchased by CMS Diversified Partner, L.P.
and 46,000 shares purchased by CMS Co-Investment Subpartnership.
(j) Includes purchases by the following affiliates of Credit Suisse First
Boston Corporation: with respect to Class AA Convertible Preferred Stock:
272,722 shares purchased by DLJ Investment Partners II, L.P., 51,588 shares
purchased by DLJ Investment Funding II, Inc., 34,384 shares purchased by
DLJ ESC II, L.P. and 121,196 shares purchased by DLJ Investment Partners,
L.P.; and with respect to Class A-5 5% Convertible Preferred Stock: 50,308
shares purchased by DLJ Investment Funding II, Inc. and 7,214 shares
purchased by DLJ ESC II L.P.
We believe that the terms of all of the above-described transactions were
no less favorable than we could have obtained from unaffiliated third parties.
In connection with the above-described transactions, we entered into an
agreement with the investors providing for registration rights with respect to
the shares of common stock, including those issuable upon conversion of each
class of preferred stock. For more information, please see "Description of
Capital Stock -- Registration Rights."
In addition, we have employment agreements with some of our executive
officers, which are discussed under "Management -- Employment Agreements."
We have no outstanding loans to, or guarantees on behalf of, any of our
directors or executive officers.
SECURITIES PURCHASE AGREEMENT
On May 31, 2000, we and our wholly-owned subsidiary, Medical Device
Manufacturing, Inc., a Colorado corporation, entered into a securities purchase
agreement with DLJ Investment Partners II, L.P., DLJ Investment Funding II,
Inc., DLJ ESC II L.P., DLJ Investment Partners, L.P., all of which are
affiliates of Credit Suisse First Boston Corporation, and Reliastar Financial
Corp. In accordance with the agreement, we issued and sold 515,882 shares of
Class AA Convertible Preferred Stock which at the time of issuance represented
approximately 7.9% of our outstanding common stock on a fully-diluted basis. At
the same time as the share issuance, Medical Device Manufacturing, Inc. issued
to these entities 13.5% senior subordinated notes in an aggregate principal
amount of $21.5 million, which notes mature June 1, 2007, and we issued to these
entities senior notes in an aggregate principal amount of $21.5 million, which
notes mature June 1, 2008. The senior subordinated notes accrue interest at a
rate of 13.5% per annum. Our senior notes accrue interest at a rate of 15.563%
per annum prior to June 1, 2005, which interest may be paid by the issuance of
additional notes, and 16.101% per annum thereafter. The senior subordinated
notes are subject to a prepayment penalty of 106.75% of the face amount of these
notes and the senior notes are subject to a prepayment penalty of 107.50% of the
face amount of these notes. We intend to repay the senior subordinated notes and
the senior notes by drawing upon a new credit facility to be entered into
concurrently with the closing of this offering. If we redeem the senior notes
and
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<PAGE> 62
the senior subordinated notes, we may redeem 37.5% or 193,456 of the 515,882
shares of Class AA Convertible Preferred Stock issued and sold under the
Securities Purchase Agreement for $.01 per share. We intend to redeem those
shares upon the closing of this offering.
Holders of the senior subordinated notes and senior notes have registration
rights with respect to the notes. After the six-month period following this
offering, holders of at least 25% of the principal amount of the senior
subordinated notes may require us to register those notes and holders of at
least 25% of the principal amount of the senior notes may require us to register
those notes. Generally, the holders of the senior subordinated notes and the
holders of the senior notes may each request a maximum of two registrations. In
addition, if we register debt securities other than the senior subordinated
notes or the senior notes, the holders of those notes can request that we
include the senior subordinated notes and senior notes in the registration
statement for the other debt securities to be registered. Because we intend to
repay the senior subordinated notes and the senior notes immediately following
the closing of this offering, we do not anticipate that any registration rights
associated with the notes will be available or exercised.
SHAREHOLDERS' AGREEMENT
We have entered into an agreement with our stockholders providing for
certain rights among the stockholders, including a voting agreement with respect
to our directors. Pursuant to this agreement, certain stockholders have the
right to designate members of our board of directors, which rights exist only so
long as those holders hold at least 3.5% of our outstanding common stock on an
as converted basis as follows: the KRG entities have the right to designate
three members; 7:22 Investors LLC, Eric Pollock and certain other holders
together have the right to designate one member; the AIG entities that are party
to the shareholders' agreement have the right to designate one member; and the
DLJ entities that are party to the shareholders' agreement have the right to
designate one member, which right exists only so long as the DLJ entities hold
at least 25% of the aggregate principal amount of the senior subordinated notes
and the senior notes or own at least 3.5% of our outstanding common stock on an
as converted basis. In addition, the shareholders agreement provides that we
will offer to sell a portion of any new securities issued by us, other than
shares issued in our initial public offering, to the stockholders in an amount
determined in accordance with their existing holdings. This shareholders'
agreement will terminate upon the effectiveness of this offering.
KRG MANAGEMENT AGREEMENT
On July 6, 1999, we entered into a management agreement with KRG Capital
Partners, L.L.C. We amended that agreement on May 31, 2000, and we intend to
further amend it upon the closing of this offering. Under the agreement, KRG
Capital Partners, L.L.C. assists us with financial and management consulting and
transaction advisory services, and we pay KRG an annual management fee and a fee
based on the value of acquisitions by us in which KRG was involved. In 1999 we
paid KRG an aggregate of approximately $96,774 in annual management fees, and in
2000 we paid KRG an aggregate of approximately $288,979 in annual management
fees. In addition, we paid transaction fees in conjunction with the closing of
acquisitions by us as follows: on July 14, 1999, in conjunction with the
acquisition of Star Guide we paid $300,000; on January 12, 2000, in conjunction
with the acquisition of Noble-Met we paid $400,000; on June 1, 2000, in
conjunction with the acquisition of UTI Pennsylvania we paid $1,500,000; and on
July 6, 2000, in conjunction with the acquisition of Medical Engineering
Resources, Ltd. we paid $50,000. In January 2001, we will pay KRG $255,000 in
conjunction with the acquisition of American Technical Molding. Upon the closing
of this offering, we will enter into an amended management agreement with KRG.
The new agreement with KRG will have a term of five years from the date of
effectiveness of this registration statement. KRG will receive base transaction
fees equal to 1% of the amount paid to the sellers of the company or business we
acquire. In addition, for transactions in which the amount we pay to the sellers
of the company or business exceeds $200 million, our fee will be reduced to .5%
of such amount if we also engage an investment banking firm to represent us in a
transaction. For each transaction we will also pay KRG a transaction bonus fee
equal to the greater
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<PAGE> 63
of 1% of the amount paid to the sellers of the company or business we acquire or
$250,000, with aggregate transaction bonuses in any one year not to exceed
$500,000.
STAR GUIDE ACQUISITION
In conjunction with our acquisition on July 6, 1999 of 100% of the capital
stock of Star Guide, we paid an aggregate of $19,255,000 in cash, subject to
post-closing adjustments, and issued shares of our Class A-1 5% Convertible
Preferred Stock and shares of our Class B-1 Convertible Preferred Stock. Of that
cash payment, Mr. Pollock received 23.7%. Mr. Pollock also received 237,659
shares of Class A-1 5% Convertible Preferred Stock and 190,000 shares of Class
B-1 Convertible Preferred Stock. Mr. Pollock received an additional purchase
price payment of $425,949 based on the performance of Star Guide during fiscal
year 1999.
NOBLE-MET ACQUISITION
In conjunction with our acquisition on January 11, 2000 of 100% of the
capital stock of Noble-Met, we paid an aggregate of $21,243,082.24 in cash and
issued shares of our Class A-2 5% Convertible Preferred Stock. Messrs. Freeland
and Lemker received 50.17% and 0.18%, respectively, of that total cash
consideration. We also issued Mr. Freeland 146,615 shares of our Class A-2 5%
Convertible Preferred Stock and Mr. Lemker 531 shares of our Class A-2 5%
Convertible Preferred Stock. Messrs. Freeland and Lemker are also entitled to a
portion of the deferred purchase price calculated based on the achievement by
Noble-Met of certain earnings objectives in the year 2000 as compared to the
year 1999 and in the year 2001 as compared to the year 2000. If the deferred
purchase price is earned, Messrs. Freeland and Lemker may each elect to receive
his portion all in cash or up to 25% in non-cash consideration and the remainder
in cash. The non-cash portion of the deferred purchase price will be paid in
common stock with the number of shares determined by dividing the non-cash
amount of each of Messrs. Freeland's and Lemker's deferred purchase price by 12.
UTI PENNSYLVANIA ACQUISITION
In conjunction with our acquisition on June 1, 2000 of 100% of the capital
stock of UTI Pennsylvania, we paid an aggregate of $139,203,537 and issued
shares of our Class B-2 Convertible Preferred Stock. The two principal
stockholders of UTI Pennsylvania received an aggregate of 70.2% of the total
cash amount. Messrs. Freed, Aiken, Farina, Cornwell, Gaffney and Ashby received
14.11%, 2.30%, 3.14%, 1.85%, 0.51% and 0.51% respectively of the total cash
amount. In addition, we issued shares of our Class B-2 Convertible Preferred
Stock as follows: 50,000 shares to Mr. Freed, 25,000 shares to Mr. Aiken and
25,000 shares to Mr. Farina. In addition, we granted discounted options to
purchase shares of our common stock at an exercise price of $4.00 per share as
follows: 156,250 shares to Mr. Freed, 25,368 shares to Mr. Aiken, 34,688 shares
to Mr. Farina and 20,348 shares to Mr. Cornwell. Messrs. Freed, Aiken, Farina,
Cornwell, Gaffney and Ashby are eligible to receive a portion of the deferred
cash purchase price of up to $10,000,000 calculated based on by UTI
Pennsylvania's attainment of certain earnings objectives in the year 2000. We do
not believe that those earnings objectives will be met, thus no payment will be
made. Pursuant to a bonus arrangement contained in the share purchase agreement
between us and UTI Pennsylvania dated May 31, 2000, employees of UTI
Pennsylvania, including Messrs. Freed, Aiken, Farina, Cornwell and Gaffney, are
eligible for bonuses based on the performance of UTI Pennsylvania. The bonuses
are to be paid from a discretionary bonus pool consisting of 2% of UTI
Pennsylvania's earnings before interest, taxes, depreciation and amortization,
or EBITDA. There is also a variable portion of the bonus arrangement which is
based on an EBITDA budget of $18.5 million for 2000. For each 1% that the actual
EBITDA is above 95% of the budgeted EBITDA (after giving effect to bonuses paid
under the bonus arrangement), the variable bonus plan pool will be funded with
$70,000 (after giving effect to bonuses paid under the bonus plan). We plan to
replace this bonus arrangement with a formal bonus plan in 2001.
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<PAGE> 64
STAR GUIDE LEASE
In conjunction with our acquisition on July 6, 1999 of Star Guide we
entered into a lease agreement with 5000 Independence Street LLC for the
approximately 45,000 square foot facility in which Star Guide is located. 5000
Independence Street LLC, the owner of the facility, is a limited liability
company whose members include Mr. Pollock. Mr. Pollock was among the sellers in
our acquisition of Star Guide, and Mr. Pollock is a member of our board of
directors. The lease term is eight years and is subject to one four year renewal
period at our option. The base rent for the first two years is $300,000 per
year. This lease provides that in 2001, the third year of the lease term, the
base rent shall adjust to a mutually acceptable base rent.
NOBLE-MET LEASE
In conjunction with our acquisition of Noble-Met on January 11, 2000, we
entered into a lease agreement with Image, L.C. for the approximately 48,000
square foot facility in which Noble-Met is located. Image, L.C., the owner of
the facility, is a limited liability company whose members include John R.
Freeland. Mr. Freeland was among the sellers in our acquisition of Noble-Met,
and he is a member of our board of directors. The lease term is six years and is
subject to two three year renewal periods at our option. The base rent for the
initial five year term is $324,996 per year. This lease provides that in 2004,
the fifth year of the initial term, the base rent shall adjust to a mutually
acceptable base rent.
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<PAGE> 65
PRINCIPAL STOCKHOLDERS
The following table shows information with respect to beneficial ownership
of our common stock, as of December 22, 2000, after giving pro forma effect to
the conversion of all of our outstanding shares of preferred stock into common
stock on a one-to-one basis, and as adjusted to reflect the sale of the common
stock offered by us in this offering, for:
- each of our directors and named executive officers;
- all of our directors and executive officers as a group; and
- each person known by us to beneficially own more than 5% of our common
stock.
We have calculated the percentage of beneficial ownership based on
7,518,679 shares of common stock outstanding as of December 22, 2000, after
giving effect to the conversion of our convertible preferred stock, and
shares of common stock outstanding after completion of this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(A)
---------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------ ------------------ --------- ---------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Ira Brind(b).............................................. 10,821 *
H. Stephen Cookston(c).................................... 9,969 *
John R. Freeland.......................................... 146,615 2.0
Andrew D. Freed(d)........................................ 206,250 2.7
Charles A. Hamilton(e),(f)................................ 2,953,783 39.1
Mark M. King(e)........................................... 2,693,388 35.6
Douglas M. Ladden(g)...................................... 537,412 7.1
Steven D. Neumann......................................... --
David B. Pinkerton(h)..................................... 715,590 9.5
Eric M. Pollock(i)........................................ 685,882 9.1
Bruce L. Rogers(e)........................................ 2,693,388 35.6
All directors and executive officers as a group (17
persons)(b),(c),(d),(e),(f),(g),(h),(i)................. 5,421,020 68.7
FIVE PERCENT STOCKHOLDERS
7:22 Investors LLC(j)..................................... 676,599 9.0
Entities affiliated with American International Group,
Inc.(k)................................................. 715,590 9.5
Entities affiliated with KRG Capital Partners,
L.L.C.(l)............................................... 2,693,388 35.6
Entities affiliated with CMS Companies(m)................. 833,973 11.1
Entities affiliated with Credit Suisse First Boston
Corporation(n).......................................... 537,412 7.1
</TABLE>
---------------
* Less than 1% beneficial ownership.
(a) Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to
the securities. Except as indicated by footnote, the persons named in the
table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them. The number of shares of
common stock outstanding used in calculating the percentage for each listed
person includes the shares of common stock underlying warrants or options
held by that person that are currently exercisable or are exercisable
within 60 days of December 22, 2000 but excludes shares of common stock
underlying warrants or options held by any other person. Unless indicated
by footnote, the address for each listed director and executive officer is
200 W. 7th Avenue, Collegeville, Pennsylvania 19426-2470.
(b) Consists of 1,875 shares of common stock, 4,571 shares of Class A-1 5%
Convertible Preferred Stock, 3,125 shares of Class A-5 5% Convertible
Preferred Stock and 1,250 shares of Class B-1 Convertible Preferred Stock.
Mr. Brind's address is 1926 Arch Street, Philadelphia, PA 19103.
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<PAGE> 66
(c) Includes 7,969 shares of Class A-5 5% Convertible Preferred Stock and 2,000
shares Mr. Cookston has a right to acquire pursuant to an option which is
currently exercisable. Mr. Cookston's address is 3411 Mandeville Canyon
Road, Brentwood, CA 90049.
(d) Includes 156,150 shares Mr. Freed has the right to acquire pursuant to an
option which is currently exercisable.
(e) Includes those shares described in note (l) below. Charles A. Hamilton,
Mark M. King and Bruce L. Rogers are managing directors of KRG Capital
Partners, L.L.C. and members of KRG Coinvestment, LLC. Messrs. Hamilton,
King and Rogers share voting and dispositive power in such shares. Each of
Messrs. Hamilton, King and Rogers disclaims beneficial ownership in these
shares except to the extent of his respective pecuniary interest in such
shares.
(f) Includes 73,126 shares of Class A-1 5% Convertible Preferred Stock, 33,333
shares of Class A-2 5% Convertible Preferred Stock, 75,000 shares of Class
A-4 5% Convertible Preferred Stock, 22,297 shares of Class A-5 5%
Convertible Preferred Stock and 4,559 shares represented by a warrant to
acquire non-voting common stock which is currently exercisable, held by
Infrastructure & Environmental Private Equity Fund III, LP, and 18,282
shares of Class A-1 5% Convertible Preferred Stock, 8,334 shares of Class
A-2 5% Convertible Preferred Stock, 18,750 shares of Class A-4 5%
Convertible Preferred Stock and 5,574 shares of Class A-5 5% Convertible
Preferred Stock and 1,140 shares represented by a warrant to acquire
non-voting common stock which is currently exercisable held by
Environmental & Information Technology Private Equity Fund III, LP. First
Analysis Corporation is a member of the member of the general partner of
each of these funds. Mr. Hamilton serves as a managing director of First
Analysis Corporation. Mr. Hamilton disclaims beneficial ownership in these
shares except to the extent of his pecuniary interest in such shares.
(g) Consists of 272,722 shares of Class AA Convertible Preferred Stock held by
DLJ Investment Partners II, L.P., 51,588 shares of Class AA Convertible
Preferred Stock and 50,308 shares of Class A-5 5% Convertible Preferred
Stock held by DLJ Investment Funding II, Inc., 34,384 shares of Class AA
Convertible Preferred Stock and 7,214 shares of Class A-5 5% Convertible
Preferred Stock held by DLJ ESC II, L.P. and 121,196 shares of Class AA
Convertible Preferred Stock held by DLJ Investment Partners, L.P. The DLJ
entities described above are affiliates of Credit Suisse First Boston
Corporation. Mr. Ladden is a principal of DLJ. Mr. Ladden disclaims
beneficial ownership in these shares except to the extent of his pecuniary
interest in such shares.
(h) Consists of 531,250 shares of Class A-4 5% Convertible Preferred Stock and
77,002 shares of Class A-5 5% Convertible Preferred Stock held by
Birmingham Fire Insurance Company of Pennsylvania and 93,750 shares of
Class A-4 5% Convertible Preferred Stock and 13,588 shares of Class A-5 5%
Convertible Preferred Stock held by AIG Private Equity Fund (Bermuda) Ltd.
Mr. Pinkerton is a general partner of AIG Horizon Partners, The AIG Private
Equity Portfolio, L.P. and a special advisor to the AIG Highstar Fund L.P.
Mr. Pinkerton disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest in such shares.
(i) Includes 5,000 shares of Class B-1 Convertible Preferred Stock and 4,283
shares represented by a warrant to acquire non-voting common stock, which
is currently exercisable, held by Mr. Pollock and 367,915 shares of Class
A-1 5% Convertible Preferred Stock, 210,416 shares of Class A-2 5%
Convertible Preferred Stock, 73,500 shares of Class A-5 5% Convertible
Preferred Stock and 24,768 shares represented by a warrant to acquire
non-voting common stock, which is currently exerciseable, held by 7:22
Investors LLC. Mr. Pollock is a manager of 7:22 Investors LLC. Mr. Pollock
disclaims beneficial ownership of the shares held by 7:22 Investors LLC
except to the extent of his pecuniary interest in such shares.
(j) Includes 367,915 shares of Class A-1 5% Convertible Preferred Stock,
210,416 shares of Class A-2 5% Convertible Preferred Stock, 73,500 shares
of Class A-5 5% Convertible Preferred Stock and 24,768 shares represented
by a warrant to acquire non-voting common stock, which is currently
exercisable. The business address of 7:22 Investors LLC is 5000
Independence Street, Arvada, Colorado 80002.
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(k) Consists of 531,250 shares of Class A-4 5% Convertible Preferred Stock and
77,002 shares of Class A-5 5% Convertible Preferred Stock held by
Birmingham Fire Insurance Company of Pennsylvania and 93,750 shares of
Class A-4 5% Convertible Preferred Stock and 13,588 shares of Class A-5 5%
Convertible Preferred Stock held by AIG Private Equity Fund (Bermuda) Ltd.
The business address of AIG is AIG Global Investment Corp., 175 Water
Street, 26th Floor, New York, NY 10038.
(l) Consists of
- 171,369 shares of Class A-1 5% Convertible Preferred Stock, 245,508
shares of Class A-2 5% Convertible Preferred Stock, 836,958 shares of
Class A-4 5% Convertible Preferred Stock, 189,967 shares of Class A-5 5%
Convertible Preferred Stock, 43,522 shares of Class B-1 Convertible
Preferred Stock, 65,283 shares of common stock and 21,929 shares
represented by a warrant to acquire non-voting common stock, which is
currently exercisable, held by KRG Capital Fund I, L.P.,
- 75,827 shares of Class A-1 5% Convertible Preferred Stock, 108,632 shares
of Class A-2 5% Convertible Preferred Stock, 370,335 shares of Class A-4
5% Convertible Preferred Stock, 84,056 shares of Class A-5 5% Convertible
Preferred Stock, 19,257 shares of Class B-1 Convertible Preferred Stock,
28,886 shares of common stock and 9,703 shares represented by a warrant
to acquire non-voting common stock, which is currently exercisable, held
by KRG Capital Fund I (FF), L.P.,
- 36,181 shares of Class A-1 5% Convertible Preferred Stock, 51,834 shares
of Class A-2 5% Convertible Preferred Stock, 176,708 shares of Class A-4
5% Convertible Preferred Stock, 40,108 shares of Class A-5 5% Convertible
Preferred Stock, 9,189 shares of Class B-1 Convertible Preferred Stock,
13,783 shares of common stock and 4,630 shares represented by a warrant
to acquire non-voting common stock, which is currently exercisable, held
by KRG Capital Fund I (PA), L.P.,
- 7,583 shares of Class A-1 5% Convertible Preferred Stock, 10,863 shares
of Class A-2 5% Convertible Preferred Stock, 37,034 shares of Class A-4
5% Convertible Preferred Stock, 8,406 shares of Class A-5 5% Convertible
Preferred Stock, 1,926 shares of Class B-1 Convertible Preferred Stock,
2,889 shares of common stock and 970 shares represented by a warrant to
acquire non-voting common stock, which is currently exercisable, held by
KRG Capital Fund I (GER).
- 2,182 shares of Class A-1 5% Convertible Preferred Stock, 3,127 shares of
Class A-2 5% Convertible Preferred Stock, 10,659 shares of Class A-4 5%
Convertible Preferred Stock, 2,419 shares of Class A-5 5% Convertible
Preferred Stock, 554 shares of Class B-1 Convertible Preferred Stock, 831
shares of common stock and 280 shares represented by a warrant to acquire
non-voting common stock, which is currently exercisable, held by KRG
Coinvestment, LLC,
KRG Capital Partners, L.L.C. is the general partner of the foregoing
entities other than for KRG Coinvestment, LLC for which King Consulting
Corporation serves as manager. The foregoing shares have been contributed
to a limited partnership and such share amounts reflect such party's
allocable share of the shares over which it has voting and dispositive
power. The business address of KRG Capital Partners, L.L.C. is 1515
Arapahoe Street, Tower One, Suite 1500, Denver, Colorado 80202.
(m) Consists of 908 shares of Class A-1 5% Convertible Preferred Stock, 1,300
shares of Class A-2 5% Convertible Preferred Stock, 4,433 shares of Class
A-4 5% Convertible Preferred Stock, 1,006 shares of Class A-5 5%
Convertible Preferred Stock, 231 shares of Class B-1 Convertible Preferred
Stock, 346 shares of common stock and 116 shares represented by a warrant
to acquire non-voting common stock, which is currently exercisable held by
CMS Diversified Partner L.P., 74,611 shares of Class A-1 5% Convertible
Preferred Stock, 106,890 shares of Class A-2 5% Convertible Preferred
Stock, 364,398 shares of Class A-4 5% Convertible Preferred Stock, 82,708
shares of Class A-5 5% Convertible Preferred Stock, 18,949 shares of Class
B-1 Convertible Preferred Stock, 28,423 shares of common stock and 9,548
shares represented by a warrant to acquire
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non-voting common stock, which is currently exercisable held by CMS
Co-Investment Subpartnership, and 15,249 shares of Class A-1 5% Convertible
Preferred Stock, 21,846 shares of Class A-2 5% Convertible Preferred Stock,
74,475 shares of Class A-4 5% Convertible Preferred Stock, 16,904 shares of
Class A-5 5% Convertible Preferred Stock, 3,872 shares of Class B-1
Convertible Preferred Stock, 5,809 shares of common stock and 1,951 shares
represented by a warrant to acquire non-voting common stock, which is
currently exercisable held by CMS PEP XIV Co-Investment Subpartnership. The
foregoing shares have been contributed to a limited partnership and such
share amounts reflect such party's allocable share of the shares over which
it has voting and dispositive power. The business address of CMS is 1926
Arch Street, Philadelphia, Pennsylvania 19103.
(n) Consists of 272,722 shares of Class AA Convertible Preferred Stock held by
DLJ Investment Partners II, L.P., 51,588 shares of Class AA Convertible
Preferred Stock and 50,308 shares of Class A-5 5% Convertible Preferred
Stock held by DLJ Investment Funding II, Inc., 34,384 shares of Class AA
Convertible Preferred Stock and 7,214 shares of Class A-5 5% Convertible
Preferred Stock held by DLJ ESC II, L.P. and 121,196 shares of Class AA
Convertible Preferred Stock held by DLJ Investment Partners, L.P. The DLJ
entities described above are affiliates of Credit Suisse First Boston
Corporation. The business address of Credit Suisse First Boston Corporation
is 277 Park Avenue, New York, New York 10172.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and the material provisions
of our articles of incorporation and bylaws, which will become effective upon
the closing of this offering, is only a summary. You should refer to the
complete terms of our capital stock contained in our charter and bylaws, which
have been filed as exhibits to the registration statement of which this
prospectus is a part.
GENERAL
Upon the closing of this offering, our authorized capital stock will
consist of shares of common stock, par value $0.01 per share, 88,656 shares
of which will be designated as non-voting. Our board of directors is authorized,
without a vote of stockholders, to classify or reclassify any unissued shares of
capital stock and to establish the preferences and rights of any class or series
of stock to be issued. Our charter also permits our board of directors, without
approval of the stockholders, to amend the charter to increase or decrease the
aggregate number of shares of stock or the number of shares of stock of any
class or series that we have authority to issue.
COMMON STOCK
Each holder of common stock, other than holders of non-voting common stock,
is entitled to one vote for each share on all matters to be voted upon by the
stockholders. Holder of non-voting common stock are not entitled to vote.
Holders of common stock are not entitled to cumulative voting rights with
respect to the election of directors, which means that the holders of a majority
of the outstanding common stock can elect all of the directors then standing for
election. Subject to preferences that may be applicable to any preferred stock
outstanding at the time, holders of common stock are entitled to receive ratable
dividends, if any, as may be declared from time to time by our board of
directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, holders of common stock would be
entitled to share ratably in all assets remaining after the payment of
liabilities and liquidation preferences on any outstanding preferred stock.
Holders of common stock have no preemptive or conversion rights or other
subscription rights and there are no redemption or sinking fund provisions
applicable to the common stock.
PREFERRED STOCK
Upon the closing of this offering, our charter will not provide for the
authorization of any shares of preferred stock. However, our board of directors
is authorized, without a vote of stockholders, to classify or reclassify any
unissued shares of capital stock as preferred stock in one or more series. Prior
to the issuance of any preferred stock, our board of directors is required to
set the rights, preferences and privileges and any qualifications, limitations
or restrictions for each class or series. At present, we have no plans to issue
any shares of preferred stock.
WARRANTS AND OPTIONS
Upon the closing of this offering, we will have outstanding options to
purchase a total of 673,900 shares of common stock under our Amended and
Restated 2000 Stock Option and Incentive Plan with exercise prices ranging from
$4.00 to $17.60 per share. In addition, we have issued warrants to purchase a
total of 88,656 shares of non-voting common stock outstanding at $.01 per share
which expire on January 11, 2010.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (1) actual receipt of an improper benefit or profit in money,
property or services, (2) acts committed in bad faith or active and deliberate
dishonesty established by a final judgment as being material to the cause of
action, or (3) in the case of any criminal proceeding, acts or omissions that
the
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person had reasonable cause to believe were unlawful. Our charter contains such
a provision which eliminates such liability to the maximum extent permitted by
Maryland law.
In accordance with the Maryland General Corporation Law or MGCL, our
charter and bylaws obligate us, to the maximum extent permitted by Maryland law,
to indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director or officer who
is made party to the proceeding by reason of his service in that capacity or (b)
any individual who, while a director or officer of ours and at our request,
serves or has served another corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise and who is made a party to the proceeding by reason of
his service in that capacity, against any claim or liability to which he may
become subject by reason of such status. The MGCL permits a corporation to
indemnify its directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceedings to which they may be made a party by reason
of their service in those or other capacities unless it is established that (1)
the act or omission of the director or officer was material to the matter giving
rise to the proceedings and (a) was committed in bad faith or (b) was the result
of active and deliberate dishonesty, (2) the director or officer actually
received an improper personal benefit in money, property or services or (3) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, under the MGCL,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation unless a court orders indemnification, and then
only for expenses. In accordance with the MGCL and our bylaws, as a condition to
advancing expenses, we are required to obtain (1) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by us as authorized by our bylaws and (2)
a written statement by or on his behalf to repay the amount paid or reimbursed
by us if it shall ultimately be determined that the standard of conduct was not
met.
ADDITIONAL CHARTER AND BYLAW PROVISIONS
GENERAL. Upon the closing of this offering, our charter and bylaws will
contain the following additional provisions, some of which are intended to
enhance the likelihood of continuity and stability in the composition of our
board of directors and in the policies formulated by our board of directors. In
addition, some provisions of the MGCL, if applicable to us, may hinder or delay
an attempted takeover without prior approval of our board of directors. These
provisions could discourage attempts to acquire us or remove incumbent
management even if some or a majority of our stockholders believe this action is
in their best interest. These provisions could, therefore, prevent stockholders
from receiving a premium over the market price for the shares of common stock
they hold.
BOARD OF DIRECTORS. Our charter provides that our board of directors
consist of six members and that it may be increased or decreased in accordance
with the bylaws. However, the total number of directors may not be fewer than
three nor more than twelve. Pursuant to our bylaws, the number of directors is
fixed by our board of directors within the limits set forth in the charter.
Because stockholders have no right to cumulative voting for the election of
directors, at each annual meeting of stockholders a majority of the outstanding
common stock is able to elect the class of directors then standing for election.
Our board of directors is not currently divided into classes, but it is
permissible under the MGCL under certain circumstances for our board of
directors to become classified without stockholder approval. Establishing a
classified board could have the effect of delaying or preventing a change in
control or make a removal of management more difficult.
FILLING OF BOARD VACANCIES; REMOVAL. Vacancies on our board of directors
for any cause except an increase in the number of directors may be filled by the
concurring vote of a majority of the remaining directors and, in the case of a
vacancy resulting from the removal of a director by the stockholders, by the
stockholders holding a majority of all the votes entitled to be cast in the
election of directors. Under Maryland law, directors may fill any vacancy only
until the next annual meeting of stockholders. Our
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charter provides that, except for any directors who may be elected by holders of
a class or series of stock other than the common stock, directors may be removed
with or without cause by the affirmative vote of stockholders holding a majority
of all the votes entitled to be cast for the election of directors.
POWER TO ISSUE ADDITIONAL SHARES OF STOCK. We believe that the power of
our board of directors to issue additional shares of common stock or preferred
stock and to issue such shares of stock in one or more classes or series will
provide us with increased flexibility in structuring possible future financings
and acquisitions and in meeting other needs which might arise. The additional
classes or series, as well as the common stock, will be available for issuance
without further action by our stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which our securities may be listed or traded. Although we have no intention
of doing so, we could issue a class or series of stock that could have the
effect of delaying or preventing a change in control or making removal of
management more difficult.
POWER TO RECLASSIFY SHARES OF OUR STOCK. Our charter authorizes our board
of directors to classify and reclassify any unissued shares of our stock into
other classes or series of stock and permits our board of directors, without
stockholder approval, to amend the charter to increase or decrease the aggregate
number of shares of stock or the number of shares of stock of any class or
series that we have authority to issue. Prior to issuance of any shares of each
class or series, our board of directors is required to set the rights,
preferences and privileges and any qualifications, limitations or restrictions
for each class or series. Thus, our board of directors could authorize the
issuance of shares of preferred stock with terms or conditions that could have
the effect of delaying or preventing a change in control or making removal of
management more difficult. Additionally, the issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to the
holders of our common stock or could adversely affect the rights and powers,
including voting rights, of the holders of our common stock. The issuance of
preferred stock could also cause the market price of our common stock to
decline.
STOCKHOLDER ACTION BY UNANIMOUS WRITTEN CONSENT. Pursuant to the MGCL and
our bylaws, any action required or permitted to be taken by the stockholders
must be effected at a duly called annual or special meeting of such holders, and
may not be effected by any consent in writing by such holders, unless such
consent is unanimous.
CALL OF SPECIAL MEETINGS. Our bylaws provide that special meetings of the
stockholders may be called by the President, our board of directors or any other
person specified in our bylaws. Our bylaws further provide that the Secretary
also is required to call a special meeting of the stockholders on the written
request of stockholders entitled to cast a majority of all the votes entitled to
be cast at the meeting.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS. Our bylaws
provide that:
(1) with respect to an annual meeting of stockholders, nominations of
persons for election to our board of directors and the proposal of business
to be considered by stockholders may be made only:
(a) pursuant to the notice of meeting,
(b) by our board of directors, or
(c) by a stockholder that is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in the bylaws;
and
(2) with respect to special meetings of the stockholders, only the
business specified in the notice of meeting may be brought before the
meeting of stockholders and nominations of persons for election to our
board of directors may be made only:
(a) pursuant to the notice of the meeting,
(b) by our board of directors, or
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(c) provided that our board of directors has determined that directors
shall be elected at such meeting, by a stockholder that is entitled
to vote at the meeting and has complied with the advance notice
provisions set forth in our bylaws.
The advance notice provisions contained in the bylaws generally require
nominations and new business proposals by stockholders to be delivered to our
Secretary not later than the close of business on the 60th day nor earlier than
the close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting.
MERGER, CONSOLIDATION, SHARE EXCHANGE AND TRANSFER OF ASSETS. Under our
charter, subject to the terms of any class or series of stock at the time
outstanding, we may merge with or into another entity, may consolidate with one
or more other entities, may participate in a share exchange or may transfer our
assets within the meaning of the MGCL, but any such merger, consolidation, share
exchange or transfer of assets must be approved (1) by our board of directors in
the manner provided in the MGCL and (2) by the stockholders by the affirmative
vote of not less than a majority of all votes entitled to be cast thereon to the
extent a stockholder vote is required under the MGCL to effect any such
transaction. In general, such transactions by us must first be approved by a
majority of our entire board of directors and thereafter approved by
stockholders by the affirmative vote of not less than a majority of all the
votes entitled to be cast on the matter. Under the MGCL, certain mergers may be
accomplished without a vote of stockholders. For example, no stockholder vote is
typically required for a merger of a subsidiary of a Maryland corporation into
its parent, provided the parent owns at least 90% of the subsidiary. In
addition, a merger need not be approved by stockholders of a Maryland successor
corporation if the merger does not reclassify or change the outstanding shares
or otherwise amend the charter, and the number of shares to be issued or
delivered in the merger is not more than 20% of the number of its shares of the
same class or series outstanding immediately before the merger becomes
effective. A share exchange need be approved by a Maryland successor only by its
board of directors.
Under the MGCL, a "transfer of assets" is defined to mean any sale, lease,
exchange or other transfer of all or substantially all of the assets of the
corporation. However, the approval of stockholders is not required for (1) a
transfer of assets by a corporation in the ordinary course of business actually
conducted by it, (2) a mortgage, pledge or creation of any other security
interest in any or all of the assets of the corporation, whether or not in the
ordinary course of its business, (3) an exchange of shares of stock through
voluntary action under any agreement with the stockholders or (4) a transfer of
assets to one or more persons if all the equity interests of the person or
persons are owned, directly or indirectly, by the corporation. Pursuant to the
MGCL, our voluntary dissolution also would require the affirmative vote not less
than a majority of all the votes entitled to be cast on the matter.
AMENDMENTS TO OUR CHARTER AND BYLAWS. Under the MGCL and our charter, in
order to amend our charter, our board of directors first must adopt a resolution
setting forth the proposed amendment and declaring its advisability. Except
under limited circumstances, the board must direct that the proposed amendment
be submitted to stockholders for their consideration either at an annual or
special meeting of stockholders. Thereafter, a proposed amendment which needs
stockholder approval must be approved by the affirmative vote of not less than a
majority of all the votes entitled to be cast on the matter. As permitted under
the MGCL, our bylaws provide that directors have the exclusive right to amend
the bylaws. Amendment of this provision of the charter also would require board
action and approval by stockholders by not less than two-thirds of all votes
entitled to be cast on the matter.
MARYLAND BUSINESS COMBINATION LAW. Our charter contains a provision in
which we elect not to be subject to Maryland's Business Combination Act.
However, this provision could be amended or eliminated in the future.
Under the MGCL, unless an exemption is available, certain "business
combinations" (including certain issuances of equity securities) between a
Maryland corporation and any "Interested Stockholder" or an affiliate of the
Interested Stockholder are prohibited for five years after the most recent date
on which the Interested Stockholder becomes an Interested Stockholder.
Thereafter, any such business
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combination must be recommended by our board of directors and approved by the
affirmative vote of at least (1) 80% of all the votes entitled to be cast by
holders of the outstanding shares of voting stock and (2) two-thirds of the
votes entitled to be cast by holders of voting stock other than voting stock
held by the Interested Stockholder who will (or whose affiliate will) be a party
to the business combination or any affiliate or associate of the Interested
Stockholder, voting together as a single voting group, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. A business combination that is approved by the board of directors of a
Maryland corporation at any time before an Interested Stockholder first becomes
an Interested Stockholder is not subject to the special voting requirements.
MARYLAND CONTROL SHARE ACQUISITION LAW. Our bylaws contain a provision
exempting from Maryland's Control Share Acquisition Statute any and all
acquisitions by any person of shares of our stock. However, this provision could
be amended or eliminated in the future.
Under the MGCL, "control shares" acquired in a "control share acquisition"
have no voting rights except to the extent approved by a vote of two-thirds of
the votes entitled to be cast on the matter, excluding shares owned by the
acquiror, by officers or by directors who are employees of the corporation.
"Control shares" are voting shares which, if aggregated with all other such
shares previously acquired by the acquiror or in respect of which the acquiror
is able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting power:
(1) one-fifth or more but less than one-third, (2) one-third or more but less
than a majority or (3) a majority or more of all voting power. Control shares do
not include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisitions of control shares, subject to certain exceptions. A
person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to (1) shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (2) acquisitions exempted by the charter or bylaws of the
corporation.
REGISTRATION RIGHTS
After the six-month period following this offering, the holders of up to
7,010,151 shares of our common stock will be entitled to registration rights.
These rights include rights to require us to include the holders' common stock
in future registration statements we file with the SEC subject to certain
limitations and, in some cases, demand registration rights. So long as holders
of at least 20% of the total number of shares eligible for registration by us
seek registration of the shares of common stock held by them, those holders may
require us to file a registration statement under the Securities Act on Form S-1
or, if available, a registration statement under the Securities Act on Form S-2
or S-3. Generally, the holders
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may request a maximum of two registrations. In addition to the two registrations
that may be requested by the holders generally, the DLJ entities that hold our
stock have the right to request one additional registration of their shares,
provided that the request is made by DLJ entities that hold at least 50% of the
total number of shares held by all of those entities.
In addition, if at any time after the date of this offering, we prepare to
register any of our securities under the Securities Act, for our account or for
the account of our other holders, we must send notice of the registration to all
holders with registration rights. Subject to certain conditions and limitations,
these holders may elect to register their eligible shares.
Registration of shares of common stock upon the exercise of demand
registration rights would result in the covered shares becoming freely tradable
without restriction under the Securities Act immediately upon the effectiveness
of the registration statement. We will pay the expenses incurred in connection
with such registrations, including the fees and expenses of one counsel chosen
by holders of a majority of the shares being registered on a particular
registration statement. These sales could reduce the trading price of our common
stock.
TRANSFER AGENT AND REGISTRAR
We will retain a transfer agent and registrar for our common stock prior to
the closing of this offering.
LISTING
We intend to apply to have our common stock approved for quotation on the
Nasdaq National Market under the trading symbol "UTIC."
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SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. These
sales also may make it more difficult for us to sell equity or equity-related
securities in the future and at a time and price that we deem appropriate.
Upon the closing of this offering, we will have outstanding an aggregate of
shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all of the shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act, unless these
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act. This leaves 7,325,223 shares eligible for sale in the public
market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<S> <C>
................................. After 180 days from the date of this
prospectus (subject, in some cases, to volume
limitations).
................................. At various times after 180 days from the date
of this prospectus (subject, in some cases,
to volume limitations).
</TABLE>
LOCK-UP AGREEMENTS
All of our officers and directors and stockholders holding all of the
common stock outstanding before closing of this offering have signed lock-up
agreements with our underwriters under which they agreed not to transfer or
dispose of, directly or indirectly, any shares of our common stock or any
securities convertible into or exercisable or exchangeable for shares of our
common stock, for a period of 180 days after the date of this prospectus without
the prior written consent of Credit Suisse First Boston.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock 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 our common stock then outstanding, which
will equal approximately shares immediately after this offering; or
- the average weekly trading volume of our common stock on The Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, shares eligible for resale under Rule 144(k) may be
sold immediately upon the closing of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchased shares of our common
stock from us in connection with a compensatory stock or option plan or other
written agreement is eligible to resell those shares 90 days after the effective
date of this offering in reliance on Rule 144, but without compliance with some
of the
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restrictions, including the holding period, contained in Rule 144. As of
December 22, 2000, no options had been exercised.
REGISTRATION RIGHTS
Some of our stockholders have registration rights for shares of our capital
stock they hold. See "Description of Capital Stock -- Registration Rights."
STOCK OPTIONS
As soon as practicable after the closing of this offering, we intend to
file a registration statement on Form S-8 covering the shares of common stock
reserved for issuance under our stock option plan and our employee stock
purchase plan. As of December 22, 2000, options to purchase 673,900 shares of
common stock were outstanding. The registration statement is expected to be
filed and become effective as soon as practicable after the effective date of
this offering. 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, unless the shares are subject to
vesting restrictions or the lock-up agreements described above.
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<PAGE> 77
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Banc of America
Securities LLC, Lehman Brothers Inc. and Salomon Smith Barney Inc. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Banc of America Securities LLC..............................
Lehman Brothers Inc. .......................................
Salomon Smith Barney Inc. ..................................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments in the sale of the common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and Commissions
paid by us........................... $ $ $ $
Expenses payable by us................. $ $ $ $
</TABLE>
We intend to use more than 10% of the net proceeds from the sale of the
common stock to repay indebtedness owed by us to Bank of America, N.A., an
affiliate of Banc of America Securities LLC. Accordingly, the offering is being
made in compliance with the requirements of Rule 2710(c)(8) of the Conduct Rules
of the National Association of Securities Dealers, Inc. This rule provides
generally that if more than 10% of the net proceeds from the sale of stock, not
including underwriting compensation, is paid to the underwriters of such stock
or their affiliates, the initial public offering price may not be lower than
that recommended by a "qualified independent underwriter" meeting certain
standards. Accordingly, is assuming
the responsibilities of acting as the qualified independent underwriter in
pricing the offering and conducting due diligence. As compensation for serving
as the qualified independent underwriter, we have agreed to pay .
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the share of common stock being offered.
Our officers, directors and substantially all of our stockholders have
agreed that they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock
73
<PAGE> 78
or securities convertible into or exchangeable or exercisable for any shares of
our common stock, enter into a transaction which would have the same effect, or
enter into any swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our common stock, whether
any such aforementioned transaction is to be settled by delivery of our common
stock or such other securities, in cash or otherwise, or publicly disclose the
intention to make any such offer, sale, pledge or disposition, or to enter into
any such transaction, swap, hedge or other arrangement, without, in each case,
the prior written consent of Credit Suisse First Boston Corporation for a period
of 180 days after the date of this prospectus.
At our request, the underwriters have reserved for sale, up to 5% of the
shares of our common stock offered by this prospectus at the initial public
offering price for employees, directors and certain other persons associated
with us who have expressed an interest in purchasing common stock in this
offering. The number of shares available for sale to the general public in the
offering will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We intend to apply to have our common stock approved for quotation on The
Nasdaq National Market under the symbol "UTIC."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for the common stock will be negotiated
among us and the representatives. Among the principal factors to be considered
in determining the initial public offering price will be:
- market conditions for initial public offerings;
- the history of and prospects for our business;
- our past and present operations;
- our past and present earnings and current financial position
- an assessment of our management;
- the market of securities of companies in businesses similar to ours; and
- the general condition of the securities markets.
There can be no assurance that the initial public offering price will
correspond to the price at which the common stock will trade in the public
market subsequent to the offering or that an active trading market will develop
and continue after the offering.
Affiliates of Credit Suisse First Boston Corporation invested in our senior
notes and senior subordinated notes. Banc of America Securities LLC and its
affiliates provided commercial and investment banking services related to our
credit facility. Credit Suisse First Boston Corporation, Banc of America
Securities LLC, Lehman Brothers Inc. and Salomon Smith Barney Inc. and their
respective affiliates may perform financial advisory and investment and
commercial banking services for us in the future. In addition, DLJ Investment
Partners II, L.P., DLJ Investment Funding II, Inc., DLJ ESC II, L.P. and DLJ
Investment Partners, L.P., affiliates of Credit Suisse First Boston Corporation,
collectively own 479,890 shares of our Class AA Preferred Stock and 57,522
shares of our A-5 5% Convertible Preferred Stock, Banc of America Management
Corporation, an affiliate of Banc of America Securities LLC, owns 25,000 shares
of our Class A-2 5% Convertible Preferred Stock and The Travelers Indemnity
Company and The Phoenix Insurance Company, affiliates of Salomon Smith Barney
Inc., collectively own 312,500 shares of our Class A-4 5% Convertible Preferred
Stock and 45,296 shares of our A-5 5% Convertible Preferred Stock. These shares
will be converted on a one-to-one basis into shares of our common stock upon
completion of this offering.
74
<PAGE> 79
We intend to use proceeds from the offering to repay a portion of the
indebtedness outstanding under our credit facility. Simultaneous with this
offering, we intend to enter into a new credit facility and draw upon this
facility to repay the remaining balance of our credit facility and repay our
$21.5 million 15.6% senior notes and $21.5 million 13.5% senior subordinated
notes as well as estimated prepayment penalties of $3.1 million. Affiliates of
certain of the underwriters are lenders under our existing credit facility and
our senior notes and senior subordinated notes and are expected to be lenders
under our new credit facility.
We are currently in compliance with the terms of our existing credit
facility and our senior notes and senior subordinated notes. The decision of
underwriters to distribute our common stock was made independent of the banking
affiliates of certain of the underwriters who are lenders under our existing
credit facility and our senior notes and senior subordinated notes, which
entities had no involvement in determining whether or when to distribute our
common stock under this offering or the terms of this offering. The underwriters
will not receive any benefit from this offering other than their respective
portion of the underwriting fee as paid by us.
In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, referred to as the Exchange Act.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the 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. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, that
position can only be closed out by buying shares in the open market. 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 shares
in the open market after pricing that could adversely affect investors
who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member is purchased in a stabilizing transaction or a syndicate
covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of the
common stock or preventing or retarding a decline in the market price of the
common stock. As a result the price of the common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
75
<PAGE> 80
allocated by the underwriters that will make internet distributions on the same
basis as other allocations. Credit Suisse First Boston Corporation may effect an
on-line distribution through its affiliate, DLJdirect Inc., an on-line broker
dealer, as a selling group member.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are made. Any resale of the common stock in Canada must
be made in accordance with applicable securities laws which will vary depending
on the relevant jurisdiction, and which may require resales to be made in
accordance under available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the common
stock.
REPRESENTATIONS OF PURCHASERS
By purchasing common stock in Canada and accepting a purchase confirmation
a purchaser is representing to us and the dealer from whom the purchase
confirmation is received that
- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws,
- where required by law, that the purchaser is purchasing as principal and
not as agent, and
- the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser pursuant to this offering. The report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed for common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with
76
<PAGE> 81
respect to the eligibility of the common stock for investment by the purchaser
under relevant Canadian legislation.
LEGAL MATTERS
The validity of the shares of common stock offered in this prospectus will
be passed upon for us by Hogan & Hartson L.L.P., Denver, Colorado. Legal matters
relating to the sale of common stock in this offering will be passed upon for
the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP.
EXPERTS
The audited consolidated financial statements of UTI Corporation as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999, included in this prospectus and elsewhere in the registration
statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
The consolidated financial statements of Medical Device Manufacturing, Inc.
(d/b/a Rivo Technologies) as of December 31, 1999, and for the period from July
2, 1999 (date of inception) through December 31, 1999, included in this
prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of G&D, Inc. (d/b/a Star Guide Corporation) as of
December 31, 1998 and 1997, and for each of the two years in the period ended
December 31, 1998, included in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements of Noble-Met, Ltd. and Subsidiary as
of December 31, 1999, and for the year ended December 31, 1999, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The consolidated financial statements of Noble-Met, Ltd. and Subsidiary as
of December 31, 1998 and for the years ended December 31, 1998 and 1997 included
in this prospectus and elsewhere in the registration statement, to the extent
and for the periods indicated in their report, have been audited by KPMG LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The audited combined financial statements of American Technical Molding,
Inc. as of September 30, 2000 and December 31, 1999 and for each of the periods
then ended, included in this prospectus and elsewhere in the registration
statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
77
<PAGE> 82
CHANGE IN INDEPENDENT ACCOUNTANTS
In October, 2000, we dismissed Deloitte & Touche LLP as our independent
accountants. The decision to change independent accountants was approved by our
board of directors. Deloitte & Touche LLP reported on our consolidated financial
statements as of December 31, 1999 and for the period from July 2, 1999 (date of
inception) through December 31, 1999. The report of Deloitte & Touche LLP on
those financial statements did not contain an adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. In connection with their audit, we did not have any
disagreements with Deloitte & Touche LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to their satisfaction, would have caused
them to make reference thereto in connection with their report on the financial
statements for such period.
On November 13, 2000 we engaged Arthur Andersen LLP. Since the 1970's
Arthur Andersen LLP had served as independent accountants for UTI Pennsylvania,
our predecessor.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
amendments to it, relating to the common stock offered by us. This prospectus
does not contain all of the information in the registration statement and its
exhibits and schedules. For further information with respect to our company and
our common stock, you should review the registration statement and its exhibits
and schedules. You may inspect a copy of the registration statement and the
exhibits and schedules to the registration statement without charge at the SEC's
principal office in Washington, D.C. You may obtain copies of all or any part of
the registration statement from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549, the New York Regional Office located
at Seven World Trade Center, New York, New York 10048, and the Chicago Regional
Office located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, upon payment of fees prescribed by the SEC. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains a Web site that contains reports,
proxy and information statements and other information regarding companies that
file electronically with the SEC. The address of the SEC's Web site is
www.sec.gov.
We intend to furnish our stockholders with annual reports containing
audited financial statements certified by our independent auditors.
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<PAGE> 83
TABLE OF CONTENTS
DESCRIPTION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
MDMI HOLDINGS, INC. (OUR COMPANY)
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Pro Forma Balance Sheet, September 30, 2000................. F-4
For Forma Income Statement year ended December 31, 1999..... F-6
Pro Forma Income Statement nine months ended September 30,
2000...................................................... F-8
MDMI HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 2000
Consolidated Balance Sheets as of December 31, 1999 and
September 30, 2000........................................ F-10
Consolidated Statements of Operations for the period from
July 2, 1999 (date of inception) through September 30,
1999 and the nine months ended September 30, 2000......... F-11
Consolidated Statements of Stockholders' Equity for the
period from July 2, 1999 (date of inception) through
September 30, 1999 and the nine months ended September 30,
2000...................................................... F-12
Consolidated Statements of Cash Flows for the period from
July 2, 1999 (date of inception) through September 30,
1999 and the nine months ended September 30, 2000......... F-15
Notes to Financial Statements............................... F-16
MEDICAL DEVICE MANUFACTURING, INC. (D/B/A RIVO TECHNOLOGIES)
(NOW KNOWN AS MDMI HOLDINGS, INC.)
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999
AND FOR THE PERIOD FROM JULY 2, 1999 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1999
Independent Auditors' Report................................ F-36
Consolidated Balance Sheet, December 31, 1999............... F-37
Consolidated Statement of Operations for the period from
July 2, 1999 (date of inception) through December 31,
1999...................................................... F-38
Consolidated Statement of Stockholders' Equity from July 2,
1999 (date of inception) through December 31, 1999........ F-39
Consolidated Statement of Cash Flows for the period from
July 2, 1999 (date of inception) through December 31,
1999...................................................... F-40
Notes to Consolidated Financial Statements for the period
from July 2, 1999 (date of inception) through December 31,
1999...................................................... F-41
G&D, INC., D/B/A STAR GUIDE CORPORATION
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997
Independent Auditors' Report................................ F-51
Balance Sheets as December 31, 1998 and 1997................ F-52
Statements of Earnings and Retained Earnings for the years
ended December 31, 1998 and 1997.......................... F-53
Statements of Cash Flows for the years ended December 31,
1998 and 1997............................................. F-54
Notes to Financial Statements for the years ended December
31, 1998 and 1997......................................... F-55
G&D, INC., D/B/A STAR GUIDE CORPORATION
FINANCIAL STATEMENTS FOR THE SIX-MONTHS ENDED JUNE 30, 1999
AND 1998
Balance Sheets as of June 30, 1999 and 1998................. F-58
Statements of Operations for the six-months ended June 30,
1999 and 1998............................................. F-59
Statements of Cash Flows for the six-months ended June 30,
1999 and 1998............................................. F-60
Consolidated Statements of Stockholders' Equity for the
six-months ended June 30, 1999 and 1998................... F-61
Notes to Financial Statements for the six-months ended June
30, 1999 and 1998......................................... F-62
</TABLE>
F-1
<PAGE> 84
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
NOBLE-MET, LTD. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1999 AND DECEMBER 31, 1998
Independent Auditors' Report................................ F-63
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-65
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................... F-66
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. F-67
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-68
Notes to Consolidated Financial Statements for the years
ended December 31, 1999, 1998 and 1997.................... F-69
UTI CORPORATION (OUR PREDECESSOR AND REFERRED TO IN THIS
PROSPECTUS AS UTI PENNSYLVANIA)
CONSOLIDATED FINANCIAL STATEMENTS AS OF MAY 31, 2000
Report of Independent Public Accountants.................... F-76
Consolidated Balance Sheets as of May 31, 2000, December 31,
1999 and 1998............................................. F-77
Consolidated Statements of Operations for the five months
ending May 31, 2000, and the years ending December 31,
1999, 1998 and 1997....................................... F-79
Consolidated Statements of Equity for the years ending
December 31, 1999, 1998 and 1997.......................... F-80
Consolidated Statements of Cash Flows for the five months
ending May 31, 2000, and the years ending December 31,
1999, 1998 and 1997....................................... F-82
Notes to Consolidated Financial Statements, for the five
months ended May 31, 2000 and for the years ended December
31, 1999, 1998 and 1997................................... F-83
AMERICAN TECHNICAL MOLDING GROUP
FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2000
AND YEAR ENDED DECEMBER 31, 1999
Report of Independent Public Accountants.................... F-95
Combined Balance Sheets as of September 30, 2000 and
December 31, 1999......................................... F-96
Combined Statements of Income for the period ended September
30, 2000 and year ended December 31, 1999................. F-97
Combined Statements of Stockholders' Equity and Partners'
Capital for the period ended September 30, 2000 and year
ended December 31, 1999................................... F-98
Combined Statements of Cash Flows for the period ended
September 30, 2000 and year ended December 31, 1999....... F-99
Notes to Financial Statements for the period ended September
30, 2000 and the year ended December 31, 1999............. F-100
</TABLE>
F-2
<PAGE> 85
MDMI HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated statements of operations give pro
forma effect to our acquisition of all of the issued and outstanding shares of
Star Guide Corporation in July 1999, Noble-Met, Ltd. in January 2000, Medical
Engineering Resources, Ltd. in May 2000, UTI Pennsylvania in May 2000 and
American Technical Molding Group (ATM) in December 2000 (the "Acquired
Companies") as if each acquisition had occurred on January 1, 1999.
The unaudited pro forma consolidated balance sheet gives pro forma effect
to the acquisition of ATM as if it had occurred on September 30, 2000. The
allocation of the purchase price of American Technical Molding, including the
revaluation of its tangible and intangible assets and liabilities, will be
dependent on the results of a final appraisal, which has not yet been received.
The allocation of the UTI Pennsylvania and Noble-Met purchase price is based
upon a preliminary appraisal. Accordingly, the initial purchase price allocation
is preliminary and may be adjusted upon completion of the final appraisals.
The unaudited pro forma adjusted consolidated statements of operations give
pro forma effect to the Acquired Companies, and also give pro forma effect to
the receipt of net proceeds from the sale of shares offered by us at an assumed
initial offering price of $ per share and the application of the net
proceeds of the offering as if these transactions had occurred on January 1,
1999.
The unaudited pro forma adjusted consolidated balance sheet gives effect to
the acquisition of ATM and this offering as if they occurred on September 30,
2000.
The accounting policies used in preparing the unaudited pro forma
consolidated financial statements are those disclosed in our consolidated
financial statements included in this prospectus.
The unaudited pro forma consolidated financial information has been
provided for informational purposes only and is not necessarily indicative of
the results of operations or financial condition that actually would have been
achieved if the acquisition and other transactions had been completed on the
date indicated, or that may be reported in the future. The unaudited pro forma
financial information does not reflect expenses expected to be incurred to
finalize the integration of the combined or acquired operations, or potential
cost savings or improvements in revenue that we believe can be realized as a
result of the acquisitions.
The unaudited pro forma consolidated financial information is based upon
assumptions that we believe are reasonable and should be read in conjunction
with the separate audited historical consolidated financial statements of Star
Guide Corporation, Noble-Met, Ltd. and UTI Corporation, our predecessor. The
assumptions underlying the offering and reclassification adjustments are subject
to change when the initial offering price, gross proceeds and closing date are
finalized.
F-3
<PAGE> 86
MDMI HOLDINGS, INC.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 2000
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA OFFERING PRO FORMA
AS REPORTED ATM ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- ------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents....................... $ 4,243 $ 975 $ 5,218 $ $ 5,218
Trade receivables, less allowance for
doubtful accounts........................ 17,150 1,077 18,227 -- 18,227
Inventories................................ 26,074 840 26,914 -- 26,914
Prepaid expenses and other................. 377 193 570 -- 570
Deferred income taxes...................... 7,339 -- 7,339 719(f) 8,058
-------- ------ ------- -------- --------- --------
Total current assets................. 55,184 3,085 58,269 719 58,987
-------- ------ ------- -------- --------- --------
Property and equipment, net.................. 34,010 1,885 35,895 35,895
Other assets
Goodwill, net of accumulated
amortization............................. 55,984 -- $22,709(a) 78,693 -- 78,693
Other intangible assets.................... 80,754 -- 80,754 -- 80,754
Deferred financing costs and other......... 2,705 -- 2,705 (1,829)(f) 877
-------- ------ ------- -------- --------- --------
139,443 -- 22,709 162,152 (1,829) 160,324
-------- ------ ------- -------- --------- --------
Total assets......................... $228,637 $4,970 22,709 $256,316 $ 1,110 $255,206
======== ====== ======= ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 2,285 $ 341 $ 2,626 $ 2,626
Accrued payroll and related taxes.......... 254 -- 254 254
Notes payable.............................. 175 -- 175 175
Current portion of long-term debt.......... 3,263 362 $ (362)(b) 3,263 3,263
-- -- --(e)
Accrued expenses........................... 15,091 338 15,429 $ (d) 15,429
-------- ------ ------- -------- --------- --------
Total current liabilities............ 21,068 1,041 (362) 21,747 21,747
Deferred compensation and other.............. 1,186 -- 1,186 1,186
Accrued environmental........................ 4,538 -- 4,538 4,538
Deferred income taxes........................ 82 -- -- 82 -- 82
Long-term debt............................... 122,693 700 (700)(b) 136,943 (91,250)(e) 45,693
14,250(c) -- -- --
Long-term pension liability.................. 2,469 -- -- 2,469 -- 2,469
-------- ------ ------- -------- --------- --------
Total liabilities.................... 152,036 1,741 13,188 166,965 (91,250) 75,715
-------- ------ ------- -------- --------- --------
Redeemable preferred stock................... 40 -- -- 40 (40)(e) --
-------- ------ ------- -------- --------- --------
Shareholders' equity:
Preferred stock............................ 60 -- 8(d) 68 (68)(e) --
Common stock, $.01 par -- shares
authorized, 50,000,000; 150,000 shares
issued and outstanding................... 2 50 (50)(b) 2 7 8
Foreign currency translation............... (171) -- (171) -- (171)
Partners capital........................... -- 21 (21)(b) -- -- --
Capital in excess of par value............. 83,962 -- 12,742(d) 96,704 91,244(e) 187,948
Retained earnings.......................... (7,292) 3,158 (3,158)(b) (7,292) (1,002)(f) (8,294)
-------- ------ ------- -------- --------- --------
Total shareholders' equity........... 76,561 3,229 9,521 89,311 90,180 179,491
-------- ------ ------- -------- --------- --------
Total liabilities & shareholders'
equity............................. $228,637 $4,970 $22,709 $256,316 $ (1,110) $255,206
======== ====== ======= ======== ========= ========
</TABLE>
---------------
BALANCE SHEET
ATM acquisition adjustments
(a) The excess of the purchase price for ATM over the estimated fair values of
the net assets acquired.
(b) The paydown of existing debt and the elimination of ATM equity accounts.
F-4
<PAGE> 87
(c) The financing of the transactions with proceeds from the revolving credit
facility.
(d) Reflects the issuance of 796,875 shares of class A-5 5% convertible
preferred stock.
OFFERING ADJUSTMENTS
(e) Reflects our sale of shares of common stock generating gross proceeds of
$100 million and the use of the estimated net proceeds of $91.3 million,
net of underwriting discounts and commissions and the estimated offering
expenses totaling $8.7 million, to repay the outstanding balance of the
term loans. The adjustment assumes the underwriters' over-allotment option
is not exercised. See "Use of Proceeds."
(f) Reflects the write-off of capitalized debt issuance costs, in connection
with the paydown of outstanding debt.
F-5
<PAGE> 88
MDMI HOLDINGS, INC.
PRO FORMA INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1999
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
STAR GUIDE PRO FORMA
PERIOD ENDED ACQUISITION AS
MDMI UTI NOBLE-MET JULY 2, 1999 ATM ADJUSTMENTS REPORTED
--------- ------- --------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales........................... $ 5,739 $75,334 $13,110 $5,817 $ 13,122 -- $113,122
Cost of sales................... 3,140 48,012 6,743 3,052 9,798 $ (100)(a) 70,085
(560)(b)
--------- ------- ------- ------ -------- --------- --------
Gross profit................... 2,599 27,322 6,367 2,765 3,324 660 43,037
Selling, general, and
administrative expenses........ 839 21,920 2,378 1,114 1,595 (95)(e) 27,985
(228)(b)
462(d)
R&D expenses.................... 1 2,051 334 1 -- -- 2,387
Amortization of intangibles..... 513 422 6 -- 8,025(c) 8,966
--------- ------- ------- ------ -------- --------- --------
Operating income (loss)........ 1,246 2,929 3,655 1,644 1,729 (7,504) 3,699
--------- ------- ------- ------ -------- --------- --------
Other income (expense):
Interest expense............... (804) (592) (412) (107) (46) (14,798)(g) (16,759)
Other.......................... 23 (210) (31) (36) -- -- (254)
--------- ------- ------- ------ -------- --------- --------
Total other expenses..... (781) (802) (443) (143) (46) (14,798) (17,013)
--------- ------- ------- ------ -------- --------- --------
Pretax income................... 465 2,127 3,212 1,501 1,683 (22,302) (13,314)
Income tax expense.............. 356 233 30 2 (7,984)(h) (4,219)
3,144(i)
--------- ------- ------- ------ -------- --------- --------
Net income (loss)............... $ 109 $ 1,894 $ 3,182 $1,501 $ 1,681 $ (17,462) $ (9,095)
========= ======= ======= ====== ======== ========= ========
Basic net income
per share.................... $ .11 -- -- -- -- -- $ (1.24)
Diluted net income per share... $ .10 -- -- -- -- -- $ (1.24)
Shares used in computing basic
net income per share......... 1,018,372 -- -- -- -- -- 7,408,741
Shares used in computing
diluted net income per
share........................ 1,103,294 -- -- -- -- -- 7,408,741
<CAPTION>
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -----------
<S> <C> <C>
Sales........................... -- $113,122
Cost of sales................... -- 70,085
------- --------
Gross profit................... $ -- 43,037
Selling, general, and
administrative expenses........ -- 27,985
R&D expenses.................... -- 2,387
Amortization of intangibles..... -- 8,966
------- --------
Operating income (loss)........ -- 3,699
------- --------
Other income (expense):
Interest expense............... 9,123(j) (7,636)
Other.......................... -- (254)
------- --------
Total other expenses..... 9,123 (7,890)
------- --------
Pretax income................... 9,123 (4,191)
Income tax expense.............. 3,585(k) (634)
------- --------
Net income (loss)............... $ 5,538 $ (3,557)
======= ========
Basic net income
per share.................... -- $ (.48)
Diluted net income per share... -- $ (.48)
Shares used in computing basic
net income per share......... -- 7,408,741
Shares used in computing
diluted net income per
share........................ 7,408,741
</TABLE>
---------------
INCOME STATEMENT
Acquisition adjustments
(a) Represents the reversal of one-time expenses related to the write-up of
inventory to fair value.
(b) Reflects the change in depreciation expense based on the fair value
assigned to property, plant & equipment upon the acquisitions.
(c) Reflects the additional amortization expense related to the allocation of
the purchase price to goodwill for the acquisitions. The amortization is
based on the following estimated useful lives:
<TABLE>
<S> <C>
Goodwill.................................................... 20 years
Developed technology & know-how............................. 15-20 years
Workforce................................................... 5-7 years
Customer base............................................... 20 years
</TABLE>
(d) Reflects the increase in amortization of debt issuance costs as a result of
the additional financing associated with the acquisitions.
(e) Represents the reversal of one-time expenses related to professional fees.
F-6
<PAGE> 89
(g) Reflects the additional interest expense related to the borrowings required
by us to complete the acquisitions, based on our current incremental
borrowing rate of approximately 11.54%. An increase in interest rates of
1/8 of one percent would increase the interest expense reported by
$111,234.
(h) Reflects the income tax effect of adjustments.
(i) Reflects the income tax effect of treating UTI, Noble-Met, Star Guide and
ATM as taxable entities effective January 1, 1999. Prior to their
acquisition by MDMI, UTI, Noble-Met, Star Guide and ATM held subchapter "S"
or partnership status for federal and state income tax purposes, and did
not recognize income taxes in their financial statements.
OFFERING ADJUSTMENTS
(j) Reflects the decrease in interest expense in connection with the use of net
proceeds from the offering to repay outstanding debt.
(k) Reflects the income tax effect of adjustments.
F-7
<PAGE> 90
MDMI HOLDINGS, INC.
PRO FORMA INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 30, 2000
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UTI
PERIOD ENDED
MAY 31, ACQUISITION PRO FORMA OFFERING PRO FORMA
MDMI(1) 2000 ATM ADJUSTMENTS AS REPORTED ADJUSTMENTS AS ADJUSTED
---------- ------------ ------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................................ $ 49,209 $ 35,661 $9,954 $ 94,824 $94,824
Cost of sales........................ 36,017 23,567 6,889 $ (6,438)(b) 59,700 59,700
(335)(c)
---------- -------- ------ -------- ---------- ---------- -------
Gross profit......................... 13,192 12,094 3,065 6,773 35,124 $ -- 35,124
Selling, general, and administrative
expenses............................ 13,003 27,732 1,182 (503)(f) 17,548 17,548
(229)(c)
(2,300)(a)
(20,950)(j)
(387)(e)
R&D Expenses......................... 806 702 1,508 1,508
Amortization of intangibles.......... 3,539 188 2,998(d) 6,725 6,725
---------- -------- ------ -------- ---------- ---------- -------
Operating income (loss).............. (4,156) (16,528) 1,883 28,144 9,343 9,343
---------- -------- ------ -------- ---------- ---------- -------
Other income (expense):
Interest expense.................... (7,157) (257) (50) (4,883)(g) (12,347) 6,699(k) (5,648)
Other............................... 109 (55) (35) 19 19
---------- -------- ------ -------- ---------- ---------- -------
Total other expenses.......... (7,048) (312) (85) (4,883) (12,328) 6,699 (5,629)
---------- -------- ------ -------- ---------- ---------- -------
Pretax income (loss)................. (11,204) (16,840) 1,798 23,261 (2,985) 6,699 3,714
Income tax expense (benefit)......... (3,803) 234 14 9,535(h) (285) 2,633(l) 2,348
(6,265)(i) --
---------- -------- ------ -------- ---------- ---------- -------
Net income (loss).................... $ (7,401) $(17,074) $1,784 $ 19,991 $ (2,700) $ 4,066 $ 1,366
Preferred Stock Dividends............ (2,026) -- -- -- (2,026) 2,026(m) --
---------- -------- ------ -------- ---------- ---------- -------
Net Income (Loss) Available to Common
Stockholders........................ (9,427) -- -- -- (4,724) -- 1,366
========== ======== ====== ======== ========== ========== =======
Basic net income per share........... $ (2.31) -- -- -- $ (.64) -- $ (.18)
Diluted net income per share......... $ (2.31) -- -- -- $ (.64) -- $ (.17)
Shares used in computing basic net
income per share.................... 4,089,125 -- -- -- 7,408,741 -- 7,408,741
Shares used in computing diluted net
income per share.................... 4,089,125 -- -- -- 7,408,741 -- 7,676,915
</TABLE>
---------------
(1) Includes UTI operations subsequent to June 1, 2000 and Noble-Met operations
subsequent to January 11, 2000. Noble-Met operations for the eleven-day
period ending January 11, 2000 included sales of $394, cost of sales of
$200, SG&A expenses of $47 and other expenses of $495, primarily related to
the value of options paid out prior to acquisition.
---------------
INCOME STATEMENT
Acquisition adjustments
(a) Reflects the reversal of the in-process R&D write-off incurred in
connection with the acquisitions.
(b) Represents the reversal of one-time expenses related to the write-up of
inventory to fair value.
(c) Reflects the change in depreciation expense based on the fair value
assigned to property, plant & equipment upon the acquisitions.
F-8
<PAGE> 91
(d) Reflects the additional amortization expense related to the allocation of
the purchase price to goodwill for the acquisitions. The amortization is
based on the following estimated useful lives:
<TABLE>
<S> <C>
Goodwill.................................................... 20 years
Developed technology & know-how............................. 15-20 years
Workforce................................................... 5-7 years
Customer base............................................... 20 years
</TABLE>
(e) Reflects the increase in amortization of debt issuance costs as a result of
the additional financing associated with the acquisitions, net of the
reversal of the write-off off debt issuance cost on previously existing
debt that was refinanced in connection with the Acquisitions.
(f) Represents the reversal of one-time expenses related to professional fees.
(g) Reflects the additional interest expense related to the borrowings required
by us to complete the acquisitions, based on our current incremental
borrowing rate of approximately 11.54%.
An increase in interest rates of 1/8 of one percent would increase the
interest expense reported by $81,633.
(h) Reflects the income tax effect of adjustments.
(i) Reflects the income tax effect of treating UTI, Noble-Met and Star Guide as
taxable entities effective January 1, 1999.
Prior to its acquisition by MDMI, UTI, Noble-Met and Star Guide held
subchapter "S" status for federal and state income tax purposes, and did
not recognize income taxes in their financial statements.
(j) Reflects the reversal of compensation expense incurred in connection with
the acquisition.
OFFERING ADJUSTMENTS
(k) Reflects the decrease in interest expense in connection with the use of net
proceeds from the offering to repay outstanding debt.
(l) Reflects the income tax effect of adjustments.
(m) Represents the elimination of dividends upon conversion of the convertible
preferred stock upon the closing of this offering.
F-9
<PAGE> 92
MDMI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 844,705 $ 4,243,185
Receivables --
Trade, net of allowance for doubtful accounts of $95,000
and $437,000, respectively............................. 1,319,342 17,103,288
Other................................................... 35,744 46,974
Inventories (note 3)...................................... 1,215,299 26,073,914
Prepaid expenses and other................................ 87,182 377,490
Income taxes receivable................................... 149,959 --
Deferred income taxes..................................... 72,735 7,339,008
----------- ------------
Total current assets................................ 3,724,966 55,183,859
Property, plant and equipment, net.......................... 1,521,699 34,009,724
Deferred financing costs, net of accumulated amortization of
$30,208 and $164,451, respectively........................ 335,886 2,692,883
Goodwill, net of accumulated amortization of $492,781 and
$2,024,652, respectively.................................. 19,279,082 55,984,843
Other intangible assets, net of accumulated amortization of
$20,000 and $2,071,304, respectively...................... 180,000 80,753,696
Deferred acquisition costs.................................. 123,306 12,291
----------- ------------
$25,164,939 $228,637,296
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 220,976 $ 2,285,387
Accrued payroll and related taxes......................... 123,064 254,378
Accrued expenses.......................................... 476,878 15,091,456
Purchase price consideration due to related parties....... 1,793,469 --
Current portion of long-term debt (note 4)................ 1,587,500 3,262,500
Notes payable............................................. -- 175,000
----------- ------------
Total current liabilities........................... 4,201,887 21,068,721
Note payable and long-term debt (note 4).................... 14,528,125 122,692,500
Deferred income taxes....................................... 57,217 82,242
Deferred compensation and other............................. -- 1,185,852
Accrued environmental (note 9).............................. -- 4,537,546
Pension liability........................................... -- 2,469,292
----------- ------------
Total liabilities................................... 18,787,229 152,036,153
----------- ------------
Commitments and contingencies (note 11)
Redeemable preferred stock (note 15)........................ 30,000 40,000
----------- ------------
Stockholders' equity (note 14):
Capital stock --
Class A-1 5% convertible preferred stock, par value $.01
per share, 2,500,000 shares authorized and 868,372
shares issued and outstanding (liquidation preference
of $9,500,000)......................................... 8,318 8,684
Class A-2 5% convertible preferred stock, par value $.01
per share, 1,400,000 shares authorized and 1,125,000
shares issued and outstanding.......................... -- 11,250
Class A-3 5% convertible preferred stock, par value $.01
per share, 26,456 shares authorized and 26,456 shares
issued and outstanding................................. -- 264
Class A-4 5% convertible preferred stock, par value $.01
per share, 6,250,000 shares authorized and 3,437,500
shares issued and outstanding.......................... -- 34,375
Class AA convertible preferred stock, par value $.01 per
share, 1,000,000 shares authorized and 515,882 shares
issued and outstanding................................. -- 5,159
Voting common stock, par value $.01 per share, 150,000
shares authorized, issued and outstanding.............. 1,500 1,500
Non-voting common stock, par value $.01 per share,
88,656 shares authorized and no shares outstanding..... -- --
Foreign currency translation............................ -- (170,711)
Additional paid-in capital.............................. 6,228,511 83,962,384
Retained earnings (deficit)............................. 109,381 (7,291,762)
----------- ------------
Total stockholders' equity.......................... 6,347,710 76,561,143
----------- ------------
$25,164,939 $228,637,296
=========== ============
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-10
<PAGE> 93
MDMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM JULY 2, 1999 (INCEPTION) TO SEPTEMBER 30, 1999
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1999 2000
------------- -------------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $2,757,282 $ 49,209,254
Cost of sales............................................... 1,461,848 36,016,580
---------- ------------
Gross profit................................................ 1,295,434 13,192,674
Selling, general and administrative expenses................ 328,697 13,002,574
Research and development expenses........................... 943 806,401
Amortization of intangibles................................. 257,147 3,539,435
---------- ------------
Income from operations...................................... 708,647 (4,155,736)
---------- ------------
Other income (expense):
Interest expense.......................................... (379,837) (7,157,264)
Other..................................................... 9,636 109,254
---------- ------------
Total other expense............................... (370,201) (7,048,010)
---------- ------------
Income before income taxes.................................. 338,446 (11,203,746)
Income tax expense (benefit) (note 7)....................... 218,427 (3,802,603)
---------- ------------
Net income (loss)........................................... 120,019 (7,401,143)
---------- ------------
Preferred stock dividends................................... -- (2,026,042)
---------- ------------
Net loss attributable to common stockholders................ $ 120,019 $ (9,427,185)
========== ============
Basic net income (loss) per share........................... $ 0.12 $ (2.31)
========== ============
Diluted net income (loss) per share......................... $ 0.11 $ (2.31)
========== ============
Shares used in calculating basic net income (loss) per
share..................................................... 1,018,372 4,089,125
========== ============
Shares used in calculating diluted net income (loss) per
share..................................................... 1,103,294 4,089,125
========== ============
</TABLE>
The accompanying footnotes are an integral part of these statements.
F-11
<PAGE> 94
MDMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM JULY 2, 1999 (INCEPTION) TO DECEMBER 31, 1999
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------------------------
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
---------------- ------------------- --------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------ --------- ------- ------ ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization........................ 484,460 $4,845 -- -- -- -- -- --
Issuance of capital stock --
Star Guide acquisition (note 2)........... 347,349 3,473 -- -- -- -- -- --
Net income (loss)........................... -- -- -- -- -- --
------- ------ --------- ------- ------ ---- --------- -------
Balance, December 31, 1999.................... 831,809 $8,318 -- -- -- -- -- --
------- ------ --------- ------- ------ ---- --------- -------
Comprehensive income (loss)................... -- -- -- -- -- -- -- --
Cumulative translation adjustment........... -- -- -- -- -- -- -- --
Net income (loss)........................... -- -- -- -- -- -- -- --
Total comprehensive income (loss)........... -- -- -- -- -- -- -- --
Issuance of capital stock (note 2) --
Star Guide acquisition.................... 36,563 $ 366 -- -- -- -- -- --
Noble-Met acquisition..................... -- -- 1,125,000 $11,250 -- -- -- --
MER acquisition........................... -- -- -- -- 26,456 $264 -- --
UTI acquisition........................... -- -- -- -- -- -- 3,437,500 $34,375
Appreciation in value of Star Guide stock
appreciation rights....................... -- -- -- -- -- -- -- --
Accrual for cumulative preferred
dividends................................. -- -- -- -- -- -- -- --
------- ------ --------- ------- ------ ---- --------- -------
Balance, September 30, 2000................... 868,372 $8,684 1,125,000 $11,250 26,456 $264 3,437,500 $34,375
======= ====== ========= ======= ====== ==== ========= =======
</TABLE>
F-12
<PAGE> 95
MDMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM JULY 2, 1999 (INCEPTION) TO DECEMBER 31, 1999
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK
----------------
CLASS AA
----------------
SHARES AMOUNT
------- ------
<S> <C> <C>
Initial capitalization...................................... -- --
------- ------
Issuance of capital stock --
Star Guide acquisition (Note 2)........................ -- --
Net income................................................ -- --
------- ------
Balance, December 31, 1999.................................. -- --
------- ------
Comprehensive income (loss)................................. -- --
Cumulative translation adjustment......................... -- --
------- ------
Net income (loss)......................................... -- --
------- ------
Total comprehensive income (loss)......................... -- --
Issuance of capital stock (note 2) --
Star Guide acquisition................................. -- --
Noble-Met acquisition.................................. -- --
MER acquisition........................................ -- --
UTI acquisition........................................ 515,882 $5,159
Appreciation in value of Star Guide stock appreciation
rights................................................. -- --
Accrual for cumulative preferred dividends................ -- --
------- ------
Balance, September 30, 2000................................. 515,882 $5,159
======= ======
</TABLE>
F-13
<PAGE> 96
MDMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM JULY 2, 1999 (INCEPTION) TO DECEMBER 31, 1999
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------
VOTING NON-VOTING ADDITIONAL CUMULATIVE
---------------- ----------------- PAID-IN TRANSLATION RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS TOTAL
------- ------ -------- ------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization.......... 150,000 $1,500 -- -- $ 5,291,103 -- -- $ 5,297,448
Issuance of capital
stock --
Star Guide acquisition (note
2)........................ -- -- -- -- 937,408 -- -- 940,881
Net income.................... -- -- -- -- -- -- 109,381 109,381
------- ------ -------- ------ ----------- --------- ----------- -----------
Balance, December 31,
1999.......................... 150,000 $1,500 -- -- $ 6,228,511 -- $ 109,381 6,347,710
------- ------ -------- ------ ----------- --------- ----------- -----------
Comprehensive income (loss).....
Cumulative translation
adjustment.................. -- -- -- -- -- $(170,711) -- $ (170,711)
Net income (loss)............. -- -- -- -- -- -- $(7,401,143) (7,401,143)
Total comprehensive income
(loss)...................... -- -- -- -- -- -- -- (7,571,854)
-----------
Issuance of capital stock
(note 2) --
Star Guide.................. -- -- -- -- $ 584,642 -- -- 585,008
Noble-Met................... -- -- -- -- 13,488,750 -- -- 13,500,000
MER acquisition............. -- -- -- -- 499,735 -- -- 499,999
UTI acquisition............. -- -- -- -- 65,036,466 -- -- 65,076,000
Appreciation in value of Star
Guide stock appreciation
rights...................... -- -- -- -- 150,322 -- -- 150,322
Accrual for convertible
preferred dividends......... -- -- -- -- (2,026,042) -- -- (2,026,042)
------- ------ -------- ------ ----------- --------- ----------- -----------
Balance, September 30, 2000..... 150,000 $1,500 -- -- $83,962,384 $(170,711) $(7,291,762) $76,561,143
======= ====== ======== ====== =========== ========= =========== ===========
</TABLE>
F-14
<PAGE> 97
MDMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM JULY 2, 1999 (INCEPTION) TO SEPTEMBER 30, 1999
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1999 2000
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income........................................... $ 120,019 $ (7,401,143)
Adjustments to reconcile net income to net cash flows from
operating activities --
Depreciation and amortization.......................... 324,144 6,367,166
Write off of in-process research & development acquired
as part of acquisition............................... -- 2,300,000
Write up of acquired inventory and sale thereof........ 100,000 6,452,799
Changes in operating assets and liabilities --
Receivables.......................................... (39,691) (1,347,000)
Inventories.......................................... 3,346 (2,257,336)
Prepaid expenses and other........................... 4,787 (196,910)
Payable.............................................. 59,620 --
Income taxes receivable.............................. -- 0
Accounts payable and accrued expenses................ 245,947 (43,163)
------------ -------------
Net cash provided by operating activities................... 818,172 3,874,413
------------ -------------
Cash flows from investing activities:
Capital expenditures........................................ (192,368) (1,507,650)
Acquisitions, net of cash acquired.......................... (21,032,962) (184,562,843)
Other noncurrent assets..................................... (35,546) 0
------------ -------------
Net cash used in investing activities....................... (21,260,876) (186,070,493)
------------ -------------
Cash flows from financing activities:
Proceeds from new debt...................................... 16,492,982 --
Payments on revolver........................................ (42,982) --
Indebtedness --
Borrowings (including deferred financing costs)........ 152,878,936
Repayments............................................. (39,409,375)
Proceeds from issuance of capital stock..................... 5,307,448 72,124,999
------------ -------------
Net cash provided by financing activities................... 21,757,448 185,594,560
------------ -------------
Net increase in cash and cash equivalents................... 1,314,744 3,398,480
Cash and cash equivalents................................... -- 844,705
------------ -------------
July 2, 1999 (date of inception), beginning of period
Cash and cash equivalents, end of period.................... $ 1,314,744 $ 4,243,185
============ =============
Supplemental disclosure, including non-cash investing and
financing transactions
Cash paid for interest...................................... $ 290,449 $ 2,091,795
Cash paid for income taxes.................................. 0 206,723
Capital stock issued for the acquisition of Star Guide
Corporation, net of basis reduction ($2,609,118) and note
payable ($250,000) issued to a Star Guide Corporation
selling stockholder (note 2).............................. 960,881 0
Purchase price earn out accrued (note 2).................... 896,734 0
</TABLE>
The accompanying footnotes are an integral part of these statements.
F-15
<PAGE> 98
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of MDMI
Holdings, Inc. and its wholly owned subsidiaries (collectively "MDMI" or the
"Company"). All significant intercompany transactions have been eliminated.
During 2000, the Company changed its name from Medical Device Manufacturing,
Inc. d/b/a Rivo Technologies to MDMI Holdings, Inc.
Nature of operations
The Company is engaged in providing custom manufacturing services to
companies operating in the medical device industry, including the design and
manufacture of custom components, subassembly of components and assembly of
finished medical devices. The Company also serves non-medical customers in
industries that require high quality, complex components and related engineering
services including the fiber optic, motion sensor and power generation
industries and other technology oriented industries. Sales are focused in both
domestic and European markets.
The Company was formed July 2, 1999 and acquired Star Guide Corporation
(Star Guide) July 6, 1999, Noble-Met, Ltd. (Noble-Met) January 11, 2000 and UTI
Corporation (referred to as UTI Pennsylvania) June 1, 2000. Information
presented for period ended September 30, 1999 relates to the period from July 2,
1999 through September 30, 1999. See Note 2 for a discussion of the Company's
acquisition of Noble-Met and UTI Pennsylvania.
Major customers and concentration of credit
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of accounts receivable. A significant portion
of the Company's customer base is comprised of companies within the medical
industry. The Company does not require collateral from its customers. No single
customer accounted for more than 10% of consolidated net sales during any of the
periods presented. The Company does not believe that a material part of its
business is dependent upon a single customer, the loss of which would have a
material long-term impact on the business of the Company. However, the loss of
one or more of the Company's largest customers would most likely have a negative
short-term impact on the Company's results of operations.
Unaudited financial information
The consolidated financial statements as of September 30, 2000 and for the
periods ending September 30, 1999 and 2000, included herein were prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results for the interim periods. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that
these financial statements be read in conjunction with the audited financial
statements and footnotes which are included herein.
Foreign currency translation
The Company has established manufacturing facilities in Europe. The
functional currency of each of these facilities is the respective local
currency. Assets and liabilities of the Company's foreign facilities are
translated into U.S. dollars using the current rate of exchange existing at
period-end, while revenues and expenses are translated at average monthly
exchange rates. Translation gains and losses are recorded as a
F-16
<PAGE> 99
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
component of other comprehensive income within stockholders' equity. Transaction
gains and losses are included in other income (expense), net. Currency
transaction gains and losses included in operating results for the period and
nine months ended September 30, 1999 and 2000, were not significant.
Cash equivalents
Cash and cash equivalents include all short-term investments purchased with
an original maturity of three months or less.
Inventories
Inventories are stated at the lower of cost or market and include the cost
of materials, labor and manufacturing overhead. Scrap resulting from the
manufacturing process is valued in inventory at the estimated price which will
be received from the refinery.
Property, plant and equipment
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
Land....................................................... $ -- $ 1,775,000
Buildings and improvements................................. -- 7,348,731
Machinery and equipment.................................... 1,641,721 26,646,317
Construction in progress................................... -- 316,539
---------- -----------
1,641,721 36,086,587
Less -- Accumulated depreciation........................... (120,022) (2,076,863)
---------- -----------
Property, plant and equipment, net......................... $1,521,699 $34,009,724
========== ===========
</TABLE>
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Expenditures, which
significantly increase value or extend useful lives are capitalized and replaced
properties are retired. Depreciation is calculated principally by the
straight-line method over the estimated useful lives of depreciable assets.
Accelerated methods are used for tax purposes.
Amortization of leasehold improvements is calculated by use of the
straight-line method over the shorter of the lease terms, including renewal
options expected to be exercised, or estimated useful lives of the equipment.
Useful lives of depreciable assets, by class, are as follows:
<TABLE>
<S> <C> <C>
Buildings and improvements................. 20 years
Machinery and equipment.................... 3 to 10 years
Leasehold improvements..................... 5 to 15 years
Software................................... 3-5 years
</TABLE>
Cost and accumulated depreciation for property retired or disposed of are
removed from the accounts, and any gain or loss on disposal is credited or
charged to earnings. Capitalized interest in connection with constructing
property and equipment for the period and nine months ended September 30, 1999
and 2000, were not significant. Depreciation expense was $53,977 and $1,719,838
for the period and nine months ended September 30, 1999 and 2000, respectively.
F-17
<PAGE> 100
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill
Goodwill, which represents the excess of cost over fair value of the net
assets of acquired businesses, is amortized over 20 years on a straight-line
basis. Accumulated amortization as of December 31, 1999 and September 30, 2000,
was $492,781 and $2,024,652, respectively. It is the Company's policy to review
for possible impairment of goodwill (and other long-lived assets), when an
indication of impairment exists, by developing operating income projections for
each of its lines of business and evaluating the recoverability and amortization
period using these projections. If such a review would indicate that the
carrying amount of goodwill and/or other long-lived assets is not recoverable
the Company would then reduce the carrying amount of such assets to fair value.
Based upon management's current assessment, the estimated remaining amortization
period of goodwill is appropriate and the remaining balance is fully
recoverable.
Other intangible assets
Other intangible assets include primarily developed technology and know
how, assembled workforce and customer base obtained in connection with the
acquisitions of Noble-Met and UTI Pennsylvania (see Note 2).
Amortization periods and net book value as of September 30, 2000 for the
above are as follows:
<TABLE>
<CAPTION>
AMORTIZATION NET BOOK VALUE
PERIOD SEPTEMBER 30, 2000
------------ ------------------
<S> <C> <C>
Developed technology and know how....... 15-20 years $57,723,000
Assembled workforce..................... 5-7 years 5,357,000
Customer base........................... 20 years 17,416,000
</TABLE>
Research and development costs
Research and development costs are expensed as incurred.
Hedging agreements
The Company entered into an interest rate swap agreement to manage interest
costs associated with long-term debt. The differential to be paid or received on
this agreement is accrued as interest rates change and is recognized monthly
over the life of the agreements (See Note 4).
Income taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes,"
which requires the use of the liability method in accounting for deferred taxes.
If it is more likely than not that some portion, or all, of a deferred tax asset
will not be realized, a valuation allowance is recognized.
Other assets
The cost of obtaining financing has been deferred and is being amortized on
a straight-line basis over the life of the associated obligations. Additionally,
the Company capitalizes and defers direct and incremental costs associated with
proposed business combinations, primarily consisting of fees paid to outside
legal counsel and accounting advisors and incremental internal costs, related to
due diligence performed on the target companies. Upon the successful closure of
an acquisition, the Company includes capitalized costs as part of the overall
purchase price. Deferred acquisition costs where the Company has determined that
it is unlikely that the business combination will be completed are written off
when such determination is made.
F-18
<PAGE> 101
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-based compensation
The Company accounts for stock options issued to employees using the
intrinsic value method of Accounting Principles Board Opinion No. 25.
Compensation expense is recorded on the date stock options are granted only if
the current fair value of the underlying stock exceeds the exercise price. The
Company has provided the pro forma disclosures required by Statement of
Financial Accounting Standards No. 123 in Note 6.
Earnings per share
Basic earnings per share ("EPS") is computed using the weighted average
number of common shares outstanding for the period while diluted EPS is computed
assuming conversion of all dilutive securities such as options. Included below
is a reconciliation of shares for the basic and diluted EPS computations.
<TABLE>
<CAPTION>
1999 2000
--------- ---------
<S> <C> <C>
Basic EPS Shares............................................ 1,018,372 4,089,125
Effect of Dilutive Securities............................... 84,922 --
--------- ---------
Diluted EPS Shares.......................................... 1,103,294 4,089,125
========= =========
</TABLE>
There is no difference between basic and diluted EPS regarding the amount
of income (loss) used for the computations. The effect of dilutive securities in
fiscal 1999 is comprised of warrants.
No options were outstanding at December 31, 1999. All options outstanding
at September 30, 2000 were not included in the computation of diluted EPS
because of the Company's fiscal 2000 loss position. These options expire in the
year 2010.
Revenue recognition
The Company records sales upon product shipment, when title passes to the
customer.
Comprehensive income
For the periods presented, the Company's comprehensive income (loss), as
defined by SFAS No. 130, "Reporting Comprehensive Income" includes the change in
foreign currency translation adjustments.
Use of estimates in the preparation of financial statements
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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Risks associated with international operations and currency risk
The Company's international operations are subject to risks normally
associated with foreign operations, including, but not limited to, the
disruption of markets, changes in export or import laws, restrictions on
currency exchanges and the modification or introduction of other government
policies with potentially adverse effects.
F-19
<PAGE> 102
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Financial Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and hedging, requiring recognition of all derivatives as either
assets or liabilities in the statement of financial position measured at fair
value, as well as identifying the conditions for which a derivative may be
specifically designed as a hedge. SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of Effective Date of SFAS No.
133," deferred the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000, which is fiscal year 2001 for us. The effects on our
financial condition, results of operations or cash flows of adopting SFAS No.
133 are not expected to be significant.
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements,"
providing guidance with respect to revenue recognition issues and disclosures.
As amended by SAB 101B, the Company is not required to implement SAB 101 until
the fourth quarter of Calendar 2000. The Company believes that the
implementation of SAB 101 will not have a significant impact on its financial
statements.
2. ACQUISITIONS AND DIVESTITURES:
On June 1, 2000, the Company purchased UTI Pennsylvania for a purchase
price of $150.8 million. The acquisition has been accounted for using the
purchase method of accounting. Accordingly, the assets acquired and liabilities
assumed were recorded in the financial statements at their estimated fair market
values and the results of operations of UTI Pennsylvania are included in the
consolidated statement of operations subsequent to the purchase date. The
acquisition was financed with existing cash, bank debt of approximately $53.0
million, sub debt of $43.0 million, the sale of 3,437,500 shares of Series A-4
5% Convertible Preferred Stock for $55.0 million, and the issuance of 100,000
shares of class B-2 convertible preferred stock valued at $10,000. In addition,
UTI Pennsylvania's management team was issued 236,654 options with an exercise
price of $4/share, which have a fair market value of $3.2 million. As part of
the purchase, the Company paid off UTI Pennsylvania's debt which amounted to
$5.5 million.
The fair value of assets acquired and liabilities assumed follows (in
000s):
<TABLE>
<S> <C>
Inventories.............................................. $ 23,250
Other current assets..................................... 15,321
Property and equipment................................... 29,114
Goodwill................................................. 32,317
Other intangible assets.................................. 68,800
Accrued expenses......................................... (8,617)
Accrued income taxes..................................... (2,300)
Environmental liability.................................. (4,601)
Long-term pension liability.............................. (2,495)
--------
$150,789
========
</TABLE>
On January 11, 2000, the Company purchased Noble-Met, Ltd. and Subsidiary
("Noble-Met"). Consideration paid to Noble-Met stockholders included $33.6
million in cash and securities issued by the Company, as well as the repayment
by the Company of all of Noble-Met's current and long-term debt on the date of
sale. The Share Purchase Agreement also provides for certain earnout provisions
during 2000 and 2001 which could result in additional consideration of
$21,000,000. One half of amounts paid under these earnout provisions will be
paid to Noble-Met employees (see Note 5). Noble-Met signed the Share Purchase
Agreement on December 22, 1999, and in anticipation of the January 2000 closing
of the sales
F-20
<PAGE> 103
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transaction, Noble-Met on December 26, 1999 amended and authorized termination
of the incentive stock option plan and ESOP. In January 2000, all option holders
executed Option Cancellation Agreements in exchange for the right to receive
cash payment from Noble-Met equal to the value of the Company's common stock on
the sale date. Noble-Met repurchased all outstanding options and recorded
compensation expense for the difference between the exercise price and fair
value of the options equal to $380,785. In addition, Noble-Met repurchased and
retired Noble-Met stock owned by the ESOP at fair value equal to $256,918. The
acquisition has been accounted for as a purchase, and as of the date of the
acquisition, the assets acquired and liabilities assumed were recorded in the
financial statements at their estimated fair market values. Results of
operations of Noble-Met are included in the consolidated statement of operations
subsequent to the purchase date. The acquisition was funded with existing cash,
bank debt of $20.5 million and the issuance of 833,333 shares of class A-2 5%
convertible preferred stock valued at $10.0 million. In connection with the
acquisition, Noble-Met selling shareholders purchased 291,667 shares of the
Company's class A-2 5% convertible preferred stock valued at $3.5 million.
The purchase price was allocated as follows (in 000s):
<TABLE>
<S> <C>
Inventories............................................... $ 5,972
Other current assets...................................... 1,847
Property and equipment.................................... 3,651
Other intangible Assets................................... 13,700
In-process research & development......................... 2,300
Goodwill.................................................. 7,359
Current liabilities....................................... (1,193)
-------
$33,636
=======
</TABLE>
The allocation of the purchase price for UTI Pennsylvania and Noble-Met,
including the revaluation of its tangible and intangible assets and liabilities
are based upon a preliminary appraisal. Accordingly, the initial purchase price
allocation is preliminary and may be adjusted upon completion of the final
appraisal.
On May 12, 2000, the Company acquired all of the outstanding capital stock
of Medical Engineering Resources, Ltd. (MER) for approximately $1.2 million. The
acquisition has been accounted for using the purchase method of accounting.
Accordingly, the assets acquired and liabilities assumed were recorded in the
financial statements at their estimated fair market values and the results of
operations of MER are included in the consolidated statement of operations
subsequent to the purchase date. The acquisition was financed by cash, the
issuance of 26,456 shares of class A-3 5% convertible preferred stock valued at
$500,000, and the issuance of a note payable in the amount of $375,000. The
purchase price was allocated primarily to goodwill.
On July 6, 1999 the Company acquired all of the outstanding capital stock
of Star Guide Corporation located in Arvada, Colorado for approximately
$26,867,000, including transaction and deferred financing costs of approximately
$808,500 and additional purchase price consideration related to Star Guide's
1999 results equal to $1,793,469. The acquisition was funded with existing cash,
bank debt, and the issuance of 347,349 shares of class A-1 convertible preferred
stock valued $3,800,000 and 200,000 shares of class B-1 convertible preferred
stock valued at $20,000. The purchase price consideration was subject to the
issuance of an additional 36,563 shares of class A-1 convertible preferred stock
valued at $400,000 if specified earnings were met by Star Guide for the twelve
months ended December 31, 2000, calculated without giving consideration to
purchase accounting adjustments pushed-down to Star Guide. On May 31, 2000, the
Company released those shares, increasing the consideration by $585,008.
Certain members of Star Guide's executive management assumed management
level positions in the Company. As of the acquisition date, the aggregate
ownership in the Company by these members of
F-21
<PAGE> 104
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management exceeded 20%. Accordingly, the Company has recorded the issuance of
Class A-1 convertible preferred stock at the applicable Star Guide carryover
basis pursuant to Emerging Issues Task Force Issue No. 88-16, "Basis in
Leveraged Buyout Transactions."
The acquisition was accounted for using the purchase method of accounting
and, accordingly, Star Guide's operating results are reflected in the
accompanying consolidated financial statements since the date of acquisition,
which approximates the Company's date of inception. The purchase price,
including related transaction costs and adjusted for the carryover basis
reduction equal to $2,609,118, has been allocated to assets acquired and
liabilities assumed based on fair market values at the date of acquisition. The
fair value of assets acquired and liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
Current assets......................................... $ 3,485,558
Property and equipment................................. 1,377,143
Goodwill............................................... 19,771,863
Other intangible assets................................ 566,421
Liabilities............................................ (942,604)
-----------
$24,258,381
===========
</TABLE>
The following unaudited pro forma consolidated financial information
reflects the impact of the purchase of Noble-Met and UTI Pennsylvania, assuming
the acquisitions had occurred at the beginning of the periods presented. The pro
forma impact of the other acquisition is not significant. This unaudited pro
forma consolidated financial information has been provided for information
purposes only and is not necessarily indicative of the results of operations or
financial condition that actually would have been achieved if the acquisitions
had been on the date indicated, or that may be reported in the future (in
000's):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $100,001 $84,921
Net loss.................................................... (8,154) (2,326)
Preferred stock dividends................................... -- (2,026)
-------- -------
Net loss available for common stockholders.................. (8,154) (4,352)
Basic loss per share........................................ $ (1.23) $ (.66)
</TABLE>
The pro forma results do not give effect to any contingent payments that
may be made in connection with the acquisition of Noble-Met.
3. INVENTORIES:
Inventories consisted of the following at December 31, 1999 and September
30, 2000:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Raw materials.............................................. $ 641,744 $ 4,023,586
Intermediate stock......................................... 0 4,582,746
Work-in-process............................................ 673,555 8,668,102
Finished goods............................................. 0 9,892,530
---------- -----------
1,315,299 27,166,964
Reserve for surplus and obsolete inventories............... (100,000) (1,093,050)
---------- -----------
$1,215,299 $26,073,914
========== ===========
</TABLE>
F-22
<PAGE> 105
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the purchase of certain precious metals for anticipated
manufacturing requirements, the Company enters into consignment agreements with
a third party, whereby the Company purchases the precious metal from the
consignor at the time when an external sale is made at the prevailing market
price. The prevailing price at the time of sale is passed through to the
customer. These contracts are used as a hedging strategy to help protect against
volatility in certain precious metals prices.
4. SHORT-TERM AND LONG-TERM BORROWINGS:
Long-term debt at September 30, 2000 and December 31, 1999 consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Senior notes subject to mandatory redemption on June 1,
2006, interest at 15.563% through June 1, 2005, 16.101%
thereafter less unamortized discount of $4,120,000...... $ -- $ 17,380,000
Senior subordinated notes maturing June 1, 2007, interest
at 13.5% less unamortized discount of $2,450,000........ -- 19,050,000
Notes payable, 6.0%, and 10% at December 31, 1999, and
September 30, 2000 respectively......................... 250,000 375,000
Term loan A with a bank, 9.6% and 9.99% at December 31,
1999 and September 31, 2000, respectively............... 10,365,625 44,437,500
Term loan B with a bank, 11.6% and 10.49% at December 31,
1999 and September 30, 2000, respectively............... 5,500,000 44,887,500
----------- ------------
Total long-term debt...................................... $16,115,625 $126,130,000
----------- ------------
Less current portion...................................... (1,587,500) (3,437,500)
----------- ------------
Long-term debt, excluding current portion................. $14,528,125 $122,692,500
=========== ============
</TABLE>
Annual principal repayments are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------------
<S> <C>
2001.................................................. $ 3,437,500
2002.................................................. 6,556,250
2003.................................................. 10,996,875
2004.................................................. 12,262,500
2005.................................................. 13,809,375
2006 and thereafter................................... 85,637,500
------------
$132,700,000
============
</TABLE>
On May 31, 2000 the Company entered into a Credit Agreement with several
financial institutions that provides for a revolving credit facility of up to
$25,000,000, including revolving loans, a swing-line loan facility and a letter
of credit facility. Additionally, the agreement provides for two term loan
facilities (Term A and Term B), each totaling $45,000,000. Borrowings under the
agreement were $89,325,000 at September 30, 2000. Term A repayments are
quarterly through June 30, 2005 at an interest rate of LIBOR plus 3.25, while
Term B repayments are quarterly through February 15, 2006 at an interest rate of
LIBOR plus 3.75. At September 30, 2000, $675,000 of the available credit
facility was being used to support letters of credit, leaving $24,325,000
available for use. Commitment fees on unused portions of the line-of-credit are
0.50%.
On May 31, 2000 the Company entered into a Securities Purchase Agreement
whereby they issued $21.5 million principal amount of 15.563% Senior Notes due
2008 ("Senior Notes") and $21.5 million principal amount of 13.5% Senior
Subordinate Notes due 2007 ("Senior Subordinated Notes"). Interest
F-23
<PAGE> 106
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on the Senior Notes is payable-in-kind at 15.563% through June 1, 2005, and
payable at 16.101% thereafter until maturity. The Senior Notes are redeemable at
the Company's option at a premium of up to 7.5% of the principal, based on the
redemption date, and are subject to a mandatory redemption of $33 million,
including principal of $24,487,708, interest of $7,134,858 and premium of
$1,377,434, on June 1, 2006. The Senior Subordinated Notes are redeemable at the
Company's option at a premium of up to 6.75% of the principal, based on the
redemption date. The notes are collateralized by the Company's assets.
In connection with the Securities Purchase Agreement, the Company issued an
aggregate of 515,882 shares of Class AA Convertible Preferred Stock. The series
AA Preferred Stock has been valued at $6,870,000 and the senior and subordinated
notes have been discounted for the amount attributed to the stock.
There were no short-term borrowings outstanding at September 30, 2000.
All previous debt instruments were repaid in connection with the issuance
of the Securities Purchase Agreement and Credit Agreement.
The Company's debt agreements contain various covenants, including minimum
cash flow (as defined), debt-service coverage ratios and maximum capital
spending limits. The Company was in compliance with these covenants at September
30, 2000.
In connection with the Credit Agreement, the Company entered into a swap
agreement with a minimum term of 3 years in an aggregate notional amount equal
to not less than 40% of the term loan facilities and not more than the term loan
commitment. At September 30, 2000, $36,000,000 of the term loans were effective
at the fixed rate of 7.13 plus 3.25%-3.75%.
5. EMPLOYEE BENEFIT PLANS:
Pension plans
UTI Pennsylvania has pension plans covering certain of its employees.
Benefits are provided at a fixed rate for each month of service. UTI
Pennsylvania's funding policy is consistent with the funding requirements of
federal law and regulations. Plan assets consist of cash equivalents, bonds and
certain equity securities.
Pension cost was $15,000 for the nine months ending September 30, 2000. The
accumulated benefit obligation and fair value of the plan assets at June 1, 2000
were $583,000 and $581,000 respectively.
In connection with the purchase of UTI Pennsylvania as of June 1, 2000, the
Company terminated one of UTI Pennsylvania's previously existing pension plans.
As a result of this termination, the Company recorded a termination charge of
$1,881,000 which has been included in the allocation of the purchase price.
The Company also has a frozen pension plan covering certain employees at
their UTI SFM location. At September 30, 2000, the plan's liability is $477,692.
The Company has 401(k) plans available for most employees. An employee may
contribute up to 10%-14% of gross salary to the 401(k) plan, depending upon the
specific plan. The Company's Board of Directors determines annually what
contribution, if any, the Company shall make to the 401(k) plan. The employees'
contributions vest immediately, while the Company's contributions vest over an
immediate to six-year period. The Company matched 25%-50% of the employee's
contributions to this plan for the period and nine months ending September 1999
and 2000, depending upon the specific plan. The Company's contributions for
matching totaled approximately $5,930 and $200,892 for the period and nine
months ending September 1999 and 2000.
F-24
<PAGE> 107
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has profit sharing plans available to employees at several of
its locations. The Company's Board of Directors determines annually what
contribution, if any, the Company shall make to the profit sharing plan. The
Company's contributions vest over an immediate to six-year period. The Company
expensed $30,000 and $1,744,128 to this plan for the period and nine months
ending September 1999 and 2000.
1999 employee retention plan
With the acquisition of Star Guide, the Company established a stock based
plan to retain Star Guide's key employees. The plan provides for the issuance of
stock appreciation rights ("SARs") with various terms. The stock based awards
are made at the Company's discretion and payment of the related benefits
requires continuous employment from the date of the award through the designated
vesting date. Certain awards become 100% vested one year from the date of grant
while other awards vest 20% on each of the first, second and third anniversary
dates from the date of grant and an additional 40% on the fourth anniversary
date from the date of issuance. The Company records compensation expense related
to these awards based on the difference between the exercise price and the
estimated market appreciation of the underlying stock over the related vesting
period. The Company did not issue any SAR's related to this plan during the
period ended December 31, 1999 or nine months ending September 30, 2000.
2000 retention plan for employees
In conjunction with the Company's purchase of Noble-Met and as part of the
calculation of the purchase price, the Company established a bonus plan for
employees of Noble-Met to motivate and reward the future efforts of those
employees. The maximum amount of the deferred purchase price and therefore the
maximum amount of benefits that may be paid under the plan is $10,000,000.
Benefits under the plan are calculated based on the achievement by Noble-Met of
certain earnings objectives in the year 2000 as compared to the year 1999 and in
the year 2001 as compared to the year 2000. For each year of the plan, each
eligible employees may determine whether to receive all of that employee's
benefits under the plan in cash or in a combination of cash and up to 25% in
phantom stock. Phantom stock provided in this retention plan will be granted
under and in accordance with the Company's 2000 Employee Phantom Stock Plan. In
order to receive payment under the plan, an eligible employee must be
continuously employed by Noble-Met or an affiliate of Noble-Met from the period
beginning on January 12, 2000 through the payment date.
2000 retention plan for MER consultants and employees
In conjunction with the Company's purchase of MER and part of the
calculation of the purchase price, the Company established a bonus plan for
employees of MER to motivate and reward the future efforts of those employees on
behalf of the Company. The maximum amount of the deferred purchase price and
therefore the maximum amount of benefits that may be paid under the plan is
$1,000,000. Benefits under the plan are calculated based on the achievement by
Noble-Met of certain earnings objectives in the year 2000 as compared to the
year 1999 and in the year 2001 as compared to the year 2000. For each year of
the plan, each eligible participant may determine whether to receive all of that
participant's benefits under the plan in cash or in a combination of cash and up
to 25% in phantom stock. Phantom stock provided in this retention plan will be
granted under and in accordance with the Company's 2000 Employee Phantom Stock
Plan. In order to receive payment under the plan, an eligible participant must,
subject to certain exceptions, be continuously employed by or provide services
to the Company or its affiliates from the period beginning on May 12, 2000
through the payment date.
At September 30, 2000, $1.3 million has been accrued for the 2000 retention
plans discussed above, which includes $95,000 for the 2000 Employee Phantom
Stock Plan.
F-25
<PAGE> 108
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK GRANTS AND OPTIONS:
The Company's shareholders approved the MDMI Holdings Inc 2000 Stock Option
and Incentive Plan, which provides for grants of incentive stock options,
nonqualified stock options, restricted stock and restricted stock units. The
total number of shares authorized under the plan is 800,000 at September 30,
2000.
The Company's shareholders approved the MDMI Key Executive Deferred Comp
Plan 1999 Stock Incentive Plan effective May 31, 2000 under which certain
employees of the Company are eligible to be granted a total of 236,654 awards in
the form of incentive stock options. All of the 236,654 stock options were
granted on June 1, 2000 to former UTI Pennsylvania management, at a price of $4,
with immediate vesting. The fair value of these options, $3,115,000 has been
accounted for as additional consideration for the acquisition of UTI
Pennsylvania (see Note 2).
Star Guide phantom stock plan
The Star Guide phantom stock plan provides grants to eligible employees of
Star Guide Corporation of phantom stock based on Class A-1 5% Convertible
Preferred Stock of MDMI. Up to a total of 29,708 shares may be granted. All
shares of phantom stock granted under the plan are immediately and fully vested.
Holders of phantom stock under this plan have no voting rights, no stockholder
rights and no employment rights. They are, however, entitled to receive
dividends on phantom stock in the event dividends are accrued and paid to
holders of shares of the Company's Class A-1 5% Convertible Preferred Stock. A
holder of phantom stock may not transfer or assign phantom stock, other than by
will or the laws of descent and distribution. All such shares were issued, and
expense of $150,000 was recognized related to this plan for the nine months
ended September 30, 2000.
2000 employee phantom stock plan
The 2000 Employee Phantom Stock Plan provides grants to eligible employees
of the Company as determined by the board of directors. Phantom stock granted
under the plan is based on Class A-2 5% Convertible Preferred Stock of MDMI. Up
to a total of 229,167 shares may be granted. All shares of phantom stock granted
under the plan are immediately and fully vested. Holders of phantom stock under
this plan have no voting rights, no stockholder rights and no employment rights.
They are, however, entitled to receive dividends on phantom stock in the event
dividends are accrued and paid to holders of shares of the Company's Class A-2
5% Convertible Preferred Stock. A holder of phantom stock may not transfer or
assign phantom stock, other than by will or the laws of descent and
distribution.
F-26
<PAGE> 109
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock grant and option transactions are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Shares under option
Outstanding at July 6, 1999.............................. -- $ --
Granted............................................... -- --
Exercised............................................. -- --
Forfeited............................................. -- --
-------- ------
Outstanding at December 31, 1999......................... -- --
Granted............................................... 641,700 12.15
Exercised............................................. -- --
Forfeited............................................. -- --
-------- ------
Outstanding at September 30, 2000........................ 641,700 $12.15
======== ======
Options exercisable at:
September 30, 2000....................................... 238,654 $ 4.06
December 31, 1999........................................ -- --
</TABLE>
The grant-date market value of all outstanding options, with the exception
of those granted at $4 per share, is equal to their respective exercise prices.
Outstanding stock options have an average remaining contractual life of 10 years
at September 30, 2000 with the exercise prices for these options ranging from
$4.00 to $17.60.
As provided for in SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company utilizes the intrinsic value method of expense recognition under APB
Opinion No. 25. Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation expense for the stock option plans been
determined consistently with the provisions of SFAS No. 123, the Company's net
income (loss) and net income (loss) per share would have been the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------- -------------
<S> <C> <C>
Net income (loss)
As reported.............................................. $120,019 $(7,401,143)
Pro forma................................................ $120,019 $(7,525,522)
Basic net income per share
As reported.............................................. $ .12 $ (2.31)
Pro forma................................................ $ .12 $ (2.34)
Diluted net income per share
As reported.............................................. $ .11 $ (2.31)
Pro forma................................................ $ .11 $ (2.34)
</TABLE>
F-27
<PAGE> 110
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following range of
assumptions used for the option grants which occurred during the period and nine
months ended December 31, 1999 and September 30, 2000:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------- -------------
<S> <C> <C>
Volatility................................................. -- 28.37%
Risk-free interest rate.................................... -- 5.80%
Expected life in years..................................... -- 8
Dividend yield............................................. -- 0
</TABLE>
7. INCOME TAXES:
The provision for income taxes includes federal, state and foreign taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities. The components
of the provision for income taxes for the period and nine months ended September
30, 1999 and 2000, are as follows:
<TABLE>
<CAPTION>
1999 2000
-------- -----------
<S> <C> <C>
Current
Federal................................................... $205,397 $ --
State..................................................... 22,821 214,483
Foreign................................................... -- 67,735
FSC....................................................... -- 43,053
Deferred
Federal................................................... (6,151) (3,743,069)
State..................................................... (3,640) (317,070)
Foreign................................................... -- (67,735)
-------- -----------
Total provision................................... $218,427 $(3,802,603)
======== ===========
</TABLE>
Major differences between the federal statutory rate and the effective tax
rate for the period and nine months ended September 30, 1999 and 2000 are as
follows:
<TABLE>
<CAPTION>
1999 2000
---- -----
<S> <C> <C>
Federal statutory rate...................................... 34.0% (35.0)%
State taxes, net of federal benefit......................... 3.1% (1.6)%
Nondeductible goodwill...................................... 24.9% 2.8%
FSC......................................................... (0.7)%
Other, net.................................................. 2.5% 0.6%
Effective tax rate........................................ 64.5% (33.9)%
</TABLE>
F-28
<PAGE> 111
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31, 1999 and September 30,
2000:
<TABLE>
<CAPTION>
1999 2000
------- ----------
<S> <C> <C>
Deferred tax assets
Operating loss and tax credit carryforwards............... -- $2,084,873
Compensation reserves..................................... -- 1,892,084
Environmental reserves.................................... -- 1,808,329
Bad debt reserves......................................... $35,435 171,714
Amortization of intangible assets......................... -- 845,347
Asset and other realization reserves...................... 37,300 485,866
Other..................................................... -- 50,795
Deferred tax liabilities
Depreciation/property basis............................... 57,217 82,242
------- ----------
Net deferred tax assets..................................... $15,518 $7,256,766
======= ==========
</TABLE>
As of September 30, 2000, the Company has net operating loss carryforwards
for U.S. income tax purposes of approximately $5,541,740 which expire in the
year 2020. For financial reporting purposes, a valuation allowance has not been
recognized to reduce the deferred tax assets for which it is more likely than
not that the benefits will not be realized.
The Company's net deferred tax assets include certain amounts of net
operating loss carryforwards, principally in the U.S., which management believes
are realizable through a combination of anticipated tax planning strategies and
forecasted future taxable income. Failure to achieve forecasted future taxable
income might affect the ultimate realization of any remaining recorded net
deferred tax assets.
As of September 30, 2000, the Company has not provided for withholding or
U.S. Federal income taxes on undistributed earnings of foreign subsidiaries
since such earnings are expected to be reinvested indefinitely or substantially
offset by available foreign tax credits.
8. RELATED-PARTY TRANSACTIONS:
During 1999, Star Guide expensed and paid a management fee to KRG Capital
Partners, LLC, (KRG), majority shareholders of MDMI, equal to $96,744. During
the nine months ended September 30, 2000, expenses paid to KRG totaled $289,000.
9. ENVIRONMENTAL MATTERS:
In July 1988, UTI Pennsylvania received an Administrative Consent Order
from the United States Environmental Protection Agency known as the EPA that
required UTI Pennsylvania to test and study the groundwater and soil beneath and
around its plant in Collegeville, Pennsylvania, and to provide the EPA with a
proposal to remediate this groundwater and soil. In 1991, UTI Pennsylvania
completed its testing and submitted a corrective measures study, known as a CMS,
to the EPA. The EPA reviewed the CMS and has recommended specific measures and
UTI Pennsylvania has agreed to these to remediate the groundwater and soil.
Since 1991, UTI Pennsylvania has been negotiating with the EPA for a final CMS.
In 1995, UTI Pennsylvania submitted a revised CMS for EPA approval. In addition,
UTI Pennsylvania has been involved as a de minimus contributor in other
environmental matters.
In 1995, UTI Pennsylvania updated its environmental site assessment based
on negotiations with the EPA, and the updated assessment indicated that
additional environmental accruals were necessary. In addition, in 1995, UTI
Pennsylvania entered into a Settlement Agreement and Release with UTI
Pennsylvania's former insurance company which required the insurance company to
pay UTI Pennsylvania
F-29
<PAGE> 112
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a specified amount based on expenses incurred by UTI Pennsylvania for
environmental matters during the period from 1964 to 1979. UTI Pennsylvania had
recorded a long-term liability representing discounted future costs related to
these matters of $4.5 million as of September 30, 2000. These estimates are
based on facts known at the current time; however, changes in EPA standards,
improvement in cleanup technology and discovery of additional information
concerning other environmental matters could affect the estimated costs in the
future. The discount rate used in calculating the environmental liability was 7%
at September 30, 2000. The aggregate gross liability at September 30, 2000 is
$10.6 million. The expected payments for the following five years are as
follows:
<TABLE>
<S> <C>
2001.................................................... $ 1,282,209
2002.................................................... 359,645
2003.................................................... 319,076
2004.................................................... 216,098
2005.................................................... 222,581
2006 and thereafter..................................... 8,167,226
-----------
$10,556,835
===========
</TABLE>
In the opinion of management, after consultation with legal counsel, the
outcome of these environmental matters will not have a materially adverse effect
on the Company's financial position or results of operations.
The Company monitors its compliance with all federal and state
environmental regulations. Certain proposed regulations will require changes in
the Company's manufacturing process.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate methodologies;
however, considerable judgment is required in interpreting market data to
develop these estimates. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. Certain of these financial instruments are with major
financial institutions and expose the Company to market and credit risks and may
at times be concentrated with certain counterparties or groups of
counterparties. The creditworthiness of counterparties is continually reviewed,
and full performance is anticipated.
The methods and assumptions used to estimate the fair value of each class
of financial instruments are set forth below:
- Cash and cash equivalents, accounts receivable and accounts
payable -- The carrying amounts of these items are a reasonable estimate
of their fair values.
- Short-term borrowings -- Borrowings under the line of credit arrangements
have variable rates that reflect currently available terms and conditions
for similar debt. The carrying amount of this debt is a reasonable
estimate of its fair value.
- Long-term debt -- Borrowings under the Term Loan Facilities have variable
rates that reflect currently available terms and conditions for similar
debt. The carrying amount of this debt is a reasonable estimate of its
fair value.
- Interest rate protection agreements and bond swap agreements have no
carrying value; however, if the Company were to terminate these
agreements at September 30, 2000, the Company would have collected
$558,040 based on quotes from financial institutions.
F-30
<PAGE> 113
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
The Company is obligated on various lease agreements for office space,
automobiles and manufacturing equipment, expiring through 2112, which are
accounted for as operating leases.
The Company leases Star Guide's office and manufacturing facility from
certain of its former stockholders. The lease requires payments that were
established at prevailing market rates at the inception of the lease.
The Company leases Noble-Met's facilities in Salem, Virginia from certain
of its former stockholders, under a 15-year operating lease through December
2011, requiring monthly payments of $27,083. The lease provides for an
adjustment of annual rental payments at the end of each five-year term. The
adjustment will be limited to any increase in the landlord's mortgage payments
plus 25 percent of the base rent of the prior term. There was no such adjustment
during 2000.
Most of the leases contain purchase and/or various term renewal options at
fair market and fair rental values, respectively. In most cases, management
expects that, in the normal course of business, leases will be renewed or
replaced by other leases.
Aggregate rental expense for the period and nine months ending September
30, 1999 and 2000 was $75,000 and $756,225, respectively. The future minimum
rental commitments under all operating leases are as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
2001..................................................... $1,464,400
2002..................................................... 1,408,122
2003..................................................... 1,142,013
2004..................................................... 1,080,336
2005..................................................... 977,360
</TABLE>
During 1997, UTI Pennsylvania entered into a 15-year lease for a facility
on behalf of Micro-Coax, Inc ("MC"), a related party with annual rental payments
of approximately $551,000. During July 1998, MC took occupancy of the facility
and began making lease payments in accordance with the agreement. UTI
Pennsylvania is a guarantor for this lease. Certain former UTI Pennsylvania
shareholders have provided a letter of credit to UTI Pennsylvania in the amount
of $3.5 million related to the lease guarantee.
The Company is involved in various legal proceedings in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the outcome of such proceedings will not have a materially adverse
effect on the Company's financial position or results of operations.
The Company has various purchase commitments for materials, supplies,
machinery and equipment incident to the ordinary conduct of business. Such
commitments are not at prices in excess of current market prices.
12. BUSINESS SEGMENTS:
The Company operates its business as one reportable segment, providing
custom manufacturing services to companies operating principally in the medical
device industry.
F-31
<PAGE> 114
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents net revenues by country based on the location
of the customer:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 2000
----------- ------------
<S> <C> <C>
Net Sales
United States............................................... $1,739,888 $36,060,725
Ireland..................................................... 705,157 3,295,186
France...................................................... 110,444 844,376
UK.......................................................... 0 1,484,870
Netherlands................................................. 94,602 1,786,000
Germany..................................................... 10,527 2,582,585
Other....................................................... 96,664 3,155,512
---------- -----------
Total............................................. $2,757,282 $49,209,254
========== ===========
</TABLE>
The following table presents long-lived assets based on the location of the
asset:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Long-lived assets
U.S. ..................................................... $21,439,973 $170,840,946
UK........................................................ 0 1,490,817
Germany................................................... 0 1,121,674
Other..................................................... 0 0
----------- ------------
Total........................................... $21,439,973 $173,453,437
=========== ============
</TABLE>
13. CAPITAL STOCK:
The Company's Board of Directors has authorized an aggregate number of
common shares for issuance equal to 50 million, $.01 par value per share and 50
million of preferred stock, .01 par value per share. As of December 31, 1999,
the Company's Board of Directors limited the issuance of voting and non-voting
common stock to 150,000 shares and 88,656 shares, respectively.
Common stock
Common stock is divided into two classes, voting and non-voting
convertible. The non-voting convertible common stock is convertible one for one
into voting common stock at the option of the holder. The common stock, whether
voting or non-voting, is subject to all of the rights, privileges, preference
and priorities of the Company's preferred stock.
Series A-1 5% convertible preferred
Series A-1 convertible preferred stock ("Series A-1") has a liquidation
value equal to the original per share issue price of $10.94 and the holders are
entitled to receive cumulative dividends at the rate of 5% of liquidation value
in preference to the payment of dividends to the Company's common stockholders,
as, and if declared by the Board of Directors. The holders of Series A-1 are
entitled to vote on all matters submitted to the stockholders for a vote
together with the holders of the Company's voting common stock and the Class B-1
convertible preferred stock. Holders of Series A-1 may convert all or any
portion of the shares held into one share of voting common stock per each share
of Series A-1 held. The Company may at any time require the conversion of all of
the outstanding Series A-1 shares upon the closing of a firmly underwritten
public offering of the Company's common stock. Series A-1 shares are not
redeemable at the
F-32
<PAGE> 115
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
holders' option. The carrying value of Series A-1 differs from its original
issuance value by $2,609,118 due to valuing certain shares issued to the selling
Star Guide stockholder's at their carryover basis. There were no dividends
declared by the Company's Board of Directors during the period ended December
31, 1999.
Series A-2 5% convertible preferred stock
On December 22, 1999, the Company entered into a Share Purchase Agreement
with Noble-Met, Ltd. and the Shareholders of Noble-Met, Ltd. whereby upon the
closing under the Share Purchase Agreement on January 11, 2000 the shareholders
of Noble-Met received an aggregate of 291,667 shares of Class A-2 5% Convertible
Preferred Stock (see Note 2). On January 11, 2000, Registrant entered into
subscription agreements with certain accredited investors for the issuance of an
aggregate of 833,333 shares of Class A-2 5% Convertible Preferred Stock for an
aggregate purchase price of $10,000,000 (see Note 2).
Series A-3 5% convertible preferred stock
On May 12, 2000, the Company entered into an Agreement and Plan of Merger
with Medical Engineering Resources, Ltd., the shareholders of Medical
Engineering Resources, Ltd. and MER Acquisition Corporation, a wholly-owned
subsidiary of Registrant. Medical Engineering Resources, Ltd. merged into MER
Acquisition Corporation and the shareholders of Medical Engineering Resources,
Ltd. received an aggregate of 26,456 shares of Class A-3 5% Convertible
Preferred Stock as partial merger consideration in an aggregate of $500,000 (see
Note 2).
Series A-4 5% convertible preferred stock
On May 31, 2000 the Company entered into subscription agreements with
certain accredited investors for the issuance of an aggregate of 3,437,500
shares of Class A-4 5% Convertible Preferred Stock for an aggregate purchase
price of $55,000,000.
In the third quarter of 2000, the Company determined that the cumulative
dividends on the Series A Convertible Preferred Stock will be paid. Accordingly,
a dividend of $2.0 million was accrued at September 30, 2000 and is reflected in
other current liabilities on the Consolidated Balance Sheet.
Series AA convertible preferred stock
On May 31, 2000, the Company entered into a Securities Purchase Agreement
with certain investors for the issuance of an aggregate of 515,882 shares of
Class AA Convertible Preferred Stock in connection with the issuance of the
senior and senior subordinated notes. No separate consideration was received.
The series AA Preferred Stock has been valued at $6.8 million and the senior and
subordinated notes have been discounted for the amount attributed to the stock.
Shareholder's Agreement -- The Company has entered into a shareholders'
agreement with each holder of common and preferred stock. The agreement
prohibits the sale, assignment, transfer, pledge, hypothecate, mortgage,
encumbrance or other form of disposal except for as provided in the agreement.
Other than for permitted transfers, the Company has right of first refusal to
repurchase the outstanding shares.
Stock Purchase Warrants -- On July 6, 1999, the Company entered into a
credit agreement with a bank and issued 85,000 stock purchase warrants to the
bank. The stock purchase warrants entitled the bank to purchase up to an
aggregate of 85,000 shares of the company's non-voting common stock at an
exercise price of $.01 per share. No value was recorded for the warrants because
the value was insignificant. The stock purchase warrants are exercisable
subsequent to July 6, 2005 or at any time after the repayment in full of all
principal and accrued interest evidenced by the notes issued under the credit
agreement with the bank. The warrants expire on July 1, 2009.
F-33
<PAGE> 116
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with entering into an amended credit agreement dated January
11, 2000, the Company issued warrants to acquire an additional 3,656 shares of
the Company's non-voting common stock to bring the total numbers of warrants
issued to the bank equal to 88,656. The warrants have an exercise price of $.01
per share, are fully vested, and expire in January 2010. The value assigned to
the incremental warrants, approximating $20,000, was recorded as debt discount,
which is being amortized to interest expense over the term of the amended credit
agreement. The fair value was determined using a Black-Scholes method and was
calculated using a risk free interest rate of 5.3%, no volatility and a term of
6 years.
The warrants were sold to existing shareholders in connection with the
acquisition of UTI Pennsylvania (see Note 2).
Initial public offering:
In December 2000, the Company filed a registration on Form S-1 with the
U.S. Securities and Exchange Commission in connection with an initial public
offering of common stock of the Company. The completion of this offering is
subject to certain conditions. If successful, the estimated net proceeds of this
offering of approximately $91.3 million will be used by the Company to repay its
indebtedness under the term loans issued in May, 2000 and the remainder will be
used to reduce the revolving credit facility. The Company will record an
after-tax charge on repayment of the indebtedness amounting to approximately
$1.1 million for the write-off of unamortized deferred financing costs. The
charge will be recorded as an extraordinary loss.
The assumptions underlying the offering are subject to change when the
initial offering price, gross proceeds and closing date are finalized.
In connection with offering, all outstanding shares of Class A and Class B
Convertible Preferred Stock will be exchanged for Voting Common Stock on a one
for one basis. In addition, the Company will establish and merge into a new
Company in Maryland, with this new company being the surviving corporation. The
Company will then change its name to UTI Corporation prior to the closing of the
offering.
14. REDEEMABLE PREFERRED STOCK
Series B-1 redeemable and convertible preferred stock
Series B-1 convertible preferred stock (Series B-1) has a liquidation value
equal to $.10 per share, is subordinate to all classes of A Convertible
Preferred Stock, and is not entitled to receive dividends. The holders of Series
B-1 are entitled to participate, on an as converted basis, with the holders of
the Company's common stock as to any dividends declared and paid on common
stock. Series B-1 is convertible into voting common stock based on a conversion
formula, as defined; however, all Series B-1 shares will be redeemed by the
Company at liquidation value, if no previously converted into the Company's
voting common stock, on July 1, 2004. The Company may at any time require the
conversion of all of the outstanding Series B-1 shares upon the closing of a
firmly underwritten public offering of the Company's common stock.
Series B-2 redeemable and convertible preferred stock
On May 31, 2000, UTI Acquisition Corp., a wholly-owned subsidiary of the
Company, entered into a Share Purchase Agreement with UTI Pennsylvania and the
shareholders of UTI Pennsylvania, whereby upon the closing thereunder on June 1,
2000 certain shareholders of UTI Pennsylvania received an aggregate of 100,000
shares of Class B-1 Convertible Preferred Stock for an aggregate price of
$10,000.
F-34
<PAGE> 117
MDMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUBSEQUENT EVENTS
Acquisition
On December 22, 2000 the Company acquired all of the capital stock of
American Technical Molding, Inc. (ATM) located in Upland, California for
approximately $27.0 million including transaction costs of approximately $1.5
million. The purchase price was paid in cash of $24.5 million and 157,884 shares
of Class A-5 5% Convertible Preferred Stock. ATM and its affiliate Kelley,
Morrison, Kelley Partners provide a custom plastic injection molding
specializing in medical, high precision, tight tolerance and clean molding. The
share purchase agreement also provides for certain earnout provisions during
2001 which could increase the sales price by an additional $3.0 million. The
acquisition was funded with proceeds from the revolving line of credit of $14.3
million and from the issuance of 638,991 shares of Class A-5 5% Convertible
Preferred Stock valued at $10.2 million. In connection with the acquisition, ATM
selling shareholders received 157,884 shares of the Company's Class A-5 5%
Convertible Preferred Stock valued at $2.5 million. Additionally, 32,200 options
to acquire our Common Stock were issued in connection with the ATM acquisition,
at an exercise price of $17.60.
F-35
<PAGE> 118
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Medical Device Manufacturing, Inc.
(d/b/a Rivo Technologies)
Arvada, Colorado
We have audited the accompanying consolidated balance sheet of Medical
Device Manufacturing, Inc. (d/b/a Rivo Technologies) as of December 31, 1999,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the period from July 2, 1999 (date of inception) through December
31, 1999. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Medical Device Manufacturing,
Inc. (d/b/a Rivo Technologies) as of December 31, 1999, and the results of its
operations and its cash flows for the period then ended, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company reclassified its Class B-1 redeemable preferred stock from stockholders'
equity in anticipation of an initial public offering.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 20, 2000, except for Note 1, as to which the date is December 22, 2000
F-36
<PAGE> 119
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 844,705
Receivables --
Trade, net of allowance for doubtful accounts of
$95,000............................................... 1,319,342
Other.................................................. 35,744
Inventories (note 3)...................................... 1,215,299
Prepaid expenses and other................................ 87,182
Income taxes receivable................................... 149,959
Deferred income taxes..................................... 72,735
-----------
Total current assets.............................. 3,724,966
Property and equipment, net (note 4)........................ 1,521,699
Deferred financing costs, net of accumulated amortization of
$30,208................................................... 335,886
Goodwill, net of accumulated amortization of $492,781....... 19,279,082
Non-competition agreements, net of accumulated amortization
of $20,000................................................ 180,000
Deferred acquisition costs (note 1)......................... 123,306
-----------
$25,164,939
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 220,976
Accrued payroll and related taxes......................... 123,064
Accrued expenses.......................................... 476,878
Purchase price consideration due to related parties (note
2)..................................................... 1,793,469
Current portion of long-term debt (note 5)................ 1,587,500
-----------
Total current liabilities......................... 4,201,887
Note payable and long-term debt (note 5).................... 14,528,125
Deferred income taxes....................................... 57,217
-----------
Total liabilities................................. 18,787,229
-----------
Commitments and contingencies (note 6)
Redeemable preferred stock................................ 30,000
-----------
Stockholders' equity (note 7):
Capital stock --
Class A-1 5% convertible preferred stock, par value
$.01 per share, 841,030 shares authorized and 831,809
shares issued and outstanding (liquidation preference
of $9,100,000)........................................ 8,318
Voting common stock, par value $.01 per share, 150,000
shares authorized, issued and outstanding............. 1,500
Non-voting common stock, par value $.01 per share,
85,000 shares authorized and no shares outstanding.... --
Additional paid-in capital............................. 6,228,511
Retained earnings...................................... 109,381
-----------
Total stockholders' equity........................ 6,347,710
-----------
$25,164,939
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 120
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JULY 2, 1999 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<S> <C>
Net sales................................................... $5,738,853
Cost of sales............................................... 3,140,635
----------
Gross profit................................................ 2,598,218
Selling, general and administrative expenses................ 1,351,394
----------
Income from operations...................................... 1,246,824
----------
Other income (expense):
Interest expense.......................................... (804,382)
Other..................................................... 23,062
----------
Total other expense......................................... (781,320)
----------
Income before income taxes.................................. 465,504
Income tax expense (Note 8)................................. 356,123
----------
Net income........................................ $ 109,381
==========
Basic net income per share.................................. $ .11
==========
Diluted net income per share................................ $ .10
==========
Shares used in calculating basic net income per share....... 1,018,372
==========
Shares used in calculating diluted net income per share..... 1,103,294
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 121
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM JULY 2, 1999 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED
STOCK COMMON STOCK
---------------- ----------------------------------
CLASS A-1 VOTING NON-VOTING ADDITIONAL
---------------- ---------------- --------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------- ------ ------- ------ ------ ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization....................... 484,460 $4,845 150,000 $1,500 -- $-- $5,291,103 $ --
Issuance of capital stock --
Star Guide acquisition (note 2)............ 347,349 3,473 -- -- -- -- 937,408 --
Net income................................... -- -- -- -- -- -- -- 109,381
------- ------ ------- ------ -- --- ---------- --------
Balance, December 31, 1999................... 831,809 $8,318 150,000 $1,500 -- $-- $6,228,511 $109,381
======= ====== ======= ====== == === ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE> 122
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JULY 2, 1999 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income.................................................. $ 109,381
Adjustments to reconcile net income to net cash flows from
operating activities --
Depreciation and amortization............................. 663,011
Gain on disposition of property and equipment............. (652)
Deferred income taxes..................................... 16,082
Changes in operating assets and liabilities --
Receivables............................................ 67,716
Inventories............................................ 125,429
Prepaid expenses and other............................. (34,833)
------------
Income taxes receivable................................ (149,959)
------------
Accounts payable and accrued expenses.................. 296,303
------------
Net cash provided by operating activities................... 1,092,478
------------
Cash flows from investing activities:
Capital expenditures........................................ (264,578)
Acquisition of Star Guide, net of $413,522 in cash acquired
(note 2).................................................. (21,032,962)
Other noncurrent assets..................................... (123,306)
------------
Net cash used in investing activities....................... (21,420,846)
------------
Cash flows from financing activities:
Indebtedness --
Borrowings (including deferred financing costs)........... 16,242,982
Repayments................................................ (377,357)
Proceeds from issuance of capital stock..................... 5,307,448
------------
Net cash provided by financing activities................... 21,173,073
Net increase in cash and cash equivalents................... 844,705
Cash and cash equivalents -- July 2, 1999 (date of
inception)................................................ --
------------
Cash and cash equivalents, end of period.................... $ 844,705
============
Supplemental disclosure, including non-cash investing and
financing transactions....................................
Cash paid for interest...................................... $ 647,659
Cash paid for income taxes.................................. 490,000
Capital stock issued for the acquisition of Star Guide
Corporation, net of basis reduction ($2,609,118) and note
payable ($250,000) issued to a Star Guide Corporation
selling stockholder (note 2).............................. 960,881
Purchase price earnout accrued (note 2)................ 1,793,469
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE> 123
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JULY 2, 1999 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1999
1. SUMMARY OF ACCOUNTING POLICIES:
Nature of the organization
Medical Device Manufacturing, Inc. (d/b/a Rivo Technologies), a Colorado
corporation (MDM) was formed on July 2, 1999 and is principally a holding
company with operations conducted through its wholly-owned subsidiary, Star
Guide Corporation (Star Guide). MDM and Star Guide (collectively referred to as
the Company) is headquartered in Arvada, Colorado and at December 31, 1999 its
principal shareholders include KRG Capital Partners, LLC and certain Star Guide
selling shareholders (see Note 2). The Company manufactures precision wire parts
used primarily in medical devices.
Principles of consolidation
The consolidated financial statements include the MDM's and Star Guide's
accounts. All significant intercompany transactions and balances have been
eliminated in consolidation.
Earnings per share
Basic earnings per share ("EPS") is computed using the weighted average
number of common shares outstanding for the period while diluted EPS is computed
assuming exercise of all warrants. Included below is a reconciliation of shares
for the basic and diluted EPS computations.
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Basic EPS Shares.......................................... 1,018,372
Effect of Dilutive Securities............................. 84,922
---------
Diluted EPS Shares........................................ 1,103,294
</TABLE>
There is no difference between basic and diluted EPS regarding the amount
of income (loss) used for the computations. The effect of dilutive securities in
fiscal 1999 is comprised of warrants.
Revenue recognition
Revenue is recognized upon shipment of products, when title passes to the
customer. The Company sells its products in North America, Europe and the Far
East. Foreign sales represented approximately 33.5 percent of the Company's
sales for the period ended December 31, 1999. Corresponding foreign receivables
represented approximately 31.0 percent of the Company's trade receivables at
December 31, 1999. All foreign sales are billed and paid in U.S. currency.
Research and development
Costs incurred in connection with research and development activities are
expensed as incurred.
Fair value of financial instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities and the current
portion of long-term obligations. The carrying amounts of these financial
instruments approximate fair value due to their short maturities. The carrying
value of long-term obligations is considered to be equal to their fair value due
to the rates being variable rates equivalent to market rates for the relative
risks of the debt.
F-41
<PAGE> 124
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and cash equivalents
For purposes of the statement of cash flows, cash and cash equivalents
include cash and all highly liquid instruments with original maturities of three
months or less.
Inventories
Inventories are value at the lower of cost, determined on a first-in,
first-out method, or market and include the cost of materials, labor and
manufacturing overhead.
Property and equipment
Property and equipment are recorded at cost. Maintenance, repairs and minor
renewals are expensed as incurred. Expenditures, which significantly increase
value or extend useful lives are capitalized and replaced properties are
retired.
Depreciation for financial reporting purposes is calculated using the
straight-line method over the shorter of the estimated useful lives or the lease
term of the respective assets, as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment..................................... 7
Office furniture and equipment.............................. 5-7
Vehicles.................................................... 5
Software.................................................... 3
</TABLE>
Depreciation for income tax purposes is calculated using accelerated
methods. Upon retirement or disposition of assets, cost and accumulated
depreciation are removed from the related accounts any gain or loss is included
in income.
Intangible assets
In connection with the issuance of bank debt as well as in connection with
the acquisition of Star Guide (Note 2), the Company recorded certain intangible
assets. The following schedule summarizes the amortization periods and
amortization expense recorded for the period ended December 31, 1999:
<TABLE>
<CAPTION>
USEFUL AMORTIZATION
LIFE EXPENSE
------ ------------
<S> <C> <C>
Amortization of:
Deferred financing costs.................................... 5 years $ 30,208
Goodwill.................................................... 20 years 492,781
Non-competition agreements.................................. 5 years 20,000
--------
$542,989
========
</TABLE>
Deferred acquisition costs
The Company capitalizes and defers direct and incremental costs associated
with proposed business combinations, primarily consisting of fees paid to
outside legal and accounting advisors and incremental internal costs, related to
due diligence performed on the target companies. Upon the successful closure of
an acquisition, the Company includes capitalized costs as part of the overall
purchase price. Deferred acquisition costs where the Company has determined that
it is unlikely that the business combination will be completed are written off
when such determination is made.
F-42
<PAGE> 125
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability is based on estimated undiscounted future net cash
flows from the use and ultimate disposition of the asset. The Company recorded
no adjustment for impairment of long-lived assets for the period ended December
31, 1999.
Income taxes
The Company accounts for income taxes in accordance with the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes," which requires an asset and
liability approach to financial accounting and reporting for income taxes.
Deferred income tax assets and liabilities are computed for differences between
the financial statement basis and the income tax basis of assets and liabilities
that will result in taxable or deductible amounts in the future. Such deferred
income tax computations are based on enacted laws and rates applicable to the
years in which the differences are expected to affect taxable income.
Redeemable preferred stock
The Company accounts for Series B-1 redeemable and convertible stock in
accordance with Regulation S-X, Rule 5-02 issued by the Securities and Exchange
Commission (Note 7).
Accounting estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 the reported amounts of revenues and expenses
during the reporting period. Significant estimates included in the accompanying
consolidated financial statements relate to reserves for surplus and obsolete
inventories, uncollectible accounts receivable and estimated useful lives for
intangible assets. Actual results could differ significantly from those
estimates.
Comprehensive income
For the period presented, the Company's comprehensive income as defined by
SFAS No. 130, "Reporting Comprehensive Income," is equal to its net income.
Stock-based compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its stock-based compensation plan (Note 7).
New accounting pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The accounting
provisions for qualifying hedges allow gains and losses recognized related to a
hedged item in the income statement to be offset by related derivative's gain
and losses and requires the Company to formally document, designate, and assess
the effectiveness of transactions that qualify for
F-43
<PAGE> 126
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hedge accounting. The Company is not required to adopt this statement until
January 1, 2001. The Company has not determined its method or timing of adopting
this statement or the impact on its financial statements. However, when adopted
this statement could increase volatility in reported earnings and other
comprehensive income of the Company.
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements,"
providing guidance with respect to revenue recognition issues and disclosures.
As amended by SAB 101B, the Company is not required to implement SAB 101 until
the fourth quarter of Calendar 2000. The Company believes that the
implementation of SAB 101 will not have a significant impact on its financial
statements.
2. ACQUISITION OF STAR GUIDE CORPORATION:
On July 6, 1999, the Company acquired all of the outstanding capital stock
of Star Guide Corporation located in Arvada, Colorado for approximately
$26,867,000 including transaction and deferred financing costs of approximately
$808,500 and additional purchase price consideration related to Star Guide's
1999 results equal to $1,793,469. The acquisition was funded with existing cash,
bank debt, and the issuance of 347,349 shares of class A-1 convertible preferred
stock valued at $3,800,000 and 200,000 shares of class B-1 convertible preferred
stock valued at $20,000. The purchase price consideration is subject to the
issuance of an additional 36,563 shares of class A-1 convertible preferred stock
valued at $400,000 as of the date of the acquisition if specified earnings are
met by Star Guide for the twelve months ended December 31, 2000, calculated
without giving consideration to purchase accounting adjustments pushed-down to
Star Guide.
Certain members of Star Guide's executive management assumed management
level positions in the Company. As of the acquisition date, the aggregate
ownership in the Company by these members of management exceeded 20 percent.
Accordingly, the Company has recorded the issuance of Class A-1 convertible
preferred stock at the applicable Star Guide carryover basis pursuant to
Emerging Issues Task Force Issue No. 88-16, "Basis in Leveraged Buyout
Transactions."
The acquisition was accounted for using the purchase method of accounting
and, accordingly, Star Guide's operating results are reflected in the
accompanying financial statements since the date of the acquisition, which
approximates the Company's date of inception. Accordingly, pro forma results of
operations from the Company's date of inception are not presented. The purchase
price, including related transaction costs and adjusted for the carryover basis
reduction equal to $2,609,118, has been allocated to assets acquired and
liabilities assumed based on fair market values at the date of acquisition. The
fair value of assets acquired and liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
FINANCIAL STATEMENT CATEGORY
Current assets......................................... $ 3,485,558
Property and equipment................................. 1,377,143
Goodwill............................................... 19,771,863
Other intangible assets................................ 566,421
Liabilities............................................ (942,604)
-----------
$24,258,381
===========
</TABLE>
F-44
<PAGE> 127
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES:
Inventories consist of the following at December 31, 1999:
<TABLE>
<S> <C>
Raw materials........................................... $ 641,744
Work-in-process and manufactured parts.................. 673,555
----------
1,315,299
Reserve for surplus and obsolete inventories............ (100,000)
----------
$1,215,299
==========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31, 1999:
<TABLE>
<S> <C>
Machinery and equipment................................. $1,480,975
Office, furniture, equipment and software............... 149,417
Vehicles................................................ 11,329
----------
1,641,721
Less accumulated depreciation........................... (120,022)
----------
$1,521,699
==========
</TABLE>
5. NOTE PAYABLE AND LONG-TERM DEBT:
Note payable and long-term debt consist of the following as of December 31,
1999:
<TABLE>
<CAPTION>
INTEREST RATE AT
DECEMBER 31,
1999
----------------
<S> <C> <C>
Note payable -- related party (Note 2).................... 6.0% $ 250,000
Long-term debt:
Revolving credit facility with a bank................... 9.8% --
Term Loan A with a bank................................. 9.6% 10,365,625
Term Loan B with a bank................................. 11.6% 5,500,000
-----------
16,115,625
Less current maturities................................... (1,587,500)
-----------
Long-term debt............................................ $14,528,125
===========
</TABLE>
The note payable to a related party was entered into in connection with the
acquisition of Star Guide and principal and accrued interest thereon was paid in
full in January 2000.
On July 6, 1999, the Company entered into a credit agreement with a bank
providing for aggregate maximum borrowings equal to $25,000,000 (Credit
Agreement). The Credit Agreement includes Term Loan A with an original principal
equal to $10,700,000, Term Loan B with an original principal equal to $5,500,000
and a revolving credit facility to fund the Company's working capital, capital
expenditure and acquisition requirements. Interest is payable monthly and
accrues at LIBOR plus 3.75 percent on Term Loan A, LIBOR plus 5.75 percent on
Term Loan B, LIBOR plus 3.50 percent on working capital and capital expenditure
borrowings and LIBOR plus 3.75 percent on acquisition borrowings.
The Credit Agreement matures on June 30, 2005. Term Loan A has mandatory
quarterly principal payments. Outstanding borrowings on Term Loan B and the
revolving credit facility are payable in full on
F-45
<PAGE> 128
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 2005 subject to mandatory incremental payments during the term of the
Credit Agreement, as defined, and are collateralized by substantially all of the
Company's assets. The Credit Agreement prohibits the payment of dividends,
limits additional indebtedness and transactions with related parties, requires
the maintenance of certain financial ratios and contains other covenants
customary in transactions of this type. At December 31, 1999, the Company had
approximately $1,368,412 of unused borrowing availability under the Credit
Agreement and the Company was in compliance with all covenants.
Aggregate annual maturities for notes payable and long-term debt
obligations subsequent to December 31, 1999 is as follows:
<TABLE>
<S> <C>
2000................................................... $ 1,587,500
2001................................................... 1,404,375
2002................................................... 1,671,875
2003................................................... 1,939,375
2004................................................... 2,206,875
2005................................................... 7,305,625
-----------
$16,115,625
===========
</TABLE>
The Credit Agreement was amended in January 2000 to increase maximum
borrowings to $40,000,000 in connection with the acquisition of Noble-Met, Ltd.
(see Note 12).
6. COMMITMENTS, CONTINGENCIES AND RELATED-PARTY TRANSACTIONS:
The Company's 401(k) plan is available for all employees who have been
employed by the Company for a period of one year with a minimum of 1,000 hours
worked. An employee may contribute up to 10 percent of gross salary to the
401(k) plan. The Company's Board of Directors determines annually what
contribution, if any, the Company shall make to the 401(k) plan. The employees'
contributions vest immediately, while the Company's contributions vest over a
six-year period. The Company matched 25 percent of the employees' contributions
to this plan for the period ended December 31, 1999 and the Company's
contributions for matching totaled approximately $21,173 for the period ended
December 31, 1999.
The Company's profit sharing plan is available for all employees who have
been employed by the Company for a period of one year with a minimum of 1,000
hours worked. The Company's Board of Directors determines annually what
contribution, if any, the Company shall make to the profit sharing plan. The
Company's contributions vest over a six-year period. The Company contributed
$120,000 to this plan for the period ended December 31, 1999.
In addition to operating leases entered into for office and manufacturing
equipment, the Company leases "Star Guide" office and manufacturing facility
from certain of its stockholders. The lease requires payments that were
established at prevailing market rates at the inception of the lease. Most of
the leases contain purchase and/or various term renewal options at fair market
and fair rental values, respectively. In most cases management expects that, in
the normal course of business, leases will be renewed or replaced
F-46
<PAGE> 129
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by other leases. At December 31, 1999, future minimum payments under
noncancellable operating leases having an initial or remaining term in excess of
one year were as follows:
<TABLE>
<S> <C>
2000..................................................... $ 300,000
2001..................................................... 300,000
2002..................................................... 300,000
2003..................................................... 300,000
2004..................................................... 300,000
2005 and thereafter...................................... 750,000
----------
$2,250,000
==========
</TABLE>
Lease expense for the period ended December 31, 1999 was $145,968.
7. STOCKHOLDERS' EQUITY:
The Company's Board of Directors has authorized an aggregate number of
common shares of issuance equal to 30 million, $.01 par value per share and 20
million shares of preferred stock, $.01 par value per share. As of December 31,
1999, the Company's Board of Directors limited the issuance of voting and
non-voting convertible common stock to 150,000 shares and 85,000 shares,
respectively.
Common stock
Common stock is divided into two classes, voting and nonvoting convertible.
The nonvoting convertible common stock is convertible one for one into voting
common stock at the option of the holder. The common stock, whether voting or
nonvoting, is subject to all of the rights, privileges, preference and
priorities of the Company's preferred stock.
Series A-1 5 percent convertible preferred stock
Series A-1 convertible preferred stock (Series A-1) has a liquidation value
equal to the original per share issue price of $10.94 and the holders are
entitled to receive cumulative dividends at the rate of 5 percent of liquidation
value in preference to the payment of dividends to the "Company" common
stockholders, as, and if declared by the Board of Directors. The holders of
Series A-1 are entitled to vote on all matters submitted to the stockholders for
a vote together with the holders of the Company's voting common stock and the
Class B-1 convertible preferred stock. Holders of Series A-1 may convert all or
any portion of the shares held into one share of voting common stock per each
share of Series A-1 held. The Company may at any time require the conversion of
all of the outstanding Series A-1 shares upon the closing of a firmly
underwritten public offering of the Company's common stock. Series A-1 shares
are not redeemable at the holders' option. The carrying value of Series A-1
differs from its original issuance value by $2,609,118 due to valuing certain
shares issued to the selling Star Guide stockholders at their carryover basis
(see Note 2). There were no dividends declared by the Company's Board of
Directors during the period ended December 31, 1999.
Shareholders' agreement
The Company has entered into a shareholders' agreement with each holder of
common and preferred stock. The agreement prohibits the sale, assignment,
transfer, pledge, hypothecate, mortgage, encumbrance or other form of disposal
except for as provided for in the agreement. Other than for permitted transfers,
the Company has right of first refusal to repurchase the outstanding shares.
F-47
<PAGE> 130
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock purchase warrants
On July 6, 1999, the Company entered into a credit agreement with a bank
and issued 85,000 stock purchase warrants to the bank. The stock purchase
warrants entitle the bank to purchase up to an aggregate of 85,000 shares of the
Company's nonvoting common stock at an exercise price equal to $.01 per share.
No value was recorded for the warrants because the value was insignificant. The
stock purchase warrants are exercisable subsequent to July 6, 2005 or at any
time after the repayment in full of all principal and accrued interest evidenced
by the notes issued under the credit agreement with the bank. The warrants
expire on July 1, 2009.
1999 Star Guide employee retention plan
With the acquisition of Star Guide, the Company established a stock based
plan to retain Star Guide's key employees. The plan provides for the issuance of
stock appreciation rights (SARs) with various terms. The stock based awards are
made at the Company's discretion and payment of the related benefits requires
continuous employment from the date of the award through the designated vesting
date. Certain awards become 100 percent vested one year from the date of grant
while other awards vest 20 percent on each of the first, second and third
anniversary dates from the date of grant and an additional 40 percent on the
fourth anniversary date from the date of issuance. The company records
compensation expense related to these awards based on the difference between the
exercise price and the estimated market appreciation of the underlying stock
over the related vesting period. The Company did not issue any SARs during the
period ended December 31, 1999.
8. INCOME TAXES:
The following is a summary of the income tax provision for the period ended
December 31, 1999:
<TABLE>
<S> <C>
Current expense:
Federal................................................. $308,151
State................................................... 31,890
--------
340,041
--------
Deferred expense:
Federal................................................. 14,145
State................................................... 1,937
--------
16,082
--------
Total income tax expense........................ $356,123
========
</TABLE>
Temporary differences, which give rise to the net deferred tax asset as of
December 31, 1999, are as follows:
<TABLE>
<S> <C>
Current deferred tax assets:
Accounts receivable...................................... $35,435
Inventories.............................................. 37,300
-------
Total current deferred tax assets.......................... $72,735
=======
Noncurrent deferred tax liability -- property and
equipment................................................ $57,217
=======
</TABLE>
F-48
<PAGE> 131
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the statutory federal income tax rate and the
Company's effective income tax rate for the period ended December 31 1999 is
summarized as follows:
<TABLE>
<S> <C>
Statutory federal income tax rate........................... 34.0%
State income tax, net of federal benefit.................... 3.3
Nondeductible goodwill amortization......................... 36.0
Other....................................................... 3.2
----
Effective income tax rate................................... 76.5%
====
</TABLE>
9. CONCENTRATION OF CREDIT RISKS:
Concentrations of credit risk
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company provides credit, in the normal course of business, to various commercial
enterprises. The Company does not require collateral or other security on these
accounts receivable. The Company manages exposure to credit risk through credit
approvals, credits limits and monitoring procedures. Management believes that
credit risks at December 31, 1999 have been adequately provided for in the
financial statements. For the period ended December 31, 1999, the Company had
the following three customers that individually accounted for at least 10
percent of the Company's net sales.
<TABLE>
<S> <C> <C>
A........................................................... $1,664,267 29%
B........................................................... $1,319,936 23%
C........................................................... $ 688,662 12%
</TABLE>
10. REDEEMABLE PREFERRED STOCK:
Series B-1 convertible preferred stock
Series B-1 convertible preferred stock (Series B-1) has a liquidation value
equal to $.10 per share, is subordinate to Class A-1 and any other series of
Series A preferred stock, and is not entitled to receive dividends. The holders
of Series B-1 are entitled to participate, on an as converted basis, with the
holders of the Company's common stock as to any dividends declared and paid on
common stock. Series B-1 is convertible into voting common stock based on a
conversion formula, as defined; however, all Series B-1 shares will be redeemed
by the Company at liquidation value, if not previously converted into the
Company's voting common stock, on July 1, 2004. The Company may at any time
require the conversion of all of the outstanding Series B-1 shares upon the
closing of a firmly underwritten public offering of the Company's common stock.
11. SEGMENT INFORMATION:
The Company operates as one segment, the manufacturing of precision wire
parts used primarily in medical devices.
Management evaluates the segment based on operating income, defined as
gross margin less selling, general and administrative expenses. The accounting
policies for segment reporting are the same as those described in Note 1 of
Notes to Consolidated Financial Statements.
F-49
<PAGE> 132
MEDICAL DEVICE MANUFACTURING, INC.
d/b/a RIVO TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents net revenues by country based on the location
of the customer for the period ended December 31, 1999:
<TABLE>
<S> <C>
Operations by geographic area
Net sales
United States......................................... $3,537,091
Ireland............................................... 1,480,407
France................................................ 311,405
Netherlands........................................... 222,016
All other............................................. 187,934
----------
Total......................................... $5,738,853
==========
</TABLE>
12. SUBSEQUENT EVENTS:
On January 11, 2000, the Company amended its credit agreement with a bank
to increase its borrowing availability to $40,000,000. The amended credit
agreement includes Term Loan A with an original principal equal to $26,000,000,
Term Loan B with an original principal equal to $10,000,000 and a $4,000,000
(subject to borrowing base limitations) revolving credit facility to fund the
Company's working capital, capital expenditure and acquisition requirements.
Interest is payable monthly and accrues at LIBOR plus 3.75 percent on Term Loan
A, LIBOR plus 5.00 percent on Term Loan B, LIBOR plus 3.25 percent on working
capital and capital expenditure borrowings and LIBOR plus 3.75 percent on
acquisition borrowings. The Company borrowed an additional $17,659,000 under the
amended credit agreement.
The amended credit agreement matures on January 10, 2006. Term Loan A has
mandatory quarterly principal payments. Outstanding borrowings on Term Loan B
and the revolving credit facility are payable in full on January 10, 2006,
subject to mandatory incremental payments during the term of the credit
agreement, as defined, and are collateralized by substantially all of the
Company's assets. The amended credit agreement prohibits the payment of
dividends, limits additional indebtedness and transactions with related parties,
requires the maintenance of certain financial ratios and contains other
covenants customary in transactions of this type.
In connection with entering into the amended credit agreement, the Company
issued warrants to acquire additional 3,656 shares of the company's nonvoting
common stock to bring the total number of warrants issued to the bank equal to
88,656. The warrants have an exercise price of $.01 per share, are fully vested
and expire in January 2010. The value assigned to the incremental warrants,
approximating $20,000, was recorded as debt discount, which is being amortized
to interest expense over the term of the amended credit agreement. The fair
value was determined using a Black-Scholes model and was calculated using a risk
free interest rate of 5.3 percent, no volatility and a term of 6 years.
On January 11, 2000, the Company acquired all of the outstanding capital
stock of Noble-Met Ltd., a manufacturer of specialty wire and tubular products
used in the biomedical and electrical industries located in Salem, Virginia. The
Company paid approximately $25,000,000 for the acquisition, including issuance
of Series A-1 convertible preferred stock valued at $3,500,000 and assumed
$5,600,000 in debt. The purchase agreement provides for an adjustment based on
Noble-Met Ltd.'s audited 1999 results and management has estimated additional
consideration related to this calculation, as defined, approximately $2,533,000.
In addition, the purchase agreement includes certain earnout provisions during
calendar years 2000 and 2001 which could result in additional consideration of
$21,000,000, if certain performance thresholds are attained. Noble-Met Ltd. has
total assets of approximately $11,100,000 and its net sales for calendar 1999
approximated $13.1 million. The acquisition will be accounted for using the
purchase method of accounting.
F-50
<PAGE> 133
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
G&D, Inc., d/b/a Star Guide Corporation
Arvada, Colorado
We have audited the accompanying balance sheets of G&D, Inc., d/b/a Star
Guide Corporation as of December 31, 1998 and 1997, and the related statements
of earnings and retained earnings and of cash flows for the years then ended.
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, such financial statements present fairly, in all material
respects, the financial position of G&D, Inc., d/b/a Star Guide Corporation as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
April 16, 1999
F-51
<PAGE> 134
G&D, INC.
d/b/a STAR GUIDE CORPORATION
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
ASSETS (NOTE 4)
Current assets:
Cash and equivalents........................................ $ 617,927 $1,288,674
Receivables:
Trade, (less allowance for doubtful accounts of $15,000
and $0,
respectively).......................................... 1,132,047 1,254,310
Other (note 7)............................................ 85,580 33,625
Inventories (note 2)........................................ 890,705 1,061,181
Prepaid expenses and other.................................. 8,658 10,074
---------- ----------
Total current assets.............................. 2,734,917 3,647,864
Property, plant and equipment, net (note 3)................. 6,359,439 5,951,600
Goodwill, (net of accumulated amortization of $253,900 and
$242,532)................................................. 212,215 200,848
Note receivable -- related party (note 7)................... 113,940 91,152
Other assets................................................ 55,915 59,785
---------- ----------
Total............................................. $9,476,426 $9,951,249
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payables:
Trade..................................................... $ 286,949 $ 182,663
Other..................................................... 111,731 68,987
Distributions payable....................................... 39,781 366,421
Accrued expenses............................................ 265,474 258,883
Current portion of notes payable and long-term debt (note
4)........................................................ 317,765 150,000
---------- ----------
Total current liabilities......................... 1,021,700 1,026,954
Notes payable and long-term debt (note 4)................... 3,231,580 2,750,000
---------- ----------
Total liabilities................................. 4,253,280 3,776,954
---------- ----------
Commitments and contingencies (note 5)
Stockholders' equity:
Common stock, no par value; 20,000,000 shares authorized,
10,000,000 shares issued and outstanding.................. 277,517 277,517
Retained earnings........................................... 4,945,629 5,896,778
---------- ----------
Total stockholders' equity........................ 5,223,146 6,174,295
---------- ----------
Total............................................. $9,476,426 $9,951,249
========== ==========
</TABLE>
See notes to financial statements.
F-52
<PAGE> 135
G&D, INC.
d/b/a STAR GUIDE CORPORATION
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Net sales................................................... $ 9,764,806 $ 9,769,049
Cost of sales............................................... 4,915,158 5,837,521
----------- -----------
Gross profit................................................ 4,849,648 3,931,528
Operating expenses:
Salaries and wages (notes 5).............................. 357,939 433,492
Benefits.................................................. 84,153 120,915
Depreciation and amortization............................. 77,384 91,231
Selling, general and administrative expenses.............. 975,408 638,714
(Gain) loss on disposal of assets......................... 558,182 (432)
----------- -----------
Income from operations...................................... 2,796,582 2,647,608
Other income (expense):
Interest expense.......................................... (288,800) (218,811)
Other..................................................... 52,194 51,144
----------- -----------
Total other income (expense)...................... (236,606) (167,667)
----------- -----------
Net income.................................................. 2,559,976 2,479,941
----------- -----------
Retained earnings -- beginning of year...................... 4,672,366 4,945,629
Stockholders' distributions................................. (2,286,713) (1,528,792)
----------- -----------
Retained earnings -- end of year............................ $ 4,945,629 $ 5,896,778
=========== ===========
</TABLE>
See notes to financial statements.
F-53
<PAGE> 136
G&D, INC.
d/b/a STAR GUIDE CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income.................................................. $ 2,559,976 $ 2,479,941
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization............................. 755,389 761,233
Provision for losses on accounts receivable............... -- 15,000
Loss (gain) on disposal of assets......................... 558,182 (585)
Changes in assets and liabilities:
Receivables............................................... (295,629) (92,548)
Inventories............................................... (120,986) (170,476)
Prepaid expenses and other................................ 25,954 (1,416)
Other long term assets.................................... -- (9,025)
Payables.................................................. (58,041) (147,030)
Accrued expenses.......................................... (515,102) (6,591)
----------- -----------
Net cash provided by operating activities......... 2,909,743 2,828,503
----------- -----------
Cash flows from investing activities:
Capital expenditures...................................... (3,294,645) (336,284)
Repayment of note receivable-related party................ 22,789 30,025
----------- -----------
Net cash used in investing activities............. (3,271,856) (306,259)
Cash flows from financing activities:
Stockholders' distributions............................... (2,286,713) (1,202,152)
Borrowings under line of credit........................... 725,000 --
Repayments of notes payable, long-term debt and line of
credit................................................. (1,116,303) (649,345)
----------- -----------
Net cash used in financing activities............. (2,678,016) (1,851,497)
Net increase (decrease) in cash and cash equivalents........ $(3,040,129) $ 670,747
Cash and cash equivalents -- beginning of year.............. 3,658,056 617,927
----------- -----------
Cash and cash equivalents -- end of year.................... $ 617,927 $ 1,288,674
=========== ===========
Supplemental cash flow information:
Cash paid during the year:
Interest............................................... $ 274,312 $ 226,148
=========== ===========
</TABLE>
See notes to financial statements.
F-54
<PAGE> 137
G&D, INC.
d/b/a STAR GUIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998
1. SUMMARY OF ACCOUNTING POLICIES
Nature of the Organization -- Star Guide Corporation (the Company), a
Colorado corporation, was formed in 1967. The Company manufactures precision
wire parts used primarily in medical devices.
Revenue Recognition -- Revenue is recognized upon shipment of products,
when title passes to the customer. The company sells its products in North
America, Europe and the Far East. Foreign sales represented approximately 28%
and 32% of the Company's sales in 1998 and 1997, respectively. Corresponding
foreign receivables represented approximately 40% and 30% of the Company's trade
receivables at December 31, 1998 and 1997, respectively. All foreign sales are
billed and paid in U.S. currency.
Cash and Cash Equivalents -- For purposes of the statements of cash flows,
cash and cash equivalents include cash and all highly liquid instruments with
maturities of three months or less at the time of purchase.
Inventories -- Inventories are stated at the lower of cost, determined on a
first-in, first-out method, or market.
Property, Plant and Equipment -- Property, plant and equipment is stated at
cost and depreciated over estimated useful lives using accelerated and
straight-line methods. Maintenance and repairs are expensed as incurred.
Expenditures, which significantly increase value or extend useful lives are
capitalized.
Goodwill -- Goodwill is related to the original purchase of the Company.
Excess acquisition cost of the Company over the fair market value of the
underlying net tangible assets is being amortized by the straight-line method
over 40 years.
Income Taxes -- The Company is organized as a Subchapter S Corporation.
Accordingly, any income tax liability is the responsibility of the individual
stockholders, and no provision for income taxes has been made in the Company's
financial statements.
Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principle 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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates.
Impairment of Long Lived Assets -- Long lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable based on future net cash
flows from the use and ultimate disposition of the asset. As of December 31,
1998 the Company has not recognized any impairment losses.
Comprehensive Income -- For the periods presented, the Company's
comprehensive income as defined by SFAS No. 130, "Reporting Comprehensive
Income," is equal to its Net Income.
New Accounting Pronouncement -- In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that all derivative
instruments (including certain derivative instruments embedded in other
contracts) to be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The accounting provisions for qualifying
hedges allow gains and losses recognized related to a hedged item in the income
statement to be offset by related derivative's gain and losses, and requires the
Company to formally document, designate, and assess the
F-55
<PAGE> 138
G&D, INC.
d/b/a STAR GUIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
effectiveness of transactions that qualify for hedge accounting. The Company is
not required to adopt this statement until January 1, 2001. The Company has not
determined its method or timing of adopting this statement or the impact on its
financial statements. However, when adopted this statement could increase
volatility in reported earnings and other comprehensive income of the Company.
Reclassifications -- Certain prior year amounts reported in the
accompanying financial statements have been reclassified to conform with the
year ended December 31, 1998 presentation.
2. INVENTORIES
Inventories consist of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Raw materials............................................... $456,609 $ 502,299
Work in process and manufactured parts...................... 434,096 558,882
-------- ----------
Total............................................. $890,705 $1,061,181
======== ==========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1997 and 1998:
<TABLE>
<CAPTION>
USEFUL LIFE 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Land........................................... $ 447,706 $ 447,706
Building and improvements...................... 5-40 years 4,035,352 4,070,519
Machinery and equipment........................ 7 years 3,408,266 3,611,883
Office furniture and equipment and software.... 3-7 years 322,184 386,231
Vehicles....................................... 5 years 121,937 151,987
----------- -----------
Subtotal..................................... 8,335,445 8,668,326
Less accumulated depreciation.................. (1,976,006) (2,716,726)
----------- -----------
Total................................ $ 6,359,439 $ 5,951,600
=========== ===========
</TABLE>
4. LONG-TERM DEBT AND LINE OF CREDIT
In November 1996, the Company entered into a $3,500,000 financing agreement
with Jefferson County (the County) and a bank for the construction of a new
manufacturing and administrative facility located in Arvada, Colorado. The
County issued a Jefferson County, Colorado Industrial Development Revenue Bond
(Star Guide Corporation Project) Series 1996 to the bank on the behalf of the
Company. The bank provided the proceeds of the financing to the Company and the
Company makes principal and interest payments on this bond directly to the bank.
The interest rate associated with this debt varies between 5.5% and 7.25%, the
outstanding principal is $2,900,000 and $3,250,000 at December 31, 1998 and
1997, respectively, and the debt is collateralized by all of the Company's
assets.
As of December 31, 1997 and 1998, the Company has notes payable outstanding
of $299,345 and $0, respectively, with and average interest rate of 8.27%.
F-56
<PAGE> 139
G&D, INC.
d/b/a STAR GUIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate annual maturities of long-term debt for years subsequent to
December 31, 1998 are as follow:
<TABLE>
<S> <C>
1999..................................................... $ 150,000
2000..................................................... 200,000
2001..................................................... 200,000
2002..................................................... 200,000
2003..................................................... 250,000
Thereafter............................................... 1,900,000
----------
$2,900,000
==========
</TABLE>
The Company had a revolving line of credit with a bank, which expired March
16, 1998. The line of credit had a maximum borrowing capacity of $500,000
bearing interest at the bank's prime rate plus 1%, payable monthly. As of
December 31, 1998 and 1997, the Company had no borrowings outstanding under this
line.
5. COMMITMENTS AND CONTINGENCIES
The Company's 401(k) plan is available for all employees who have been
employed by the Company for a period of one year with a minimum of 1,000 hours
worked. An employee may contribute up to 10% of gross salary to the 401(k) plan.
The Company's Board of Directors determines annually what contribution, if any,
the Company shall make to the 401(k) plan. The employees' contributions vest
immediately, while the Company's contributions vest over a six-year period. The
Company matched 25% of the employees' contributions to this plan for each of the
years ended December 31, 1998 and 1997. The Company's contributions for matching
totaled approximately $24,600 and $19,000 for the years ended December 31, 1998
and 1997, respectively.
The Company's profit sharing plan is available for all employees who have
been employed by the Company for a period of one year with a minimum of 1,000
hours worked. The Company's Board of Directors determines annually what
contribution, if any, the Company shall make to the profit sharing plan. The
Company's contributions vest over a six-year period. The Company contributed
$120,000 to this plan for each of the years ended December 31, 1998 and 1997.
The Company is involved in various litigation matters in the normal course
of its operations. Management does not believe that the ultimate outcome of
these matters will have material adverse effect on the financial statements of
the Company.
6. STOCKHOLDERS' EQUITY
In January 1998, the Company amended its Articles of Incorporation to
increase the number of shares authorized from 500,000 to 20,000,000 of which
200,000 shares are Class A Common Stock and the remaining 19,800,000 are Class B
Non-Voting Common Stock. The two classes of stock are otherwise identical. All
103,184 previous outstanding shares of common stock were exchanged for 100,000
shares of Class A Common Stock and 9,900,000 shares of Class B Common Stock.
7. RELATED PARTY
The Company had a note receivable from a related party of $113,940 and
$136,729 as of December 31, 1998 and 1997, respectively. This note requires
annual principal payments of $22,789, plus interest at a rate of 5.75%. The
current portion of this note is included in other receivables in the balance
sheet.
F-57
<PAGE> 140
G&D, INC.
d/b/a STAR GUIDE CORPORATION
BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
----------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents........................................ $ 278,114 1,288,674
Receivables
Trade, less allowance for doubtful accounts............... 1,492,190 1,254,310
Other..................................................... 10,612 33,625
Inventories................................................. 1,340,728 1,061,181
Prepaid expenses and other.................................. 52,348 10,074
---------- ----------
Total current assets.............................. 3,173,992 3,647,864
Related party receivable.................................... 1,529 --
Property and equipment, net................................. 1,377,143 5,951,600
Goodwill, net............................................... 195,162 200,848
Note receivable-related party............................... -- 91,152
Other assets................................................ -- 59,785
---------- ----------
Total assets...................................... $4,747,826 9,951,249
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payables-trade............................................ $ 347,582 182,663
Accrued payroll and related taxes......................... 151,412 68,987
Short term borrowings-revolver.............................. 3,000,000 --
Accrued expenses and other.................................. 210,715 625,304
Current portion of notes payable and long-term debt......... -- 150,000
---------- ----------
Total current liabilities......................... 3,709,709 1,026,954
Note payable and long-term debt................... -- 2,750,000
---------- ----------
Total liabilities................................. 3,709,709 3,776,954
---------- ----------
Commitments and contingencies
Stockholders' equity:
Class A common stock, $.01 par; 200,000 shares authorized;
100,000 shares issued and outstanding.................. 1,000 1,000
Class B common stock, $.01 par; 19,800,000 shares
authorized; 9,900,000 shares issued and outstanding.... 99,000 99,000
Additional paid-in capital.................................. 518,194 177,517
Retained earnings........................................... 419,923 5,896,778
---------- ----------
Total stockholders' equity........................ 1,038,117 6,174,295
---------- ----------
Total liabilities and stockholders' equity........ $4,747,826 9,951,249
========== ==========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-58
<PAGE> 141
G&D, INC.
d/b/a STAR GUIDE CORPORATION
STATEMENTS OF OPERATIONS
SIX-MONTHS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $4,753,524 $5,817,232
Cost of sales............................................... 2,991,974 3,052,827
---------- ----------
Gross profit................................................ 1,761,550 2,764,405
Selling, general and administrative expenses................ 454,330 1,119,693
---------- ----------
Income from operations...................................... 1,307,220 1,644,712
Other income (expense):
Interest expense.......................................... (124,952) (106,580)
Other..................................................... 17,605 (35,685)
---------- ----------
Total other expense............................... (107,347) (142,265)
---------- ----------
Income before income tax.................................... 1,199,873 1,502,447
Income tax expense.......................................... -- --
---------- ----------
Net income.................................................. $1,199,873 $1,502,447
========== ==========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-59
<PAGE> 142
G&D, INC.
d/b/a STAR GUIDE CORPORATION
STATEMENTS OF CASH FLOWS
SIX-MONTHS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,199,873 $ 1,502,447
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization.......................... 371,316 317,583
Loss (gain) on disposal of assets...................... -- 30,077
Write-off of deferred financing costs.................. -- 46,947
Stock-based compensation expense....................... -- 340,677
Changes in assets and liabilities:
Receivables............................................ (23,757) (237,880)
Inventories............................................ (83,852) (279,547)
Prepaid expenses and other............................. 23,699 (42,049)
Payables............................................... (57,187) 247,344
Accrued expenses and other current liabilities......... 89,269 (414,585)
----------- -----------
Net cash provided by operating activities......... 1,519,361 1,511,014
----------- -----------
Cash flows from investing activities:
Capital expenditures...................................... (123,576) (64,644)
Other non-current assets.................................. -- (1,529)
Repayment of note receivable-related party................ 22,788 113,940
----------- -----------
Net cash used in investing activities............. (100,788) 47,767
Cash flows from financing activities:
Stockholders' distributions............................... (758,370) (5,569,341)
Borrowings under line of credit........................... -- 3,000,000
Repayments of notes payable, long-term debt and line of
credit................................................. (299,345) --
----------- -----------
Net cash used in financing activities............. (1,057,715) (2,569,341)
Net increase (decrease) in cash and cash equivalents........ 360,858 (1,010,560)
Cash and cash equivalents -- beginning of period............ 617,927 1,288,674
----------- -----------
Cash and cash equivalents -- end of period........ $ 978,785 $ 278,114
=========== ===========
Supplemental cash flow information:
Cash paid during the period:
Interest............................................... $ 4,137 $ 135,408
=========== ===========
Income taxes........................................... -- --
=========== ===========
Supplemental schedule of non-cash investing and financing
activities:
Distribution of land, building and equipment to
stockholders.......................................... -- 4,309,963
=========== ===========
Assumption of debt by stockholders..................... -- 2,900,000
=========== ===========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-60
<PAGE> 143
G&D, INC.
d/b/a STAR GUIDE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 AND SIX MONTH PERIOD ENDING JUNE 30, 1999
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------
CLASS A CLASS B ADDITIONAL
---------------- ------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- ------ --------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998................ 100,000 $1,000 9,900,000 $99,000 $177,517 $ 4,945,629 $ 5,223,146
Cash distributions to stockholders...... (1,528,792) (1,528,792)
Net income.............................. -- -- -- -- -- 2,479,941 2,479,941
----------- -----------
Balance, December 31, 1998.............. 100,000 1,000 9,900,000 99,000 177,517 5,896,778 6,174,295
------- ------ --------- ------- -------- ----------- -----------
Cash distribution to stockholders....... (6,979,302) (6,979,302)
Net income.............................. 1,502,447 1,502,447
Stock-based compensation................ 340,677 340,677
------- ------ --------- ------- -------- ----------- -----------
Balance, June 30, 1999.................. 100,000 $1,000 9,900,000 $99,000 $518,194 $ 419,923 $ 1,038,117
======= ====== ========= ======= ======== =========== ===========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-61
<PAGE> 144
G&D, INC.
d/b/a STAR GUIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
1. UNAUDITED FINANCIAL INFORMATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and the notes thereto included herein.
The information furnished reflects all adjustments which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods.
2. INVENTORIES
Inventories consist of the following at June 30, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
(UNAUDITED)
<S> <C> <C>
Raw materials............................................... $541,533 $ 559,738
Work in process and manufactured parts...................... 433,024 780,990
-------- ----------
Total............................................. $974,557 $1,340,728
======== ==========
</TABLE>
3. STOCKHOLDERS' EQUITY
In January 1998, the Company amended its Articles of Incorporation to
increase the number of shares authorized from 500,000 to 20,000,000 of which
200,000 shares are Class A Common Stock and the remaining 19,800,000 are Class B
Non-Voting Common Stock. The two classes of stock are otherwise identical. All
103,184 previous outstanding shares of common stock were exchanged for 100,000
shares of Class A Common Stock and 9,900,000 shares of Class B Common Stock (see
Note 1).
3. SUBSEQUENT EVENT
On July 6, 1999, the Company's stockholders sold all of the Company's
outstanding capital stock to Medical Device Manufacturing, Inc. ("MDM"), a
holding company with operations conducted through its wholly-owned subsidiary,
Star Guide Corporation. Prior to the sale of the Company to MDM, the Company was
organized as a Subchapter S Corporation. Accordingly, any income tax liability
was the responsibility of the individual stockholders, and no provision for
income taxes has been made in the Company's financial statements for the
six-month period ended June 30, 1998 and 1999.
F-62
<PAGE> 145
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Stockholders of
Noble-Met, Ltd. and Subsidiary:
We have audited the accompanying consolidated balance sheet of Noble-Met,
LTD. and subsidiary (the "Company") as of December 31, 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements taken as a whole.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 1999 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Noble-Met, Ltd. and subsidiary as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company reclassified certain shares of its common stock subject to a put option
in anticipation of an initial public offering.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 17, 2000, except for Note 1, as to which the date is December 22, 2000
F-63
<PAGE> 146
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Noble-Met, Ltd. and Subsidiary:
We have audited the accompanying consolidated balance sheet of Noble-Met,
Ltd. and Subsidiary (the "Company") as of December 31, 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 1997 and 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 audits to obtain
reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Noble-Met,
Ltd. and Subsidiary as of December 31, 1998, and the results of their operations
and their cash flows for the years ended December 31, 1997 and 1998 in
conformity with generally accepted accounting principles.
KPMG LLP
March 25, 1999
F-64
<PAGE> 147
NOBLE-MET, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 33,505 $ 55,336
Accounts receivable, less allowance for doubtful accounts
of $15,000............................................. 1,424,502 1,227,537
Inventory................................................. 3,127,286 4,812,276
Income taxes refundable................................... 8,300 --
Prepaid expenses.......................................... 28,652 47,290
---------- -----------
Total current assets.............................. 4,622,245 6,142,439
---------- -----------
Property and equipment:
Machinery and equipment................................... 4,445,796 5,769,900
Office equipment.......................................... 596,299 703,642
Vehicles.................................................. 14,442 14,442
Leasehold improvements.................................... 181,438 195,213
---------- -----------
5,237,975 6,683,197
Less accumulated amortization and depreciation.............. 1,149,759 1,737,955
---------- -----------
Property and equipment, net................................. 4,088,216 4,945,242
Deferred financing costs, net of accumulated amortization of
$1,376 and $4,378 respectively............................ 13,635 10,633
---------- -----------
Total assets...................................... $8,724,096 $11,098,314
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................ $2,411,992 $ 226,389
Line of credit............................................ -- 1,876,000
Current portion of long-term debt......................... 721,433 854,600
Accounts payable.......................................... 206,546 345,835
Income taxes payable...................................... -- 13,220
Accrued expenses.......................................... 276,560 325,570
---------- -----------
Total current liabilities......................... 3,616,531 3,641,614
Long-term debt, excluding current portion................... 2,670,967 2,248,617
---------- -----------
Total liabilities................................. 6,287,498 5,890,231
---------- -----------
Common stock subject to put option.......................... -- 212,760
---------- -----------
Stockholders' equity:
Common stock, no par value, 5,000,000 shares authorized;
issued and Outstanding 4,065,782 and 4,113,282 shares
respectively........................................... 1,000 1,000
Additional paid-in capital................................ 10,788 287,714
Retained earnings......................................... 2,424,810 4,706,609
---------- -----------
Total stockholders' equity........................ 2,436,598 4,995,323
---------- -----------
Total liabilities and stockholders' equity........ $8,724,096 $11,098,314
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-65
<PAGE> 148
NOBLE-MET, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................. $11,109,016 $13,033,149 $13,110,318
Cost of sales......................................... 5,244,766 6,809,486 7,076,628
----------- ----------- -----------
Gross profit.......................................... 5,864,250 6,223,663 6,033,690
Selling, general and administrative expenses.......... 3,277,691 3,977,718 2,377,774
----------- ----------- -----------
Income from operations................................ 2,586,559 2,245,945 3,655,916
----------- ----------- -----------
Other income (expense):
Interest expense.................................... (41,964) (193,254) (412,227)
Interest income..................................... 5,506 265 --
Other, net.......................................... 2,062 (3,247) (30,856)
----------- ----------- -----------
Other income (expense), net........................... (34,396) (196,236) (443,083)
----------- ----------- -----------
Income before income tax expense...................... 2,552,163 2,049,709 3,212,833
Income tax expense.................................... -- 22,600 30,470
----------- ----------- -----------
Net income.................................. $ 2,552,163 $ 2,027,109 $ 3,182,363
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-66
<PAGE> 149
NOBLE-MET, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996.......... 4,749,998 $1,000 $ 10,788 $ 3,384,401 $ 3,396,189
Distributions to stockholders........ -- -- -- (1,442,984) (1,442,984)
Net income........................... -- -- -- 2,552,163 2,552,163
--------- ------ -------- ----------- -----------
Balances, December 31, 1997.......... 4,749,998 $1,000 $ 10,788 $ 4,493,580 $ 4,505,368
Repurchase of common stock at $5.07
per share.......................... (591,716) -- -- (3,000,000) (3,000,000)
Repurchase of common stock at $5.83
per share.......................... (92,500) -- -- (539,275) (539,275)
Distributions to stockholders........ (556,604) (556,604)
Net income........................... -- -- -- 2,027,109 2,027,109
--------- ------ -------- ----------- -----------
Balances, December 31, 1998.......... 4,065,782 1,000 10,788 2,424,810 2,436,598
Sale of common stock at $5.83 per
share.............................. 47,500 -- 276,926 -- 276,926
Distributions to stockholders........ (900,564) (900,564)
Net income........................... -- -- -- 3,182,363 3,182,363
--------- ------ -------- ----------- -----------
Balances, December 31, 1999.......... 4,113,282 $1,000 $287,714 $ 4,706,609 $ 4,995,323
========= ====== ======== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-67
<PAGE> 150
NOBLE-MET, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 2,552,163 $ 2,027,109 $ 3,182,363
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 315,704 449,037 634,169
Loss/(gain) on disposal of property and
equipment...................................... (1,828) 3,823 31,491
(Increase)/decrease in:
Accounts receivable.............................. (281,252) (382,333) 196,965
Inventory........................................ (672,244) (650,754) (1,684,990)
Income taxes refundable.......................... -- (8,300) 8,300
Prepaid expenses................................. (14,472) (5,905) (18,638)
Increase in:
Accounts payable................................. 45,782 33,597 139,289
Accrued expenses................................. 189,515 7,459 62,230
----------- ----------- -----------
Net cash provided by operating activities... 2,133,368 1,473,733 2,551,179
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................. (1,445,748) (1,403,511) (1,525,679)
Proceeds from sale of property and equipment........ 9,120 -- 5,995
----------- ----------- -----------
Net cash used in investing activities....... (1,436,628) (1,403,511) (1,519,684)
----------- ----------- -----------
Cash flows from financing activities:
Increase (decrease) in cash overdraft............... (205,293) 2,138,708 (2,185,603)
Proceeds from line of credit........................ 3,771,000 7,172,591 11,000,000
Payments on line of credit.......................... (2,647,000) (8,296,591) (9,124,000)
Proceeds from long-term debt........................ -- 3,774,250 498,750
Principal payments on long-term debt................ (172,463) (714,785) (787,933)
Deferred financing costs............................ -- (15,011) --
Proceeds from sale of common stock.................. -- -- 489,686
Repurchase of common stock.......................... -- (3,539,275) --
Distributions to stockholders....................... (1,442,984) (556,604) (900,564)
----------- ----------- -----------
Net cash used in financing activities....... (696,740) (36,717) (1,009,664)
----------- ----------- -----------
Net increase in cash.................................. -- 33,505 21,831
----------- ----------- -----------
Cash at beginning of year............................. -- -- 33,505
----------- ----------- -----------
Cash at end of year................................... $ -- $ 33,505 $ 55,336
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 41,964 $ 170,474 $ 388,604
=========== =========== ===========
Income taxes paid................................... $ -- $ 30,900 $ 8,950
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-68
<PAGE> 151
NOBLE-MET, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Business -- During 1998, Noble-Met. Ltd. formed a
wholly-owned subsidiary, NMET Corporation (NMET Corp), which, in turn, owns 100
percent of Noble-Met Foreign Sales Corporation (Nmet FSC).
Noble-Met, Ltd. and its subsidiary (Company) are engaged in the manufacture
of specialty wire and tubular products for use in the biomedical and electrical
industries. Sales are focused in both domestic and European markets.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Noble-Met, Ltd. and its wholly-owned subsidiary. All
significant intercompany accounts have been eliminated.
Cash and cash equivalents -- For purposes of the statement of cash flows,
cash and cash equivalents include cash and all highly liquid instruments with
original maturities of three months or less at the time of purchase.
Inventory -- Raw materials, work-in-process and finished goods inventories
are stated at the lower of cost or market, with cost being determined on the
specific identification basis. Scrap resulting from the manufacturing process is
valued in inventory at the estimated price which will be received from the
refinery.
Property and Equipment -- Property and equipment are stated at cost.
Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is calculated by use of the straight-line method over the estimated
useful lives of the related assets. Amortization of leasehold improvements is
calculated by use of the straight-line method over the shorter of the lease
terms, including renewal options expected to be exercised, or estimated useful
lives of the improvements. The useful lives of property and equipment are as
follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment..................................... 5-10
Office equipment............................................ 3-10
Vehicles.................................................... 5
Leasehold improvements...................................... 5-15
</TABLE>
Impairment of Long-Lived Assets -- Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability is based on
future net cash flows from the use and ultimate disposition of the asset. The
Company recorded no adjustment for impairment of long-lived assets for the years
ended December 31, 1997, 1998 and 1999.
Deferred Financing Costs -- The cost of obtaining financing has been
deferred and is being amortized on a straight-line basis over the life of the
notes payable.
Income Taxes -- Effective January 1, 1993, Noble-Met, Ltd. elected by
unanimous consent of its stockholders to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under those provisions, Noble-Met,
Ltd. does not pay federal corporate income taxes on its taxable income. Instead,
the stockholders are liable for individual federal income taxes on their
respective share of the Company's taxable income. Nmet Corp and Nmet FSC are
taxable corporations.
Income taxes for Nmet Corp and Nmet FSC are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax
F-69
<PAGE> 152
NOBLE-MET, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the change in net assets in the period that
includes the enactment date. There were no deferred tax assets or liabilities at
December 31, 1998 and 1999.
Common Stock Subject to Put Option -- In anticipation of the inclusion of
the Company's consolidated financial statements in a registration statement to
be filed with the Securities and Exchange Commission by UTI Corporation, the
Company reclassified certain shares of its common stock held by its Employees'
Stock Ownership Plan with a put option to the Company (Note 7).
Stock Option Plan -- The Company accounts for its stock option plan using
the intrinsic value method. As such, compensation expense is recorded on the
date of grant only if the fair value of the underlying stock exceeds the
exercise price.
Research and Development -- The cost of research and development is
expensed as incurred and included in cost of sales within the accompanying
income statement. Total research and development expenses for the years ended
December 31, 1997, 1998 and 1999 were approximately $263,000, $310,000 and
$334,000 respectively.
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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. INVENTORY
Inventory at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Raw materials............................................... $1,434,841 $1,886,396
Work in process............................................. 618,584 1,197,721
Finished goods.............................................. 863,996 1,420,743
Scrap....................................................... 209,865 307,416
---------- ----------
Total............................................. $3,127,286 $4,812,276
========== ==========
</TABLE>
3. LINE OF CREDIT AND LONG-TERM DEBT
The Company had a line of credit with First Union National Bank totaling
$3,000,000 on December 31, 1998 and 1999 (see Note 8). The line of credit
included $2,000,000 for working capital purposes and $1,000,000 for purchase of
machinery and equipment. The line of credit matures May 31, 2000, at which time
any amount outstanding is due. The line of credit bears interest at the 30-day
LIBOR rate plus 1.45 percent (6.514 and 7.2725 percent at December 31, 1998 and
1999, respectively) payable monthly. Assets pledged as collateral include
accounts receivable, inventory, equipment and general intangibles. At December
31, 1999, $1,876,000 was outstanding under the line of credit, in addition,
$500,000 of the line was being utilized to support a letter of credit in
connection with an inventory consignment agreement. Accordingly, the available
balance under the line of credit at December 31, 1999 was $624,000.
At December 31, 1998 and 1999, the Company had a commitment for the
financing of expenditures for new machinery and equipment which bears interest
at the 30-day LIBOR rate plus 1.45 percent (6.514
F-70
<PAGE> 153
NOBLE-MET, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 7.273 percent at December 31, 1998 and 1999, respectively). Equipment
financed was to be pledged as collateral. At December 31, 1998, there was
$501,250 outstanding under this commitment. In 1999, the Company borrowed the
remaining amount available under this commitment and at December 31, 1999,
$866,667 was outstanding on this credit facility.
Long-term debt at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Note payable to First Union National Bank, due May 31, 2003,
payable in monthly installments of $54,550 plus interest
at the 30-day LIBOR rate plus 1.45% (6.514% and 7.2725% at
December 31, 1998 and 1999, respectively), secured by the
assets of the Company..................................... $2,891,150 $2,236,550
Note payable to First Union National Bank, due April 1,
2004, payable in equal monthly payments of $16,667
beginning May 1, 1999, plus interest at the 30-day LIBOR
rate plus 1.45% (6.514% and 7.2725% at December 31, 1998
and 1999, respectively), secured by certain machinery and
equipment................................................. 501,250 866,667
---------- ----------
Total long-term debt.............................. 3,392,400 3,103,217
Less current portion........................................ 721,433 854,600
---------- ----------
Long-term debt, excluding current portion......... $2,670,967 $2,248,617
========== ==========
</TABLE>
The aggregate principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
2000..................................................... $ 854,600
2001..................................................... 854,600
2002..................................................... 854,600
2003..................................................... 472,750
2004..................................................... 66,667
Thereafter............................................... --
----------
Total.......................................... $3,103,217
==========
</TABLE>
The Company's debt agreements include various covenants, including minimum
working capital, debt-to-net-worth and debt-service coverage ratios. The Company
was in compliance with these covenants at December 31, 1999.
4. OPERATING LEASES
The Company leases, from the majority stockholders of the Company, its
facilities in Salem, Virginia under a 15-year operating lease through December
2011, requiring monthly lease payments of $27,083. The lease provides for an
adjustment of annual rental payments at the end of each five-year term. The
adjustment will be limited to any increase in the landlord's mortgage payments
plus 25 percent of the base rent of the prior term. There was no such adjustment
during 1997, 1998 or 1999. Total rental expense was $324,996 for each of the
years ended December 31, 1997, 1998 and 1999.
F-71
<PAGE> 154
NOBLE-MET, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future minimum lease payments required under the facilities lease with
stockholders are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- ----------
<S> <C>
2000..................................................... $ 324,996
2001..................................................... 324,996
2002..................................................... 324,996
2003..................................................... 324,996
2004..................................................... 324,996
Thereafter............................................... 2,274,972
----------
Total.......................................... $3,899,952
==========
</TABLE>
5. INCOME TAXES
As discussed in Note 1, Nmet Corp and Nmet FSC are subject to corporate
income taxes. Income tax expense for the years ended December 31, 1998 and 1999
consist of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 CURRENT DEFERRED TOTAL
---------------------------- ------- -------- -------
<S> <C> <C> <C>
U.S. Federal............................................. $19,600 $-- $19,600
State.................................................... 3,000 -- 3,000
------- --- -------
Totals................................................... $22,600 $-- $22,600
======= === =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------
<S> <C> <C> <C>
U.S. Federal............................................. $28,300 $-- $28,300
State.................................................... 2,170 -- 2,170
------- --- -------
Totals................................................... $30,470 $-- $30,470
======= === =======
</TABLE>
Reported income tax expense differed from the amount computed by applying
the U.S. Federal income tax rate of 34 percent to the combined income before
income taxes of Nmet Corp and Nmet FSC primarily as a result of state income
taxes, the foreign sales corporation benefit, and the difference between 34
percent and the statutory tax rates.
6. STOCK OPTIONS
On January 1, 1997, the Company adopted an incentive stock option plan (the
"Plan") covering substantially all of its employees. Under the Plan, 250,000
shares of unissued common stock are reserved in connection with stock options
outstanding or to be granted. The Plan provides for the issuance of stock
options at a price not less than the fair value of the shares on the date of
grant.
F-72
<PAGE> 155
NOBLE-MET, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option activity for the years ended
December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996........................... -- --
Granted on January 1, 1997................................. 69,925 $2.78
Granted on November 19, 1997............................... 44,250 $4.82
Forfeited in 1997.......................................... (200) $4.82
------- -----
Outstanding at December 31, 1997........................... 113,975 $3.57
Granted on May 27, 1998.................................... 36,500 $5.07
Granted on November 11, 1998............................... 17,600 $5.83
Forfeited in 1998.......................................... (31,300) $4.95
------- -----
Outstanding at December 31, 1998........................... 136,775 $3.94
------- -----
Granted in 1999............................................ 15,000 $5.83
Forfeited in 1999.......................................... (10,000) $5.35
------- -----
Outstanding at December 31, 1999........................... 141,775 $4.19
=======
Available for grant at December 31, 1999................... 108,225
=======
</TABLE>
The options are exercisable six months after the date of grant. No options
are exercisable later than the earlier of five years from the date upon which
the Company first issues shares of its common stock pursuant to a registered
initial public offering (Public Offering Date) or ten years from the grant date
of the option. However, no options shall be exercisable before the Public
Offering Date. Therefore, no options were exercisable at December 31, 1998 and
1999.
The Company uses the intrinsic value method, in accounting for its Plan
and, accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value of its stock options at the grant
date, there would have been no material impact on the Company's net income. See
Note 9.
7. EMPLOYEE BENEFITS
Effective January 1, 1999, the Company's 401(k) Retirement Plan was
restated to form the Employees' Stock Ownership and Retirement Savings Plan of
Noble-Met, LTD. (the "ESOP"). The ESOP covers substantially all employees and is
designed to broaden the ownership of the Company. Employees become participants
in the ESOP following the date on which they complete one year of service and
attain age 21. The retirement savings plan portion of the ESOP allows
participants to contribute through salary reduction up to 7 percent of their
annual compensation with the Company matching at its discretion 200 percent of
the employees' contribution. The Company also has the option to make qualified
non-elective contributions to the ESOP. The Company's contributions may be made
in the form of cash or common stock of the Company or a combination thereof. The
Company's matching contributions to the ESOP were equal to $256,366 for the year
ended December 31, 1999.
The ESOP contains a put option which allows participants who are
withdrawing from the ESOP to require the Company to repurchase the stock in
their accounts at fair market value, as defined, during the put option period,
as defined. The ESOP has the option of assuming the Company's repurchase
obligations resulting from the put option. See Note 9.
Prior to January 1, 1999, the Company had a 401(k) Retirement Plan which
covered substantially all employees who met eligibility requirements and
provided an opportunity for employees to make tax
F-73
<PAGE> 156
NOBLE-MET, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred contributions of up to 7 percent of annual compensation with the
Company matching at its discretion 200 percent of the employees' contribution.
The Company also had the option to make an additional profit sharing
contribution to the plan. The Company's matching contributions to the plan
amounted to $130,242 and $204,269 for the years ended December 31, 1997 and
1998. No additional profit sharing contribution was made for 1997 or 1998.
8. CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
The Company provides credit, in the normal course of business, to various
commercial enterprises. The Company does not require collateral or other
security on these accounts receivable. The Company manages exposure to credit
risk through credit approvals, credit limits and monitoring procedures.
Management believes that credit risks at December 31, 1998 and 1999, have been
adequately provided for in the consolidated financial statements.
For the years ended December 31, 1997, 1998 and 1999, approximately 77
percent, 79 percent and 69 percent, respectively, of net sales were to customers
located in the United States, while approximately 23 percent, 21 percent and 31
percent, respectively, were to international customers. The majority of
international sales were to customers located in Europe. Sales to customers in
Ireland accounted for approximately 15% of the Company's net sales for 1999. No
other individual foreign country accounted for more than 10 percent of the
Company's net sales in 1997, 1998 and 1999.
For the year ended December 31, 1997, the Company had net sales from five
customers, each of which accounted for more than 5 percent of net sales,
aggregating approximately $7,964,000 or 72 percent of net sales. The related
trade accounts receivable balances for these five customers at December 31, 1997
totaled approximately $583,000. As of December 31, 1997, one customer had an
accounts receivable balance in excess of 5 percent of total stockholders'
equity. The accounts receivable balance of this customer was approximately
$290,000 as of December 31, 1997.
For the year ended December 31, 1998, the Company had net sales to six
customers, each of which accounted for more than 5 percent of net sales,
aggregating approximately $8,820,000 or 68 percent of net sales. The related
trade accounts receivable balances for these six customers at December 31, 1998
totaled approximately $870,000. In addition, two customers had outstanding
accounts receivable balances in excess of 5 percent of total stockholders'
equity. These customers owed the Company approximately $349,000 and $267,000 as
of December 31, 1998.
For the year ended December 31, 1999, the Company had net sales to four
customers, each of which accounted for more than 5 percent of net sales,
aggregating approximately $8,134,000 or 62 percent of net sales. The related
trade accounts receivable balances for these four customers at December 31, 1999
totaled approximately $745,800. In addition, one customer had outstanding
accounts receivable balance in excess of 5 percent of total stockholders'
equity. This customer owed the Company approximately $340,000 as of December 31,
1999.
9. SUBSEQUENT EVENTS
On January 11, 2000 the Company was sold to Medical Device Manufacturing,
Inc. (d/b/a Rivo Technologies) ("Rivo"). The Company and its stockholders
received consideration equal to $25,000,000 in cash and securities issued by
Rivo, and Rivo assumed and paid off all of the Company's current and long-term
debt on the date of sale. An adjustment to the sales price of $2,533,464, based
on the final 1999 audited results will be paid 45 days after delivery of the
audited financial statements. The Shares Purchase Agreement entered into with
Rivo also provides for certain earnout provisions during calendar years 2000 and
2001 which would result in additional consideration of approximately
$21,000,000.
F-74
<PAGE> 157
NOBLE-MET, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company signed the Share Purchase Agreement on December 22, 1999 and in
anticipation of the January 2000 closing of the sale transaction, the Company on
December 26, 1999 amended and authorized termination of the incentive stock
option plan and ESOP. In January 2000, all option holders executed Option
Cancellation Agreements in exchange for the right to receive cash payments from
the Company equal to the value of the Company's common stock on the sale date.
The Company repurchased all outstanding options and recorded compensation
expense for the difference between the exercise price and the fair value of the
options equal to $380,785. In addition, the Company repurchased and retired
Company stock owned by the ESOP at fair value equal to $256,918.
F-75
<PAGE> 158
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
UTI Corporation:
We have audited the accompanying consolidated balance sheets of UTI
Corporation (a Pennsylvania corporation), as of December 31, 1998 and 1999, and
the related consolidated statements of operations, statements of equity and cash
flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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 consolidated financial position of UTI Corporation
as of December 31, 1998 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
Philadelphia, Pennsylvania
February 4, 2000
F-76
<PAGE> 159
UTI CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MAY 31,
1998 1999 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 2,049,305 $ 2,116,817 $ 2,341,142
------------ ------------ ------------
Accounts receivable --
Trade, less allowance for doubtful accounts of
$376,989 in 1998, $318,017 in 1999 and
$332,057 in 2000............................ 10,016,462 11,801,929 12,783,015
------------ ------------ ------------
Due from related party........................... 2,012,049 -- --
------------ ------------ ------------
Inventories --
Raw materials................................. 2,369,497 2,298,761 2,363,983
Intermediate stock............................ 2,049,343 1,305,006 1,617,896
Work-in-process............................... 2,795,421 4,363,691 4,185,087
Finished products............................. 3,820,310 5,140,482 4,462,053
------------ ------------ ------------
11,034,571 13,107,940 12,629,019
------------ ------------ ------------
Prepaid expenses................................... 1,022,402 502,067 196,859
------------ ------------ ------------
Other.............................................. 243,559 -- --
------------ ------------ ------------
Total current assets..................... 26,378,348 27,528,753 27,950,035
------------ ------------ ------------
Property and Equipment, at cost:
Land............................................. 312,536 605,324 505,971
Machinery and equipment.......................... 40,805,949 44,935,777 46,144,640
Building and leasehold improvements.............. 8,761,170 11,474,883 11,554,958
------------ ------------ ------------
49,879,655 57,015,984 58,205,569
Less -- accumulated depreciation................... (32,429,865) (34,225,551) (35,596,391)
------------ ------------ ------------
17,449,790 22,790,433 22,609,178
------------ ------------ ------------
Other assets:
Intangible pension asset........................... 25,807 -- --
Goodwill, net of accumulated amortization of
$852,825 in 1998, $1,260,084 in 1999 and
$1,442,393 in 2000............................... 4,638,082 4,882,566 4,864,538
Cash surrender value (face amount of $17,382,840 at
December 31, 1999)............................... 2,510,586 3,024,409 --
Other.............................................. 50,484 131,509 30,254
------------ ------------ ------------
7,224,959 8,038,484 4,894,792
------------ ------------ ------------
Total Assets....................................... $ 51,053,097 $ 58,357,670 $ 55,454,005
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-77
<PAGE> 160
UTI CORPORATION
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MAY 31,
1998 1999 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................ $ 2,067,965 $ 2,775,682 $ --
Current portion of long-term debt................ 397,509 343,126 320,417
Accounts payable................................. 1,650,292 2,198,608 2,652,764
Accrued expenses................................. 4,167,745 3,992,814 4,449,340
Accrued profit sharing........................... 2,020,212 1,753,973 890,614
Deferred compensation -- current................. -- 1,779,000 2,305,000
------------ ------------ ------------
Total current liabilities................ 10,303,723 12,843,203 10,618,135
Deferred compensation.............................. 5,327,625 5,327,625
Deferred compensation -- options................... 1,670,705 5,807,655 3,786,463
Deferred compensation -- other..................... 974,417 1,342,105 2,089,444
Accrued environmental.............................. 3,566,083 3,555,928 3,690,949
Long-term pension liability........................ 52,560 655,504 614,396
Long-term debt..................................... 5,792,425 7,689,413 5,162,943
------------ ------------ ------------
Total liabilities........................ 27,687,538 37,221,433 25,962,330
------------ ------------ ------------
Minority interest.................................. 434,219 -- --
------------ ------------ ------------
Commitments and contingencies (note 10)
Shareholders' equity:
Common stock --
Class A voting, par value $.10 per share;
authorized, 40,250 shares; issued, 13,163
shares...................................... 1,195 1,316 1,316
Class B nonvoting, par value $.10 per share;
authorized, 3,984,750 shares; issued,
1,300,675 shares............................ 118,382 130,067 154,926
Capital in excess of par value................... 595,278 6,069,256 27,621,599
Retained earnings................................ 22,202,496 20,322,340 1,992,539
Other comprehensive income....................... 13,989 (58,922) (278,510)
Less -- 1,952 shares of common stock held in
treasury......................................... -- (195) (195)
------------ ------------ ------------
22,931,340 26,463,862 29,491,675
Notes receivable from shareholders................. -- (5,327,625) --
------------ ------------ ------------
Total shareholders' equity............... 22,931,340 21,136,237 29,491,675
------------ ------------ ------------
$ 51,053,097 $ 58,357,670 $ 55,454,005
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE> 161
UTI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999 MAY 31, 2000
----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales................................... $61,609,760 $73,128,739 $75,334,431 $ 35,660,779
Cost of sales........................... 39,502,663 46,695,630 48,011,852 23,566,459
----------- ----------- ----------- ------------
Gross profit....................... 22,107,097 26,433,109 27,322,579 12,094,320
Selling, general and administrative
expenses.............................. 14,502,913 17,347,867 22,342,846 27,920,056
Research and development expense........ 1,600,377 1,979,110 2,051,116 702,122
----------- ----------- ----------- ------------
Operating income.............. 6,003,807 7,106,132 2,928,617 (16,527,858)
----------- ----------- ----------- ------------
Other (income) expenses:
Interest expense, net................. 122,274 463,591 592,486 257,203
Other................................. (1,587,995) 165,152 184,551 54,694
----------- ----------- ----------- ------------
Total other expenses
(income).................... (1,465,721) 628,743 777,037 311,897
----------- ----------- ----------- ------------
Minority interest expense............... 14,047 59,339 24,637 --
----------- ----------- ----------- ------------
Income (loss) before income taxes....... 7,455,481 6,418,050 2,126,943 (16,839,755)
Income tax expense...................... 279,669 592,891 233,304 234,498
----------- ----------- ----------- ------------
Net income (loss)....................... $ 7,175,812 $ 5,825,159 $ 1,893,639 $(17,074,253)
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE> 162
UTI CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CLASS A CLASS B CAPITAL IN
---------------------- ------------------ -------------------- EXCESS OF TREASURY
SHARES AMOUNT SHARES PAR VALUE SHARES AMOUNT PAR VALUE STOCK
---------- --------- ------ --------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996...... 1,263,349 $ 126,336 -- $ -- -- $ -- $ 2,379,289 $(1,364,310)
Comprehensive income............ -- -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- -- --
Cumulative translation
adjustment.................. -- -- -- -- -- -- -- --
Minimum pension liability..... -- -- -- -- -- -- -- --
Total comprehensive
income................ -- -- -- -- -- -- -- --
Dividends from related party
Distributions................. -- -- -- -- -- -- -- --
Assumption of liabilities (Note
4)............................ -- -- -- -- -- -- -- --
Treasury stock.................. -- -- -- -- -- -- -- (69,000)
---------- --------- ------ ------ --------- -------- ----------- -----------
Balance, December 31, 1997...... 1,263,349 126,336 -- -- -- -- 2,379,289 (1,433,310)
Comprehensive income............ -- -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- -- --
Cumulative translation
adjustment.................. -- -- -- -- -- -- -- --
Minimum pension liability..... -- -- -- -- -- -- -- --
Total comprehensive
income................ -- -- -- -- -- -- -- --
Dividends from related party
Distributions................. -- -- -- -- -- -- -- --
Treasury stock.................. -- -- -- -- -- -- -- (357,460)
Conversion of common stock...... (1,236,349) (126,336) 11,951 1,195 1,183,818 118,382 (1,784,011) 1,790,770
---------- --------- ------ ------ --------- -------- ----------- -----------
Balance, December 31, 1998...... -- -- 11,951 1,195 1,183,818 118,382 595,278 --
Comprehensive income............ -- -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- -- --
Cumulative translation
adjustment.................. -- -- -- -- -- -- -- --
Minimum pension liability..... -- -- -- -- -- -- -- --
Total comprehensive
income................ -- -- -- -- -- -- -- --
Distributions................... -- -- -- -- -- -- -- --
Distribution to MCC.............
Shares issued in connection with
the merger with Stent
Technologies (note 3)......... -- -- 231 23 19,146 1,915 156,026 --
Shares issued in connection with
the deferred compensation plan
(note 8)...................... -- -- 905 90 89,773 8,977 5,318,558 --
Exchange of MCC shares.......... -- -- 76 8 7,938 793 (606) (195)
---------- --------- ------ ------ --------- -------- ----------- -----------
Balance, December 31, 1999...... $ 13,163 $1,316 1,300,675 $130,067 $ 6,069,256 $ (195)
Comprehensive income............ -- -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- -- --
Cumulative translation
Adjustment.................. -- -- -- -- -- -- -- --
Total comprehensive
income (loss)......... -- -- -- -- -- -- -- --
Collection of receivable in
connection with deferred
compensation plan............. -- -- -- -- -- -- -- --
Shares issued in connection with
phantom plans................. -- -- -- -- 248,590 24,859 21,552,343 --
Distributions...................
---------- --------- ------ ------ --------- -------- ----------- -----------
Balance, May 31, 2000........... -- $ -- 13,163 $1,316 1,549,265 $154,926 $27,621,599 $ (195)
========== ========= ====== ====== ========= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE> 163
UTI CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE CUMULATIVE MINIMUM
FROM RETAINED TRANSLATION PENSION
SHAREHOLDERS EARNINGS ADJUSTMENT LIABILITY TOTAL
------------ ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.................. $ -- $ 17,474,310 $ 65,675 $(313,027) $18,368,273
Comprehensive income........................
Net income................................ -- 7,175,812 -- -- 7,175,812
Cumulative translation adjustment......... -- -- 3,735 -- 3,735
Minimum pension liability................. -- -- -- 298,154 298,154
-----------
Total comprehensive income......... 7,477,701
Micro-Coax equity transaction............... 6,487,400 6,487,400
Distributions............................... -- (4,030,118) -- -- (4,030,118)
Treasury stock.............................. (69,000)
----------- ------------ --------- --------- -----------
Balance, December 31, 1997.................. -- 27,107,404 69,410 (14,873) 28,234,256
Comprehensive income........................
Net income................................ -- 5,825,159 -- -- 5,825,159
Cumulative translation adjustment......... -- -- (28,668) -- (28,668)
Minimum pension liability................. -- -- -- (11,880) (11,880)
-----------
Total comprehensive income......... 5,784,611
Micro-Coax equity transaction............... (5,890,235) (5,890,235)
Distributions............................... -- (4,839,832) -- -- (4,839,832)
Treasury stock.............................. (357,460)
Conversion of common stock..................
----------- ------------ --------- --------- -----------
Balance, December 31, 1998.................. -- 22,202,496 40,742 (26,753) 22,931,340
Comprehensive income........................
Net income................................ -- 1,893,639 -- -- 1,893,639
Cumulative translation adjustment......... -- -- (99,664) -- (99,664)
Minimum pension liability................. -- -- -- 26,753 26,753
-----------
Total comprehensive income......... 1,820,728
Distributions............................... -- (3,773,795) -- -- (3,773,795)
Distribution to MCC.........................
Shares issued in connection with the merger
with Stent Technologies (note 3).......... -- -- -- -- 157,964
Shares issued in connection with the
deferred compensation plan (note 8)....... (5,327,625) -- -- -- --
Exchange of MCC shares......................
----------- ------------ --------- --------- -----------
Balance, December 31, 1999.................. (5,327,625) 20,322,340 (58,922) -- 21,136,237
Comprehensive income........................
Net income................................ -- (17,074,263) -- -- (17,074,263)
Cumulative translation adjustment......... -- -- (219,588) -- (219,588)
-----------
Total compensation income (loss)... -- -- -- -- (17,293,851)
Collection of receivable in connection with
deferred compensation plan................ 5,327,625 -- -- -- 5,327,625
Shares issued in connection with phantom
plans..................................... -- -- -- -- 21,577,202
Distributions............................... -- (1,255,538) -- -- (1,255,538)
----------- ------------ --------- --------- -----------
Balance, May 31, 2000....................... $ -- $ 1,992,539 $(278,510) $ -- $29,491,675
=========== ============ ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE> 164
UTI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------- MAY 31,
1997 1998 1999 2000
----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 7,175,812 $ 5,825,159 $ 1,893,639 $(17,074,263)
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization................ 2,812,413 3,581,882 4,038,400 1,670,967
Deferred compensation........................ 1,937,643 3,429,986 6,283,638 (747,853)
Loss (gain) on disposal of assets............ (13,454) (89,142) 1,891 --
Minority interest............................ 14,047 59,339 24,637 --
Exercise of phantom options.................. -- -- -- 21,577,202
Changes in assets and liabilities, net of
effects of acquisition --
Accounts receivable, net................... (2,372,216) 5,038,658 (1,673,184) (981,086)
Inventories................................ (146,975) (1,893,613) (341,718) 478,921
Prepaid expenses........................... (220,433) 305,858 562,695 305,208
Other assets............................... (420,813) (268,396) (365,569) 101,255
Accounts payable........................... (520,588) 174,303 496,431 454,156
Accrued expenses........................... 838,627 (282,666) (128,182) 456,526
Accrued pension and profit sharing......... 590,084 18,728 (266,239) (863,359)
Other long-term liabilities................ (75,768) (574,342) 32,601 93,913
----------- ------------ ----------- ------------
Net cash provided (used in) by operating
activities............................ 9,598,379 15,325,754 10,559,040 5,471,587
----------- ------------ ----------- ------------
Cash flows from investing activities:
Capital expenditures........................... (2,582,650) (4,299,312) (7,518,354) (1,526,993)
Proceeds from disposals of assets.............. 123,674 214,226 72,605 --
Acquisition of business, net of cash
acquired..................................... (4,071,695) (455,725) (2,429,820) --
Cash surrender value of life insurance......... -- -- -- 3,024,409
Additions to goodwill.......................... -- -- -- (164,279)
----------- ------------ ----------- ------------
Net cash provided by (used in) investing
activities............................ (6,530,671) (4,540,811) (9,875,569) 1,333,137
----------- ------------ ----------- ------------
Cash flows from financing activities:
Proceeds from debt obligations................. 421,573 -- 12,493,799
Payments on debt obligations................... (725,698) (859,177) (9,335,963) (5,324,861)
Purchase of treasury stock..................... (69,000) -- -- --
Micro-Coax equity transaction.................. -- (5,890,235) -- --
Distributions.................................. (4,030,118) (4,839,832) (3,773,795) (1,255,538)
----------- ------------ ----------- ------------
Net cash used in financing activities... (4,403,243) (11,589,244) (615,959) (6,580,399)
----------- ------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents........................... (1,335,535) (804,301) 67,512 224,325
Cash and cash equivalents, beginning of year..... 4,189,141 2,853,606 2,049,305 2,116,817
----------- ------------ ----------- ------------
Cash and cash equivalents, end of year........... $ 2,853,606 $ 2,049,305 $ 2,116,817 $ 2,341,142
----------- ------------ ----------- ------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest......... $ 460,669 $ 647,219 $ 687,304 $ 489,092
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE> 165
UTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIVE MONTHS ENDED MAY 31, 2000, AND THE YEARS ENDED DECEMBER 31, 1999,
1998 AND 1997
1. BACKGROUND:
UTI Corporation and its divisions, ("UTI" or the "Company") (a Pennsylvania
corporation) is engaged in various lines of business, including the
manufacturing of precision metal tubing, metal tubular components and precision
metal components throughout the United States and in Germany.
2. ACCOUNTING POLICIES:
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 the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
Principle of consolidation
The accompanying Consolidated Financial Statements are those of UTI
Corporation and its divisions, Uniform Tubes, Micro Med Machining, and Spectrum
Manufacturing (collectively "UT") and Utitec. The Micro-Coax Components ("MCC")
division was spun-off by the Company effective September 30, 1999. All prior
periods have been restated to reflect the spin-off. All significant intercompany
balances and transactions have been eliminated.
Cash and cash equivalents
Cash and cash equivalents include all short-term investments purchased with
an original maturity of three months or less.
Inventories
As of January 1, 1974, the Company adopted the last-in, first-out ("LIFO")
method of determining inventory values. If all inventories had been valued by
the FIFO method, they would have been $15,455,217 at December 31, 1998,
$17,603,977 at December 31, 1999, and $17,200,696 at May 31, 2000.
Property and depreciation
Depreciation for financial reporting purposes is provided over the
estimated useful lives of the applicable assets using principally the
straight-line method. The estimated useful lives for machinery and equipment
range from 3 to 10 years. The estimated useful lives for buildings range from 30
to 39 years. Leasehold improvements are depreciated over 15 years. Accelerated
depreciation methods are used for income tax purposes.
Goodwill
Goodwill, which represents the excess of cost over fair value of the net
assets of acquired businesses, is being amortized on a straight-line basis over
15 years. The Company develops operating income projections for each of its
lines of business and evaluates the recoverability and amortization period of
goodwill using these projections. Based upon management's current assessment,
the estimated remaining amortization period of goodwill is appropriate and the
remaining balance is fully recoverable.
F-83
<PAGE> 166
UTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue recognition
The Company records sales upon product shipment, when title passes to the
customer.
Research and development costs
Research and development costs are expensed as incurred.
Cumulative translation adjustment
The financial statements have been prepared from records maintained in the
U.S., the country in which the Company is located. The value of the U.S. dollar
rises and falls day to day on foreign currencies exchanges. The Company has
established manufacturing facilities in Europe. The functional currency of these
businesses is their local currency. These fluctuations affect the Company's
Consolidated Statements of Equity.
Generally, foreign subsidiaries translate their assets and liabilities into
U.S. dollars at the current exchange rate -- that is, the rate in effect at the
end of the fiscal period. The gains or losses that result from this process are
shown in the Cumulative Translation Adjustment account in the Shareholders'
Equity section of the Balance Sheet.
The revenue and expense accounts of foreign subsidiaries are made in
currencies different from their own. Gains and losses from these foreign
currency transactions are generally included in income as they occur.
Income taxes
Effective January 1, 1987, the Company elected by unanimous consent of its
stockholders to be taxed under the provisions of Subchapter S of the Internal
Revenue Code. Under those provisions, the Company does not pay federal corporate
income taxes on its taxable income.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentration
of credit risk are accounts receivable. The Company's customer base is comprised
principally of companies within the medical industry. The Company does not
require collateral from its customers.
3. BUSINESS ACQUISITIONS:
On November 7, 1997, the Company acquired 85% of the common stock of
Spectrum for a purchase price of $4,295,505 including transaction costs.
Spectrum is a machine shop specializing in wire cut and plunge-type electric
discharge machining and laser cutting. Their primary markets include the
medical, automotive, and electronic industries. The acquisition has been
accounted for as a purchase, and as of the date of acquisition, the assets
acquired and liabilities assumed were recorded in the financial statements at
their estimated fair market values.
F-84
<PAGE> 167
UTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Accounts receivable..................................... $ 849,868
Inventories............................................. 173,415
Other current assets.................................... 215,499
Property and equipment, including capitalized leases.... 2,570,995
Goodwill................................................ 2,250,781
Investment in real estate partnership................... 207,025
Current debt............................................ (894,541)
Other current liabilities............................... (695,279)
Deferred tax liability.................................. (91,460)
Long-term debt.......................................... (290,798)
----------
$4,295,505
==========
</TABLE>
The net sales included in the 1997 statement of income related to Spectrum
are $1,287,568, which represent the sales of Spectrum from the acquisition date
through December 31, 1997.
On March 31, 1999, the Company acquired the remaining 15% of the Common
stock of Spectrum for a purchase price of $1,000,000, which was given in the
form of a note payable. The purchase resulted in an additional $542,000 of
goodwill.
On June 14, 1999, the Company's newly created entity UTI SFM Feinmechanik
GmbH acquired 100% of SFM Feinmechanik GmbH for a purchase price of $2,429,820
including transaction costs. UTI SFM is a specialty small diameter tubing
producer, with particular expertise in stainless steel alloys. Their primary
market is in the medical industry. The acquisition has been accounted for as a
purchase, and as of the date of acquisition, the assets acquired and liabilities
assumed were recorded in the financial statements at their estimated fair market
values.
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Inventories............................................. $1,860,124
Other current assets.................................... 42,320
Property and equipment.................................. 1,110,396
Goodwill................................................ 110,600
Accrued expenses........................................ (80,872)
Long-term pension liability............................. (612,748)
----------
$2,429,820
==========
</TABLE>
The net sales included in the 1999 statement of income related to UTI SFM
are $3,007,737 which represent the sales of UTI SFM from the acquisition date
through December 31, 1999.
Effective November 1, 1999, Stent Technologies ("Stent") merged into UTI.
Stent manufactures tubing used in medical technology. Stent was owned by
shareholders of the Company so the assets and liabilities were recorded at book
value with no step-up in basis due to the related party nature of the
transaction. All shares of Stent common stock were exchanged for UTI shares
based on the enterprise value of each entity as determined by a third-party
appraiser. The net book value of Stent at the time of the transaction was
$157,964.
The net sales included in the 1999 statement of income related to Stent are
$6,200 which represent the sales of Stent from the merger date through December
31, 1999.
F-85
<PAGE> 168
UTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RELATED PARTY TRANSACTIONS:
Receivable from Related Party
During 1999, the Company transferred certain shareholders' property and
cash valued at $396,324, which is recorded in accounts receivable-trade at
December 31, 1999.
At December 31, 1998, Due from MCC represents amounts payable from MCC, a
related party which was spun-off from the Company effective September 30, 1999
(See Note 2).
5. SHORT-TERM BORROWINGS:
The Company has available two $4,000,000 demand lines of credit which bear
interest at LIBOR plus 1.10%. As of May 31, 2000, the Company has outstanding
total borrowings under these two lines of $0.
The Company also has a $300,000 demand line of credit which bears interest
at LIBOR plus 1.50%. At May 31, 2000 the Company has $0 outstanding under this
line.
During 1999, the Company entered into two Euros 1,275,000 lines of credit,
payable in Euros, both bearing interest at E-LIBOR plus 1.50%. One line of
credit expires on June 30, 2000, while the other is due on demand. At May 31,
2000, the Company has total borrowings under these two lines of $0.
6. LONG-TERM DEBT:
The Company is party to various debt instruments which are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MAY 31,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Life insurance policy loans, interest at 5%...... $1,788,637 $2,148,807 $ --
Loan payable to bank, provided through the
Montgomery County Industrial Development
Authority, due December 31, 2004,
collateralized by assets financed with the
proceeds of the loan, interest at 85% of bank's
prime rate..................................... 960,250 960,250 960,250
Loan payable to bank, provided through the
Montgomery County Industrial Development
Authority, payable in quarterly principal
installments of $62,500, collateralized by
assets financed with the proceeds of the loan,
interest at 76% of bank's prime rate or LIBOR
minus .125%, as defined........................ 1,531,049 1,281,250 1,218,750
Capital lease obligations........................ 159,998 -- --
Mortgage payable -- Spectrum building............ -- 2,342,232 2,304,360
Note payable..................................... -- 1,000,000 1,000,000
Line of credit................................... 1,750,000 300,000 --
---------- ---------- ----------
6,189,934 8,032,539 5,483,360
Less -- current portion.......................... (397,509) (343,126) (320,417)
---------- ---------- ----------
$5,792,425 $7,689,413 $5,162,943
========== ========== ==========
</TABLE>
F-86
<PAGE> 169
UTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Annual principal payments required are as follows:
<TABLE>
<S> <C>
June 1, 2000 to May 31, 2001............................ $ 320,417
June 1, 2001 to May 31, 2002............................ 353,917
June 1, 2002 to May 31, 2003............................ 1,361,965
June 1, 2003 to May 31, 2004............................ 370,736
June 1, 2004 and thereafter............................. 3,076,325
----------
$5,483,360
</TABLE>
The Company has a $6,000,000 revolving credit and term loan agreement which
expires in September 2001. Interest is at prime less 0.25% or LIBOR plus 1.10%.
The Company is charged a commitment fee of 0.25% of $4,000,000, payable each
quarter. The Company has outstanding total borrowings of $0 as of May 31, 2000.
The agreement includes certain restrictions and covenants that must be met, the
most restrictive of which concerns tangible net worth.
In September 1995, the Company entered into a Loan Agreement with a bank
which provided for Industrial Revenue Bond financing up to a maximum of
$3,000,000 through the Montgomery County Industrial Development Authority. As of
May 31, 2000, $1,218,750 is outstanding under this Loan Agreement.
The company entered into a mortgage with a bank, which is payable in
monthly installments of $22,085 plus interest at a rate of 7.38%; final payment
of monthly installments is due March 1, 2009. A $1,149,510 balloon payment of
the remaining principal is due on April 1, 2009. The mortgage is collateralized
by certain land, building and improvements owned by the Company. The mortgage
contains certain restrictions and covenants that must be met, among other
restrictions, the most restrictive of which concerns the achievement of certain
coverage and leverage ratios.
The Company entered into a $1,000,000 note payable, which accrues interest
at 6.00%, with a former owner of Spectrum for the purchase of the owner's
remaining 15% stock in Spectrum (see Note 3). Payment of the note and accrued
interest is due during 2003.
The Company is in compliance with all of its debt covenants as of May 31,
2000.
7. INCOME TAXES:
Effective January 1, 1987, the shareholders of UTI elected to be treated as
an S Corporation under the provisions of the Internal Revenue Code. Under this
election, income of Uniform Tubes, Inc., Micro Med Machining and Utitec, Inc. is
passed through to the shareholders of UTI and taxed at the individual level.
Effective April 1, 1999, the shareholders of UTI elected to change the status of
Spectrum from a C Corporation to that of an S Corporation under the provisions
of the Internal Revenue Code. The deferred tax liability of $248,898 is no
longer required as a result of the effect of this change in tax status and is
included in income tax expense in the consolidated statements of income.
The income of Spectrum Manufacturing, Inc., through March 31, 1999, and the
Company's UK branch is subject to income taxes.
The income tax expense of $55,000, $592,891 and $482,202 in 1997, 1998 and
1999, respectively and $234,498 for the five-month period ended May 31, 2000,
represents the tax due on the income of Spectrum and the UK branch as well as
state income taxes due on income not subject to S Corporation rules. The
effective tax rate is lower than the expected rate due to the benefit associated
with the S Corporation status.
F-87
<PAGE> 170
UTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company reports certain income and expense items for tax purposes on a
basis different from that reflected in the accompanying financial statements.
The principal differences relate to the use of accelerated methods of
depreciation for income tax purposes. In the event that the S Corporation is
terminated, deferred income taxes applicable to these differences would be
reflected in the accompanying financial statements.
Major differences between the federal statutory rate and the effective tax
rate for the years ending December 31, 1997, 1998 and 1999 and the five month
period ending May 31, 2000 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000
----- ------ ------ -----
<S> <C> <C> <C> <C>
Federal statutory rate......... 35% 35% 35% 35%
State taxes, net of federal
benefit...................... 2.1% 3.2% 9.0% (.4)%
S-Corp benefit................. (35.0)% (31.4)% (42.2)% (35)%
Difference in rates on foreign
subsidiaries................. 1.7% 2.4% 9.1% (1.0)%
----- ------ ------ -----
Effective tax rate... 3.8% 9.2% 10.9% (1.4)%
===== ====== ====== =====
</TABLE>
Deferred taxes are not significant.
8. DEFERRED COMPENSATION:
Profit sharing
The Company has a profit sharing plan (the "Plan") for the benefit of
certain employees. The annual contribution is determined by the Board of
Directors of UTI. Approximately one half of the annual contribution is paid as a
cash bonus and the remainder is contributed to a Trust on behalf of the Plan.
For 1997, 1998, 1999 and the five-month period ended May 31, 2000, cash bonuses
were $1,000,742, $986,627, $846,987 and $447,282, respectively. For 1997, 1998,
1999 and the five-month period ended May 31, 2000, contributions accrued for the
Trust were $1,000,742, $986,627 $906,987 and 455,416, respectively.
Phantom incentive plans
In 1994, UTI adopted a Phantom Incentive Plan which provides incentives to
key employees of its divisions. Participants in the plan are designated by the
Board of Directors and earn an award based on a formula defined in the plan
agreement. The award is based on the increase in the fair value of the division
during 1994 to 1998, as defined in the agreement. Vesting under the plan is
based on meeting projected net income amounts during the term of the plan. UTI
recorded income from this plan of $161,837 in 1998.
On January 1, 1998, a Phantom Equity Plan was established by UTI for
certain key management employees of its divisions. Under the Phantom Equity Plan
performance units are granted to eligible persons who choose to rollover amounts
from the Phantom Incentive Plan. The value of the performance units is equal to
the appraised value of the division on the most recent valuation date divided by
the number of outstanding performance units. As of December 31, 1997, management
employees elected to rollover into the Phantom Equity Plan $3,323,128 from the
Phantom Incentive Plan which is included as Deferred Compensation on the balance
sheets. The remainder of the Phantom Incentive Plan amount of $340,412 was paid
to participants in cash. The Deferred Compensation balance includes a transfer
of $138,060 to UT's Phantom Equity Plan from an affiliated division. The Company
recorded expense for this plan of $1,328,334 in 1998. During 1999, all amounts
in this plan were rolled into the Deferred Compensation Plan, as discussed
below.
F-88
<PAGE> 171
UTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, the Company established a Phantom Stock Option Plan for
certain key management employees, effective January 1, 1998. Performance options
are granted to eligible persons as determined by an appointed administrative
committee. The value of the performance options is equal to the appraised
minority value of the Company on the most recent valuation date divided by
1,000,000 units less the Baseline Value, which is defined as the value of the
Company on the most recent valuation date on or prior to the performance option
grant date divided by 1,000,000 units. An eligible participant's options vest
ratably at 20% a year over five years. A total of 286,207 options were granted
as of December 31, 1998. As of December 31, 1998 and 1999, $1,670,705 and
$4,136,950, respectively, was recorded as Deferred Compensation -- Options in
the accompanying consolidated balance sheets.
During 1999, the Company established a Deferred Compensation Plan for
certain key management employees effective October 1, 1999. Participation in the
plan is granted to eligible persons who choose to rollover amounts from other
plans of the Company as determined by the Board of Directors. As of October 1,
1999, management employees elected to rollover into the Deferred Compensation
Plan $5,327,625 from the Phantom Equity Plan which is shown as Deferred
Compensation in the balance sheets. The value of a participant's accounts is
equal to their initial account balance, as defined in the agreement plus any
subsequent additions, if any, to such balance. The Company shall pay each
participant interest of 7% per year on the average monthly account balance.
Participants' accounts are 100% vested and nonforfeitable.
In connection with the Deferred Compensation Plan discussed above, certain
key management employees were issued shares of common stock and entered into
Stock Pledge Agreements with the Company. The employees pledged specific shares
of common stock held by the employees as security for the promissory notes
entered into by the employees.
Certain key management employees acquired stock and signed promissory notes
to the Company totaling $5,327,625. The notes accrue interest at 7% per year
payable on October 1 of each year commencing October 1, 2000. The promissory
notes mature on October 1, 2009 unless certain conditions as provided in the
notes shall apply. The amount of the promissory notes is reflected as a
reduction from shareholders' equity in the accompanying consolidated balance
sheets.
During 1999, the Company established a Phantom Plan Arrangement for key
management employees of Utitec, effective January 1, 1999. The value of the Plan
is equal to 12% of the current Enterprise Value less 12% of the Enterprise Value
at December 31, 1998. The Enterprise Value is defined as the most recent three
year average of earnings before interest and taxes adjusted for certain items,
as defined in the agreement, multiplied by a multiple, as defined in the
agreement. The participants vest ratably at 20% a year over five years. The
Company recorded expense related to this plan of $429,500 for the five-month
period ending May 31, 2000 and $36,000 during 1999 which was recorded as
Deferred Compensation -- Other in the accompanying consolidated balance sheets.
During 1999, the Company established a Phantom Stock Rights Plan for a key
management employee of Spectrum, effective March 31, 1999. The value of the
phantom stock rights are equal to the Formula Value of the rights, which is
based upon a percentage of an average, over a defined period of time, of
earnings before interest and taxes, and excluding certain gains and other items,
less the Baseline Value of the rights, as defined in the agreement. The employee
is 100% vested in the current value of the rights, which may be exercised by the
employee or Company upon the occurrence of an Exercise Event, as defined in the
agreement, or reaching the Exercisability Date, which is December 31, 2002. The
Company recorded expense related to this Plan of $1,779,000 during 1999 and
$526,000 for the five-month period ending May 31, 2000, which was recorded as
Deferred Compensation -- Current in the accompanying consolidated balance sheet.
F-89
<PAGE> 172
UTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension plan
The Company has pension plans that cover certain of its employees. Benefits
are provided at a fixed rate for each month of service. The Company's funding
policy is consistent with the funding requirements of federal law and
regulations. Plan assets consist of cash equivalents, bonds and certain equity
securities.
Pension cost for the Company in 1997, 1998, and 1999 were $472,587,
$428,755, and $467,465, respectively and include the following items:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
1997 1998 1999 2000
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Components of net periodic benefit
cost:
Service cost........................ $ 313,885 $ 319,072 $ 350,602 $ 122,664
Interest cost....................... 540,959 565,319 593,059 301,328
Expected return on plan assets...... (1,270,975) (610,281) (644,256) (335,091)
Amortization........................ 888,718 154,645 168,060 37,004
----------- --------- --------- ---------
Net periodic benefit cost........... $ 472,587 $ 428,755 $ 467,465 $ 125,905
=========== ========= ========= =========
</TABLE>
Uniform Tubes, Inc. sponsors a pension plan for certain employees. Prior to
December 31, 1999, the assets and obligations of this plan were commingled into
one overall plan with MCC. On December 31, 1999, these assets and obligations
were formally split into two distinct pension plans in accordance with IRS
guidelines.
F-90
<PAGE> 173
UTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following sets forth the plan's funded status and other information as
of December 31, 1998, 1999 and as of May 31, 2000:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999 MAY 31, 2000
------------ ------------ ------------
<S> <C> <C> <C>
Change in benefit obligation
Benefit obligation on January 1............. $8,214,881 $ 9,194,762 $10,073,326
Service cost................................ 319,072 350,602 122,664
Interest cost............................... 565,319 593,059 301,328
Amendments.................................. 249,451 -- --
Actuarial loss (gain)....................... 325,240 340,193 (591,083)
Benefits paid............................... (479,201) (405,290) (201,985)
---------- ----------- -----------
Benefit obligation on December 31........... $9,194,762 $10,073,326 $ 9,704,250
========== =========== ===========
Change in plan assets
Fair value of plan assets on January 1...... $8,723,666 $ 9,515,670 $11,593,347
Employer contribution....................... 43,000 12,000 --
Actual return on plan assets................ 1,313,068 1,822,743 (197,992)
Change in asset split methodology due to the
spin-off of MCC.......................... -- 729,020 --
Benefits paid............................... (479,201) (405,290) (201,985)
Plan expense paid by plan assets............ (84,863) (80,796) (28,322)
---------- ----------- -----------
Fair value of plan assets on December 31.... $9,515,670 $11,593,347 $11,165,048
========== =========== ===========
Funded status............................... $ 320,909 $ 1,520,021 $ 1,460,798
Unrecognized net actuarial gain............. (767,861) (2,294,877) (2,282,124)
Unrecognized prior service cost............. 1,005,956 890,597 818,283
Unrecognized transitional obligation........ 44,549 32,347 25,226
---------- ----------- -----------
Prepaid (accrued) benefit cost.............. $ 603,553 $ (148,088) $ 22,183
========== =========== ===========
Weighted average assumptions as of December 31
Discount rate............................... 6.75% 7.25% 7.75%
Expected return on plan assets.............. 7.00% 7.00% 7.00%
</TABLE>
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 87, "Employers' Accounting for Pensions," the Company in
1996 recorded an additional minimum liability representing the excess of the
accumulated benefit obligation over the fair value of plan assets and accrued
pension liability. The additional liability was offset by an intangible pension
asset to the extent of previously unrecognized prior service cost and
unrecognized transition obligation with the balance recorded as a separate
reduction of equity.
9. SHAREHOLDERS' INVESTMENT:
The Company and its two major shareholders and their family members who are
shareholders of the Company entered into a shareholders' agreement dated October
1, 1999, which restricts the sale, transfer or disposal of stock except as
provided in the agreement. This agreement revokes all prior agreements between
the Company and its two major shareholders as they relate to disposition of
common stock of the Company. Under the terms of the agreement, upon the death of
either shareholder, the survivor is obligated to purchase all of the decedent's
Class A voting common stock upon the terms and conditions provided. Upon the
death of the survivor, the Company is obligated to purchase all of the
decedent's Class A voting common stock upon the terms and conditions provided
except that the appraisal shall be as
F-91
<PAGE> 174
UTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the date of death and shall include all insurance proceeds to be received by
the Company. The purchase price as defined in the agreement includes the
appraised value of the stock plus any amounts due in accordance with the
Distribution Agreement (see below) and shall be paid in cash. In addition, if
either shareholder wishes to dispose of any of the owned Class A shares of
stock, the other major shareholder has the right of first refusal and then the
Company is obligated to purchase all or any of such unpurchased shares upon
terms and conditions provided. If any family members wish to dispose by any
means of any of their shares of Class A common stock, the related major
shareholder and then the Company shall have the right of first refusal.
Additionally, either shareholder may each year transfer up to 2% of their Class
B nonvoting common stock to any exempt organization as defined in Section 501(c)
of the Internal Revenue Code provided the transferee signs and agrees to be
bound by the agreement. Any such transfer may require, at the transferee's
option, the Company to redeem in any one-year up to but not in excess of 4% of
the value of the shares of such transferee based on the appraisal value and
shall be paid in cash.
The Company entered into a shareholders' agreement with its other
shareholders as of October 1, 1999, that restricts the sale, transfer or
disposal of stock except as provided in the agreement. This agreement revokes
all prior agreements between the Company and the other shareholders as they
relate to disposition of common stock of the Company. Under the terms of the
agreements, upon either the death of a shareholder or the decision of a
shareholder to sell his stock, the Company is required to purchase all of the
stock. The purchase price, as defined in the agreement, includes the appraised
value of the stock plus any amounts due in accordance with the Distribution
Agreement. Payments for the appraised value of the stock may be made within 120
days of the event or in five or ten equal annual installments with interest at
the prime rate, depending on the event that precipitated the sale of the stock.
The shareholders' agreement also contains provisions that in the event that
the Company is ever liquidated or sold, the Company agrees to purchase all
shares of the Company's common stock and the shareholders agree to sell all of
the shares of the Company's stock to the Company.
In connection with the S Corporation election, the Company has entered into
a Distribution Agreement with the shareholders. The agreement calls for the
Company to make distributions in amounts that will enable the shareholders to
make timely payments of their federal and state income and estimated tax
liabilities arising from the Company's election of S Corporation status.
Additional distributions may be made at the discretion of the Board of
Directors.
10. COMMITMENTS AND CONTINGENCIES:
The Company is obligated on various lease agreements for office space and
automobiles, expiring through 2009, which are accounted for as operating leases.
Aggregate rental expense for the Company was $776,535 in 1999 and $369,059
for the five-month period ending May 31, 2000. Aggregate rental expense for 1997
and 1998 was $1,281,835 and $746,460, respectively. The future minimum rental
commitments under all operating leases are as follows:
<TABLE>
<S> <C>
June 1, 2000 to May 31, 2001............................. $ 803,928
June 1, 2001 to May 31, 2002............................. 769,725
June 1, 2002 to May 31, 2003............................. 570,297
June 1, 2003 to May 31, 2004............................. 458,678
June 1, 2004 and thereafter.............................. 398,951
----------
$3,001,579
</TABLE>
UTI has certain commitments related to the acquisition of Micro Med. The
purchase price is subject to adjustment based on operating performance for the
period from the date of acquisition to December 31,
F-92
<PAGE> 175
UTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000. For 1998, 1999 and the five-month period ended May 31, 2000, $455,725, $0
and $164,281, respectively, of additional purchase price was recorded and was
reflected as additional goodwill.
During 1997, UTI entered into a 15-year lease for a facility in Limerick,
Pennsylvania with annual rental payments of approximately $551,000. During July
1998, MCC took occupancy of the facility and began making lease payments in
accordance with the agreement. UTI is a guarantor for this lease. Certain former
UTI shareholders have provided a letter of credit to UTI in the amount of $3.5
million related to the lease guarantee.
The Company has various purchase commitments for materials, supplies,
machinery and equipment incident to the ordinary conduct of business. Such
commitments are not at prices in excess of current market prices.
11. ENVIRONMENTAL MATTERS:
In July 1988, the Company received an Administrative Consent Order from the
Environmental Protection Agency ("EPA") that required the Company to test and
study the groundwater and soil beneath and around its plant in Trappe,
Pennsylvania, and to provide the EPA with a proposal to remediate this
groundwater and soil. In 1991, the Company completed its testing and submitted a
Corrective Measures Study ("CMS") to the EPA. The EPA reviewed the CMS and has
recommended specific measures and the Company has agreed to these to remediate
the groundwater and soil. Since 1991, the Company has been negotiating with the
EPA for a final CMS. In 1995, the Company submitted a revised CMS for EPA
approval. In addition, the Company has been involved as a de minimus contributor
in other environmental matters.
In 1995, the Company updated its environmental site assessment based on
negotiations with the EPA, and the updated assessment indicated that additional
environmental accruals were necessary. In addition, in 1995, the Company entered
into a Settlement Agreement and Release with the Company's former insurance
company which required the insurance company to pay the Company a specified
amount based on expenses incurred by the Company for environmental matters
during the period from 1964 to 1979. The Company had recorded a long-term
liability representing discounted future costs related to these matters of
$3,566,083, $3,555,928 and $3,690,949 as of December 31, 1998, 1999 and May 31,
2000, respectively. These estimates are based on facts known at the current
time; however, changes in EPA standards, improvement in cleanup technology and
discovery of additional information concerning other environmental matters could
affect the estimated costs in the future. The discount rate used in calculating
the environmental liability was 9.5% at December 31, 1999, December 31, 2000 and
May 31, 2000. The aggregate liability at May 31, 2000 is $10,481,835. The
expected payments for the following five years are as follows:
<TABLE>
<S> <C>
2001................................................... $ 1,197,209
2002................................................... 359,645
2003................................................... 319,076
2004................................................... 216,098
2005................................................... 222,581
2006 and thereafter.................................... 8,167,226
-----------
$10,481,835
</TABLE>
In the opinion of management, after consultation with legal counsel, the
outcome of these environmental matters will not have a materially adverse effect
on the Company's financial position or results of operations.
F-93
<PAGE> 176
UTI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company monitors its compliance with all federal and state
environmental regulations. Certain proposed regulations will require changes in
the Company's manufacturing process.
The Company is involved in various legal proceedings in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the outcome of such proceedings will not have a materially adverse
effect on the Company's financial position or results of operations.
12. BUSINESS SEGMENTS:
The Company operated its business as one reportable segment during 1997,
1998, 1999 and for the period ending May 31, 2000.
The following table presents net revenues by country based on the location
of the customer:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED FOR THE FIVE
DECEMBER 31, DECEMBER 31, DECEMBER 31, MONTHS ENDED
OPERATIONS BY GEOGRAPHIC AREA 1997 1998 1999 2000
----------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
United States.................... $55,897,388 $61,919,035 $62,317,674 $27,941,176
UK............................... 2,505,060 3,519,992 3,676,123 1,863,047
Germany.......................... 439,595 3,298,543 4,171,908 2,623,346
Other............................ 2,767,717 4,391,169 5,168,726 3,233,210
----------- ----------- ----------- -----------
Total.................. $61,609,760 $73,128,739 $75,334,431 $35,660,779
</TABLE>
The following table presents property, plant and equipment based on the
location of the asset:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MAY 31,
1998 1999 2000
------------ ------------ -----------
<S> <C> <C> <C>
Long-lived assets:
U.S. ......................................... $16,991,648 $21,186,599 $21,171,533
UK............................................ 458,142 363,720 302,651
Germany....................................... -- 1,240,114 1,134,994
----------- ----------- -----------
Total............................... $17,449,790 $22,790,433 $22,609,178
</TABLE>
13. SUBSEQUENT EVENTS:
On May 31, 2000, the Company's stockholders sold all of the Company's
outstanding stock to Medical Device Manufacturing, Inc. (MDMI) for total
consideration of $150.7 million.
As part of the sale, the Company redeemed the outstanding compensation
arrangements. Shares of common stock were issued to the participants and the
related expense of $20,951,113 was included in the selling, general and
administrative expenses in the accompanying consolidated statement of Income for
the five-month period ending May 31, 2000 related to the redemption.
Additionally, approximately $436,000 of expenses related to the acquisition were
included in selling, general and administrative expenses in the accompanying
consolidated statement of income for the five month period ending May 31, 2000.
F-94
<PAGE> 177
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The American Technical Molding Group:
We have audited the accompanying combined balance sheets of the AMERICAN
TECHNICAL MOLDING GROUP (See Note 1), as of December 31, 1999 and September 30,
2000 and the related combined statements of income, stockholders' equity and
partners' capital and cash flows for the year ended December 31, 1999 and the
period ended September 30, 2000. 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 auditing standards generally
accepted in the United States. 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 combined financial position of American Technical
Molding Group as of December 31, 1999 and September 30, 2000, and the results of
their operations and their cash flows for the year ended December 31, 1999 and
for the period ended September 30, 2000, in conformity with accounting
principles generally accepted in the United States.
Philadelphia, Pennsylvania,
December 19, 2000
F-95
<PAGE> 178
AMERICAN TECHNICAL MOLDING GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 462,000 $ 975,000
Accounts receivable, net of allowance for doubtful
accounts of $28,000 and $23,000 at December 31, 1999
and September 30, 2000, respectively................... 1,273,000 1,077,000
Inventories............................................... 799,000 840,000
Prepaid expenses and other current assets................. 192,000 193,000
----------- -----------
Total current assets.............................. 2,726,000 3,085,000
----------- -----------
Property and equipment, at cost:
Machinery and equipment................................... 4,386,000 4,477,000
Office equipment.......................................... 294,000 380,000
Vehicles.................................................. 94,000 94,000
Leasehold improvements.................................... 392,000 436,000
Less accumulated depreciation and amortization............ (3,186,000) (3,502,000)
----------- -----------
Property and equipment, net............................... 1,980,000 1,885,000
----------- -----------
Total assets...................................... $ 4,706,000 $ 4,970,000
=========== ===========
LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable.......................................... $ 376,000 $ 341,000
Accrued expenses.......................................... 301,000 218,000
Other current liabilities................................. 178,000 120,000
Current portion of long-term debt......................... 341,000 362,000
----------- -----------
Total current liabilities......................... 1,196,000 1,041,000
Long-term debt, net of current portion...................... 865,000 700,000
----------- -----------
Total liabilities................................. 2,061,000 1,741,000
----------- -----------
Commitments and contingencies (note 7)
Stockholders' equity and partners' capital:
Common stock, no par value, 50,000 shares authorized;
issued and outstanding 10,000 shares at December 31,
1999 and September 30, 2000, respectively.............. 50,000 50,000
Partners' capital......................................... 21,000 21,000
Retained earnings......................................... 2,574,000 3,158,000
----------- -----------
Total stockholders' equity and partners'
capital......................................... 2,645,000 3,229,000
----------- -----------
Total liabilities, stockholders' equity and
partners' capital............................... $ 4,706,000 $ 4,970,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-96
<PAGE> 179
AMERICAN TECHNICAL MOLDING GROUP
COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
THE PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
1999 2000
----------- ----------
<S> <C> <C>
Sales....................................................... $13,122,000 $9,954,000
Cost of sales............................................... 9,798,000 6,889,000
----------- ----------
Gross profit.............................................. 3,324,000 3,065,000
Selling, general and administrative expenses................ 1,595,000 1,182,000
----------- ----------
Income from operations...................................... 1,729,000 1,883,000
----------- ----------
Other expense:
Interest expense, net..................................... 46,000 50,000
Other expense............................................. -- 35,000
----------- ----------
Other expense, net.......................................... 46,000 85,000
----------- ----------
Income before income tax expense............................ 1,683,000 1,798,000
Income tax expense.......................................... 2,000 14,000
----------- ----------
Net income.................................................. $ 1,681,000 $1,784,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-97
<PAGE> 180
AMERICAN TECHNICAL MOLDING GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
COMMON STOCK
---------------- PARTNERS' RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1998.............. 10,000 $50,000 $21,000 $2,078,000 $2,149,000
Distributions to shareholders.......... -- -- -- (585,000) (585,000)
Distributions to partners.............. -- -- -- (600,000) (600,000)
Net income............................. -- -- -- 1,681,000 1,681,000
------ ------- ------- ---------- ----------
Balances, December 31, 1999.............. 10,000 50,000 21,000 2,574,000 2,645,000
Distributions to shareholders.......... -- -- -- (830,000) (830,000)
Distributions to partners.............. -- -- -- (370,000) (370,000)
Net income............................. -- -- -- 1,784,000 1,784,000
------ ------- ------- ---------- ----------
Balances, September 30, 2000............. 10,000 $50,000 $21,000 $3,158,000 $3,229,000
====== ======= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-98
<PAGE> 181
AMERICAN TECHNICAL MOLDING GROUP
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,681,000 $ 1,784,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 509,000 439,000
Loss on disposal of assets............................. -- 61,000
Changes in assets and liabilities:
Accounts receivable, net............................. (267,000) 196,000
Inventories.......................................... (110,000) (41,000)
Prepaid expenses and other current assets............ 348,000 (1,000)
Accounts payable..................................... 112,000 (35,000)
Accrued expenses..................................... (1,000) (83,000)
Other current liabilities............................ (554,000) (58,000)
----------- -----------
Net cash provided by operating activities.............. 1,718,000 2,262,000
----------- -----------
Cash flows from investing activities:
Capital expenditures...................................... (680,000) (405,000)
----------- -----------
Net cash used in investing activities.................. (680,000) (405,000)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt................................ 543,000 156,000
Principal payments on long-term debt........................ (349,000) (300,000)
Distributions to stockholders and partners.................. (1,185,000) (1,200,000)
----------- -----------
Net cash used in financing activities.................. (991,000) (1,344,000)
----------- -----------
Net increase in cash and cash equivalents................... 47,000 513,000
Cash and cash equivalents, beginning of period.............. 415,000 462,000
----------- -----------
Cash and cash equivalents, end of period.................... $ 462,000 $ 975,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest...................................... $ 68,000 $ 73,000
=========== ===========
Income taxes paid........................................... $ -- $ 18,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-99
<PAGE> 182
AMERICAN TECHNICAL MOLDING GROUP
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 AND PERIOD ENDED SEPTEMBER 30, 2000
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Business -- The American Technical Molding Group
(the "Company") consists of American Technical Molding, Inc. ("ATM") and Kelley,
Morrison, Kelley, Partners ("KMK") d/b/a KMK Enterprises. The combined financial
statements include the accounts of these entities. All significant intercompany
transactions have been eliminated.
ATM, a California corporation, was incorporated in August 1988 as a C
corporation. In September 1997, ATM converted to a S-corporation. ATM is a
custom injection molding company specializing in medical, high precision, tight
tolerance and clean molding. KMK was formed in 1997, as a partnership, to serve
as the financing subsidiary for ATM's molding equipment purchases. ATM and KMK
are controlled and share the same ownership. Accordingly, the financial
statements are presented on a combined basis.
Accounting Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions. Such estimates and
assumptions effect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period.
Significant estimates included in the accompanying combined financial statements
relate to reserves for sales returns and discounts, uncollectable accounts
receivable, and surplus and obsolete inventories. Actual results could differ
from estimated amounts.
Revenue Recognition -- Revenues are generally recognized upon shipment to
the customer or when title passes to the customer based on the terms of the
sales and are recorded net of sales discounts, returns and allowances.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments purchased with original maturity of three months or less to be cash
equivalents.
Inventories -- Inventories are stated at the lower of cost or market. Cost
is determined on the first-in first-out method and includes cost of materials,
labor and manufacturing overhead.
Property and Equipment -- Property and equipment are recorded at cost.
Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is calculated by use of the straight-line method over the estimated
useful lives of the related assets. Amortization of leasehold improvements is
calculated by use of the straight-line method over the shorter of the lease
terms or estimated useful lives of the improvements. The useful lives of
property and equipment are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment..................................... 7
Office equipment............................................ 3-7
Vehicles.................................................... 5
</TABLE>
Impairment of Long-Lived Assets -- Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability is based on
estimated undiscounted future net cash flows from the use and ultimate
disposition of the asset. The Company recorded no adjustment for impairment of
long-lived assets for the year ended December 31, 1999 and the period ended
September 30, 2000.
Income Taxes -- The stockholders of ATM elected, under the provisions of
Subchapter S of the Internal Revenue Code, to have ATM taxed as a Subchapter S
corporation. Under Subchapter S, taxable income or loss of ATM is generally
included in the income tax returns of its stockholders, and therefore
F-100
<PAGE> 183
AMERICAN TECHNICAL MOLDING GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
no federal income tax provision has been recorded in the accompanying combined
financial statements. Under California tax law, an income tax equal to 1.5% of
taxable income is imposed upon Subchapter S corporations and such tax is
provided for in the accompanying combined financial statements. KMK is a
partnership, which similarly passes through earnings and or losses to the
individual partners. Accordingly, no provision for federal or state income taxes
is recorded by KMK.
New Accounting Pronouncements -- For fiscal 2001, the Company will be
required to adopt Statement of Financial Standards ("SFAS") No. 133, "Accounting
for Derivative Investments and Hedging Activities." The adoption of SFAS No. 133
is not expected to have a material impact on the Company's financial position or
results of operations.
2. INVENTORIES
Inventories at December 31, 1999 and September 30, 2000 consisted of the
following:
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Raw materials................................... $303,000 $319,000
Finished goods.................................. 496,000 521,000
-------- --------
Total................................. $799,000 $840,000
======== ========
</TABLE>
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 1999 and
September 30, 2000 consisted of the following:
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Deposits........................................ $162,000 $155,000
Prepaids........................................ 30,000 38,000
-------- --------
Total................................. $192,000 $193,000
======== ========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses at December 31, 1999 and September 30, 2000 consisted of
the following:
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Accrued wages and related liabilities........... $280,000 $205,000
Other........................................... 21,000 13,000
-------- --------
Total................................. $301,000 $218,000
======== ========
</TABLE>
5. OTHER CURRENT LIABILITIES
Other current liabilities consisted of customer deposits. Customer deposits
represents prepayments made by the Company's customer for mold manufacturing
services. The Company provides various mold manufacturing services and arranges
for subcontracting for the production of molds on behalf of their customers.
Customer deposits are reflected as a current liability in the accompanying
combined financial statements as amount is expected to be earned within the next
year.
F-101
<PAGE> 184
AMERICAN TECHNICAL MOLDING GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt at December 31, 1999 and September 30, 2000 consisted of the
following:
<TABLE>
<CAPTION>
1999 2000
---------- ----------
<S> <C> <C>
Note payable to a financial institution, interest due
monthly at 8.18% per annum, payable in 60 monthly
installments of $10,345, final payment due December 30,
2004, collateralized by the equipment of the Company...... $ 508,000 $ 444,000
Note payable to a financial institution, interest due
monthly at 7.00% per annum, payable in 60 monthly
installments of $7,690, final payment due December 30,
2003, collateralized by the equipment of the Company...... 315,000 261,000
Note payable to a financial institution, interest due
monthly at 8.71% per annum, payable in 60 monthly
installments of $3,194, final payment due December 6,
2004, collateralized by the equipment of the Company...... -- 138,000
Note payable to a financial institution, interest due
monthly at 8.71% per annum, payable in 60 monthly
installments of $4,228, final payment due December 15,
2002, collateralized by the equipment of the Company...... 134,000 104,000
Note payable to a financial institution, interest due
monthly at 9.00% per annum, payable in 60 monthly
installments of $4,700, final payment due July 31, 2001,
collateralized by the equipment of the Company............ 83,000 45,000
Note payable to a financial institution, interest due
monthly at 8.76% per annum, payable in 60 monthly
installments of $2,031, final payment due May 19, 2001,
collateralized by the equipment of the Company............ 31,000 14,000
Note payable to a financial institution, interest due
monthly at 8.04% per annum, payable in 60 monthly
installments of $1,996, final payment due March 31, 2001,
collateralized by the equipment of the Company............ 28,000 12,000
Note payable to a financial institution, interest due
monthly at 8.67% per annum, payable in 60 monthly
installments of $4,181, final payment due August 1, 2000,
collateralized by the equipment of the Company............ 33,000 --
Other....................................................... 74,000 44,000
---------- ----------
Total long-term debt.............................. 1,206,000 1,062,000
Less current portion...................................... (341,000) (362,000)
---------- ----------
Long-term debt, excluding current portion................. $ 865,000 $ 700,000
========== ==========
</TABLE>
F-102
<PAGE> 185
AMERICAN TECHNICAL MOLDING GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDING SEPTEMBER 30,
--------------------------
<S> <C>
2001.................................................... $ 362,000
2002.................................................... 258,000
2003.................................................... 240,000
2004.................................................... 167,000
2005.................................................... 35,000
----------
Total......................................... $1,062,000
==========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases its operating facility under a ten year operating lease
through December 2004, requiring monthly lease payments of approximately
$18,000. Total rental expense was $211,000 and $166,000 for the year ended
December 31, 1999 and the period ended September 30, 2000, respectively.
The future minimum lease payments required under the facilities lease are
as follows:
<TABLE>
<CAPTION>
YEARS ENDING SEPTEMBER 30,
--------------------------
<S> <C>
2001..................................................... $221,000
2002..................................................... 221,000
2003..................................................... 221,000
2004..................................................... 147,000
--------
Total.......................................... $810,000
========
</TABLE>
Legal matters
The Company is involved in a legal proceeding, which is routine, and in the
normal course of business. In the opinion of management, after consultation with
legal counsel, the resolution of these matters will not have a material adverse
impact on the Company's financial position or results of operations.
8. STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
In September 1997, ATM amended its Articles of Incorporation to cancel all
previously issued common and preferred shares and to authorize the issuance of
New Common Stock. The Company is authorized to issue 50,000 shares of the New
Common Stock. New Common Stock is entitled to one vote per share on all matters.
Any action taken by the stockholders of the ATM on any subject matter in which
stockholders are entitled to vote as authorized by applicable California laws or
the Articles of Incorporation shall not be effective unless 60% of the
stockholders have approved such action.
Partners' capital represents the partners' initial capital contribution
into KMK.
9. RELATED PARTY TRANSACTIONS
The Company acquires services from JK Molds, a related party by way of
common ownership. The Company outsources certain mold manufacturing services to
JK Molds. Total expenditures to JK Molds for the year ended December 31, 1999
and the period ended September 30, 2000 was $235,000 and $203,000, respectively.
$17,000 and $12,000 was owed to JK Molds at December 31, 1999 and
F-103
<PAGE> 186
AMERICAN TECHNICAL MOLDING GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 2000, respectively, and is included in accounts payable in the
accompanying combined financial statements.
The stockholders of the Company hold an interest in VL Manufacturing along
with another party ("VL"). VL Manufacturing was established with the sole right
to produce certain products owned by VL. The Company has provided funding to VL
in working with them to develop its products and molds. The Company is
continuing to redevelop, improve and produce product for VL Manufacturing. The
Company has incurred costs of approximately $0 and $121,000, respectively, for
the year ended December 31, 1999 and the period ended September 30, 2000.
10. CONCENTRATIONS OF CREDIT RISK
The Company maintains certain cash accounts in a commercial bank. The
Federal Deposit Insurance Corporation ("FDIC") insures accounts at this bank up
to $100,000. At December 31, 1999 and September 30, 2000, the Company had
$519,000 and $569,000 of bank balances, respectively, held at this commercial
bank. The Company performs ongoing evaluation of this bank to limit their risk
of exposure.
The Company provides credit, in the normal course of business, to various
commercial enterprises. The Company does not require collateral or other
security on these accounts receivable. The Company manages exposure to credit
risk through monitoring procedures. Management believes that credit risks at
December 31, 1999 and September 30, 2000, have been adequately provided for in
the financial statements.
For the year ended December 31, 1999 and the period ended September 30,
2000, the Company had the following three customers that individually accounted
for at least ten percent of the Company's net sales.
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Customer A........................................... 19% 21%
Customer B........................................... 15% 16%
Customer C........................................... 10% 16%
</TABLE>
The related accounts receivable as a percentage to total net accounts
receivable for these three customers as of December 31, 1999 and September 30,
2000 was as follows:
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Customer A........................................... 10% 4%
Customer B........................................... 0% 10%
Customer C........................................... 24% 24%
</TABLE>
11. EMPLOYEE SAVINGS PLAN
The Company has established an employee savings plan ("Plan") under Section
401(k) of the Internal Revenue Code in which all eligible employees can elect to
participate. The employees can elect to have certain percentages of their pay
withheld for contribution to the Plan on a tax-free basis. The Company matches
employees' contributions as defined in the Plan. During the year ended December
31, 1999 and the period ended September 30, 2000, the Company made contributions
to the Plan of $12,000 and $8,000, respectively.
F-104
<PAGE> 187
MDMI HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
PERIOD EXPENSE CHARGE-OFFS OTHER(1) PERIOD
------------ ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
Period ended December 31, 1999:
Allowance for doubtful accounts....... $95 $ 0 $ 0 $ 0 $ 95
Nine months ended September 30, 2000:
Allowance for doubtful accounts....... $95 $16 $(21) $347 $437
</TABLE>
---------------
(1) Relates to acquisitions of Noble-Met and UTI.
F-105
<PAGE> 188
[UTI CORPORATION LOGO]
<PAGE> 189
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table shows the various fees and expenses, other than the
underwriting discounts and commissions, payable by Registrant in connection with
the sale of the common stock being registered under this registration statement.
All amounts shown are estimates except for the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
Registration fee............................................ $28,750
NASD filing fee............................................. 12,000
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses (including legal fees)........... *
Transfer agent and registrar fees and expenses.............. *
Miscellaneous............................................... *
-------
Total............................................. $
=======
</TABLE>
---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (1) actual receipt of an improper benefit or profit in money,
property or services, (2) acts committed in bad faith or active and deliberate
dishonesty established by a final judgment as being material to the cause of
action, or (3) in the case of any criminal proceeding, acts or omissions that
the person had reasonable cause to believe were unlawful. Our charter contains
such a provision which eliminates such liability to the maximum extent permitted
by Maryland law.
In accordance with the Maryland General Corporation Law or MGCL, our
charter and bylaws obligate us, to the maximum extent permitted by Maryland law,
to indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director or officer who
is made party to the proceeding by reason of his service in that capacity or (b)
any individual who, while a director or officer of UTI and at our request,
serves or has served another corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise and who is made a party to the proceeding by reason of
his service in that capacity, against any claim or liability to which he may
become subject by reason of such status. The MGCL permits a corporation to
indemnify its directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceedings to which they may be made a party by reason
of their service in those or other capacities unless it is established that (1)
the act or omission of the director or officer was material to the matter giving
rise to the proceedings and (a) was committed in bad faith or (b) was the result
of active and deliberate dishonesty, (2) the director or officer actually
received an improper personal benefit in money, property or services or (3) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, under the MGCL,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation unless a court orders indemnification, and then
only for expenses. In accordance with the MGCL and our bylaws, as a condition to
advancing expenses, we are required to obtain (1) a written affirmation by the
director or officer of his good faith belief that he has
II-1
<PAGE> 190
met the standard of conduct necessary for indemnification by us as authorized by
our bylaws and (2) a written statement by or on his behalf to repay the amount
paid or reimbursed by us if it shall ultimately be determined that the standard
of conduct was not met.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities issued or sold by
Registrant within the last three years. All such securities were offered and
sold in reliance upon the exemption from registration under Section 4(2) of the
Securities Act, relating to sales by an issuer not involving any public
offering, including offers and sales under Regulation D, or Rule 701 under the
Securities Act.
The sales of securities were made without the use of an underwriter and the
certificates evidencing the shares bear a restrictive legend permitting the
transfer thereof only upon registration of the shares or pursuant to an
exemption from registration under the Securities Act.
(1) On July 6, 1999, Registrant entered into an Agreement for Purchase and
Sale of Stock with G&D, Inc. d/b/a Star Guide Corporation and the shareholders
of G&D, Inc., whereby in consideration for 100% of the capital stock of G&D, the
shareholders of G&D received, among other consideration, an aggregate of 383,912
shares of Class A-1 5% Convertible Preferred Stock equal to $4,200,000 and
certain shareholders of G&D received an aggregate of 200,000 shares of Class B-1
Convertible Preferred stock equal to $20,000.
(2) On July 6, 1999, Registrant entered into subscription agreements with
certain accredited investors for the issuance of an aggregate of 484,460 shares
of Class A-1 5% Convertible Preferred Stock for an aggregate purchase price of
$5,000,000.
(3) On July 6, 1999, Registrant entered into subscription agreements with
certain accredited investors for the issuance of an aggregate of 100,000 shares
of Class B-1 Convertible Preferred Stock for an aggregate purchase price of
$10,000.
(4) On July 6, 1999, Registrant entered into subscription agreements with
certain accredited investors for the issuance of an aggregate of 150,000 shares
of voting common stock for an aggregate purchase price of $1,500.
(5) On December 22, 1999, Registrant entered into a Share Purchase
Agreement with Noble-Met, Ltd. and the Shareholders of Noble-Met, Ltd. whereby
in consideration for 100% of the capital stock of Noble-Met upon the closing
under the Share Purchase Agreement on January 11, 2000 the stockholders of
Noble-Met received, among other consideration, an aggregate of 291,667 shares of
Class A-2 5% Convertible Preferred Stock equal to $3,500,000.
(6) On January 11, 2000, Registrant entered into subscription agreements
with certain accredited investors for the issuance of an aggregate of 833,333
shares of Class A-2 5% Convertible Preferred Stock for an aggregate purchase
price of $10,000,000.
(7) On January 11, 2000, in connection with a credit facility with Banc of
America Commercial Finance Corporation, Registrant issued a warrant to Banc of
America Commercial Finance Corporation to purchase 88,656 shares of non-voting
common stock at an initial exercise price of $.01 per share.
(8) On May 12, 2000, Registrant entered into an Agreement and Plan of
Merger with Medical Engineering Resources, Ltd., the stockholders of Medical
Engineering Resources, Ltd. and MER Acquisition Corporation, a wholly-owned
subsidiary of Registrant. In consideration for 100% of the capital stock of
Medical Engineering Resources, Ltd., the stockholders of Medical Engineering
Resources, Ltd. received, among other consideration, an aggregate of 26,456
shares of Class A-3 5% Convertible Preferred Stock equal to $500,000.
(9) On May 31, 2000 Registrant entered into subscription agreements with
certain accredited investors for the issuance of an aggregate of 3,437,500
shares of Class A-4 5% Convertible Preferred Stock for an aggregate purchase
price of $55,000,000.
II-2
<PAGE> 191
(10) On May 31, 2000, Registrant entered into a Securities Purchase
Agreement with DLJ Investment Partners II, L.P., DLJ Investment Funding II,
Inc., DLJ ESC II, L.P. and DLJ Investment Partners, L.P. for the issuance of an
aggregate of 479,890 shares of Class AA Convertible Preferred Stock for an
aggregate purchase price of $6,238,570.
(11) On May 31, 2000, UTI Acquisition Corp., a wholly-owned subsidiary of
Registrant, entered into a Share Purchase Agreement with UTI Pennsylvania and
the stockholders of UTI Pennsylvania, whereby in consideration for 100% of the
capital stock of UTI Corporation, upon the closing under the Share Purchase
Agreement on June 1, 2000 certain stockholders of UTI received, among other
consideration, an aggregate of 100,000 shares of Class B-2 Convertible Preferred
Stock equal to $10,000.
(12) From May 31, 2000 to December 22, 2000 Registrant granted options to
purchase an aggregate of 673,900 shares of common stock to employees, directors
and consultants under its 2000 Stock Option and Incentive Plan dated February 3,
2000. As of December 22, 2000 no shares have been purchased upon the exercise of
options and 238,654 shares were fully vested.
(13) On December 21, 2000, Registrant entered into subscription agreements
with certain accredited investors for the issuance of an aggregate of 829,616
shares of Class A-5 5% Convertible Preferred Stock for an aggregate purchase
price of $13,273,856.
(14) On December 22, 2000, Medical Device Manufacturing, Inc., a
wholly-owned subsidiary of Registrant entered into an Agreement and Plan of
Merger with American Technical Molding, Inc., the stockholders of American
Technical Molding, Inc. and KMKATM Acquisition Corp., an indirect wholly-owned
subsidiary of Registrant. In consideration for 100% of the capital stock of
American Technical Molding, Inc., two of the stockholders of American Technical
Molding, Inc. received, among other consideration, an aggregate of 157,884
shares of Class A-5 5% Convertible Preferred Stock equal to an aggregate of
$2,526,144.
(15) On December 22, 2000, Registrant issued 7,969 shares of Class A-5 5%
Convertible Preferred Stock equal to approximately $127,000 to H. Stephen
Cookston, a director, in consideration for Mr. Cookston's services in connection
with Registrant's acquisition of American Technical Molding, Inc.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and other instruments issued in such
transactions. All recipients either received adequate information about
Registrant or had access, through employment or other relationships, to
information about Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Agreement for Purchase and Sale of Stock, dated July 6,
1999, among Medical Device Manufacturing, Inc., G&D, Inc.
d/b/a Star Guide, and Shareholders of G&D, Inc.
2.2 Share Purchase Agreement, dated December 22, 1999, among
Medical Device Manufacturing, Inc., Noble-Met, Ltd. and
the Shareholders of Noble-Met, Ltd.
2.3 Agreement and Plan of Merger, dated May 12, 2000, among
Medical Device Manufacturing, Inc., MER Acquisition
Corp., Medical Engineering Resources, Ltd. and the
Shareholders of Medical Engineering Resources, Ltd.
dated.
2.4 Stock Purchase Agreement, dated May 31, 2000, among UTI
Acquisition Corp., UTI Corporation and the Shareholders
of UTI Corporation
</TABLE>
II-3
<PAGE> 192
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.5 Agreement and Plan of Merger dated December 22, 2000,
among Medical Device Manufacturing, Inc., KMKATM
Acquisition Corp., American Technical Molding, Inc. and
the Shareholders of American Technical Molding, Inc.
3.1 Articles of Incorporation of UTI Corporation
3.1.1 Form of Articles of Amendment and Restatement of UTI
Corporation to be effective upon the closing of the
offering being made pursuant to this registration
statement
3.2 Bylaws of UTI Corporation
4.1* Specimen certificate representing the common stock
5.1* Opinion of Hogan & Hartson L.L.P. with respect to the
legality of the common stock
10.1 Second Amended and Restated Registration Rights Agreement
dated May 31, 2000
10.1.1 Form of Joinder to Second Amended and Restated
Registration Rights Agreement
10.2 Shareholders' Agreement dated July 6, 1999
10.2.1 Form of Joinder to Shareholders' Agreement
10.2.2 First Amendment to Shareholders' Agreement dated May 31,
2000
10.2.3 Form of Joinder to First Amendment to Shareholders'
Agreement
10.3 Form of Subscription Agreement for Class A-1 5%
Convertible Preferred Stock, Class B-1 Convertible
Preferred Stock and Voting Common Stock
10.3.1 Form of Subscription Agreement for Class A-2 5%
Convertible Preferred Stock
10.3.2 Form of Subscription Agreement for Class A-3 5%
Convertible Preferred Stock
10.3.3 Form of Subscription Agreement for Class A-4 5%
Convertible Preferred Stock
10.3.4 Form of Subscription Agreement for Class A-5 5%
Convertible Preferred Stock
10.3.5 Form of Subscription Agreement for Class A-5 5%
Convertible Preferred Stock (American Technical Molding
Stockholders)
10.3.6 Form of Subscription Agreement for Class B-2 Convertible
Preferred Stock
10.4* Form of Amended and Restated 2000 Stock Option and
Incentive Plan to be effective upon the closing of the
offering being made pursuant to this registration
statement
10.4.1* Form of 2000 Stock Option and Incentive Plan Incentive
Stock Option Agreement
10.4.2* Form of 2000 Stock Option and Incentive Plan
Non-Incentive Stock Option Agreement
10.5* Form of Employee Stock Purchase Plan to be effective upon
the closing of the offering being made pursuant to this
registration statement
10.6 Star Guide Phantom Stock Plan
10.7 2000 Employee Phantom Stock Plan
10.7.1 Form of 2000 Employee Phantom Stock Plan Agreement
10.8 2000 Retention Plan for Employees
10.9 2000 Retention Plan for MER Consultants and Employees
10.10 UTI Corporation Key Executive Deferred Compensation Plan
10.11 UTI Supplemental Executive Retirement Pension Program
10.12 Employment Agreement, dated May 31, 2000, among Medical
Device Manufacturing, Inc., UTI Corporation and Andrew D.
Freed
</TABLE>
II-4
<PAGE> 193
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.13 Employment Agreement, dated May 31, 2000, among Medical
Device Manufacturing, Inc., UTI Corporation and Barry
Aiken
10.14 Employment Agreement, dated May 31, 2000, among Medical
Device Manufacturing, Inc., UTI Corporation and Jeffrey
M. Farina
10.15 Employment Agreement, dated May 31, 2000, between Medical
Device Manufacturing, Inc. and Eric Pollock
10.16 Non-Competition Agreement, dated May 31, 2000, among
Medical Device Manufacturing, Inc., UTI Corporation and
Andrew D. Freed
10.17 Non-Competition Agreement, dated May 31, 2000, among
Medical Device Manufacturing, Inc., UTI Corporation and
Barry Aiken
10.18 Non-Competition Agreement, dated May 31, 2000, among
Medical Device Manufacturing, Inc., UTI Corporation and
Jeffrey M. Farina
10.19 Non-Competition Agreement, dated May 31, 2000, among
Medical Device Manufacturing, Inc., UTI Corporation and
Frank J. Cornwell
10.20 Non-Competition Agreement, dated July 6, 2000, among
Medical Device Manufacturing, Inc., G&D, Inc. and Eric
Pollock
10.21* Letter Agreement among Medical Device Manufacturing,
Inc., MDMI Holdings, Inc. and Eric Pollock
10.22 Lease Agreement dated July 6, 1999 between 5000
Independence LLC and Medical Device Manufacturing, Inc.
10.23 Lease Agreement dated January 11, 2000 between Image,
L.C. and Noble-Met, Ltd.
10.24 Lease Agreement dated January 8, 1999 between Sunbeam
Properties, Inc. and UTI Corporation
10.25 Lease Agreement dated August 12, 1997 between DTEC, Inc.
and UTI Corporation
10.26 Lease Agreement dated June 14, 1999 between Suddeutche
Feinmechanik GmbH and UTI SFM Feinmechanik GmbH
10.27 Lease Agreement dated July 13, 1993 between Bakmat
Developments Limited, Uniform Tubes Europe and UTI
Corporation
10.27.1 Lease Agreement dated June 30, 2000 by and among
Industrial Property Investment Fund, acting by its
General Partner, Legal and General Property Partners
(Industrial Fund) Limited and Uniform Tubes, Europe
10.28 Lease Agreement dated December 11, 2000 by and among
Peter Lyons, G&D, Inc., d/b/a Star Guide Corporation, and
Seazun Limited
10.29* Standard Industrial Lease dated June 30, 1993 by and
among Upland Technology Associates, J. K. Molds and
American Technical Molding
10.30 Credit Agreement by and Among Medical Device
Manufacturing, Inc., as Borrower, Bank of America, N.A.,
as Administrative Agent and as Lender, Fleet National
Bank, as Syndication Agent and as Lender, Dresdner Bank
AG, New York and Grand Cayman Branch, as Documentation
Agent and as Lender, and the Other Lenders Party Thereto
dated May 31, 2000; Banc of America Securities LLC, as
Co-Arranger and Book Manager and FleetBoston Robertson
Stephens LLC, as Co-Arranger
10.30.1 First Amendment to Credit Agreement dated July 13, 2000
10.30.2* Second Amendment to Credit Agreement
</TABLE>
II-5
<PAGE> 194
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.31 Securities Purchase Agreement dated May 31, 2000 by and
among MDMI Holdings, Inc. and Medical Device
Manufacturing, Inc. and DLJ Investment Partners II, L.P.,
DLJ Investment Funding II, Inc., DLJ ESC II L.P., DLJ
Investment Partners, L.P., and Reliastar Financial Corp.,
including Form of Senior Note, Form of Senior
Subordinated Note, Form of Indenture for the Senior Notes
and Form of Indenture for the Senior Subordinated Notes
10.32 Note Registration Rights Agreement for the Senior Notes
by and among MDMI Holdings, Inc. and DLJ Investment
Partners II, L.P., DLJ Investment Funding II, Inc., DLJ
ESC II L.P., DLJ Investment Partners, L.P., and Reliastar
Financial Corp.
10.33 Note Registration Rights Agreement for the Senior
Subordinated Notes by and among Medical Device
Manufacturing, Inc. and DLJ Investment Partners II, L.P.,
DLJ Investment Funding II, Inc., DLJ ESC II L.P., DLJ
Investment Partners, L.P. and Reliastar Financial Corp.
10.34 Anti-Dilution Agreement among MDMI Holdings, Inc. and DLJ
Investment Partners II, L.P., DLJ Investment Funding II,
Inc., DLJ ESC II L.P., DLJ Investment Partners, L.P. and
Reliastar Financial Corp.
10.35 Management Agreement dated July 6, 1999 by and among KRG
Capital Partners, L.L.C., Medical Device Manufacturing,
Inc., and G&D, Inc.
10.35.1 First Amendment to Management Agreement dated May 31,
2000 by and among KRG Capital Partners, L.L.C., MDMI
Holdings, Inc., Medical Device Manufacturing, Inc. and
G&D, Inc.
10.35.2* Second Amendment to Management Agreement by and among KRG
Capital Partners, L.L.C., MDMI Holdings, Inc. and Medical
Device Manufacturing, Inc.
10.36* Letter agreement between MDMI Holdings, Inc. and H.
Stephen Cookston, as amended
16.1 Letter from Deloitte & Touche
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors -- Arthur Andersen
23.2 Consent of Independent Auditors -- Deloitte & Touche
23.3 Consent of Independent Auditors -- KPMG
23.4 Consent of Hogan & Hartson L.L.P. (included in Exhibit
5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
---------------
* to be filed by amendment
(b) Financial Statement Schedules:
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-6
<PAGE> 195
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 196
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Collegeville,
Commonwealth of Pennsylvania, on December 27, 2000.
UTI Corporation
By: /s/ ANDREW D. FREED
----------------------------------
Andrew D. Freed
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Andrew
D. Freed, Bruce L. Rogers and Steven D. Neumann and each of them, his or her
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, from such person and in each person's name, place and stead,
in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement or any registration
statement relating to this registration statement under Rule 462 under the
Securities Act of 1933 and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his, her or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ANDREW D. FREED Director, Chief Executive December 27, 2000
----------------------------------------------------- Officer and President
Andrew D. Freed (Principal Executive
Officer)
/s/ THOMAS F. LEMKER Vice President Finance December 27, 2000
----------------------------------------------------- (Principal Financial
Thomas F. Lemker Officer/ Principal
Accounting Officer)
/s/ IRA BRIND Director December 27, 2000
-----------------------------------------------------
Ira Brind
/s/ H. STEPHEN COOKSTON Director December 27, 2000
-----------------------------------------------------
H. Stephen Cookston
/s/ JOHN R. FREELAND Director December 27, 2000
-----------------------------------------------------
John R. Freeland
/s/ CHARLES A. HAMILTON Director December 27, 2000
-----------------------------------------------------
Charles A. Hamilton
</TABLE>
II-8
<PAGE> 197
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DOUGLAS M. LADDEN Director December 27, 2000
-----------------------------------------------------
Douglas M. Ladden
/s/ MARK M. KING Director December 27, 2000
-----------------------------------------------------
Mark M. King
/s/ STEVEN D. NEUMANN Director December 27, 2000
-----------------------------------------------------
Steven D. Neumann
/s/ DAVID B. PINKERTON Director December 27, 2000
-----------------------------------------------------
David B. Pinkerton
/s/ ERIC M. POLLOCK Director December 27, 2000
-----------------------------------------------------
Eric M. Pollock
/s/ BRUCE L. ROGERS Director December 27, 2000
-----------------------------------------------------
Bruce L. Rogers
</TABLE>
II-9
<PAGE> 198
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Agreement for Purchase and Sale of Stock, dated July 6,
1999, among Medical Device Manufacturing, Inc., G&D, Inc.
d/b/a Star Guide, and Shareholders of G&D, Inc.
2.2 Share Purchase Agreement, dated December 22, 1999, among
Medical Device Manufacturing, Inc., Noble-Met, Ltd. and
the Shareholders of Noble-Met, Ltd.
2.3 Agreement and Plan of Merger, dated May 12, 2000, among
Medical Device Manufacturing, Inc., MER Acquisition
Corp., Medical Engineering Resources, Ltd. and the
Shareholders of Medical Engineering Resources, Ltd.
dated.
2.4 Stock Purchase Agreement, dated May 31, 2000, among UTI
Acquisition Corp., UTI Corporation and the Shareholders
of UTI Corporation
2.5 Agreement and Plan of Merger dated December 22, 2000,
among Medical Device Manufacturing, Inc., KMKATM
Acquisition Corp., American Technical Molding, Inc. and
the Shareholders of American Technical Molding, Inc.
3.1 Articles of Incorporation of UTI Corporation
3.1.1 Form of Articles of Amendment and Restatement of UTI
Corporation to be effective upon the closing of the
offering being made pursuant to this registration
statement
3.2 Bylaws of UTI Corporation
4.1* Specimen certificate representing the common stock
5.1* Opinion of Hogan & Hartson L.L.P. with respect to the
legality of the common stock
10.1 Second Amended and Restated Registration Rights Agreement
dated May 31, 2000
10.1.1 Form of Joinder to Second Amended and Restated
Registration Rights Agreement
10.2 Shareholders' Agreement dated July 6, 1999
10.2.1 Form of Joinder to Shareholders' Agreement
10.2.2 First Amendment to Shareholders' Agreement dated May 31,
2000
10.2.3 Form of Joinder to First Amendment to Shareholders'
Agreement
10.3 Form of Subscription Agreement for Class A-1 5%
Convertible Preferred Stock, Class B-1 Convertible
Preferred Stock and Voting Common Stock
10.3.1 Form of Subscription Agreement for Class A-2 5%
Convertible Preferred Stock
10.3.2 Form of Subscription Agreement for Class A-3 5%
Convertible Preferred Stock
10.3.3 Form of Subscription Agreement for Class A-4 5%
Convertible Preferred Stock
10.3.4 Form of Subscription Agreement for Class A-5 5%
Convertible Preferred Stock
10.3.5 Form of Subscription Agreement for Class A-5 5%
Convertible Preferred Stock (American Technical Molding
Stockholders)
10.3.6 Form of Subscription Agreement for Class B-2 Convertible
Preferred Stock
10.4* Form of Amended and Restated 2000 Stock Option and
Incentive Plan to be effective upon the closing of the
offering being made pursuant to this registration
statement
10.4.1* Form of 2000 Stock Option and Incentive Plan Incentive
Stock Option Agreement
</TABLE>
<PAGE> 199
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.4.2* Form of 2000 Stock Option and Incentive Plan
Non-Incentive Stock Option Agreement
10.5* Form of Employee Stock Purchase Plan to be effective upon
the closing of the offering being made pursuant to this
registration statement
10.6 Star Guide Phantom Stock Plan
10.7 2000 Employee Phantom Stock Plan
10.7.1 Form of 2000 Employee Phantom Stock Plan Agreement
10.8 2000 Retention Plan for Employees
10.9 2000 Retention Plan for MER Consultants and Employees
10.10 UTI Corporation Key Executive Deferred Compensation Plan
10.11 UTI Supplemental Executive Retirement Pension Program
10.12 Employment Agreement, dated May 31, 2000, among Medical
Device Manufacturing, Inc., UTI Corporation and Andrew D.
Freed
10.13 Employment Agreement, dated May 31, 2000, among Medical
Device Manufacturing, Inc., UTI Corporation and Barry
Aiken
10.14 Employment Agreement, dated May 31, 2000, among Medical
Device Manufacturing, Inc., UTI Corporation and Jeffrey
M. Farina
10.15 Employment Agreement, dated May 31, 2000, between Medical
Device Manufacturing, Inc. and Eric Pollock
10.16 Non-Competition Agreement, dated May 31, 2000, among
Medical Device Manufacturing, Inc., UTI Corporation and
Andrew D. Freed
10.17 Non-Competition Agreement, dated May 31, 2000, among
Medical Device Manufacturing, Inc., UTI Corporation and
Barry Aiken
10.18 Non-Competition Agreement, dated May 31, 2000, among
Medical Device Manufacturing, Inc., UTI Corporation and
Jeffrey M. Farina
10.19 Non-Competition Agreement, dated May 31, 2000, among
Medical Device Manufacturing, Inc., UTI Corporation and
Frank J. Cornwell
10.20 Non-Competition Agreement, dated July 6, 2000, among
Medical Device Manufacturing, Inc., G&D, Inc. and Eric
Pollock
10.21* Letter Agreement among Medical Device Manufacturing,
Inc., MDMI Holdings, Inc. and Eric Pollock
10.22 Lease Agreement dated July 6, 1999 between 5000
Independence LLC and Medical Device Manufacturing, Inc.
10.23 Lease Agreement dated January 11, 2000 between Image,
L.C. and Noble-Met, Ltd.
10.24 Lease Agreement dated January 8, 1999 between Sunbeam
Properties, Inc. and UTI Corporation
10.25 Lease Agreement dated August 12, 1997 between DTEC, Inc.
and UTI Corporation
10.26 Lease Agreement dated June 14, 1999 between Suddeutche
Feinmechanik GmbH and UTI SFM Feinmechanik GmbH
10.27 Lease Agreement dated July 13, 1993 between Bakmat
Developments Limited, Uniform Tubes Europe and UTI
Corporation
</TABLE>
<PAGE> 200
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.27.1 Lease Agreement dated June 30, 2000 by and among
Industrial Property Investment Fund, acting by its
General Partner, Legal and General Property Partners
(Industrial Fund) Limited and Uniform Tubes, Europe
10.28 Lease Agreement dated December 11, 2000 by and among
Peter Lyons, G&D, Inc., d/b/a Star Guide Corporation, and
Seazun Limited
10.29* Standard Industrial Lease dated June 30, 1993 by and
among Upland Technology Associates, J. K. Molds and
American Technical Molding
10.30 Credit Agreement by and Among Medical Device
Manufacturing, Inc., as Borrower, Bank of America, N.A.,
as Administrative Agent and as Lender, Fleet National
Bank, as Syndication Agent and as Lender, Dresdner Bank
AG, New York and Grand Cayman Branch, as Documentation
Agent and as Lender, and the Other Lenders Party Thereto
dated May 31, 2000; Banc of America Securities LLC, as
Co-Arranger and Book Manager and FleetBoston Robertson
Stephens LLC, as Co-Arranger
10.30.1 First Amendment to Credit Agreement dated July 13, 2000
10.30.2* Second Amendment to Credit Agreement
10.31 Securities Purchase Agreement dated May 31, 2000 by and
among MDMI Holdings, Inc. and Medical Device
Manufacturing, Inc. and DLJ Investment Partners II, L.P.,
DLJ Investment Funding II, Inc., DLJ ESC II L.P., DLJ
Investment Partners, L.P., and Reliastar Financial Corp.,
including Form of Senior Note, Form of Senior
Subordinated Note, Form of Indenture for the Senior Notes
and Form of Indenture for the Senior Subordinated Notes
10.32 Note Registration Rights Agreement for the Senior Notes
by and among MDMI Holdings, Inc. and DLJ Investment
Partners II, L.P., DLJ Investment Funding II, Inc., DLJ
ESC II L.P., DLJ Investment Partners, L.P., and Reliastar
Financial Corp.
10.33 Note Registration Rights Agreement for the Senior
Subordinated Notes by and among Medical Device
Manufacturing, Inc. and DLJ Investment Partners II, L.P.,
DLJ Investment Funding II, Inc., DLJ ESC II L.P., DLJ
Investment Partners, L.P. and Reliastar Financial Corp.
10.34 Anti-Dilution Agreement among MDMI Holdings, Inc. and DLJ
Investment Partners II, L.P., DLJ Investment Funding II,
Inc., DLJ ESC II L.P., DLJ Investment Partners, L.P. and
Reliastar Financial Corp.
10.35 Management Agreement dated July 6, 1999 by and among KRG
Capital Partners, L.L.C., Medical Device Manufacturing,
Inc., and G&D, Inc.
10.35.1 First Amendment to Management Agreement dated May 31,
2000 by and among KRG Capital Partners, L.L.C., MDMI
Holdings, Inc., Medical Device Manufacturing, Inc. and
G&D, Inc.
10.35.2* Second Amendment to Management Agreement by and among KRG
Capital Partners, L.L.C., MDMI Holdings, Inc. and Medical
Device Manufacturing, Inc.
10.36* Letter agreement between MDMI Holdings, Inc. and H.
Stephen Cookston, as amended
16.1 Letter from Deloitte & Touche
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors -- Arthur Andersen
</TABLE>
<PAGE> 201
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.2 Consent of Independent Auditors -- Deloitte & Touche
23.3 Consent of Independent Auditors -- KPMG
23.4 Consent of Hogan & Hartson L.L.P. (included in Exhibit
5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
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* to be filed by amendment