November 8, 2004
Ron Sparks
President and Chief Executive Officer
Medical Device Manufacturing, Inc.
200 West 7th Avenue
Collegeville, Pennsylvania 19426-0992
Re: Medical Device Manufacturing, Inc.
Amendment No. 1 to Registration Statement on Form S-4
Filed October 25, 2004
File No. 333-118675
Dear Mr. Sparks:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Summary - Page 1
1. We note your response to comment 11. For clarity, please
revise
your disclosure that "these end markets are projected to grow at
8%-
13% per year from 2003 to 2008" to reflect the specific projected
growth rates and periods of each of your target markets. We note
that the Merrill Lynch report states that the orthopedics market,
sales into which contributed approximately 6.8% of your net sales
in
2003, is expected to grow at a rate of 12% per year from 2003 to
2007. In addition, the Theta Report states that the
cardiovascular
device market, sales into which contributed approximately 33.6% of
your net sales in 2003, is expected to grow at a rate of 12.5% per
year from 2002 to 2006. Finally, the Frost & Sullivan report
states
that the endoscopic market, sales into which contributed
approximately 50% of your net sales in 2003, is expected to grow
at a
rate of 8.2% per year from 2002 to 2007.
2. In addition, although we will not require that consents of
Merrill
Lynch, PJB Medical Publications (the publisher of the Theta
Report)
and Frost & Sullivan be filed as exhibits to your registration
statement, we do believe that those entities should consent to
being
named in your prospectus. Please supplementally provide us with
copies of those contents or revise to eliminate all industry size
and
growth estimates from your prospectus.
Summary Historical and Pro Forma Condensed Consolidated Financial
Data - Page 13
3. The pro forma information includes the effects of certain
transactions listed on page 13. Please revise to summarize the
significant terms of each transaction included, or refer to where
you
discuss those terms in your filing. Please similarly revise your
Unaudited Pro Forma Condensed Consolidated Financial Statements on
page P-1.
4. Please revise to provide a complete description of the
significant
terms of each transaction included in the pro forma information.
5. We note that you present pro forma EBITDA for the twelve months
ended December 31, 2003 and six months ended June 30, 2004. If you
elect to present this pro forma presentation, you should balance
this
presentation with pro forma cash flows from operating, investing
and
financing activities. Otherwise, you should delete the pro forma
presentation of EBITDA.
Risk Factors - Page 16
If we become subject to product liability claims . . . -
Page
23
6. We note your response to comment 24. Please revise this risk
factor further to disclose that, subsequent to the MedSource
recalls
in 2001 and 2002, the customers decided to manufacture the
recalled
devices internally, resulting in lost annual revenues of $5.0
million
and $2.0 million, respectively.
Selected Historical Consolidated Financial Data - Page 44
7. Please refer to our prior comment 33. As previously requested,
please disclose why you reflect UTI Pennsylvania as a predecessor.
On
page 15, where you show the ratio of earnings to fixed charges for
your predecessor, please also disclose the nature of your
predecessor
or cross-reference to where you provide such a discussion.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations - Page 48
Results of Operations - Page 49
8. Please refer to our prior comments 40 and 112. We note that you
recorded an impairment charge for the goodwill at a reporting unit
of
$17.5 million in fiscal 2002. On page F-16 and 52 you state that
the
impairment was due to the loss of significant customers during
2002.
Please revise the disclosure on page F-16 to discuss how you
measured
the amount of the impairment loss including any significant
assumptions. Due to the significance of the impairment charge, we
would expect a discussion of the loss of these customers in your
discussion of the change in revenues. Per your response, the loss
was
not significant to the overall company. Please explain in further
detail why the loss was not significant to the entire company when
the impairment charge of $17.5 million represents 13%, 45%, and
54%
of your revenues, gross profit, and loss before taxes in fiscal
2002.
Contractual Obligations and Commitments - Page 56
9. Please refer to our prior comment 49. Please revise to provide
the required historical information required by Item 303(a)(5) of
Regulation S-K as previously requested. If you choose to present a
pro forma table, then you should also include pro forma notes
explaining and quantifying each adjustment. You should also
discuss
briefly what transactions the pro forma presentation reflects.
10. Please refer to our prior comment 50. As defined in Item
303(a)(5) of Regulation S-K, a purchase obligation means "an
agreement to purchase goods or services that is enforceable and
legally binding on the registrant that specifies all significant
terms, including: fixed or minimum quantities to be purchased;
fixed,
minimum or variable price provisions; and the approximate timing
of
the transaction." Please revise to include purchase obligations in
your tabular disclosure of contractual obligations, or state that
you
have none. The current disclosure regarding your purchase
commitments
should be deleted since it may confuse a reader regarding whether
or
not you do have purchase obligations as defined in this Item.
11. We note your discussion of an obligation related to the Venusa
acquisition and environmental obligations. Why do you discuss
these
obligations in this section? Are they part of your required
disclosure under Item 303(a)(5)? If not, please move these
disclosures to another properly labeled section. Does the table of
contractual obligations include all other long-term liabilities
reflected on your balance sheet under U.S. GAAP? Please explain
your
response and see the requirements of Item 303(a)(5) of Regulation
S-
K.
Business - Page 60
Industry Background - Page 60
12. We note your disclosure on page 60 in response to comment 55.
According to the sources you cited, the growth rates for your
target
markets are expected to continue over the next 3 years. Please
revise the disclosure here accordingly.
Business Strategy - Page 65
13. We note your response to comment 37. Please revise your
disclosures on page 65 to briefly discuss the status of your
efforts
to implement your "Zero Defects" quality improvement program and
your
"Lean Manufacturing" cost reduction program.
Security Ownership of Certain Beneficial Owners and Management -
Page
83
14. We note your response to comment 75. Please revise to
identify
the natural persons who hold or share voting and/or dispositive
power
with respect to the shares held by "DLJ Merchant Banking Partners
III, L.P. and related funds." Although we understand that DLJ
Merchant Banking Partners III, L.P. is controlled by Credit Suisse
Group, which we understand is a public company, disclosure of the
natural persons who hold or share voting and/or dispositive power
with respect to those shares is still required.
Medical Device Manufacturing, Inc. Financial Statements - Page F-2
15. Please refer to our prior comment 1. As previously requested,
please provide disclosures from the perspective of Medical Device
Manufacturing, Inc. ("MDMI"). For example, do the debt covenants
on
page F-19 apply to UTI or MDMI, or both? Is it MDMI`s pension plan
or
UTI`s? What about the profit sharing and SERP? Is MDMI the lessee
or
UTI for the operating leases discussed on page F-33? If UTI, why
are
the amounts and disclosures included in MDMI`s financial
statements?
With respect to your stock-based compensation and Note 8, please
revise to provide your disclosure from the perspective of MDMI,
the
registrant. Were the options granted for common shares of MDMI or
UTI? Are 100% of the options granted by UTI pushed down to MDMI?
Why?
Please explain. Does MDMI have a stock option plan?
Consolidated Statements of Stockholders` Equity - Page F-5
16. Please refer to our prior comments 84 and 118. It appears that
you have grants of parent-company (UTI) stock or stock options
that
are accounted for under Opinion 25 by UTI to an employee of MDMI
(an
entity that is part of the consolidated group of companies). The
amount of compensation expense recorded by MDMI, less any amount
paid
by MDMI to UTI in exchange for the award, should be recorded as a
capital contribution in shareholder`s equity in the separate
financial statements of MDMI. As such, it appears that you should
reflect a separate account for deferred stock-based compensation.
It
also appears that you should be recording deferred compensation
and
additional paid-in capital for the options for your parent`s
shares
of common stock issued to your employees. Please revise or advise.
Please also address your accounting policy for these stock option
grants in your accounting policy footnote and disclose the amount
of
deferred stock based compensation incurred in 2001 and 2002 and
the
method and period over which you are amortizing these amounts to
compensation expense.
Note 1. Summary of Significant Accounting Policies - Page F-7
17. Please refer to our prior comments 89, 114, 126, and 127.
Please
respond to the following comments:
a) Provide us with a detailed response addressing why you believe
that it is appropriate to push down UTI`s debt and related
interest
expense and UTI`s equity to MDMI. Specifically address the
interpretive response to Question 3 of SAB Topic 5.J and how it
applies to your specific facts and circumstances. Also, since
Question 3 and the interpretive response discuss debt, you should
explain in detail why you believe it is appropriate to also push
down
equity. What is the basis for this conclusion?
b) Also discuss why your method of pushing down the equity is
appropriate. That is, we note that you reflect the UTI redeemable
and
convertible preferred stock as a separate line item in MDMI`s
balance
sheet, but you reflect UTI`s other preferred stock and common
stock
as lump sum entries within additional paid-in capital.
c) Tell us whether all of the debt and equity of UTI was pushed
down
to MDMI. If not, please explain why the debt or equity was not
pushed
down.
d) What assets, liabilities, and equity, or income and expenses of
UTI have not been pushed down to MDMI and why?
e) You should revise your disclosures to clarify the reasons for
your
accounting treatment. Include a discussion of MDMI`s rights and
obligations with respect to the pushed down debt of UTI. It should
be
clear from your disclosure what amounts/transactions of UTI you
have
included in MDMI`s financial statements, how you measure and
reflect
those amounts/transactions, and why.
f) Please revise to provide all of the applicable disclosures
required by SAB Topic 1:B.
g) Please note that upon resolving this issue, we may have
additional
comments regarding the disclosures in your filing to properly
reflect
the outcome.
18. Please refer to our prior comment 93. Please revise to
clarify
what "other estimates" may need to be made. Please do the same
for
the other estimates in property, plant and equipment and
intangible
assets as well. Please clarify how your impairment policy complies
with paragraphs 20 -21 of SFAS 142. Why do you refer to the "fair
value" of goodwill? SFAS 142 requires you to assess the implied
fair
value of goodwill.
19. Please refer to our prior comments 94 and 113. Under SFAS 142,
you should amortize an intangible asset with a finite useful life.
A
useful life is the period over which an asset is expected to
contribute directly or indirectly to your future cash flows. Your
estimate of the useful life of an intangible asset should be based
on
an analysis of all pertinent factors including (a) your expected
use
of the asset, (b) any legal, regulatory, or contractual provisions
that may limit the useful life, (c) any legal, regulatory, or
contractual provisions that enable renewal or extension of the
asset`s legal or contractual life without substantial cost
(provided
there is evidence to support renewal or extension and renewal or
extension can be accomplished without material modifications of
the
existing terms and conditions), (d) the effects of obsolescence,
demand, competition, and other economic factors (such as the
stability of the industry, known technological advances,
legislative
action that results in an uncertain or changing regulatory
environment, and expected changes in distribution channels), and
(e)
the level of maintenance expenditures required to obtain the
expected
future cash flows from the asset (for example, a material level of
required maintenance in relation to the carrying amount of the
asset
may suggest a very limited useful life). See paragraph 11 of SFAS
142. We note that in your response to comment 94 only one
subsidiary
has had customer relationships in excess of 20 years. The rest of
the response refers to ten years or "over ten years." Please tell
us
in more how you determined that 20 years was the appropriate
period
and why and how your analysis is consistent with paragraph 11 of
SFAS
142. Did you evaluate the useful life for each acquisition? When
determining the value of the customer base what measurement method
and assumptions did you use and why? Was the cash flow period in
your
measurement analysis consistent with the useful life? It appears
from
your response to prior comment 113 that for the Venusa
acquisition,
you valued the intangible asset related to customer contracts
using a
three-year economic life but use a six-year economic life to
amortize
the asset. Please explain the basis for this difference.
20. Please refer to our prior comments 99 and 100. Please show us
a
rollforward of your reserve for sales returns for each period
presented. The amounts in the rollforward should be presented on a
gross basis. Under paragraph 4 of SFAS 48, that statement does not
apply to sales transactions in which a customer may return
defective
goods, such as under warranty provisions. It appears that your
returns may include those related to warranties for which you
should
comply with SFAS 5 and FIN 45. Please revise or advise.
Note 2. Acquisitions - Page F-13
21. Please refer to our prior comment 106. Please tell us and
disclose the method and significant assumptions you used to
determine
the value of the UTI Class A-7 5% convertible preferred stock
issued
in the acquisition. See paragraph 51(d) of FSAS 141. Also, please
disclose your accounting treatment for the earn-out payment. See
paragraph 51(f) of SFAS 141.
22. We note that page 46 refers to two acquisitions in fiscal
2001.
Please revise or advise. Provide all of the disclosures required
by
paragraph 51 of SFAS 141.
Note 6. Short-term and long-term borrowings - Page F-17
23. Please refer to our prior comment 115. Please disclose how you
accounted for and valued the UTI shares issued and how you will
amortize the debt discount. Did you recognize additional paid-in
capital for the value of the shares issued by UTI? Please also
disclose when the transaction occurred.
Note 8. Stock grants and options and stock based plans - Page F-22
24. Please refer to our prior comment 119. Please tell us and
disclose why you mark to market the value of the phantom stock. Do
employees have the right to receive the appreciation and/or
depreciation of the value of the stock in addition to dividends?
Why
do you refer to stock appreciation rights in the statement of
stockholders` equity? If no dividends have been declared, why do
you
accrue compensation expense? How did you determine the fair value
of
the Class A-1 5% Preferred Stock each period? When did you grant
the
phantom stock rights?
Note 10. Capital Stock - Page F-25
25. We note the $1.8 million expense with regards to a beneficial
conversion feature on the Class A-6 convertible preferred stock.
Please supplementally tell us why other expenses were pushed down
to
MDMI, yet this expense remained on UTI`s statement of operations.
Please cite the accounting literature you relied upon in your
response. Please also tell us and disclose how you determined the
amount of the beneficial conversion feature.
26. Please refer to our prior comment 126. Please tell us why you
assumed (a) a three-year return, (b) of $2.31, and (c) using a
discount rate of 30%.
27. Please refer to our prior comments 131, 132, and 137. Please
tell
us in more detail why you are not accreting to the liquidation
value
or accruing dividends. At what point would you begin accreting to
the
liquidation value and/or accruing dividends. Is the treatment of
dividends similar for the phantom stock? Please explain. Do the
Class
A preferred shares include a beneficial conversion feature? Please
revise Note 10 to disclose that dividends are due upon conversion
of
the preferred stock or reference to where this is disclosed in
Note
16. We note that conversion is at the holder`s option.
Note 15. Business Segments - Page F-32
28. Please refer to our prior comment 134. Under paragraph 17 of
SFAS
131 you may aggregate two or more operating segments into a single
operating segment if aggregation is (a) consistent with the
objective
and basic principles of SFAS 131 and (b) if the segments have
similar
economic characteristics and (c) if the segments are similar in
each
of the other areas outlined in paragraph 17 of SFAS 131. You must
report results as viewed and evaluated by your CODM. While
evaluating
similar economic characteristics is a matter of judgment that
depends
on the specific facts and circumstances, you should look to the
measures management/CODM uses to evaluate performance. Also, as
noted
in the staff`s speech at the 2003 AICPA conference, when looking
at
similar long-term performance, you should evaluate both past
historical and future estimates using a reasonable period of time
for
each. Please revise your response to tell us why you believe that
the
three operating segments have similar economic characteristics.
Provide quantitative data to support your conclusion. If segments
are
aggregated under SFAS 131, you should revise your disclosure to
state
that they are aggregated and why.
Unaudited Condensed Consolidated Financial Statements - Page F-42
Consolidated Condensed Balance Sheets - Page F-42
29. Please show us the significant components of the change in
your
common stock and paid-in capital between December 31, 2003 and
June
30, 2004 of $87,056,000. Ensure that each of these significant
factors is discussed and quantified in the notes to the condensed
consolidated financial statements.
Note 7. Short-term and long-term debt - Page F-49
30. Please tell us and disclose the significant components of the
$15.9 million of fees related to the new debt.
Note 9. Capital Stock and Redeemable Preferred Stock - Page F-50
31. Why are you reflecting the value of the Class B-2 convertible
preferred stock issued to UTI`s CEO for services performed for UTI
in
MDMI`s books?
32. Please tell us and disclose how you accounted for the
difference
of $6.2 million between the carrying value and redemption value of
the Class C redeemable preferred stock and why. Please also
explain
why you reflected the dividends in paid-in capital. Also clarify
to
what other amounts you refer in the last sentence of the last
paragraph in Note 9 on page F-50.
33. Please disclose the significant terms of the Class A-7 and A-8
5%
convertible preferred stock. What is the liquidation value of the
stock?
As appropriate, please amend your registration statement in
response
to these comments. You may wish to provide us with marked copies
of
the amendment to expedite our review. Please furnish a cover
letter
with your amendment that keys your responses to our comments and
provides any requested supplemental information. Detailed cover
letters greatly facilitate our review. Please understand that we
may
have additional comments after reviewing your amendment and
responses
to our comments.
You may contact Heather Tress at (202) 824-5263 or Kate
Tillan
at (202) 942-2861 if you have questions regarding comments on the
financial statements and related matters. Please contact Donald C.
Hunt at (202) 824-5662 or me at (202) 942-7924 with any other
questions.
Sincerely,
David Ritenour
Special Counsel
cc: Christopher J. Walsh, Esq. (via fax)
Scott A. Berdan, Esq. (via fax)
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Mr. Ron Sparks
Medical Device Manufacturing, Inc.
November 8, 2004
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