AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 3, 2001
REGISTRATION NO. 333-62176
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 3841 51-0317849
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification Number)
organization) Classification Code Number)
311 ENTERPRISE DRIVE
PLAINSBORO, NEW JERSEY 08536
(609) 275-0500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-------------------
JOHN B. HENNEMAN, III
CHIEF ADMINISTRATIVE OFFICER AND SECRETARY
311ENTERPRISE DRIVE
PLAINSBORO, NEW JERSEY 08536
(609) 275-0500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
PETER M. LABONSKI, ESQ. PETER H. JAKES, ESQ.
LATHAM & WATKINS DAVID K. BOSTON, ESQ.
885 THIRD AVENUE, SUITE 1000 WILLKIE FARR & GALLAGHER
NEW YORK, NY10022 787 SEVENTH AVENUE
(212) 906-1200 NEW YORK, NY 10019
(212) 728-8000
-------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
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, other than securities offered only in connection with dividend or interest
reinvestment plans, 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, please 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 delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 as amended, 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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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the Securities and Exchange Commission declares
our registration statement effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 3, 2001
3,750,000 SHARES
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
COMMON STOCK
$ PER SHARE [LOGO]
o Integra LifeSciences o The Nasdaq National Market
Holdings Corporation is lists our common stock under
offering 3,500,000 shares the symbol "IART." The last
and selling stockholders reported sale price for the
are offering an common stock on August 2, 2001
additional 250,000 shares. was $26.76 per share.
-------------------------------------
THIS INVESTMENT INVOLVES RISK.SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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PER SHARE TOTAL
----------- ---------
Public offering price .................................. $ $
Underwriting discount .................................. $ $
Proceeds to Integra LifeSciences ....................... $ $
Proceeds to Selling Stockholders ....................... $ $
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INTEGRA LIFESCIENCES AND THE SELLING STOCKHOLDERS HAVE GRANTED THE UNDERWRITERS
A 30-DAY OPTION TO PURCHASE UP TO 562,500 ADDITIONAL SHARES OF COMMON STOCK TO
COVER OVER-ALLOTMENTS, IF ANY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
U.S. BANCORP PIPER JAFFRAY
ABN AMRO ROTHSCHILD LLC
CIBC WORLD MARKETS
ADAMS, HARKNESS & HILL, INC.
THE DATE OF THIS PROSPECTUS IS , 2001.
TABLE OF CONTENTS
PAGE
Summary ............................................................... 1
Risk Factors .......................................................... 5
Forward-Looking Statements ............................................ 16
Use of Proceeds. ...................................................... 17
Price Range of Common Stock ........................................... 17
Dividend Policy ....................................................... 18
Dilution .............................................................. 18
Capitalization ........................................................ 19
Selected Consolidated Financial Data. ................................. 21
Management's Discussion And Analysis of Financial Condition And
Results of Operations ............................................... 23
Business .............................................................. 37
Management ............................................................ 51
Principal Stockholders ................................................ 54
Certain Transactions .................................................. 56
Description of Capital Stock .......................................... 56
Selling Stockholders .................................................. 59
Shares Eligible for Future Sale ....................................... 60
Underwriting .......................................................... 62
Legal Matters ......................................................... 63
Experts ............................................................... 64
Where You Can Find More Information ................................... 65
Index to Financial Statements ......................................... F-1
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i
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SUMMARY
WE DESCRIBE THE ITEMS IN THE FOLLOWING SUMMARY IN MORE DETAIL LATER IN THIS
PROSPECTUS. THIS SUMMARY PROVIDES AN OVERVIEW OF SELECTED INFORMATION AND DOES
NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER. THEREFORE, YOU SHOULD ALSO
READ THE MORE DETAILED INFORMATION SET OUT IN THIS PROSPECTUS, THE FINANCIAL
STATEMENTS AND THE OTHER INFORMATION INCORPORATED BY REFERENCE INTO THIS
PROSPECTUS.
BUSINESS OF INTEGRA LIFESCIENCES
We develop, manufacture and market medical devices, implants and biomaterials
for the neurosurgical, orthopedic and soft tissue repair markets. Our operations
consist of:
o Integra NeuroSciences, which is a leading provider of implants,
devices, and monitors used in neurosurgery, neurotrauma, and related
critical care; and
o Integra LifeSciences, which develops and manufactures a variety of
medical products and devices, including products based on our
proprietary tissue regeneration technology which are used to treat soft
tissue and orthopedic conditions.
Integra NeuroSciences sells primarily through a direct sales organization and
Integra LifeSciences sells primarily through strategic alliances and
distributors. Our strategic alliances include alliances with Ethicon, a division
of Johnson & Johnson, the Genetics Institute Division of American Home Products
Corporation and Medtronic Sofamor Danek.
Integra was founded in 1989 and over the next decade built a product portfolio
based on collagen that may be dissolved and assimilated into the patient's body
and replaced with natural tissue, also known as absorbable or resorbable
collagen, and developed technologies directed toward tissue regeneration. During
1999 and 2000, we expanded into the neurosurgical market through acquisitions
and introductions of new products. Our 2000 revenues increased to $71.6 million
as compared to $42.9 million in 1999, and our revenues for the first three
months of 2001 were $21.7 million compared to $14.5 million for the first three
months of 2000. Integra NeuroSciences accounted for 64% of total revenues in
2000 and 68% of total revenues during the first three months of 2001.
Our goal is to become a leader in the development, manufacture and marketing of
medical devices, implants and biomaterials in the markets in which we compete.
Our products are principally used in the diagnosis and treatment of
neurosurgical, soft-tissue and orthopedic conditions and we intend to expand our
presence in those markets. Key elements of our strategy include the following:
o Expand our presence in neurosurgery and closely related surgical
specialties;
o Continue to develop new and innovative medical products;
o Pursue additional strategic acquisitions; and
o Continue to form strategic alliances for Integra LifeSciences products
and technologies.
OFFICE AND WEBSITE INFORMATION
We formed Integra as a Delaware corporation in June 1989. Our executive
officesare located at 311 Enterprise Drive, Plainsboro, New Jersey 08536. Our
telephone number is (609) 275-0500. Our World Wide Web site address is
http://www.integra-LS.com. The information on our web site is not part of this
prospectus.
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1
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THE OFFERING
Common stock offered:
By Integra LifeSciences ....................... 3,500,000 shares
By the Selling Stockholders ................... 250,000 shares
Total ....................................... 3,750,000 shares
Common stock outstanding after the offering ..... 24,306,779 shares
Assumed offering price .......................... $26.76 per share
Use of proceeds ................................. We intend to use the net
proceeds from the shares
of common stock we are
offering for general
corporate purposes, which
could include, among other
things, the acquisition of
product lines or companies,
the repayment of
indebtedness, the expansion
of our sales and marketing
resources and the development
of new technologies and
products, and for working
capital. See "Use of
Proceeds" for more detailed
information about our use of
proceeds from the offering.
Nasdaq National Market symbol ................... IART
The number of shares of common stock to be outstanding after the offering
excludes:
o 3,865,600 shares of our common stock issuable upon the exercise of
outstanding options at a weighted average exercise price of $8.06 per
share;
o 2,312,300 shares of our common stock available for future issuances
under our stock option plans;
o 2,250,000 shares of our common stock underlying the Restricted Units
held by our President and Chief Executive Officer;
o 600,000 shares of our common stock issuable upon conversion of 54,000
shares of Series CConvertible Preferred Stock;
o 353,825 shares of our common stock issuable under our Employee Stock
Purchase Plan; and
o 310,811 shares of our common stock issuable upon the exercise of
outstanding warrants at a weighted average exercise price of $8.85 per
share.
Except as otherwise noted, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
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2
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SUMMARY FINANCIAL DATA
(in thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED DECEMBER 31,
-------------------------
- -------------------------------------
2001 2000
2000 1999 1998
------------ ------------
- ----------- ------------ -----------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA(1):
Product sales ................................. $ 20,284 $ 13,332 $
64,987 $ 40,047 $ 14,182
Other revenue ................................. 1,400 1,199
6,662 2,829 3,379
--------- ---------
- --------- --------- ---------
Total revenue ............................... 21,684 14,531
71,649 42,876 17,561
Cost of product sales ......................... 8,594 6,687
29,511 22,678 7,580
Research and development ...................... 2,073 1,890
7,524 8,893 8,424
Selling and marketing ......................... 4,751 2,949
15,371 9,487 5,901
General and administrative(2) ................. 3,204 3,747
28,483 13,324 9,787
Amortization .................................. 680 480
2,481 874 49
--------- ---------
- --------- --------- ---------
Total costs and expenses .................... 19,302 15,753
83,370 55,256 31,741
--------- ---------
- --------- --------- ---------
Operating income (loss) ....................... 2,382 (1,222)
(11,721) (12,380) (14,180)
Interest income (expense), net ................ (78) 11
(473) 294 1,250
Gain on disposition of product line ........... -- 115
1,146 4,161 --
Other income (expense) net .................... (62) 123
201 141 588
--------- ---------
- --------- --------- ---------
Income (loss) before income taxes ............. 2,242 (973)
(10,847) (7,784) (12,342)
Income tax expense (benefit)(3) ............... 246 62
108 (1,818) --
--------- ---------
- --------- --------- ---------
Income (loss) before cumulative
effect of accounting change ................. 1,996 (1,035)
(10,955) (5,966) (12,342)
Cumulative effect of an accounting change(4) .. -- (470)
(470) -- --
--------- ---------
- --------- --------- ---------
Net income (loss) ............................. $ 1,996 $ (1,505)
$(11,425) $ (5,966) $(12,342)
========= =========
========= ========= =========
Diluted net income (loss) per share ........... $ 0.07 $ (0.35) $
(0.97) $ (0.40) $ (0.77)
========= =========
========= ========= =========
Weighted average common shares
outstanding ................................. 21,849 17,224
17,553 16,802 16,139
========= =========
========= ========= =========
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3
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In the As Adjusted column of the consolidated balance sheet data below, we have
adjusted the balance sheet data as of March 31, 2001 to give effect to our
receipt of the estimated net proceeds of $[87.9] million from the sale of
3,500,000 shares of common stock we are offering for sale under this prospectus
at an assumed public offering price of $[26.76] per share and the application of
these proceeds as set forth under the caption "Use of Proceeds."
AS OF MARCH 31, 2001
------------------------
ACTUAL AS ADJUSTED
-----------------------------
(IN THOUSANDS)
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments ................ $ 19,374 $ 96,366
Working capital .......................... 27,992 112,780
Total assets ............................. 91,079 168,071
Short-term debt .......................... 9,150 1,354
Long-term debt ........................... 3,121 --
Accumulated deficit ...................... (103,733) (103,733)
Total stockholders' equity ............... 56,874 144,783
- -----------
(1) As the result of our acquisitions of Rystan Company, Inc. in September 1998
and the NeuroCare Group of companies in March 1999, and the acquisition of
Clinical Neuro Systems and product lines from NMT Medical, Inc. in 2000,
the consolidated financial results for certain of the periods presented
above may not be directly comparable.
(2) General and administrative expenses in 2000 included a $13.5 million
stock-based compensation charge in connection with the extension of the
employment of the Company's President and Chief Executive Officer.
(3) The 1999 income tax benefit includes a non-cash benefit of $1.8 million
resulting from the reduction of the deferred tax liability recorded in the
NeuroCare Group of companies acquisition to the extent that consolidated
deferred tax assets were generated subsequent to the acquisition. The 2000
income tax expense and 1999 income tax benefit include $0.5 million and
$0.6 million, respectively, of benefits associated with the sale of New
Jersey state net operating losses.
(4) As the result of the adoption of SEC Staff Accounting Bulletin No. 101
Revenue Recognition, we recorded a $470,000 cumulative effect of an
accounting change to defer a portion of a nonrefundable, up-front fee
received and recorded in other revenue in 1998. The cumulative effect of
this accounting change was measured as of January 1, 2000. As a result of
this accounting change, other revenue in 2000 includes $112,000 of
amortization of the amount deferred as of January 1, 2000.
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4
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE YOU DECIDE TO
BUY OUR COMMON STOCK. YOU SHOULD ALSO CONSIDER THE OTHER INFORMATION IN THIS
PROSPECTUS AS WELL AS THE OTHER DOCUMENTS INCORPORATED IN THIS PROSPECTUS BY
REFERENCE.
WE MAY CONTINUE TO INCUR OPERATING LOSSES.
To date, we have experienced significant operating losses in funding the
research, development, manufacturing and marketing of our products and may
continue to incur operating losses. As of March 31, 2001, we had an accumulated
deficit of $103.7 million. We have incurred operating losses in each fiscal year
since we were formed. We have experienced two quarters of profitability over the
last four quarters, including the first quarter of 2001. Our ability to maintain
profitability depends in part upon our ability, either independently or in
collaboration with others, to successfully manufacture and market our products
and services. We cannot assure you that we can sustain profitability on an
ongoing basis.
WE MAY BE UNABLE TO RAISE ADDITIONAL FINANCING NECESSARY TO CONDUCT OUR
BUSINESS, MAKE PAYMENTS WHEN DUE OR REFINANCE OUR DEBT.
As of March 31, 2001, we had cash, cash equivalents and short-term investments
of approximately $19.4 million and short and long-term debt of approximately
$12.3 million. In the absence of a material acquisition or a material adverse
change in our business, financial condition or results of operations, we have
the ability to fund our operations from our existing capital resources and cash
generated from our operations through the end of 2002. However, we may need to
raise additional funds in the future in order to implement our business plan, to
refinance our debt, to conduct research and development, to fund marketing
programs or to acquire complementary businesses, technologies or services. Any
required additional financing may be unavailable on terms favorable to us, or at
all. If we raise additional funds by issuing equity securities, you may
experience significant dilution of your ownership interest and these securities
may have rights senior to those of the holders of our preferred or common stock.
If we cannot obtain additional financing when required on acceptable terms, we
may be unable to fund our expansion, develop or enhance our products and
services, take advantage of business opportunities or respond to competitive
pressures.
WHILE OUR CURRENT CAPITAL REQUIREMENTS DO NOT INCLUDE A SIGNIFICANT INCREASE IN
OUR DEBT LEVELS, WERE CIRCUMSTANCES TO ARISE THAT REQUIRE US TO INCUR MORE DEBT,
THE PROVISIONS OF OUR CURRENT DEBT INSTRUMENTS WOULD LIMIT US FROM INCURRING
THAT INDEBTEDNESS.
Historically, the cash we generate from our operating activities, new equity
investments and borrowings has been sufficient to meet our requirements for debt
service, working capital, capital expenditures, and investments in and advances
to our affiliates. Although in the past we have been able to obtain new debt, we
cannot guarantee that we will be able to continue to do so in the future or that
the cost to us or the other terms which would affect us would be as favorable to
us as our current loans and credit agreement. Although we believe that our
business will continue to generate cash, should we need to borrow additional
funds, the covenants in the credit agreement for our current debt limit our
ability to borrow more money.
THE INTEGRA PARENT COMPANY DEPENDS ON ITS SUBSIDIARIES IN WHICH IT HAS
INVESTMENTS TO FUND ITS CASH NEEDS.
The Integra parent company directly owns no significant assets other than stock,
equity and other interests in our subsidiaries. This creates risks regarding our
ability to provide cash to the Integra parent company to conduct future
activities or to repay any interest and principal which it might owe on future
borrowings at the Integra parent level, our ability to pay cash dividends to our
preferred and common stockholders in the future, and the ability of our
subsidiaries and other companies to respond to changing business and economic
conditions and to get new loans.
5
OUR OPERATING RESULTS MAY FLUCTUATE.
Our operating results may fluctuate from time to time, which could affect the
value of your shares. Our operating results have fluctuated in the past and can
be expected to fluctuate from time to time in the future. Some of the factors
that may cause these fluctuations include:
o the impact of acquisitions;
o the timing of significant customer orders;
o market acceptance of our existing products, as well as products in
development;
o the timing of regulatory approvals;
o the timing of payments received and the recognition of those payments
as revenue under collaborative arrangements and strategic alliances;
o our ability to manufacture our products efficiently; and
o the timing of our research and development expenditures.
THE INDUSTRY AND MARKET SEGMENTS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE, AND
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES.
In general, the medical technology industry is characterized by intense
competition. We compete with established pharmaceutical and medical technology
companies. Competition also comes from early stage companies that have
alternative technological solutions for our primary clinical targets, as well as
universities, research institutions and other non-profit entities. Many of our
competitors have access to greater financial, technical, research and
development, marketing, manufacturing, sales, distribution services and other
resources than we do. Further, our competitors may be more effective at
implementing their technologies to develop commercial products.
Our competitive position will depend on our ability to achieve market acceptance
for our products, implement production and marketing plans, secure regulatory
approval for products under development, obtain patent protection and secure
adequate capital resources. We may need to develop new applications for our
products to remain competitive. Technological advances by one or more of our
current or future competitors could render our present or future products
obsolete or uneconomical. Our future success will depend upon our ability to
compete effectively against current technology as well as to respond effectively
to technological advances. We can not assure you that competitive pressures will
not adversely affect our profitability.
The largest competitors of Integra NeuroSciences in the neurosurgery markets are
the PS Medical division of Medtronic, Inc., the Codman division of Johnson &
Johnson, the Valleylab and Radionics divisions of Tyco International Ltd., and
NMT Neurosciences, a division of NMT Medical, Inc. In addition, various of the
Integra NeuroSciences product lines compete with smaller specialized companies
or larger companies that do not otherwise focus on neurosurgery. The products of
Integra LifeSciences face diverse and broad competition, depending on the market
addressed by the product. In addition, certain companies are known to be
competing in the area of skin substitution or regeneration, including
Organogenesis and Advanced Tissue Sciences. Finally, in certain cases our
products compete primarily against medical practices that treat a condition
without using a device, rather than any particular product, such as autograft
tissue as a substitute for INTEGRA(R) Dermal Regeneration Template.
OUR CURRENT STRATEGY INVOLVES GROWTH THROUGH ACQUISITIONS, WHICH REQUIRES US TO
INCUR SUBSTANTIAL COSTS AND POTENTIAL LIABILITIES FOR WHICH WE MAY NEVER REALIZE
THE ANTICIPATED BENEFITS.
In addition to internal growth, our current strategy involves growth through
acquisitions. Since the beginning of 2000, we have acquired four different
businesses. On January 17, 2000, we purchased the business, including certain
assets and liabilities, of Clinical Neuro Systems, Inc. for $6.8 million. CNS
designs, manufactures and
6
sells neurosurgical external ventricular drainage systems, including catheters
and drainage bags, as well as cranial access kits. The purchase price of the CNS
business consisted of $4.0 million in cash and a $2.8 million 5% secured
promissory note issued to the seller.
On April 6, 2000, we purchased the Selector(R) Ultrasonic Aspirator, Ruggles(TM)
hand-held neurosurgical instruments and Spembly Medical cryosurgery product
lines, including certain assets and liabilities, from NMT Medical, Inc. for
$11.6 million in cash.
On April 4, 2001, we acquired all of the outstanding stock of GMSmbH, the German
manufacturer of the LICOX(R) Brain Tissue Oxygen Monitoring System, for $2.9
million, of which $2.3 million was paid at closing.
On April 27, 2001, we acquired Satelec Medical, a subsidiary of the
Satelec-Pierre Rolland group, for $3.6 million in cash. Satelec Medical, based
in France, manufactures and markets the Dissectron(R) ultrasonic surgical
aspirator console and a line of related handpieces.
We cannot assure you that we will be able to continue to implement our growth
strategy, or that this strategy will ultimately be successful. A significant
portion of our growth in revenues has resulted from, and is expected to continue
to result from, the acquisition of businesses complementary to our own. We
engage in evaluations of potential acquisitions and are in various stages of
discussion regarding possible acquisitions, certain of which, if consummated,
could be significant to us. Any potential acquisitions may result in significant
transaction expenses, increased interest and amortization expense, increased
depreciation expense and increased operating expense, any of which could have a
material adverse effect on our operating results. As we grow by acquisitions, we
must be able to integrate and manage the new businesses to realize economies of
scale and control costs. In addition, acquisitions involve other risks,
including diversion of management resources otherwise available for ongoing
development of our business and risks associated with entering new markets with
which our marketing and sales force has limited experience or where experienced
distribution alliances are not available. Our future profitability will depend
in part upon our ability to further develop our resources to adapt to the
particulars of those new products or business areas and to identify and enter
into satisfactory distribution networks. We may not be able to identify suitable
acquisition candidates in the future, obtain acceptable financing or consummate
any future acquisitions. If we cannot integrate acquired operations, manage the
cost of providing our products or price our products appropriately, our
profitability would suffer. In addition, as a result of our acquisitions of
other healthcare businesses, we may be subject to the risk of unanticipated
business uncertainties or legal liabilities relating to those acquired
businesses for which the sellers of the acquired businesses may not indemnify
us. Future acquisitions may also result in potentially dilutive issuances of
equity securities.
TO MARKET OUR PRODUCTS UNDER DEVELOPMENT WE WILL FIRST NEED TO OBTAIN REGULATORY
APPROVAL. FURTHER, IF WE FAIL TO COMPLY WITH THE EXTENSIVE GOVERNMENTAL
REGULATIONS THAT AFFECT OUR BUSINESS, WE COULD BE SUBJECT TO PENALTIES AND COULD
BE PRECLUDED FROM MARKETING OUR PRODUCTS.
Our research and development activities and the manufacturing, labeling,
distribution and marketing of our existing and future products are subject to
regulation by numerous governmental agencies in the United States and in other
countries. The FDA and comparable agencies in other countries impose mandatory
procedures and standards for the conduct of clinical trials and the production
and marketing of products for diagnostic and human therapeutic use.
Our products under development are subject to FDA approval or clearance prior to
marketing for commercial use. The process of obtaining necessary FDA approvals
or clearances can take years and is expensive and full of uncertainties. Our
inability to obtain required regulatory approval on a timely or acceptable basis
could harm our business. Further, approval or clearance may place substantial
restrictions on the indications for which the product may be marketed or to whom
it may be marketed. To gain approval for the use of a product for clinical
indications other than those for which the product was initially approved or
cleared or for significant changes to
7
the product, further studies, including clinical trials and FDA approvals, may
be required. In addition, for products with an approved pre-market approval
application, the FDA requires postapproval reporting and may require
postapproval surveillance programs to monitor the product's safety and
effectiveness. Results of post approval programs may limit or expand the further
marketing of the product.
We believe that the most significant risk of our recent applications to the FDA
relates to the regulatory classification of certain of our new products, or
proposed new uses for existing products. In the filing of each application, we
make a legal judgment about the appropriate form and content of the application.
If the FDA disagrees with our judgment in any particular case and, for example,
requires us to file a pre-market approval application rather than allowing us to
market for approved uses while we seek broader approvals or requires extensive
additional clinical data, the time and expense required to obtain the required
approval might be significantly increased or might not be granted. For example,
we have filed, and expect to file, a series of post-approval supplements for the
INTEGRA(R) Dermal Regeneration Template seeking approval to promote the product
for new uses. It is possible that the FDA will require additional clinical
information to support these applications, or that the FDA will reject our
applications entirely.
Approved products are subject to continuing FDA requirements relating to quality
control and quality assurance, maintenance of records, reporting of adverse
events, and documentation, and labeling and promotion of medical devices.
The FDA and foreign regulatory authorities require that our products be
manufactured according to rigorous standards. These regulatory requirements may
significantly increase our production or purchasing costs and may even prevent
us from making or obtaining our products in amounts sufficient to meet market
demand. If we, or a third party manufacturer, change our approved manufacturing
process, the FDA may require a new approval before that process could be used.
Failure to develop our manufacturing capability may mean that even if we develop
promising new products, we may not be able to produce them profitably, as a
result of delays and additional capital investment costs. Manufacturing
facilities, both international and domestic, are also subject to inspections by
or under the authority of the FDA. In addition, failure to comply with
applicable regulatory requirements could subject us to enforcement action,
including product seizures, recalls, withdrawal of clearances or approvals,
restrictions on or injunctions against marketing our product or products based
on our technology, and civil and criminal penalties. We have voluntarily
recalled various products in the last four years, but none of our recalls have
related to important products or resulted in significant expense. There have
been no involuntary recalls of our products. See "Business Government
Regulation."
CERTAIN OF OUR PRODUCTS CONTAIN MATERIALS DERIVED FROM ANIMAL SOURCES, AND MAY
AS A RESULT BECOME SUBJECT TO ADDITIONAL REGULATION.
Certain of our products, including the DuraGen(R) Dural Graft Matrix and the
INTEGRA(R) Dermal Regeneration Template, contain material derived from animal
tissue. Products, including food as well as pharmaceuticals and medical devices,
that contain materials derived from animal sources are increasingly subject to
scrutiny in the press and by regulatory authorities. The authorities are
concerned about the potential for the transmission of disease from animals to
humans via those materials. This public scrutiny has been particularly acute in
Western Europe with respect to products derived from cattle, because of concern
that materials infected with the agent that causes bovine spongiform
encephalopathy, otherwise known as "BSE" or "mad cow disease," may, if ingested
or implanted, cause a variant of the human Creutzfeldt-Jakob Disease, an
ultimately fatal disease with no known cure.
We take great care to provide that our products are safe, and free of agents
that can cause disease. In particular, the collagen used in the manufacture of
our products is derived only from the achilles tendon of cattle from the United
States, where no cases of BSE have been reported. Scientists and regulatory
authorities classify the achilles tendon as having a negligible risk of
containing the agent that causes BSE (an improperly folded protein known as a
prion) compared with other parts of the body. Additionally, we use processes in
the manufacturing of our products that are believed to inactivate prions.
8
Nevertheless, products that contain materials derived from animals, including
our products, may become subject to additional regulation, or even be banned in
certain countries, because of concern over the potential for prion transmission.
Accordingly, new regulation, or a ban of our products, could have a significant
adverse effect on our current business or our ability to expand our business.
LACK OF MARKET ACCEPTANCE FOR OUR PRODUCTS OR MARKET PREFERENCE FOR TECHNOLOGIES
WHICH COMPETE WITH OUR PRODUCTS WOULD REDUCE OUR REVENUES AND PROFITABILITY.
We cannot be certain that our current products, or any other products that we
develop or market, will achieve or maintain market acceptance. Certain of the
medical indications that can be treated by our devices can also be treated by
other medical devices or by medical practices that do not include a device. The
medical community widely accepts many alternative treatments, and certain of
these other treatments have a long history of use. For example, suturing in
graft tissue is a well-established means for closing the dura mater, and it may
interfere with the widespread acceptance in the market for INTEGRA(R) Dermal
Regeneration Template.
We cannot be certain that our devices and procedures will be able to replace
those established treatments or that either physicians or the medical community
in general will accept and utilize our devices or any other medical products
that we may develop. For example, we cannot be certain that the NeuraGen(TM)
Nerve Guide, when launched commercially, will be accepted by the medical
community over conventional microsurgical techniques for connecting severed
peripheral nerves.
In addition, our future success depends, in part, on our ability to develop
additional products. Even if we determine that a product candidate has medical
benefits, the cost of commercializing that product candidate may be too high to
justify development. In addition, competitors may develop products that are more
effective, cost less, or are ready for commercial introduction before our
products. If we are unable to develop additional, commercially viable products,
it could adversely affect our future prospects.
Market acceptance of our products depends on many factors, including our ability
to convince prospective collaborators and customers that our technology is an
attractive alternative to other technologies, manufacture products in sufficient
quantities and at an acceptable cost and place and service, directly, or through
our strategic alliances, sufficient quantities of our products. In addition,
limited funding available for product and technology acquisitions by our
customers, as well as internal obstacles to customer approvals of purchases of
our products could harm our technology. The industry is subject to rapid and
continuous change arising from, among other things, consolidation and
technological improvements. One or more of these factors may vary unpredictably,
which could materially adversely affect our competitive position. We may not be
able to adjust our contemplated plan of development to meet changing market
demands.
OUR BUSINESS DEPENDS SIGNIFICANTLY ON KEY RELATIONSHIPS WITH THIRD PARTIES WHICH
WE MAY NOT BE ABLE TO ESTABLISH AND MAINTAIN.
Our revenue stream and our business strategy depend in part on our entering into
and maintaining collaborative or alliance agreements with third parties
concerning product marketing as well as research and development programs. Our
most important strategic alliances are our agreement with Ethicon, Inc., a
division of Johnson & Johnson, relating to INTEGRA(R) Dermal Regeneration
Template, and our agreement with the Genetics Institute division of American
Home Products for the development of collagen matrices to be used in conjunction
with Genetics Institute's recombinant bone protein, a protein that stimulates
the growth of bone in humans. Termination of either of these alliances would
have an adverse effect on our revenues and would substantially reduce our
expectations for the growth of our Integra LifeSciences division.
Our ability to enter into agreements with collaborators depends in part on
convincing them that our technology can help achieve and accelerate their goals
and strategies. This may require substantial time, effort and expense on our
part with no guarantee that a strategic relationship will result. We may not be
able to establish or maintain these relationships on commercially acceptable
terms. Our future agreements may not ultimately be
9
successful. Even if we enter into collaborative or alliance agreements, our
collaborators could terminate these agreements or they could expire before
meaningful developmental milestones are reached. The termination or expiration
of any of these relationships could have a material adverse effect on our
business.
Much of the revenue that we may receive under these collaborations will depend
upon our collaborators' ability to successfully introduce, market and sell new
products derived from our products. Our success depends in part upon the
performance by these collaborators of their responsibilities under these
agreements.
Some collaborators may not perform their obligations as we expect. Some of the
companies we currently have alliances with or are targeting as potential
alliances offer products competitive with our products or may develop
competitive production technologies or competitive products outside of their
collaborations with us that could have a material adverse effect on our
competitive position. In addition, our role in the collaborations is mostly
limited to the production aspects.
As a result, we may also be dependent on collaborators for other aspects of the
development, preclinical and clinical testing, regulatory approval, sales,
marketing and distribution of our products. If our current or future
collaborators do not effectively market our products or develop additional
products based on our technology, it could significantly reduce our sales and
other revenues.
Finally, we have received and may continue to receive payments from
collaborators that may not be immediately recognized as revenue and therefore
may not contribute to reported profits until further conditions are satisfied.
OUR INTELLECTUAL PROPERTY RIGHTS MAY NOT PROVIDE MEANINGFUL COMMERCIAL
PROTECTION FOR OUR PRODUCTS, WHICH COULD ENABLE THIRD PARTIES TO USE OUR
TECHNOLOGY OR VERY SIMILAR TECHNOLOGY AND COULD REDUCE OUR ABILITY TO COMPETE IN
THE MARKET.
Our ability to compete effectively will depend, in part, on our ability to
maintain the proprietary nature of our technologies and manufacturing processes,
which includes the ability to obtain, protect and enforce patents on our
technology and to protect our trade secrets. We own or have licensed patents
that cover significant aspects of the DuraGen(R), NeuraGen(TM), INTEGRA(R)
Dermal Regeneration Template, Camino(R), Ventrix(R), LICOX(R), Selector(R),
BioPatch(R), VitaCufF(R), and Spembly(R) cryosurgical product lines. However,
you should not rely on our patents to provide us with any significant
competitive advantage. Others may challenge our patents and, as a result, our
patents could be narrowed, invalidated or rendered unenforceable. Competitors
may develop products similar to ours which our patents do not cover. In
addition, our current and future patent applications may not result in the
issuance of patents in the United States or foreign countries. Further, there is
a substantial backlog of patent applications at the U.S. Patent and Trademark
Office, and the approval or rejection of patent applications may take several
years.
OUR COMPETITIVE POSITION IS DEPENDENT IN PART UPON UNPATENTED TRADE SECRETS,
WHICH WE MAY NOT BE ABLE TO PROTECT.
Our competitive position is also dependent upon unpatented trade secrets. Trade
secrets are difficult to protect. We cannot assure you that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, that those trade
secrets will not be disclosed, or that we can effectively protect our rights to
unpatented trade secrets.
In an effort to protect our trade secrets, we have a policy of requiring our
employees, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of their
relationship with us must be kept confidential, except in specified
circumstances. We cannot assure you, however, that these agreements will provide
meaningful protection for our trade secrets or other proprietary information in
the event of the unauthorized use or disclosure of confidential information.
10
OUR SUCCESS WILL DEPEND PARTLY ON OUR ABILITY TO OPERATE WITHOUT INFRINGING OR
MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.
We may be sued for infringing the intellectual property rights of others. In
addition, we may find it necessary, if threatened, to initiate a lawsuit seeking
a declaration from a court that we do not infringe the proprietary rights of
others or that these rights are invalid or unenforceable. If we do not prevail
in any litigation, in addition to any damages we might have to pay, we would be
required to stop the infringing activity or obtain a license. Any required
license may not be available to us on acceptable terms, or at all. In addition,
some licenses may be nonexclusive, and, therefore, our competitors may have
access to the same technology licensed to us. If we fail to obtain a required
license or are unable to design around a patent, we may be unable to sell some
of our products, which could have a material adverse effect on our revenues and
profitability.
IT MAY BE DIFFICULT TO REPLACE SOME OF OUR SUPPLIERS.
Outside vendors, some of whom are sole-source suppliers, provide key components
and raw materials used in the manufacture of our products. Although we believe
that alternative sources for these components and raw materials are available,
any supply interruption in a limited or sole source component or raw material
could harm our ability to manufacture our products until a new source of supply
is identified and qualified. In addition, an uncorrected defect or supplier's
variation in a component or raw material, either unknown to us or incompatible
with our manufacturing process, could harm our ability to manufacture products.
We may not be able to find a sufficient alternative supplier in a reasonable
time period, or on commercially reasonable terms, if at all, and our ability to
produce and supply our products could be impaired. We believe that these factors
are most likely to affect our Camino(R) and Ventrix(R) lines of intra-cranial
pressure monitors and catheters, which are assembled using many different
electronic parts from numerous suppliers. We obtain parts or raw materials from
more than 2,200 different suppliers, of which 18 are sole-source suppliers.
While we are not dependent on these sole-source suppliers, if we were suddenly
unable to purchase products from one or more of these companies, we would need
time to qualify a replacement, and the production of any affected products could
be disrupted. While it is our policy to maintain sufficient inventory of
components that our production will not be significantly disrupted even if a
particular component or material is not available for a period of time, we
remain at risk that we will not be able to qualify new components or materials
quickly enough to prevent a disruption if one or more of our suppliers cease
production of important components or materials. While we rely on Spear
Products, Inc. for cattle tendon, which is our source of collagen for many of
our products, we believe it is readily available in adequate quantities from
other suppliers.
IF ANY OF OUR MANUFACTURING FACILITIES WERE DAMAGED AND/OR OUR MANUFACTURING
PROCESSES INTERRUPTED, WE COULD EXPERIENCE LOST REVENUES AND OUR BUSINESS COULD
BE SERIOUSLY HARMED.
We manufacture our products in a limited number of facilities. Damage to our
manufacturing, development or research facilities due to fire, natural disaster,
power loss, communications failure, unauthorized entry or other events could
cause us to cease development and manufacturing of some or all of our products.
In particular, our San Diego, California facility that manufactures our
Camino(R) and Ventrix(R) product line is as susceptible to earthquake damage and
power losses from electrical shortages as are other businesses in the Southern
California area. Our silicone manufacturing plant in Anasco, Puerto Rico is
vulnerable to hurricane damage.
WE MAY BE INVOLVED IN LAWSUITS TO PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH MAY BE EXPENSIVE.
In order to protect or enforce our intellectual property rights, we may have to
initiate legal proceedings against third parties, such as infringement suits or
interference proceedings. Intellectual property litigation is costly, and, even
if we prevail, the cost of that litigation could affect our profitability. In
addition, litigation is time consuming and could divert management attention and
resources away from our business. We may also provoke these third parties to
assert claims against us.
11
In July 1996, we filed a patent infringement lawsuit in the United States
District Court for the Southern District of California against Merck KGaA, a
German corporation, Scripps Research Institute, a California nonprofit
corporation, and David A. Cheresh, Ph.D., a research scientist with Scripps,
seeking damages and injunctive relief. The complaint charged, among other
things, that the defendant Merck KGaA willfully and deliberately induced, and
continues to willfully and deliberately induce, defendants Scripps Research
Institute and Dr. David A. Cheresh to infringe certain of our patents.
This case went to trial in February 2000, and on March 17, 2000, a jury returned
a unanimous verdict for us finding that Merck KGaA had willfully infringed and
induced the infringement of our patents, and awarded $15,000,000 in damages. The
court dismissed Scripps and Dr. Cheresh from the case. Various post-trial
motions are pending, including a request by Merck KGaA for a judgment as a
matter of law notwithstanding the verdict, which could have the effect of
reducing the judgment or reducing the verdict of the jury. The litigation has
cost in excess of $6.0 million to date. Lower levels of expenditures are
expected on an ongoing basis until its conclusion. See "Business-Legal
Proceedings."
WE ARE EXPOSED TO A VARIETY OF RISKS RELATING TO OUR INTERNATIONAL SALES AND
OPERATIONS, INCLUDING FLUCTUATIONS IN EXCHANGE RATES AND DELAYS IN COLLECTION OF
ACCOUNTS RECEIVABLE.
We generate significant sales outside the United States, a substantial portion
of which are U.S. dollar denominated transactions conducted with customers who
generate revenue in currencies other than the U.S. dollar. As a result, currency
fluctuations between the U.S. dollar and the currencies in which those customers
do business may have an impact on the demand for our products in foreign
countries where the U.S. dollar has increased compared to the local currency. We
cannot predict the effects of exchange rate fluctuations upon our future
operating results because of the number of currencies involved, the variability
of currency exposure and the potential volatility of currency exchange rates.
Because we have operating subsidiaries based in Europe and we generate certain
revenues and incur certain operating expenses in British Pounds and the Euro, we
will experience currency exchange risk with respect to those foreign currency
denominated revenues or expenses. Although product sales in these currencies
amounted to less than 5% of our total product sales for the year ended December
31, 2000, we expect that the amount of sales denominated in the British Pound
and Euro will increase as a percentage of total sales because of recent
acquisitions of European companies and our decision to sell directly, rather
than through distributors, in major European countries.
Relationships with customers and effective terms of sale frequently vary by
country, often with longer-term receivables than are typical in the United
States.
CHANGES IN THE HEALTH CARE INDUSTRY MAY REQUIRE US TO DECREASE THE SELLING PRICE
FOR OUR PRODUCTS OR COULD RESULT IN A REDUCTION IN THE SIZE OF THE MARKET FOR
OUR PRODUCTS, AND LIMIT THE MEANS BY WHICH WE MAY DISCOUNT OUR PRODUCTS, EACH OF
WHICH COULD HAVE A NEGATIVE IMPACT ON OUR FINANCIAL PERFORMANCE.
Trends toward managed care, health care cost containment, and other changes in
government and private sector initiatives in the United States and other
countries in which we do business are placing increased emphasis on the delivery
of more cost-effective medical therapies that could adversely affect the sale
and/or the prices of our products. For example:
o major third-party payors of hospital services, including Medicare,
Medicaid and private health care insurers, have substantially revised
their payment methodologies, which has resulted in stricter standards
for reimbursement of hospital charges for certain medical procedures;
o Medicare, Medicaid and private health care insurer cutbacks could
create downward price pressure;
o numerous legislative proposals have been considered that would result
in major reforms in the U.S. health care system that could have an
adverse effect on our business;
12
o there has been a consolidation among health care facilities and
purchasers of medical devices in the United States who prefer to limit
the number of suppliers from whom they purchase medical products, and
these entities may decide to stop purchasing our products or demand
discounts on our prices;
o there is economic pressure to contain health care costs in
international markets;
o there are proposed and existing laws and regulations in domestic and
international markets regulating pricing and profitability of
companies in the health care industry; and
o there have been initiatives by third party payors to challenge the
prices charged for medical products which could affect our ability to
sell products on a competitive basis.
Both the pressure to reduce prices for our products in response to these trends
and the decrease in the size of the market as a result of these trends could
adversely affect our levels of revenues and profitability of sales.
In addition, there are laws and regulations that regulate the means by which
companies in the health care industry may compete by discounting the prices of
their products. Although we exercise care in structuring our customer discount
arrangements to comply with those laws and regulations, we cannot assure you
that:
o government officials charged with responsibility for enforcing those
laws will not assert that these customer discount arrangements are in
violation of those laws or regulations, or
o government regulators or courts will interpret those laws or
regulations in a manner consistent with our interpretation.
WE MAY HAVE SIGNIFICANT PRODUCT LIABILITY EXPOSURE AND OUR INSURANCE MAY NOT
COVER ALL POTENTIAL CLAIMS.
We face an inherent business risk of exposure to product liability and other
claims in the event that our technologies or products are alleged to have caused
harm. We may not be able to obtain insurance for the potential liability on
acceptable terms with adequate coverage, or at reasonable costs. Any potential
product liability claims could exceed the amount of our insurance coverage or
may be excluded from coverage under the terms of the policy. Our insurance may
not be renewed at a cost and level of coverage comparable to that then in
effect.
WE ARE SUBJECT TO OTHER REGULATORY REQUIREMENTS RELATING TO OCCUPATIONAL HEALTH
AND SAFETY AND THE USE OF HAZARDOUS SUBSTANCES WHICH MAY IMPOSE SIGNIFICANT
COMPLIANCE COSTS ON US.
We are subject to regulation under federal and state laws regarding occupational
health and safety, laboratory practices, and the use, handling and disposal of
toxic or hazardous substances. Our research, development and manufacturing
processes involve the controlled use of certain hazardous materials. Although we
believe that our safety procedures for handling and disposing of those materials
comply with the standards prescribed by the applicable laws and regulations, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, we could be held liable
for any damages that result and any related liability could exceed the limits or
fall outside the coverage of our insurance and could exceed our resources. We
may not be able to maintain insurance on acceptable terms, or at all. We may
incur significant costs to comply with environmental laws and regulations in the
future. We may also be subject to other present and possible future local,
state, federal and foreign regulations.
THE LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS.
We believe our success depends on the contributions of a number of our key
personnel, including Stuart M. Essig, our President and Chief Executive Officer.
If we lose the services of key personnel, that loss could materially harm our
business. We maintain "key person" life insurance on Mr. Essig. In addition,
recruiting and retaining qualified personnel will be critical to our success.
There is a shortage in the industry of qualified management and scientific
personnel, and competition for these individuals is intense. We can not assure
you that we will be able to attract additional personnel and retain existing
personnel.
13
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Many of our stockholders will have an opportunity to sell their stock following
the offering. Also, many of our employees and directors may exercise their stock
options in order to sell the stock underlying their options in the market under
a registration statement we have filed with the SEC. Sales of a substantial
number of shares of our common stock in the public market after the offering
could depress the market price of our common stock and impair our ability to
raise capital through the sale of additional equity securities. Officers,
directors and certain of our principal stockholders owning an aggregate of
approximately 9,931,015 shares of our common stock have agreed that they will
not, without the prior written consent of the U.S. Bancorp Piper Jaffray Inc.,
directly or indirectly sell any of these restricted shares, or any of the
4,163,850 shares of our common stock that we may issue upon the exercise of
outstanding options or underlying restricted units held by our officers and
directors, for 90 days after the date of this prospectus. Furthermore, we have
registered 8,505,000 shares of common stock reserved for issuance to our
employees, directors and consultants under our stock award and employee benefit
plans. Of this amount, as of June 30, 2001, approximately 6,553,000 shares were
held in reserve for future issuance.
OUR STOCK PRICE MAY CONTINUE TO BE HIGHLY VOLATILE AND YOU MAY NOT BE ABLE TO
RESELL YOUR SHARES AT OR ABOVE THE PRICE YOU PAID FOR THEM.
The stock market in general, and the stock prices of medical device companies,
biotechnology companies and other technology-based companies in particular, have
experienced significant volatility that often has been unrelated to the
operating performance of and beyond the control of any specific public
companies. The market price of our common stock has fluctuated widely in the
past and is likely to continue to fluctuate in the future. The high and low
market prices of our common stock from June 30, 1999 through July 31, 2001 were
$29.03 per share on July 31, 2001 and $5.375 per share on December 28, 1999,
respectively, and the high and low market prices of our common stock during the
fiscal quarter ended June 30, 2001 were $22.450 per share on June 29, 2001, and
$11.40 per share on April 16, 2001, respectively. See "Price Range of Common
Stock and Dividends." Factors that may have a significant impact on the market
price of our common stock include:
o our actual financial results differing from guidance provided by
management;
o our actual financial results differing from that expected by
securities analysts;
o future announcements concerning us or our competitors, including the
announcement of acquisitions;
o changes in the prospects of our business partners or suppliers;
o developments regarding our patents or other proprietary rights or
those of our competitors;
o quality deficiencies in our products;
o competitive developments, including technological innovations by us or
our competitors;
o government regulation, including the FDA's review of our products and
developments;
o changes in recommendations of securities analysts and rumors that may
be circulated about us or our competitors;
o public perception of risks associated with our operations;
o conditions or trends in the medical device and biotechnology
industries;
o additions or departures of key personnel; and
o sales of our common stock.
Any of these factors could immediately, significantly and adversely affect the
trading price of our common stock.
14
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We do not currently pay any cash dividends on our common stock and do not
anticipate paying any of these dividends in the foreseeable future. We intend to
retain future earnings to fund our growth. Accordingly, you will not receive a
return on your investment in our common stock through the payment of dividends
in the foreseeable future and may not realize a return on your investment even
if you sell your shares. As a result, you may not be able to resell your shares
at or above the price you paid for them.
OUR MAJOR STOCKHOLDERS COULD MAKE DECISIONS ADVERSE TO YOUR INTERESTS.
Our directors and executive officers and affiliates of certain directors own or
control, and after the completion of an offering of our common stock may still
own or control, a majority of our outstanding voting securities and would be
generally able to elect all directors, to determine the outcome of corporate
actions requiring stockholder approval and otherwise to control the business.
The ability of the board of directors to issue preferred stock, while providing
flexibility in connection with financing, acquisitions and other corporate
purposes, could have the effect of discouraging, deferring or preventing a
change in control or an unsolicited acquisition proposal, since the issuance of
preferred stock could be used to dilute the share ownership of a person or
entity seeking to obtain control of us. This control could preclude any
unsolicited acquisition of Integra and consequently adversely affect the market
price of the common stock. Furthermore, we are subject to Section 203 of the
Delaware General Corporation Law, which could have the effect of delaying or
preventing a change of control.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN USING THE PROCEEDS FROM THIS
OFFERING AND, THEREFORE, INVESTORS WILL BE RELYING ON THE JUDGMENT OF OUR
MANAGEMENT TO INVEST THOSE FUNDS EFFECTIVELY.
We intend to use the net proceeds of this offering for general corporate
purposes, which could include, among other things, acquisition of product lines
or companies, repayment of indebtedness, expanding our sales and marketing
resources, including expanding our international business, developing new
technologies and products and for working capital. The amounts and timing of
these expenditures will vary significantly depending upon a number of factors,
including the amount of cash generated or consumed by our operations, the
progress of our research and development activities and the market response to
the introduction of any new products and services. In addition, we may use a
portion of the net proceeds from this offering to acquire or invest in
businesses, products, services or technologies complementary to our current
business, through mergers, acquisitions, joint ventures or otherwise. Our
management will retain broad discretion with respect to the expenditure of
proceeds. Investors will be relying on the judgment of our management regarding
the application of the proceeds of this offering.
15
FORWARD-LOOKING STATEMENTS
We have made statements in this prospectus, including statements under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are subject to a number of risks, uncertainties and
assumptions about Integra, including, among other things:
o general economic and business conditions, both nationally and in our
international markets;
o our expectations and estimates concerning future financial
performance, financing plans and the impact of competition;
o anticipated trends in our business;
o existing and future regulations affecting our business;
o our ability to obtain additional debt and equity financing to fund
capital expenditures and working capital requirements if required;
o our ability to complete acquisitions; and
o other risk factors described in the section entitled "Risk Factors" in
this prospectus.
You can identify these forward-looking statements by forward-looking words such
as "believe," "may," "could," "will," "estimate," "continue," "anticipate,"
"intend," "seek," "plan," "expect," "should," "would" and similar expressions in
this prospectus.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus may not occur and actual results
could differ materially from those anticipated or implied in the forward-looking
statements.
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate as
of the date on the front cover, but the information may have changed since that
date.
16
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 3,500,000 shares of
our common stock we are offering under this prospectus at an assumed public
offering price of [$26.76] per share will be approximately $[87.9] million,
after deducting the underwriting discount and estimated offering expenses. We
will not receive any proceeds from the sale of common stock by the selling
stockholders.
We expect to use the net proceeds received by us from the sale of common stock
under this prospectus for general corporate purposes, which could include, among
other things, acquisition of product lines or companies, repayment of
indebtedness, expanding our sales and marketing resources, including expanding
our international business, and developing new technologies and products, and
for working capital. Pending application of the net proceeds, we may invest the
net proceeds in short term, interest bearing investments. We will not receive
any proceeds from the sale of common stock by any selling stockholder.
PRICE RANGE OF COMMON STOCK
Our common stock trades on the Nasdaq National Market under the symbol "IART".
The following table presents the high and low sales prices for our common stock
for each quarter for the periods indicated. All outstanding common share and per
share amounts have been retroactively adjusted to reflect a one-for-two reverse
stock split of our common stock on May 18, 1998.
HIGH LOW
-------- -------
FISCAL YEAR 1999
First Quarter ..................................... $ 5.188 $ 3.000
Second Quarter .................................... $ 7.000 $ 3.875
Third Quarter ..................................... $ 10.375 $ 5.625
Fourth Quarter .................................... $ 6.4688 $ 5.375
FISCAL YEAR 2000
First Quarter ..................................... $ 19.875 $ 5.875
Second Quarter .................................... $ 12.625 $ 6.688
Third Quarter ..................................... $ 15.000 $ 9.438
Fourth Quarter .................................... $ 16.125 $ 9.688
FISCAL YEAR 2001
First Quarter ..................................... $ 18.3125 $ 9.875
Second Quarter .................................... $ 22.450 $ 11.400
Third Quarter (through August 2, 2001) ............ $ 26.760 $ 18.800
The closing price for the common stock on August 2, 2001 was $26.76. We had 825
stockholders of record as of August 2, 2001.
17
DIVIDEND POLICY
We do not currently pay any cash dividends on our common stock and do not
anticipate paying any of these dividends in the foreseeable future. Any future
payment of dividends to our stockholders will depend on decisions that our board
of directors will make and will depend on then existing conditions, including
our financial condition, contractual restrictions, capital requirements and
business prospects.
DILUTION
The net tangible book value of our common stock as of March 31, 2001 was
approximately $32.5 million or $1.29 per share of common stock. Net tangible
book value per share represents the amount of our convertible preferred stock,
common stock and other stockholders' equity, less intangible assets, divided by
the number of shares of our common stock outstanding (including the effects of
the 2,250,000 shares underlying the Restricted Units held by our President and
Chief Executive Officer and shares of common stock issuable upon conversion of
our outstanding preferred stock or exercise of outstanding options and
warrants). Purchasers of common stock in this offering will have an immediate
dilution of net tangible book value.
Net tangible book value dilution per share represents the difference between the
amount per share paid by purchasers of shares of common stock in the offering
and the pro forma net tangible book value per share of the common stock
immediately after completion of the offering. After giving effect to the
issuance and sale of 3,500,000 shares of common stock in the offering at a
public offering price of $[26.76] per share, and after deduction of underwriting
discounts and commissions and estimated offering expenses, the pro forma net
tangible book value of Integra as of March 31, 2001 would have been
approximately $[120.4] million, or $[4.20] per share of common stock. This
represents an immediate increase in net tangible book value of $2.91 per share
to existing stockholders and an immediate dilution of net tangible book value of
$22.56 per share to purchasers of common stock in the offering, as illustrated
in the following table:
Public offering price per share of common stock ......................$ 26.76
Net tangible book value per share of common stock
before the offering .........................................$ 1.29
Increase per share of common stock attributable to
the offering ..............................................$ 2.91
---------
Pro forma net tangible book value per share of common stock
after the offering .................................................$ 4.20
Net tangible book value dilution per share ...........................$ 22.56
18
CAPITALIZATION
The following table sets forth: (a) the actual capitalization of Integra as of
March 31, 2001; (b) the pro forma capitalization of Integra as of March 31, 2001
after giving effect to the conversion of the Series B Preferred Stock into
common stock which occurred on June 26, 2001 and (c) that pro forma
capitalization as adjusted to give effect to our receipt of the estimated net
proceeds of $[87.9] million from the sale of 3,500,000 shares of common stock we
are offering for sale under this prospectus at an assumed public offering price
of $[26.76] per share and the application of these proceeds as set forth under
the caption "Use of Proceeds."
You should read this table in conjunction with our consolidated financial
statements and their notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Use of Proceeds" and
"Description of Capital Stock" for additional information.
AS
OF MARCH 31, 2001
- -------------------------------------
PRO FORMA
ACTUAL
PRO FORMA AS ADJUSTED
---------
- --------- -----------
(IN
THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Cash, cash equivalents and short-term investments ................ $ 19,374
$ 19,374 $ 96,366
=========
========= =========
Short-term debt .................................................. $ 9,150
$ 9,150 $ 1,354
Long-term debt ................................................... 3,121
3,121 --
Stockholders' equity:
Preferred stock; $0.01 par value; 15,000 authorized shares; 100
Series B Convertible shares issued and outstanding at March 31,
2001(0 Series B Convertible shares outstanding in the Pro-forma
column), $12,000 including a 10% annual cumulative dividend
liquidation preference; 54 Series C Convertible shares issued
and outstanding
at March 31, 2001, $5,940 including a preference ............... 2
1 1
Common stock; $0.01 par value; 60,000 authorized
shares; 17,658 (20,276 in the Pro-forma column and
23,776 in the Pro Forma As Adjusted column)
issued and outstanding at March 31, 2001 ....................... 177
203 238
Additional paid-in capital ....................................... 161,564
161,539 249,413
Treasury stock, at cost; 20 shares at March 31, 2001 ............. (180)
(180) (180)
Other ............................................................ (58)
(58) (58)
Accumulated other comprehensive loss ............................. (898)
(898) (898)
Accumulated deficit .............................................. (103,733)
(103,733) (103,733)
---------
- --------- ---------
Total stockholders' equity ..................................... 56,874
56,874 144,783
---------
- --------- ---------
Total capitalization ........................................... $ 69,145
$ 69,145 $ 146,137
=========
========= =========
The number of shares of common stock to be outstanding after the offering
excludes:
o 3,865,600 shares of our common stock issuable upon the exercise of
outstanding options at a weighted average exercise price of $8.06 per
share;
o 2,312,300 shares of our common stock available for future issuances
under our stock option plans;
o 2,250,000 shares of our common stock underlying the Restricted Units
held by our President and Chief Executive Officer;
19
o 600,000 shares of our common stock issuable upon conversion of 54,000
shares of Series CConvertible Preferred Stock;
o 353,825 shares of our common stock issuable under our Employee Stock
Purchase Plan;
o 310,811 shares of our common stock that we may issue upon the exercise
of outstanding warrants at a weighted average exercise price of $8.85
per share.
20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data as of and for each of the five years ended December
31 has been derived from consolidated financial statements that have been
audited by PricewaterhouseCoopers LLP, independent accountants. The selected
financial data as of and for each of the three-month periods ended March 31,
2001 and 2000 has been derived from our unaudited financial statements. In our
opinion, the unaudited financial information includes all adjustments,
consisting only of normal recurring adjustments, considered necessary for a fair
presentation of that information. The information set forth below is not
necessarily indicative of the results of future operations and should be read in
conjunction with our consolidated financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.
THREE MONTHS
ENDED MARCH 31, YEAR
ENDED DECEMBER 31,
-----------------------
- -----------------------------------------------------
2001 2000 2000 1999
1998 1997 1996
-------------------------
- ------------------------------------------------------
(UNAUDITED) (IN
THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA(1):
Product sales .................. $ 20,284 $ 13,332 $ 64,987 $ 40,047
$ 14,182 $ 14,103 $ 11,300
Other revenue ................. 1,400 1,199 6,662 2,829
3,379 745 1,938
-------- -------- -------- --------
- -------- -------- -------
Total revenue .................. 21,684 14,531 71,649 42,876
17,561 14,848 13,238
Cost of product sales .......... 8,594 6,687 29,511 22,678
7,580 7,184 6,808
Research and development ....... 2,073 1,890 7,524 8,893
8,424 6,406 6,294
Selling and marketing ......... 4,751 2,949 15,371 9,487
5,901 5,405 4,263
General and administrative(2) . 3,204 3,747 28,483 13,324
9,787 14,764 5,320
Amortization ................... 680 480 2,481 874
49 -- --
-------- -------- -------- --------
- -------- -------- -------
Total costs and expenses ...... 19,302 15,753 83,370 55,256
31,741 33,759 22,685
-------- -------- -------- --------
- -------- -------- -------
Operating income (loss) ....... 2,382 (1,222) (11,721) (12,380)
(14,180) (18,911) (9,447)
Interest income
(expense), net ............... (78) 11 (473) 294
1,250 1,771 1,799
Gain on disposition
of product lines ............ -- 115 1,146 4,161
-- -- --
Other income
(expense), net .............. (62) 123 201 141
588 176 120
-------- -------- -------- --------
- -------- -------- -------
Income (loss) before
income taxes ................ 2,242 (973) (10,847) (7,784)
(12,342) (16,964) (7,528)
Income tax expense
(benefit)(3) ................. 246 62 108 (1,818)
-- -- --
-------- -------- -------- --------
- -------- -------- -------
Income (loss) before
cumulative effect
of accounting change ........ 1,996 (1,035) (10,955) (5,966)
(12,342) (16,964) (7,528)
Cumulative effect of an
accounting change(4) ........ -- (470) (470) --
-- -- --
-------- -------- -------- --------
- -------- -------- -------
Net income (loss) ............. $ 1,996 $ (1,505) $(11,425) $ (5,966)
$(12,342) $(16,964) $ (7,528)
======== ======== ======== ========
======== ======== =======
Diluted net income (loss)
per share .................... $ 0.07 $ (0.35) $ (0.97) $ (0.40)
$ (0.77) $ (1.15) $ (0.54)
======== ======== ======== ========
======== ======== =======
Weighted average common
shares outstanding ........... 21,849 17,224 17,553 16,802
16,139 14,810 14,057
======== ======== ======== ========
======== ======== =======
21
AS OF
MARCH 31, AS OF
DECEMBER 31,
-----------------------
- -----------------------------------------------------
2001 2000 1999
1998 1997 1996
-------------------------
- ------------------------------------------------------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA(1):
Cash, cash equivalents and
short-term investments ............$ 19,374 $ 15,138 $ 23,612 $
20,187 $ 26,272 $ 34,276
Working capital ..................... 27,992 25,177 28,014
23,898 29,407 37,936
Total assets ........................ 91,079 86,514 66,253
34,707 38,356 48,741
Long-term debt ...................... 3,121 4,758 7,625
-- -- --
Accumulated deficit.................. (103,733) (105,729) (94,304)
(88,287) (75,945) (58,981)
Total stockholders' equity........... 56,874 53,781 37,989
31,366 35,755 46,384
- ---------------
(1) As the result of our acquisitions of Rystan Company, Inc. in September
1998, the NeuroCare Group of companies in March 1999 and the acquisition of
Clinical Neuro Systems and product lines from NMT Medical, Inc. in 2000,
the consolidated financial results and balance sheet data for certain of
the periods presented above may not be directly comparable.
(2) General and administrative expense in 2000 included a $13.5 million
stock-based compensation charge in connection with the extension of the
employment of the Company's President and Chief Executive Officer. General
and administrative expense in 1997 include the following two non-cash
charges: (a) $1.0 million related to an asset impairment charge; and (b)
$5.9 million related to a stock-based signing bonus for the Company's
President and Chief Executive Officer.
(3) The 1999 income tax benefit includes a non-cash benefit of $1.8 million
resulting from the reduction of the deferred tax liability recorded in the
NeuroCare Group of companies acquisition to the extent that consolidated
deferred tax assets were generated subsequent to the acquisition. The 2000
income tax expense and 1999 income tax benefit include $0.5 million and
$0.6 million, respectively, of benefits associated with the sale of New
Jersey state net operating losses.
(4) As the result of the adoption of SAB 101, we recorded a $470,000 cumulative
effect of an accounting change to defer a portion of a nonrefundable,
up-front fee received and recorded in other revenue in 1998. The cumulative
effect of this accounting change was measured as of January 1, 2000. As a
result of this accounting change, other revenue in 2000 includes $112,000
of amortization of the amount deferred as of January 1, 2000.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ TOGETHER WITH THE "SELECTED CONSOLIDATED FINANCIAL
DATA" AND OUR FINANCIAL STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN
THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS. THE ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS
AS A RESULT OF MANY FACTORS, INCLUDING BUT NOT LIMITED TO THOSE UNDER THE
HEADING "RISK FACTORS."
OVERVIEW
We develop, manufacture and market medical devices, implants and biomaterials
for the neurosurgical, orthopedic and soft tissue repair markets. Our operations
consist of:
o Integra NeuroSciences, which is a leading provider of implants,
devices, and monitors used in neurosurgery, neurotrauma, and related
critical care; and
o Integra LifeSciences, which develops and manufactures a variety of
medical products and devices, including products based on our
proprietary tissue regeneration technology which are used to treat soft
tissue and orthopedic conditions.
Integra NeuroSciences sells primarily through a direct sales organization and
Integra LifeSciences sells primarily through strategic alliances and
distributors. Our strategic alliances include alliances with Ethicon, a division
of Johnson &Johnson, the Genetics Institute Division of American Home Products
Corporation and Medtronic Sofamor Danek.
In 1999, we initiated a repositioning of our business to focus selectively on
the neurosurgical, orthopedic and soft tissue repair markets. Implementation of
this strategy included the purchase of the NeuroCare Group of companies in March
1999 and the execution of an agreement with Ethicon, that provides Ethicon with
exclusive marketing and distribution rights to INTEGRA(R) Dermal Regeneration
Template worldwide, excluding Japan. As a result of these transactions, we
formed our Integra NeuroSciences division and reorganized the remainder of our
products into our Integra LifeSciences division. The agreement with Ethicon
allowed the Integra LifeSciences division to focus on strategic collaborative
initiatives. The Integra LifeSciences segment now operates as a provider of
innovative products and development activities through strategic alliances with
marketing partners and distributors. As a result of these activities, our
segment financial results for each of the years 2000, 1999 and 1998 and for the
first three months of 2001 and 2000, may not be directly comparable.
To date, we have experienced significant operating losses and may continue to
incur these losses unless product sales and research and collaborative
arrangements generate sufficient revenue to fund continuing operations. As of
March 31, 2001 we had an accumulated deficit of $103.7 million.
RECENT ACQUISITIONS
On March 29, 1999 we acquired certain assets and stock held by Heyer-Schulte(R)
NeuroCare, L.P. and its subsidiaries, Heyer-Schulte NeuroCare, Inc., Camino
NeuroCare, Inc. and Neuro Navigational, LLC (collectively, the "NeuroCare
Group") through our wholly-owned subsidiaries, NeuroCare Holding Corporation,
Integra NeuroCare LLC and Redmond NeuroCare LLC (collectively, "Integra
NeuroCare"). The purchase price for the NeuroCare Group consisted of $14.2
million in cash and approximately $11 million of assumed indebtedness under a
term loan from Fleet Capital Corporation. The NeuroCare Group's assets include a
manufacturing, packaging and distribution facility in San Diego, California and
a manufacturing facility in Anasco, Puerto Rico, as well as a corporate
headquarters in Pleasant Prairie, Wisconsin, which we closed in the third
quarter of 1999.
23
On January 17, 2000, we purchased the business, including certain assets and
liabilities, of Clinical Neuro Systems, Inc. for $6.8 million. CNS designs,
manufactures and sells neurosurgical external ventricular drainage systems,
including catheters and drainage bags, as well as cranial access kits. The
purchase price of the CNS business consisted of $4.0 million in cash and a $2.8
million 5% secured promissory note issued to the seller. The promissory note, of
which approximately $1.4 million remains outstanding, is collateralized by
inventory, property and equipment of the CNS business and by a collateral
assignment of a $2.8 million promissory note from one of our subsidiaries.
On April 6, 2000, we purchased the Selector(R)Ultrasonic Aspirator, Ruggles(TM)
hand-held neurosurgical instruments and Spembly Medical cryosurgery product
lines, including certain assets and liabilities, from NMT Medical, Inc. for
$11.6 million in cash.
On April 4, 2001, we acquired all of the outstanding stock of GMSmbH, the German
manufacturer of the LICOX(R) Brain Tissue Oxygen Monitoring System, for $2.9
million, of which $2.3 million was paid at closing. Prior to the acquisition,
our Integra NeuroSciences division had exclusive marketing rights to the
LICOX(R) products in the United States and certain other markets. Revenues of
the acquired GMS business were approximately $1.2 million in 2000, consisting
primarily of sales of the LICOX(R) products in Germany and to various
international distributors, including Integra.
On April 27, 2001, we acquired Satelec Medical, a subsidiary of the
Satelec-Pierre Rolland group, for $3.6 million in cash. Satelec Medical, based
in France, manufactures and markets the Dissectron(R) ultrasonic surgical
aspirator console and a broad line of related handpieces. The Dissectron(R)
product is the leading ultrasonic surgical system in France. The Dissectron(R)
product has FDA 510(k) clearance for neurosurgical applications and CE Mark
Certification in the European Union. Revenues of the acquired business were
approximately $1.5 million in 2000.
These acquisitions have been accounted for using the purchase method of
accounting, and our consolidated financial statements include the results of
operations of the acquired businesses since their respective dates of
acquisition.
24
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 TO THREE MONTHS ENDED MARCH 31,
2000. Product sales and gross margins on product sales were as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
------------ ------------
(IN THOUSANDS)
(UNAUDITED)
Integra NeuroSciences:
Neuro intensive care unit ................... $ 6,532 $ 5,532
Neuro operating room ........................ 7,945 3,288
------- -------
Total product sales ......................... 14,477 8,820
Cost of product sales ....................... 5,637 4,178
------- -------
Gross margin on product sales ............... 8,840 4,642
Gross margin percentage ..................... 61% 53%
Integra LifeSciences:
Private label products ...................... 3,216 2,488
Distributed products ........................ 2,591 2,024
------- -------
Total product sales ......................... 5,807 4,512
Cost of product sales ....................... 2,957 2,509
------- -------
Gross margin on product sales ............... 2,850 2,003
Gross margin percentage ..................... 49% 44%
Consolidated:
Product sales ............................... $20,284 $13,332
Gross margin percentage ..................... 58% 50%
REVENUE AND GROSS MARGINS. In the first quarter of 2001, total revenues
increased $7.2 million, or 49%, over the first quarter of 2000 to $21.7 million.
Revenue growth was led by a $7.0 million increase in product sales to $20.3
million, a 52% increase over the first quarter of 2000. Included in this
increase was $2.8 million in sales of acquired NMT Medical, Inc. product lines.
Sales in the Integra NeuroSciences division increased $5.7 million to $14.5
million in the first quarter of 2001, and included $2.3 million in sales of
acquired NMT Medical, Inc. product lines. Increased sales of our DuraGen(R)
Dural Graft Matrix, our intracranial monitoring and cranial access products for
the neuro intensive care unit and our hydrocephalus management products,
contributed to the strong internal growth of $3.4 million in the Integra
NeuroSciences division. Gross margin on Integra NeuroSciences' product sales
increased 8 percentage points to 61% in the first quarter of 2001 through an
improved sales mix of higher margin products, including the DuraGen(R) product
and acquired product lines. The gross margin reported for the first quarter of
2000 was reduced by 1 percentage point relating to fair value inventory purchase
accounting adjustments recorded in connection with the CNS acquisition.
Future product sales in the Integra NeuroSciences division are expected to
benefit from internal growth in the division's existing product lines and the
recent launch of the LICOX(R) Brain Tissue Oxygen Monitoring System and the
Ventrix(R) True Tech Tunneling Catheter for intracranial pressure monitoring.
Sales of Integra LifeSciences division products increased $1.3 million to $5.8
million in the first quarter of 2001 primarily because of internal growth in our
private label products and $0.5 million in sales of acquired NMT Medical, Inc.
product lines. Sales of private label products can vary significantly from
quarter to quarter and are dependent upon the efforts of our strategic marketing
partners. Gross margin on Integra LifeSciences' product sales increased 5
percentage points to 49% in the first quarter of 2001 primarily as a result of
an improved sales mix of higher margin products.
25
Other revenue, which increased $0.2 million to $1.4 million in the first quarter
of 2001, consisted of $0.9 million of research and development funding from
strategic partners and government grants, $0.3 million of royalty income, and
$0.2 million of license and distribution revenues.
RESEARCH AND DEVELOPMENT. Research and development expenses were as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
------- ------
(IN THOUSANDS)
(UNAUDITED)
Integra NeuroSciences ........................ $ 688 $ 503
Integra LifeSciences ......................... 1,385 1,387
------- ------
Total ...................................... $2,073 $1,890
======= ======
In the Integra NeuroSciences division, research and development expenses
increased as compared to the first quarter of 2000 as a result of the ongoing
Phase III clinical trials on the NeuraGen(TM) Nerve Guide that were initiated in
the second quarter of 2000 and the completion of development activities related
to the Ventrix(R) True Tech Catheter.
The future allocation and timing of research and development expenditures
between segments and programs will vary depending on various factors, including
the timing and outcome of pre-clinical and clinical results, changing
competitive conditions, continued program funding levels, potential funding
opportunities and determinations with respect to the commercial potential of our
technologies.
MARKETING AND SALES. Selling and marketing expenses were as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
------- ------
(IN THOUSANDS)
(UNAUDITED)
Integra NeuroSciences ........................ $4,238 $2,444
Integra LifeSciences ......................... 513 505
------ ------
Total ...................................... $4,751 $2,949
====== ======
Integra NeuroSciences selling and marketing expenses increased $1.8 million as
compared to the first quarter of 2000 primarily because of the increase in the
size of the direct sales force in the United States throughout 2000 and into
2001 from 18 to 44 neurospecialists. Additional increases were related to a
distribution facility located in the United Kingdom that was acquired in the NMT
Medical, Inc. acquisition.
Within the Integra LifeSciences division, product sales and marketing activities
are primarily the responsibility of our strategic marketing partners and
distributors.
26
GENERAL AND ADMINISTRATIVE. General and administrative expenses were as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
------- ------
(IN THOUSANDS)
(UNAUDITED)
Integra NeuroSciences ........................ $ 790 $ 890
Integra LifeSciences ......................... 347 302
Corporate .................................... 2,067 2,555
------ ------
Total ...................................... $3,204 $3,747
======= ======
The $0.5 million decrease in corporate general and administrative expenses was
primarily the result of decreased legal fees associated with the conclusion of
the Merck KGaA patent infringement trial at the end of the first quarter of
2000.
OTHER INCOME. Other income (expense), net for the three months ended March 31,
2000, included $176,000 of gain on sale of investments.
INCOME TAX EXPENSE. The provision for income taxes increased $184,000 in the
first quarter of 2001 to $246,000, or 11% of pre-tax net income, which is our
anticipated effective rate for the year ended December 31, 2001.
NET INCOME. Net income for the first quarter of 2001 was $2.0 million, or $0.07
per share. Net loss for the first quarter of 2000 was $1.5 million, or $0.35 per
share. The net loss per share for the first quarter of 2000 includes the $4.2
million beneficial conversion feature associated with the issuance of
convertible preferred stock and common stock warrants in March 2000, which is
treated as a non-cash dividend in computing per share earnings. The beneficial
conversion feature is based upon the excess of the price of the underlying
common stock as compared to the fixed conversion price of the convertible
preferred stock, after taking into account the value assigned to the warrants.
Included in the first quarter net loss of $1.5 million was a $0.5 million
cumulative effect of an accounting change, $0.1 million of fair value inventory
purchase accounting adjustments, and a $0.1 million gain on the sale of a
product line. Excluding these items and the $4.2 million beneficial conversion
feature associated with the convertible preferred stock, the net loss per share
for the first quarter of 2000 would have been $0.08.
INTERNATIONAL PRODUCT SALES AND OPERATIONS. In the first quarter of 2001, sales
to customers outside the United States totaled $4.4 million, or 21% of
consolidated product sales, of which approximately 55% were to Europe. Of this
amount, $1.3 million of these sales were generated in foreign currencies from
our subsidiary based in Andover, England. Our international sales and operations
are subject to the risk of foreign currency fluctuations, both in terms of
exchange risk related to transactions conducted in foreign currencies and the
price of our products in those markets for which sales are denominated in the
U.S. dollar.
In the first quarter of 2000, sales to customers outside the United States
totaled $2.7 million, or 20% of consolidated product sales, of which
approximately 39% were to Europe.
We seek to increase our presence in international markets, particularly in
Europe, through acquisitions of businesses with an existing international sales
and marketing infrastructure or the capacity to develop this type of
infrastructure. We acquired operations in Germany and France with the
acquisitions of GMS and Satelec Medical in April 2001.
27
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 TO THE YEAR ENDED
DECEMBER 31, 1999
YEAR ENDED
DECEMBER 31,
--------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
Integra NeuroSciences:
Neuro intensive care unit .................. $23,521 $14,398
Neuro operating room ....................... 21,324 8,014
------- -------
Total product sales ........................ 44,845 22,412
Cost of product sales ...................... 19,198 12,893
------- -------
Gross margin on product sales .............. 25,647 9,519
Gross margin percentage .................... 57% 42%
Integra LifeSciences:
Private label products ..................... $11,018 $10,226
Distributed products ....................... 9,124 7,409
------- -------
Total product sales ........................ 20,142 17,635
Cost of product sales ...................... 10,313 9,785
------- -------
Gross margin on product sales .............. 9,829 7,850
Gross margin percentage .................... 49% 45%
Consolidated:
Product sales .............................. $64,987 $40,047
Gross margin percentage .................... 55% 43%
REVENUE AND GROSS MARGINS. Total product sales increased $24.9 million, or 62%,
in 2000, with sales of product lines acquired in 2000 accounting for $11.2
million, or 28%, of this increase. Sales growth for the year was led by the
Integra NeuroSciences division, which reported an increase of $22.4 million, or
100%, from the prior year. Included in this increase was $9.6 million of sales
of product lines acquired in 2000. A $5.5 million increase in sales of the
DuraGen(R) product, which was launched in the third quarter of 1999, and
additional growth in products acquired in the NeuroCare Group of companies
acquisition at the end of the first quarter of 1999 resulted in the remainder of
this increase. Adjusted gross margin on Integra NeuroSciences' product sales
increased 7 percentage points to 58% in 2000 through an improved sales mix of
higher margin products, including the DuraGen(R) product and product lines
acquired in 2000. The adjusted gross margin excludes fair value inventory
purchase accounting adjustments recorded in connection with the acquisitions.
Sales in the Integra LifeSciences division increased $2.5 million, or 14%, in
2000, with sales of a distributed product line acquired in 2000 accounting for
$1.6 million of this increase. The remainder of this increase relates primarily
to higher sales of private label products, with increased sales of orthopedic
biomaterials to our strategic partners for use in their clinical trials being
slightly offset by lower sales of INTEGRA(R) Dermal Regeneration Template. Sales
of INTEGRA(R) Dermal Regeneration Template decreased because of the lower
transfer price to Ethicon beginning in the second half of 1999. Adjusted gross
margin on Integra LifeSciences' product sales increased from 48% to 49% in 2000.
The improvement in gross margins was primarily related to increased capacity
utilization and increased sales of higher margin products in 2000, both of which
were offset by the lower gross margins on sales of the INTEGRA(R) Dermal
Regeneration Template through Ethicon and sales of a lower margin distributed
product line acquired in 2000.
Other revenue, which increased $3.9 million to $6.7 million in 2000, consisted
of $2.8 million of research and development funding from strategic partners and
government grants, $2.3 million of license, distribution, and other
event-related revenues from strategic partners and other third parties, and $1.6
million of royalty income.
28
RESEARCH AND DEVELOPMENT. Research and development expenses were as follows:
YEAR ENDED
DECEMBER 31,
-------------------------
2000 1999
------- ------
(IN THOUSANDS)
Integra NeuroSciences ........................ $2,469 $2,080
Integra LifeSciences ......................... 5,055 6,813
------- ------
Total ...................................... $7,524 $8,893
====== ======
Research and development expense in the Integra NeuroSciences division increased
in 2000 primarily because there was a full year of research and development
activities from the acquired NeuroCare Group of companies business in 2000.
Significant ongoing research and development programs of our Integra
NeuroSciences segment include the development of the next generation of
intra-cranial monitors and catheters and shunting products and the continuation
of clinical trials involving the NeuraGen(TM) Nerve Guide, a bioabsorbable
collagen conduit designed to support guided regeneration of severed peripheral
nerves.
Research and development activities within the Integra LifeSciences division
decreased in 2000 primarily because of the elimination of several non-core
research programs throughout 1999, reductions in headcount in our New
Jersey-based research group, and reduced spending in the articular cartilage
program. Offsetting these decreases were additional research activities related
to the INTEGRA(R) Dermal Regeneration Template program that Ethicon and
government grants funded. The agreement with Ethicon provides us with research
funding of $2.0 million per year through the year 2004. Significant ongoing
research and development programs in the Integra LifeSciences segment include
clinical and development activities related to INTEGRA(R) Dermal Regeneration
Template, additional applications for our orthopedic technologies, and other
activities involving our tissue regeneration technologies.
The future allocation and timing of research and development expenditures
between divisions and programs will vary depending on various factors, including
the timing and outcome of pre-clinical and clinical results, changing
competitive conditions, continued program funding levels, potential funding
opportunities and determinations with respect to the commercial potential of our
technologies.
MARKETING AND SALES. Selling and marketing expenses were as follows:
YEAR ENDED
DECEMBER 31,
--------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
Integra NeuroSciences ...................... $12,868 $ 6,244
Integra LifeSciences ....................... 2,503 3,243
------- -------
Total .................................... $15,371 $ 9,487
======= =======
Integra NeuroSciences selling and marketing expense increased significantly
because of a large increase in the direct sales force to over 50 personnel
during 2000, increased sales from acquired products and growth in existing
products, and increased tradeshow participation. Through acquisitions and
recruiting of experienced personnel, the Integra NeuroSciences division has
developed a leading sales and marketing infrastructure to market its products to
neurosurgeons and critical care units, which comprise a focused group of
hospital-based practitioners. A further increase in Integra NeuroSciences
selling and marketing expense is expected in 2001, as continuing costs
associated with the larger direct sales force and the national distribution
center opened in the second quarter of 2000 impact the full year 2001 results.
29
The decrease in Integra LifeSciences selling and marketing expenses is primarily
the result of the transition of INTEGRA(R) Dermal Regeneration Template selling
and marketing activities to Ethicon in June 1999, offset by costs associated
with the opening of our new national distribution center in New Jersey.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were as follows:
YEAR ENDED
DECEMBER 31,
--------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
Integra NeuroSciences ...................... $ 4,981 $ 4,726
Integra LifeSciences ....................... 3,799 2,433
Corporate .................................. 19,703 6,165
------- -------
Total .................................... $28,483 $13,324
======= =======
Integra NeuroSciences general and administrative expenses increased in 2000
primarily because of acquisitions and an allowance recorded against a
distributor's accounts receivable balance. Offsetting these increases were $1.0
million of severance costs incurred in 1999 in connection with the closure of
the corporate headquarters of the NeuroCare Group in July 1999. General and
administrative expense in the Integra LifeSciences segment increased in 2000
primarily due to additional headcount and acquisitions. The increase in
corporate general and administrative expenses in 2000 was almost entirely
related to a $13.5 million stock-based compensation charge recorded in
connection with the extension of the employment agreement of Integra's President
and Chief Executive Officer. A decrease in legal fees associated with the
conclusion of the jury trial in the patent infringement lawsuit against Merck
KGaA in the first quarter of 2000 was offset by increased corporate headcount.
NET INTEREST EXPENSE. Net interest expense consisted of interest expense of $1.3
million and interest income of $0.8 million in 2000. In 1999, net interest
income consisted of $1.0 million of interest income and $0.7 million of interest
expense. Interest expense increased in 2000 consistent with higher average bank
loans outstanding during 2000 and interest associated with the note issued to
the seller of the CNS business. Interest income decreased in 2000 consistent
with lower average cash and marketable securities balances during 2000.
We recorded a $1.1 million pre-tax gain on the disposition of two product lines
in 2000 and a $4.1 million pre-tax gain on the disposition of a product line in
1999.
OTHER INCOME (EXPENSE). Other income (expense), net in 2000 included $0.2
million of gain on sale of investments.
INCOME TAX BENEFIT (EXPENSE). The income tax provision of $0.1 million recorded
in 2000 consists of $0.6 million of income tax expense, which was offset by a
$0.5 million benefit from the sale of New Jersey state net operating losses
under a state sponsored program. The income tax benefit of $1.8 million recorded
in 1999 consists of a $1.8 million non-cash benefit resulting from the reduction
of the deferred tax liability recorded in the NeuroCare Group acquisition to the
extent that consolidated deferred tax assets were generated subsequent to the
acquisition. A tax benefit of $0.6 million associated with the sale of New
Jersey state net operating losses was offset by $0.6 million of income tax
expense.
NET INCOME (LOSS). The reported net loss for the year ended December 31, 2000
was $11.4 million, or $0.97 per share. The reported net loss per share includes
$1.5 million of preferred stock dividends and a $4.2 million beneficial
conversion feature associated with the issuance of convertible preferred stock
and warrants in March 2000, which is treated as a non-cash dividend in computing
per share earnings. The beneficial conversion dividend is based upon the excess
of the price of the underlying common stock as compared to the fixed conversion
price of the convertible preferred stock, after taking into account the value
assigned to the common stock warrants. Included in the reported net loss of
$11.4 million was a $1.1 million gain on the sale of product lines, the $13.5
million stock-based compensation charge, a $0.5 million cumulative effect of an
accounting
30
change and $0.4 million of fair value inventory purchase accounting adjustments.
Excluding these items, we would have reported net income of $1.8 million.
Excluding these items and the $4.2 million beneficial conversion feature
recorded on the convertible preferred stock, we would have reported net income
of $0.02 per share for the year ended December 31, 2000.
The reported net loss for the year ended December 31, 1999 was $6.0 million, or
$0.40 per share. The reported net loss per share includes $0.8 million of
preferred stock dividends. Included in the reported net loss of $6.0 million was
a $3.7 million gain (net of tax) on the sale of a product line and a $1.8
million tax benefit related to the NeuroCare Group of companies acquisition,
$2.5 million of fair value inventory purchase accounting adjustments and $1.0
million of severance costs associated with the NeuroCare Group of companies
acquisition. Excluding these items, we would have reported a net loss of $8.0
million, or $0.52 per share.
Excluding the above items, the adjusted Earnings before Interest, Taxes,
Depreciation and Amortization would have been $7.8 million in 2000, as compared
to a negative $5.6 million in 1999. EBITDA is calculated by adding back
interest, taxes, depreciation and amortization to net income or loss.
INTERNATIONAL PRODUCT SALES AND OPERATIONS. In 2000, sales to customers outside
the United States totaled $13.6 million, or 21% of consolidated product sales,
of which approximately 50% were to Europe. Of this amount, $3.2 million of these
sales were generated in foreign currencies from our subsidiary based in Andover,
England, which was acquired in April 2000. Our international sales and
operations are subject to the risk of foreign currency fluctuations, both in
terms of exchange risk related to transactions conducted in foreign currencies
and the price of our products in those markets for which sales are denominated
in the U.S. dollar.
In 1999, sales outside the United States totaled $9.1 million. All of these
product sales were generated from operations based in the United States and were
denominated in U.S. dollars.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED
DECEMBER 31, 1998
YEAR ENDED
DECEMBER 31,
--------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
Integra NeuroSciences:
Neuro intensive care unit .................. $14,398 $--
Neuro operating room ....................... 8,014 --
------- -------
Total product sales ........................ 22,412 --
Cost of product sales ...................... 12,893 --
------- -------
Gross margin on product sales .............. 9,519 --
Gross margin percentage .................... 42% --
Integra LifeSciences:
Private label products ..................... $10,226 $11,295
Distributed products ....................... 7,409 2,887
------- -------
Total product sales ........................ 17,635 14,182
Cost of product sales ...................... 9,785 7,580
------- -------
Gross margin on product sales .............. 7,850 6,602
Gross margin percentage .................... 45% 47%
Consolidated:
Product sales .............................. $40,047 $14,182
Gross margin percentage .................... 43% 47%
31
REVENUE AND GROSS MARGINS. Total product sales increased $25.9 million, or 182%,
in 1999, with sales of product lines acquired in 1999 accounting for $24.5
million, or a 172% increase over 1998. Sales growth for the year was led by the
Integra NeuroSciences division, which reported $21.9 million of sales from
product lines acquired in the NeuroCare Group of companies acquisition and $0.5
million of sales of the DuraGen(R) product, which was launched in the third
quarter of 1999. Excluding fair value inventory purchase accounting adjustments
recorded in connection with the NeuroCare Group acquisition, gross margins on
Integra NeuroSciences product sales would have been 51% in 1999.
Sales in the Integra LifeSciences division increased $3.5 million, or 24%, in
1999. An increase of $3.6 million from sales of distributed product lines
acquired in 1998 and 1999 was offset by a decrease of $2.1 million of sales of
INTEGRA(R) Dermal Regeneration Template through Ethicon in 1999. The remainder
of the increase in 1999 relates to internal sales growth in existing product
lines. Excluding fair value inventory purchase accounting adjustments, which
reduced reported 1998 gross margins by 2 percentage points, adjusted gross
margins on Integra LifeSciences product sales decreased 1 percentage point to
48% in 1999. The decline in adjusted gross margins in 1999 was related to the
lower gross margins on sales of the INTEGRA(R) Dermal Regeneration Template
through Ethicon.
Other revenue, which decreased $0.6 million to $2.8 million in 1999, consisted
of $1.6 million of research and development funding from strategic partners and
government grants, $0.6 million of license, distribution and other event-related
revenues from strategic partners and other third parties, and $0.6 million of
royalty income. In 1998, other revenue consisted of $1.3 million of license,
distribution and other event-related revenues from strategic partners and other
third parties, $1.8 million of research and development funding from strategic
partners and government grants, and $0.3 million of royalty income.
RESEARCH AND DEVELOPMENT. Research and development expenses were as follows:
YEAR ENDED
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
Integra NeuroSciences ........................ $2,080 $ 945
Integra LifeSciences ......................... 6,813 7,479
------ ------
Total ...................................... $8,893 $8,424
====== ======
Research and development expense in the Integra NeuroSciences segment increased
in 1999 primarily because of the NeuroCare Group of companies acquisition.
Integra NeuroSciences research and development activities in 1998 consisted of
programs involving the DuraGen(R) product and the NeuraGen(TM) Nerve Guide.
Research and development activities within the Integra LifeSciences segment
decreased in 1999 primarily because of the elimination of several non-core
research programs throughout 1999.
MARKETING AND SALES. Selling and marketing expenses were as follows:
YEAR ENDED
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
Integra NeuroSciences ........................ $6,244 $ 628
Integra LifeSciences ......................... 3,243 5,273
------ ------
Total ...................................... $9,487 $5,901
====== ======
32
Integra NeuroSciences selling and marketing expense increased in 1999 primarily
because of the NeuroCare Group of companies acquisition. Additional increases
resulted from expenses related to the domestic and international launch of the
DuraGen(R) product in the third quarter of 1999. The decrease in Integra
LifeSciences selling and marketing expenses is primarily the result of the
transition of INTEGRA(R) Dermal Regeneration Template selling and marketing
activities to Ethicon, offset by a slight increase in sales and marketing costs
related to acquired product lines.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were as follows:
YEAR ENDED
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
Integra NeuroSciences ...................... $ 4,726 $ 437
Integra LifeSciences ....................... 2,433 2,111
Corporate .................................. 6,165 7,239
-------- -------
Total .................................... $13,324 $ 9,787
======== =======
Integra NeuroSciences general and administrative expense increased in 1999
primarily because of the NeuroCare Group acquisition. Included in this amount is
$1.0 million of severance costs associated with the closure of the corporate
headquarters of NeuroCare Group in July 1999. General and administrative expense
in the Integra LifeSciences division increased in 1999 primarily due to
additional headcount. The decrease in corporate general and administrative
expenses in 1999 resulted primarily from decreased legal fees and costs
associated with maintenance of our intellectual property and the effects of a
$0.2 million asset impairment charge recorded in 1998, offset by increases
related to additional headcount.
NET INTEREST INCOME. Net interest income consisted of interest income of $1.0
million and interest expense of $0.7 million in 1999. Interest income decreased
in 1999 consistent with lower average cash and marketable securities balances
during 1999.
OTHER INCOME. Other income decreased in 1999 primarily because of a $0.6 million
favorable litigation settlement recorded in 1998.
NET INCOME (LOSS). The reported net loss for the year ended December 31, 1999
was $6.0 million, or $0.40 per share. The reported net loss per share includes
$0.8 million of preferred stock dividends. Included in the reported net loss of
$6.0 million was a $3.7 million gain (net of tax) on the sale of a product line
and a $1.8 million tax benefit related to the NeuroCare Group acquisition, $2.5
million of fair value inventory purchase accounting adjustments and $1.0 million
of severance costs associated with the NeuroCare Group acquisition. Excluding
these items, we would have reported a net loss of $8.0 million, or $0.52 per
share.
The reported net loss for the year ended December 31, 1998 was $12.3 million, or
$0.77 per share.
INTERNATIONAL PRODUCT SALES. In 1999 and 1998, respectively, sales outside the
United States totaled $9.1 million and $2.3 million, respectively. All of these
product sales were generated from operations based in the United States and were
denominated in U.S. dollars.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, we had cash, cash equivalents and short-term investments of
approximately $19.4 million and $12.3 million in short and long-term debt.
33
To date, we have experienced significant cumulative operating losses.
Historically, we have funded our operations primarily through private and public
offerings of equity securities, product revenues, research and collaboration
funding, borrowings under a revolving credit line and cash acquired in
connection with business acquisitions and dispositions. Recently, however, we
have substantially reduced the net rate at which we use cash and, in the first
quarter of 2001, generated positive operating cash flows of $4.5 million.
Operating cash flows in the first quarter of 2001 included a $2.2 million use of
cash due to inventory growth and a $1.9 million source of cash from a prepayment
relating to the second quarter of 2001 from our strategic alliance with Ethicon.
Our principal uses of funds during the first quarter of 2001 were $2.2 million
of debt repayments and $0.4 million in purchases of property and equipment.
Principal sources of funds were $4.5 million of positive operating cash flow,
$0.8 million of proceeds from short-term borrowings, and $1.4 million from the
issuance of common stock upon the exercise of employee stock options and
warrants.
Excluding the $13.5 million stock-based compensation charge, we would have
reported operating income of $1.8 million for the year ended December 31, 2000.
However, we did not generate positive operating cash flows in 2000 because of a
significant increase in working capital.
Our principal uses of funds during 2000 were $4.1 million for the acquisition of
CNS, $12.1 million for the acquisition of certain product lines from NMT
Medical, Inc., $3.3 million in purchases of property and equipment, $2.3 million
of term loan repayments, and $5.0 million used in operations. Operating cash
flow was negative in 2000 primarily because of increased inventory to support
the growth in the business, increased accounts receivable balances generated
from higher product sales, and an increase in demonstration equipment and sample
product provided to the significantly larger Integra NeuroSciences sales force.
In 1999, cash flow from operations was positive primarily because of a $5.7
million increase in deferred revenues, most of which was provided by cash
received under the agreement with Ethicon.
In 2000, we raised $5.4 million from the sale of Series C Preferred Stock and
warrants to affiliates of Soros Private Equity Partners LLC, $5.0 million from a
private placement of common stock, $3.2 million from the issuance of common
stock through employee benefit plans, $3.1 million of proceeds from short-term
borrowings, and $1.6 million from the sale of product lines.
We maintain a term loan and revolving credit facility from Fleet Capital
Corporation, which is collateralized by all of the assets and ownership
interests of various of our subsidiaries including Integra NeuroCare LLC.
NeuroCare Holding Corporation (the parent company of Integra NeuroCare LLC) has
guaranteed Integra NeuroCare LLC's obligation under that facility. Integra
NeuroCare LLC is subject to various financial and non-financial covenants under
the revolving credit facility with Fleet Capital Corporation, including
significant restrictions on its ability to transfer funds to us or our other
subsidiaries and restrictions on its ability to borrow more money. The financial
covenants specify minimum levels of interest and fixed charge coverage and net
worth, and also specify maximum levels of capital expenditures and total
indebtedness to operating cash flow, among others. While we anticipate that
Integra NeuroCare LLC will be able to satisfy the requirements of these
financial covenants, we cannot insure that Integra NeuroCare LLC will generate
sufficient earnings before interest, taxes, depreciation and amortization to
meet the requirements of those covenants. The term loan is subject to mandatory
prepayment amounts if certain levels of cash flow are achieved. In April 2001,
Integra NeuroCare LLC prepaid approximately $2.1 million in principal as a
result of those provisions in addition to the scheduled quarterly principal
payment.
In January 2000, we issued a $2.8 million 5% promissory note to the seller of
the CNS business. The promissory note, which is payable in two principal
payments of $1.4 million each, plus accrued interest, is collateralized by
inventory, property and equipment of the CNS business and by a collateral
assignment of a $2.8 million promissory note from one of our subsidiaries. The
first principal payment, including accrued interest, was paid on January 16,
2001. The final payment is due in January 2002. In addition, we will have the
net proceeds of the shares we sell in this offering available for our funding
uses.
34
On December 31, 2001 the warrants issued to affiliates of Soros Private Equity
Partners LLC will expire.
In the short-term, we believe that we have sufficient resources to fund our
operations. In the absence of a material acquisition or a material adverse
change in our business, we believe we have the ability to fund our operations
from our existing capital resources and cash generated from the business through
the end of 2002. However, in the longer-term, we cannot insure that we will be
able to generate sufficient revenues to sustain positive operating cash flows or
profitability or to find acceptable alternatives to finance future acquisitions.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risks arising from an increase in interest rates
payable on the variable rate revolving credit facility with Fleet Capital
Corporation. For example, based on the remaining term loan and revolving credit
facility outstanding at March 31, 2001, an annual interest rate increase of 100
basis points would increase interest expense by approximately $110,000 annually.
CONVERSION OF SERIES B CONVERTIBLE PREFERRED STOCK
On May 4, 2001, we notified the holders of the 100,000 shares of Series B
Preferred of our intention to redeem these shares on June 29, 2001 for $12.3
million. The holders of the Series B Preferred had the right to convert their
shares into common stock prior to this redemption. As of June 26, 2001, all of
the holders of the Series B Preferred exercised this right to convert their
100,000 shares of Series B Preferred into 2,617,800 shares of common stock.
NET OPERATING LOSSES
At December 31, 2000, we had net operating loss carryforwards of approximately
$41.6 million and $18.2 million for federal and state income tax purposes,
respectively, to offset future taxable income, if any. The federal and state net
operating loss carryforwards expire through 2018 and 2007, respectively. Our
ability to use such net operating losses to offset future federal taxable income
may be limited by, among other things, Internal Revenue Code Section 382, which
generally applies if we experience an "ownership change" within the meaning of
such section.
At December 31, 2000, several of our subsidiaries had unused net operating loss
carryforwards and tax credit carryforwards arising from periods prior to our
ownership. Excluding our Telios Pharmaceuticals, Inc. subsidiary, approximately
$9 million of these net operating loss carryforwards for federal income tax
purposes expire between 2001 and 2005. Our Telios subsidiary has approximately
$84 million of net operating losses, which expire between 2002 and 2010. The
amount of Telios' net operating loss that is available and our ability to
utilize this loss is dependent on the determined value of Telios at the date of
acquisition. We have a valuation allowance of $45 million recorded against all
deferred tax assets, including the net operating losses, due to the uncertainty
of realization. The Internal Revenue Code of 1986, as amended, Section 382 and
other provisions of the Internal Revenue Code and its applicable regulations
severely limits the timing and manner in which we may utilize these acquired net
operating losses in any year.
As of December 31, 2000, we had provided a $44.8 million valuation allowance
against our consolidated deferred tax asset due to the uncertainty of its
realization. Because we have generated taxable income during recent quarters,
management is continuing to reassess the potential realizability of this asset
through the generation of future taxable income. The recognition of the deferred
tax asset could affect our income tax provision in the near term.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999 (as amended in March 2000 and June 2000) the staff of the
Securities and Exchange Commission issued Staff Accounting Bulletin 101, Revenue
Recognition. As the result of the adoption of the Accounting Bulletin, we
recorded a $470,000 cumulative effect of an accounting change to defer a portion
of a
35
non-refundable, up-front fee received and recorded in other revenue in 1998. The
cumulative effect of this accounting change was measured and recorded as of
January 1, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Statement No.
133, as amended by Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," requires companies to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
these instruments at fair value. Our adoption of Statement No. 133 as of January
1, 2001 did not have a material effect on our results of operations or financial
position during the first quarter of 2001.
36
BUSINESS
OVERVIEW
We develop, manufacture and market medical devices, implants and biomaterials
for the neurosurgical, orthopedic and soft tissue repair markets. Our operations
consist of:
o Integra NeuroSciences, which is a leading provider of implants,
devices, and monitors used in neurosurgery, neurotrauma, and related
critical care; and
o Integra LifeSciences, which develops and manufactures a variety of
medical products and devices, including products based on our
proprietary tissue regeneration technology which are used to treat soft
tissue and orthopedic conditions.
Integra NeuroSciences sells primarily through a direct sales organization, and
Integra LifeSciences sells primarily through strategic alliances and
distributors.
Integra was founded in 1989 and over the next decade built a product portfolio
based on absorbable collagen, and developed technologies directed toward tissue
regeneration. During 1999 and 2000, we expanded into the neurosurgical market
through acquisitions and introductions of new products. Our 2000 revenues
increased to $71.6 million, compared to $42.9 million in 1999 and $17.6 million
in 1998. Revenues for the first quarter of 2001 increased $7.2 million, or 49%,
over the first quarter of 2000 to $21.7 million. Integra NeuroSciences accounted
for 64% of our total revenues in 2000 and 68% of our total revenues during the
first three months of 2001.
In 2000, we sold over 1,000 different products to over 2,000 hospitals and other
customers in more than 80 countries. We generate revenues from product sales,
strategic alliances and royalties and in 2000 invested $7.5 million in research
and development relating to new products, including those using our
biomaterials, peptide chemistry and collagen engineering technologies.
Integra NeuroSciences accounted for 64% of total revenues in 2000 and 68% of
total revenues during the first three months of 2001. We market these products
to neurosurgeons and critical care units, which comprise a focused group of
hospital-based practitioners. As a result, we believe we are able to access this
market through a cost-effective sales and marketing infrastructure.
For the majority of the products we manufacture under Integra LifeSciences, we
partner with market leaders which we believe allows us to achieve our growth
objectives cost effectively while enabling us to focus our management efforts on
developing new products. These non-neurosurgical products address large, diverse
markets, and we believe that they can be more cost effectively promoted through
leveraging marketing partners than through developing a sales infrastructure
ourselves. Our strategic alliances include those alliances with Ethicon, a
division of Johnson & Johnson; the Genetics Institute division of American Home
Products Corporation; and Medtronic Sofamor Danek.
INDUSTRY
MARKETS FOR INTEGRA NEUROSCIENCES PRODUCTS
The neurosurgical device markets that we serve consist of medical products,
implants and instruments used for the diagnosis, treatment and monitoring of
chronic diseases and acute injuries involving the brain and spinal chord. These
products are primarily used in the operating room and intensive care unit by
neurosurgeons and nurses. According to industry sources and our estimates, the
size of the market for our products is approximately $400 million and is
expected to grow at annual rate of 6-8%.
Integra NeuroSciences addresses the market need created by trauma cases, cancer,
hydrocephalus and other conditions of the brain and spine through its
established market positions in intracranial monitoring, neurosurgical shunting,
dural repair, tumor ablation and specialty neurosurgical instrumentation.
37
Intracranial monitors are used by neurosurgeons in diagnosing and treating cases
of severe head trauma and other diseases. Integra NeuroSciences currently has
approximately 3,000 intracranial monitors installed worldwide. There are
approximately 400,000 cases of head trauma each year in the United States, of
which the portion that requires monitoring and intervention represents a market
of approximately $40 million.
Our DuraGen(R) Dural Graft Matrix product line addresses the market for dural
substitutes, including cranial and spinal procedures. The dura matter is the
thick membrane that contains the cerebrospinal fluid within the brain and the
spine. The dura matter must be penetrated during brain surgery and is often
damaged during spinal surgery. In either case, surgeons often close or repair
the dura matter with a graft. The graft may consist of other tissue taken from
elsewhere in the patient's body, or it may be one of the dural substitute
products currently on the market which are made of synthetic materials,
processed human cadaver, or bovine pericardium.
Our Selector(R) Integra Ultrasonic Aspirator, Dissectron(R) Ultrasonic Surgical
Aspirator and Integra Coblation(R) products address the market for the surgical
destruction and removal of malignant and non-malignant tumors and other tissue.
More than 110,000 metastatic brain tumors are diagnosed annually in the United
States.
Hydrocephalus is an incurable condition resulting from an imbalance between the
amount of cerebrospinal fluid produced by the body and the rate at which
cerebrospinal fluid is absorbed by the brain. This condition causes the
ventricles of the brain to enlarge and the pressure inside the head to increase.
Hydrocephalus often is present at birth, but may also result from head trauma,
spina bifida, intraventricular hemorrhage, intracranial tumors and cysts. The
most common method of treatment of hydrocephalus is the insertion of a shunt
into the ventricular system of the brain to divert the flow of cerebrospinal
fluid out of the brain. A pressure valve then maintains the cerebrospinal fluid
at normal levels within the ventricles.
According to the Hydrocephalus Association, hydrocephalus affects approximately
one in 500 children born in the United States. We estimate that approximately
80% of total cerebrospinal fluid shunt sales address birth-related hydrocephalus
with the remaining 20% addressing surgical procedures involving excess
cerebrospinal fluid due to head trauma.
Based on industry sources, we believe that the total United States market for
hydrocephalus management, including monitoring, shunting and drainage, is
approximately $70 million. Of that amount, it is estimated that a little more
than half consists of sales of monitoring products, and the balance consists of
sales of shunts and drains for the management of hydrocephalus.
Integra NeuroSciences' Redmond(TM)-Ruggles(TM) line of neurosurgery and spinal
instrumentation products, including hand-held spinal and neurosurgery
instruments such as retractors, kerrisons, dissectors and curettes, addresses
the market for neurosurgical instruments.
Integra NeuroSciences' line of minimally invasive neuroendoscopy products
addresses a market growing, in part, because of the introduction of new
procedures called third ventriculostomies which are increasingly substituted for
shunt placement for patients who meet the criteria.
Our NeuraGen(TM) Nerve Guide addresses the market for the repair of severed
peripheral nerves, a market opportunity estimated to be $40 million. We received
FDA clearance for the NeuraGen(TM) Nerve Guide in June, 2001 and expect to
launch the product in the fourth quarter of 2001.
MARKETS FOR INTEGRA LIFESCIENCES PRODUCTS
The markets for our Integra LifeSciences technologies consist of medical
products and implants used for the treatment of defects, diseases and injuries
involving soft tissue, bone and cartilage and for infection control. The Integra
LifeSciences division is responsible for all of our products outside the Integra
NeuroSciences division.
38
Integra LifeSciences skin replacement products address the market need created
by severe burns and chronic wounds. We estimate that the worldwide market for
use of skin replacement products (such as INTEGRA(R) Dermal Regeneration
Template) in the treatment of severe burns is approximately $75 million.
However, the potential market for the use of INTEGRA(R) Dermal Regeneration
Template for reconstructive surgery and the treatment of chronic wounds is much
larger, which we estimate to be in excess of $1 billion.
Our Biomend(R) Absorbable Collagen Membrane product addresses the need for
guided tissue regeneration in peridontal surgery, and our cartilage repair
program addresses the need for articular cartilage repair. In addition we are
also developing a new class of absorbable materials for the orthopedic implant
market. These materials, which are made from the tyrosine-derived
polycarbonates, are designed to enhance the rate and quality of healing and
tissue regeneration when implanted in bone.
STRATEGY
Our goal is to become a leader in the development, manufacture and marketing of
medical devices, implants and biomaterials in the markets in which we compete.
Our products are principally used in the diagnosis and treatment of
neurosurgical, soft-tissue and orthopedic conditions and we intend to expand our
presence in those markets. Key elements of our strategy include the following:
EXPAND OUR NEUROSURGERY MARKET PRESENCE. Through acquisitions and internal
growth, we have rapidly grown Integra NeuroSciences into a leading provider of
products for the neurosurgery market. We believe there exists additional growth
potential in this market through:
o increasing market share of existing product lines;
o expanding our product portfolio through acquisitions; and
o continuing development and promotion of innovative products, such as
the DuraGen(R) Dural Graft Matrix.
CONTINUE TO DEVELOP NEW AND INNOVATIVE MEDICAL PRODUCTS. As evidenced by our
development of INTEGRA(R) Dermal Regeneration Template, Biomend(R), Biomend(R)
Extend, DuraGen(R) and NeuraGen(R) products, we have a leading proprietary
absorbable implant franchise. INTEGRA(R) Dermal Regeneration Template is a
proprietary absorbable matrix used to enable the human body to regenerate
functional dermal tissue. In 1999, we introduced our DuraGen(R) Dural Graft
matrix to close brain and spine membranes. We are currently developing a variety
of innovative neurosurgical and other medical products as well as seeking
expanded applications for our existing products.
CONTINUE TO FORM STRATEGIC ALLIANCES FOR INTEGRA LIFESCIENCES PRODUCTS. We have
collaborated with well-known medical device companies to develop and market the
majority of our non-neurosurgical product lines. These products address large
and diverse markets which we believe can be more cost effectively accessed
through marketing partners than through developing our own sales infrastructure.
We have partnered with Ethicon to market our INTEGRA(R) Dermal Regeneration
Template and intend to pursue additional strategic alliances selectively.
ADDITIONAL STRATEGIC ACQUISITIONS. Since March 1999 we have completed five
acquisitions in the neurosurgical market. We intend to seek additional
acquisitions in this market and in other specialty medical technology markets
characterized by high margins, fragmented competition and focused target
customers.
INTEGRA NEUROSCIENCES PRODUCTS
We manufacture and market a multi-line offering of innovative neurosurgical
devices used for brain and spine injuries. We intend to be the neurosurgeon's
and neuro-intensive care unit's "one-stop shop" for these products. For the
intensive care unit, we sell the Camino(R), Ventrix(R) and LICOX(R) lines of
intracranial pressure, temperature
39
and oxygen-monitoring systems and external drainage systems manufactured under
the Camino(R), Heyer-Schulte(R) and Clinical Neuro Systems(TM) brand names. For
the operating room, we sell a wide range of products, including Heyer-Schulte(R)
hydrocephalus management shunting products, the DuraGen(R) Dural Graft Matrix,
the Selector(R) Integra Ultrasonic Aspirator and Dissectron(R) Ultrasonic
Surgical Aspirator, Integra Coblation(R) Neurosurgical Systems,
Redmond(TM)-Ruggles(TM) neurosurgical instruments and Neuro Navigational(R)
endoscopes.
Our neurosurgical products can be segmented by use into functional areas of the
hospital as follows:
NEURO INTENSIVE CARE UNIT
THE MONITORING OF BRAIN PARAMETERS. Integra NeuroSciences sells the Camino(R)
and Ventrix(R) lines of intracranial pressure and temperature monitoring
systems, and the LICOX(R) Brain Tissue Oxygen Monitoring System. The Camino(R)
and Ventrix(R) systems measure the intracranial pressure and temperature in the
brain and ventricles, and the LICOX(R) system allows for continuous qualitative
regional monitoring of dissolved oxygen in cerebral tissues. Core technologies
in the brain parameter monitoring product line include the design and
manufacture of the disposable catheters used in the monitoring systems, pressure
transducer technology, optical detection/fiber optic transmission technology,
sensor characterization and calibration technology and monitor design and
manufacture.
EXTERNAL DRAINAGE SYSTEM PRODUCT LINE. Integra NeuroSciences' ventricular and
lumbar external drainage systems are manufactured under the Camino(R),
Heyer-Shulte(R) and Clinical Neuro Systems(TM) brand names. External drainage
systems are medical devices used to drain excess cerebrospinal fluid from the
ventricles of the brain into an external container.
NEURO OPERATING ROOM
DURAGEN(R) PRODUCT LINE. The DuraGen(R) Dural Graft Matrix is an absorbable
collagen matrix indicated for the repair of the dura matter. We believe that the
other methods for repairing the dura matter suffer from shortcomings addressed
by the DuraGen(R) Dural Graft Matrix.
Our DuraGen(R) product has been shown in clinical trials to be an effective
means for closing the dura matter without the need for suturing, which allows
the neurosurgeon to conclude the operation more efficiently. In addition,
because the DuraGen(R) product is ultimately absorbed by the body and replaced
with new natural tissue, the patient avoids some of the risks associated with a
permanent implant inside the cranium.
SELECTOR(R) INTEGRA ULTRASONIC ASPIRATOR. The Selector(R) Integra Ultrasonic
Aspirator uses very high frequency sound waves to pulverize cancer tumors, and
allows the surgeon to remove the damaged tumor tissue by aspiration. Unlike
other surgical techniques, ultrasonic surgery selectively dissects and fragments
soft tissue leaving fibrous tissues such as nerves and blood vessels intact.
Ultrasonic aspiration facilitates the removal of unwanted tissue adjacent or
attached to vital structures.
DISSECTRON(R) ULTRASONIC SURGICAL ASPIRATOR. The Dissectron(R) Ultrasonic
Surgical Aspirator system, acquired in April 2001, applies ultrasonic energy to
precisely fragment and emulsify soft tissue, which is subsequently aspirated,
while preserving major blood vessels, nerves and elastic fibers. The system has
been used internationally in a variety of surgical applications, including
neurosurgery.
INTEGRA COBLATION(R). Integra NeuroSciences is the exclusive sales and
distribution partner for ArthroCare Corporation's Coblation(R) based surgical
system for neurosurgery in North America and certain other international
markets. ArthroCare's Coblation(R) products allow surgeons to operate with a
high level of control, limiting damage to surrounding tissue and thereby
potentially reducing pain and speeding recovery for the patient. Coblation(R)
products, including the neurosurgery system that we distribute, operate at lower
temperatures than traditional electrosurgical or laser surgery tools and enable
surgeons to remove, shrink or sculpt soft tissue and to seal bleeding vessels.
ArthroCare's soft-tissue surgery systems consist of a controller unit and an
assortment of disposable devices that are specialized for specific types of
surgery. We are working with
40
ArthroCare to develop handpieces and other accessories particularly for the
neurosurgical application.
SHUNTS FOR HYDROCEPHALUS MANAGEMENT. Neurosurgical shunts are medical devices
implanted in the patient to drain excess cerebrospinal fluid from the ventricles
of the brain into the patient's peritoneal cavity. Our line of shunting products
for hydrocephalus management includes the Novus(R), LPV(R) and Pudenz(TM)
shunts, ventricular, peritoneal and cardiac catheters, physician-specified
hydrocephalus management shunt kits, Ommaya(R) cerebrospinal fluid reservoirs
and Spetzler(R) lumbar and syringo-peritoneal shunts.
REDMOND(TM)-RUGGLES(TM) PRODUCT LINE. We provide neurosurgeons and spine
surgeons with a full line of specialty hand-held spinal and neurosurgical
instruments sold under the Redmond(TM) and Ruggles(TM) brand names. These
products include retractors, kerrisons, dissectors and curettes. Major product
segments include spinal instruments, microsurgical neuro instruments, and
products customized by Integra NeuroSciences and sold through other companies
and distributors. Specialty surgical steel fabricators in Germany manufacture
most of these products to Integra's specifications.
NEURO NAVIGATIONAL(R) ENDOSCOPE PRODUCT LINE. We manufacture and sell disposable
and minimally invasive neuroendoscopy products under the Neuro Navigational(R)
brand name. These fiber optic instruments are used to facilitate minimally
invasive neurosurgery.
NEURAGEN(TM) NERVE GUIDE. We manufacture the NeuraGen(TM) Nerve Guide, an
absorbable implant for the repair of severed peripheral nerves in the
extremities. Peripheral nerves may become severed through traumatic accidents or
surgical injuries, often resulting in the permanent loss of motor and sensory
function. Although severed peripheral nerves regenerate spontaneously, they do
not establish functional connections unless the nerve stumps are surgically
reconnected. The NeuraGen(TM) product is an absorbable collagen tube designed to
provide a protective environment for the regenerating nerve and to provide a
conduit through which regenerating nerves can bridge the injury. The
NeuraGen(TM) Nerve Guide offers a rapid method for rejoining severed peripheral
nerves, in contrast to conventional microsurgical techniques.
In June 2001, we received Section 510(k) clearance from the FDA to market the
NeuraGen(TM) product and we plan to launch the product in the United States in
the fourth quarter of 2001.
The table below provides a summary of our Integra NeuroSciences products, their
application and status:
- --------------------------------------------------------------------------------
- --------------------------
PRODUCT LINES APPLICATION
STATUS
- --------------------------------------------------------------------------------
- --------------------------
NEURO INTENSIVE CARE UNIT
- --------------------------------------------------------------------------------
- --------------------------
Camino(R)and Ventrix(R)fiber Access, drainage and continuous
Marketed
optic-based intracranial monitoring of intracranial
monitoring systems, LICOX(R) pressure, oxygen and temperature
oxygen monitoring systems, following injury or neurosurgical
Clinical Neuro Systems(TM), procedures
Camino(R)and Heyer-Schulte(R)
drainage systems & cranial access kits
- --------------------------------------------------------------------------------
- --------------------------
NEURO OPERATING ROOM
- --------------------------------------------------------------------------------
- --------------------------
DuraGen(R)Dural Graft Matrix Graft to close brain and spine
Marketed
(absorbable collagen-based) membrane
- --------------------------------------------------------------------------------
- --------------------------
Selector(R)Integra Ultrasonic Uses ultrasound to ablate cancer
Marketed
Aspirator/ Dissectron(R) tumors
Ultrasonic Surgical Aspirator
- --------------------------------------------------------------------------------
- --------------------------
41
INTEGRA NEUROSCIENCES (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------
PRODUCT LINES APPLICATION
STATUS
- --------------------------------------------------------------------------------
- --------------------------
Integra Coblation(R)(1) Uses bipolar electrosurgery to
Marketed
Neurosurgical System ablate cancer tumors for
neurosurgical applications
- --------------------------------------------------------------------------------
- --------------------------
Heyer-Schulte(R)neurosurgical shunts Specifically designed for the
Marketed
management of hydrocephalus, a
chronic condition involving excess
cerebrospinal fluid in the brain
- --------------------------------------------------------------------------------
- --------------------------
Redmond(TM)-Ruggles(TM) Specialized surgical instruments
Marketed
neurosurgical and spinal instruments for use in brain or spinal surgery
- --------------------------------------------------------------------------------
- --------------------------
Neuro Navigational(R)flexible For minimally invasive surgical
Marketed
endoscopes access to the brain
- --------------------------------------------------------------------------------
- --------------------------
NeuraGen(TM)Nerve Guide Repair of peripheral nerves
Cleared by FDA,
market launch
planned for
fourth quarter
of 2001
- --------------------------------------------------------------------------------
- --------------------------
(1) Coblation is a registered trademark of Arthrocare Corporation.
INTEGRA LIFESCIENCES PRODUCTS
The Integra LifeSciences division develops and manufactures tissue regeneration
products and surgical products that are primarily sold outside of neurosurgery
and neurotrauma. Many of the current products of Integra LifeSciences are built
on our expertise in absorbable collagen products. Integra LifeSciences' research
and development programs are generally constructed around strategic alliances
with leading medical device companies.
INTEGRA(R) DERMAL REGENERATION TEMPLATE. INTEGRA(R) Dermal Regeneration Template
is designed to enable the human body to regenerate functional dermal tissue.
Human skin consists of the epidermis and the dermis. The epidermis is the thin,
outer layer that serves as a protective seal for the body, and the dermis is the
thicker layer underneath that provides structural strength and flexibility and
supports the viability of the epidermis through a vascular network. The body
normally responds to severe damage to the dermis by producing scar tissue in the
wound area. This scar tissue is accompanied by contraction that pulls the edges
of the wound closer which, while closing the wound, often permanently reduces
flexibility. In severe cases, this contraction leads to a reduction in the range
of motion for the patient, who subsequently requires extensive physical
rehabilitation or reconstructive surgery. Physicians treating severe wounds,
such as full-thickness burns, seek to minimize scarring and contraction.
INTEGRA(R) Dermal Regeneration Template was designed to minimize scar formation
and wound contracture in full thickness skin defects. INTEGRA(R) Dermal
Regeneration Template consists of two layers, a thin collagen-glycosaminoglycan
sponge and a silicone membrane. The product is applied with the sponge layer in
contact with the excised wound. The sponge material serves as a template for the
growth of new functional dermal tissue. The outer membrane layer acts as a
temporary substitute for the epidermis to control water vapor transmission,
prevent re-injury and minimize bacterial contamination.
INTEGRA(R) Dermal Regeneration Template was approved by the FDA under a
premarket approval application for the post-excisional treatment of
life-threatening full-thickness or deep partial-thickness thermal injury where
42
sufficient autograft is not available at the time of excision or not desirable
due to the physiological condition of the patient. Through a strategic alliance
with Ethicon, we are seeking to obtain broader indications for this product,
including approval for use in reconstructive surgery and treatment of chronic
wounds.
BIOMEND(R) ABSORBABLE COLLAGEN MEMBRANE. Our BioMend(R) Absorbable Collagen
Membrane is used for guided tissue regeneration in periodontal surgery. The
BioMend(R) membrane is inserted between the gum and the tooth after surgical
treatment of periodontal disease, preventing the gum tissue from interfering
with the regeneration of the periodontal ligament that holds the tooth in place.
The BioMend(R) product is intended to be absorbed after approximately four to
seven weeks, avoiding the requirement for additional surgical procedures to
remove a non-absorbable membrane. BioMend(R) Extend has the same indication for
use as BioMend(R), except that it absorbs in approximately 16 weeks. The
BioMend(R) and BioMend(R) Extend Absorbable Collagen Membrane is sold through
the Sulzer Dental division of Sulzer Medica.
COLLAGEN MATRICES FOR USE WITH BONE GROWTH FACTORS. We supply the Genetics
Institute division of American Home Products with absorbable collagen sponges
for use in developing bone regeneration implants. Since 1994, we have supplied
absorbable collagen sponges for use with Genetics Institute's recombinant human
bone morphogenic protein-2 (rhBMP-2). Recombinant human BMP-2 is a manufactured
version of human protein naturally present in very small quantities in the body.
Genetics Institute is developing recombinant human bone morphogenic protein-2
for clinical evaluation in several areas of bone repair and augmentation. Spine
applications are being developed through a related collaboration with Medtronic
Sofamor Danek in North America. Genetics Institute has filed a pre-market
approval application with the FDA seeking approval for the use of rhBMP-2 in
conjunction with our Absorbable Collagen Sponge for use in treatment of acute
long-bone fractures requiring open surgical management and Medtronic Sofamor
Danek has filed a pre-market approval application seeking approval for the use
of rhBMP-2 and our collagen sponges for spinal fusions.
On June 22, 2001 Genetics Institute announced that it had received a
"not-approvable" letter from the FDA regarding its pre-market approval
application for the treatment of long-bone fractures, which may delay or
ultimately prevent the approval of rhBMP-2 for those uses. The "non-approvable"
letter focuses on the design of the pivotal clinical study and the
interpretation of the clinical data submitted by Genetics Institute. Genetics
Institute has stated that the "non-approvable" letter should not have an impact
on the pre-market approval application filed by Medtronic Sofamor Danek for
spinal fusion applications.
CARTILAGE REPAIR PROGRAM. Damaged articular cartilage, which connects the
skeletal joints, is associated with the onset of progressive pain, degeneration
and, ultimately, long-term osteoarthritis. Normal articular cartilage does not
effectively heal. The conventional procedure for treating traumatic damage to
cartilage involves smoothing damaged portions of the tissue and removing
free-floating material from the joint using arthroscopic surgery with the
objective of reducing pain and restoring mobility. However, this therapy does
not stop joint surface degeneration, often requires two or more surgeries and
results in the formation of fibrocartilage, which is rough and non-weight
bearing over prolonged periods. Moreover, the long-term result of this procedure
often is permanent reduction of joint mobility and an increased risk of
developing osteoarthritis.
We are developing our proprietary technology base toward an approach that will
support regeneration of the patient's own articular cartilage. This technology
will allow the patient's body to regenerate a smooth, weight-bearing surface.
Our objective in developing this cartilage-specific technology is to produce a
product that provides the proper matrix system to allow the natural regeneration
of the patient's cartilage, with full restoration of function and diminished
risk of osteoarthritis.
TYROSINE POLYCARBONATES FOR ORTHOPEDIC IMPLANTS. We are continuing to develop
additional biomaterial technologies that enhance the rate and quality of healing
and tissue regeneration with synthetic biodegradable scaffolds that support cell
attachment and growth. We are developing a new class of absorbable
polycarbonates created through the polymerization of tyrosine, a naturally
occurring amino acid. A well-defined and commercially scaleable manufacturing
process prepares these materials. Device fabrication by traditional
43
techniques such as compression molding and extrusion is readily achieved. We
believe that this new biomaterial will be useful in promoting full bone healing
when implanted in damaged sites. This material is currently being developed for
orthopedic and tissue engineering applications where strength and bone
compatibility are critical issues for success of healing. We have entered into
agreements to supply the material to Bionx Implants, Inc. for specified
orthopedic implants. No medical device containing the material has yet been
approved for sale.
OTHER SURGICAL PRODUCTS. Other current products of Integra LifeSciences include
the VitaCuff(R)catheter access infection control device (sold to Bard Access
Systems, Inc., Arrow International, Inc. and Tyco International Ltd.), the
BioPatch(R)anti-microbial wound dressing (sold to Ethicon), and a wide range of
absorbable collagen products for hemostasis (sold to Sulzer Dental for use in
periodontal surgery and directly and through various other distributors under
the Helistat(R)and Helitene(R)Absorbable Collagen Hemostatic Agent names).
Our Sundt(TM) and other hemodynamic shunts are used to divert blood to vital
organs (such as the brain) during carotid artery surgical procedures involving
blood vessels.
Finally, our Spembly Medical cryosurgery products allow surgeons to use low
temperatures to more easily extract diseased tissue.
The table below provides a summary of our Integra LifeSciences products, their
application, status and marketing/development partner:
- --------------------------------------------------------------------------------
- -------------------------------
PRODUCT LINES APPLICATION STATUS
MARKETING/DEVELOPMENT PARTNER
- --------------------------------------------------------------------------------
- -------------------------------
PRIVATE LABEL PRODUCTS
- --------------------------------------------------------------------------------
- -------------------------------
WOUND MANAGEMENT
- --------------------------------------------------------------------------------
- -------------------------------
INTEGRA(R)Dermal Regenerate dermis and repair Marketed
Ethicon, Inc., a division of
Regeneration Template skin defects
Johnson & Johnson, and Century
Medical, Inc. Japan
- --------------------------------------------------------------------------------
- -------------------------------
DENTAL SURGERY PRODUCTS
- --------------------------------------------------------------------------------
- -------------------------------
BioMend(R)and Used in guided tissue Marketed
Sulzer Dental, a division
Biomend(R)Extend regeneration in periodontal
of Sulzer Medica Ltd.
Absorbable Collagen surgery
Membrane
- --------------------------------------------------------------------------------
- -------------------------------
CollaCote(R), CollaTape(R) Used to control bleeding in Marketed
Sulzer Dental
and CollaPlug(R)absorbable dental surgery
wound dressings
- --------------------------------------------------------------------------------
- -------------------------------
INFECTION CONTROL
PRODUCTS
- --------------------------------------------------------------------------------
- -------------------------------
VitaCuff(R) Provides protection against Marketed
Arrow International, Inc.,
infection arising from
Bard Access Systems, Inc.,
long-term catheters
Tyco International
- --------------------------------------------------------------------------------
- -------------------------------
BioPatch(R)(1) Anti-microbial wound dressing Marketed
Ethicon, Inc.
- --------------------------------------------------------------------------------
- -------------------------------
ORTHOPEDICS
- --------------------------------------------------------------------------------
- -------------------------------
Absorbable Collagen Fracture management/enabling Development
Genetics Institute division of
Sponge for use with bone spinal fusion
American Home Products,
morphogenetic protein
Medtronic Sofamor Danek
(rhBMP-2)
- --------------------------------------------------------------------------------
- -------------------------------
44
- --------------------------------------------------------------------------------
- ------------------------------
PRODUCT LINES APPLICATION STATUS
MARKETING/DEVELOPMENT PARTNER
- --------------------------------------------------------------------------------
- ------------------------------
ORTHOPEDICS (CONTINUED)
- --------------------------------------------------------------------------------
- ------------------------------
Tyrosine polycarbonates Fixation or alignment of Development
Bionx Implants, Inc.
for fixation devices such fractures
as absorbable screws,
plates, pins, wedges
and nails
- --------------------------------------------------------------------------------
- -------------------------------
Articular cartilage repair Regeneration of joint cartilage Development
None
- --------------------------------------------------------------------------------
- -------------------------------
DISTRIBUTED PRODUCTS
- --------------------------------------------------------------------------------
- -------------------------------
Helitene(R)and Helistat(R) Control of bleeding Marketed
Direct and through various
absorbable collagen
distributors
hemostatic agents
- --------------------------------------------------------------------------------
- -------------------------------
Sundt(TM)and other For shunting blood during Marketed
Direct and through various
hemodynamic shunts surgical procedures involving
distributors
blood vessels
- --------------------------------------------------------------------------------
- -------------------------------
Spembly Medical Allow surgeon to use low Marketed
Various distributors
Cryosurgery products temperature to more easily
extract diseased tissue
- --------------------------------------------------------------------------------
- -------------------------------
- -----------------
(1) Biopatch is a registered trademark of Johnson & Johnson.
STRATEGIC ALLIANCES
We use distribution alliances to market the majority of our Integra LifeSciences
products. We have also entered into collaborative agreements relating to
research and development programs involving our technology. These arrangements
are described below.
ETHICON. In June 1999, we entered into a strategic alliance with Ethicon to
distribute INTEGRA(R) Dermal Regeneration Template throughout the world, except
in Japan. As part of that strategic alliance, Ethicon has agreed to pay for
clinical trials to support applications to the FDA for broader indications
beyond the severe burn market, including the treatment of chronic wounds. We
cannot be certain that these clinical trials will be completed, or that
INTEGRA(R) Dermal Regeneration Template will receive the approvals necessary to
permit Ethicon to promote it for those indications. Ethicon is responsible for
marketing and selling the product, has agreed to make significant minimum
product purchases, and will provide $2 million of annual funding for research,
development and certain clinical trials for the first five years of the alliance
and thereafter based on a percentage of net sales. In addition, Ethicon is
obligated to make contingent payments to Integra LifeSciences in the event of
certain clinical developments and to assist in the expansion of our
manufacturing capacity as Ethicon achieves certain sales targets. The aggregate
amount of available contingent payments, if all conditions for each payment are
satisfied, is $38 million. Of that amount, $25 million depends upon the
achievement of specified sales targets and $13 million depends upon the
achievement of certain clinical and regulatory events, such as regulatory
submissions and approvals for new intended uses for INTEGRA(R) Dermal
Regeneration Template. To date, we have received $750,000 in clinical and
regulatory payments, and no payments for the expansion of manufacturing
capacity. Based upon current clinical and regulatory plans and our estimates of
future sales growth, we do not expect to receive more than $2 million of such
contingent payments from Ethicon before 2004. Under the agreement, we are
obligated to manufacture the product and are responsible for continued research
and development. The initial term of the agreement is ten years, and Ethicon may
at its option extend the agreement for an additional ten years. Ethicon may
terminate the agreement prior to the end of the initial term by giving notice
one year in advance of termination. Depending upon the reasons for any
termination, Ethicon may be obligated to make significant payments to us.
45
CENTURY MEDICAL, INC. In 1997 and 1998, we signed exclusive importation and
sales agreements for INTEGRA(R) Dermal Regeneration Template, the DuraGen(R)
Dural Graft Matrix and the NeuraGen(TM) Nerve Guide in Japan with Century
Medical Inc., a subsidiary of ITOCHU Corporation. Under these agreements,
Century Medical, Inc. is conducting clinical trials at its own expense to obtain
Japanese regulatory approvals for the sale of INTEGRA(R) Dermal Regeneration
Template and the DuraGen(R) Dural Graft Matrix in Japan. The agreements with
Century Medical terminate seven years after we and Century Medical obtain
approval from Japanese regulators to sell the applicable product in Japan. We do
not receive any royalties under the agreement, but we did receive an initial
non-refundable payment of $1 million from Century Medical in 1998.
OTHER ORTHOPEDICS. In addition to our cartilage repair program, Integra
LifeSciences has several other programs oriented toward the orthopedic market.
These programs include an alliance with Genetics Institute for the development
of collagen matrices to be used in conjunction with Genetics Institute's
recombinant human bone morphogenetic protein-2. If approved, the protein is
expected to be used in conjunction with our matrices to regenerate bone.
Genetics Institute is developing products based on the protein for applications
in orthopedics, oral and maxillofacial surgery. Spine applications are being
developed through a related collaboration with Medtronic Sofamor Danek, which
has acquired the right from Genetics Institute to sell rhBMP-2 and our
Absorbable Collagen Sponges in North America for spinal applications. Genetics
Institute and Medtronic Sofamor Danek have each filed pre-market approval
applications with the FDA to obtain permission to promote rhBMP-2 with our
Absorbable Collagen Sponges. On June 22, 2001 Genetics Institute announced that
it had received a "not-approvable" letter from the FDA regarding its pre-market
approval application for the treatment of long-bone fractures, which may delay
or ultimately prevent the approval of rhBMP-2 for those uses. The
"non-approvable" letter focuses on the design of the pivotal clinical study and
the interpretation of the clinical data submitted by Genetics Institute.
Genetics Institute has stated that the "non-approvable" letter should not have
an impact on the pre-market approval application filed by Medtronic Sofamor
Danek for spinal fusion applications. Our agreement with Genetics Institute
requires us to supply Absorbable Collagen Sponges at specified prices. In
addition, we will receive a royalty equal to a percentage of Genetics
Institute's sales of surgical kits combining rhBMP-2 and our Absorbable Collagen
Sponges. The agreement terminates in 2004, but may be extended for successive
five year terms at the option of Genetics Institute. The agreement does not
provide for milestones or other contingent payments, but Genetics Institute pays
us to assist with regulatory affairs and research.
In September 1998, we announced a strategic alliance with Bionx Implants, Inc.
for developing fixation devices using Integra's polymer technology. Under this
agreement Bionx has responsibility for clinical trials and any necessary
regulatory filings. Products covered under the agreement with Bionx include an
absorbable line of screws, plates, pins, wedges and nails used for the fixation
and/or alignment of fractures or osteotomies in all areas of the musculoskeletal
system except in the spine and cranium. The initial term of our agreement with
Bionx extends until 2013, but it may be terminated earlier by either company
under various circumstances. We do not expect to receive contingent payments
under the agreement, but if absorbable devices are commercialized we will sell
raw polymer to Bionx at a specified price, plus receive a percentage of Bionx's
net sales of products made from the polymer.
SULZER DENTAL. Sulzer Medica Ltd.'s dental division, Sulzer Dental, has marketed
and sold BioMend(R) since 1995, BioMend(R) Extend since 1999 and CollaCote(R),
CollaPlug(R) and CollaTape(R) since 1992 under a distribution agreement. Under
that agreement, Sulzer Dental purchases products for the dental market from us
at specified prices and in minimum quantities. The initial term of our agreement
with Sulzer Dental ends at the end of 2004, and the agreement may be extended at
the option of Sulzer Dental for an additional five years.
SALES AND MARKETING
We sell our neurosurgical products in the United States through a direct sales
force organized into five regions, each with a manager. We employ 44 direct
sales personnel called neurospecialists covering 44 territories. We also employ
seven clinical development specialists who directly educate and train both the
neurospecialists and
46
our customers in the use of our products, and a scientific director with a Ph.D
in neurosciences. The sales organization has more than doubled in size since the
acquisition of the first neurosciences business in early 1999. We believe this
expansion allows for smaller, more focused territories, greater participation in
trade shows and more extensive marketing efforts. We also sell directly in the
United Kingdom and plan to sell through a direct sales force in Germany and
France. In the rest of the world, we sell our products through approximately 80
specialized neurosurgical distributors and dealers.
RESEARCH STRATEGY
We have either acquired or secured the proprietary rights to several important
technological and scientific platforms, including collagen matrix technology,
peptide technology, biomaterials technology, and expertise in fiber optics.
These technologies provide support for our critical applications in
neurosciences and tissue regeneration, and additional opportunities for
generating near-term and long-term revenues from medical applications. We have
been able to identify and bring together critical platform technology components
from which we work to develop solutions for both tissue regeneration and
neurosciences. These efforts have led to the successful development of new
products, such as the DuraGen(R) product.
We spent approximately $2.1 million for the three months ended March 31, 2001
and $7.5 million, $8.9 million, and $8.4 million during fiscal years 2000, 1999,
and 1998, respectively, on research and development activities. Research and
development activities funded by government grants and contract development
revenues amounted to $0.9 million for the three months ended March 31, 2001, and
$2.8 million, $1.6 million and $1.8 million during fiscal years 2000, 1999, and
1998, respectively.
GOVERNMENT REGULATION
As a manufacturer of medical devices, we are subject to extensive regulation by
the FDA and, in some jurisdictions, by state and foreign governmental
authorities. These regulations govern the introduction of new medical devices,
the observance of certain standards with respect to the design, manufacture,
testing, labeling and promotion of the devices, the maintenance of certain
records, the ability to track devices, the reporting of potential product
defects, the export of devices and other matters. We believe that we are in
substantial compliance with these governmental regulations.
From time to time, we have recalled certain of our products. Since the beginning
of 1998, we have voluntarily recalled products, and we have never involuntarily
recalled a product. We have recalled defective components or devices supplied by
other vendors, kits assembled by us that included incorrect combinations of
products and defective devices manufactured by us. None of these recalls
resulted in significant direct expense to us or significant disruption of
customer or supplier relationships. However, a future voluntary or involuntary
recall of one of our major products, particularly if it involved a potential or
actual risk to patients, would have an adverse financial impact on us, as a
result both of direct expenses and disrupted customer relationships.
Our medical devices introduced in the United States market are required by the
FDA, as a condition of marketing, to secure a Pre-market Notification clearance
pursuant to Section 510(k) of the Federal Food, Drug and Cosmetic Act, an
approved Pre-market Approval application or a supplemental pre-market approval
application. Alternatively, we may seek United States market clearance through a
Product Development Protocol approved by the FDA. Establishing and completing a
Product Development Protocol, or obtaining a pre-market approval application or
supplemental pre-market approval application, can take up to several years and
can involve preclinical studies and clinical testing. In order to perform
clinical testing in the United States on an unapproved product, we are also
required to obtain an Investigational Device Exemption from the FDA. In addition
to requiring clearance for new products, FDA rules may require a filing and FDA
approval, usually through a pre-market approval application supplement or a
510(k) Premarket Notification clearance, prior to marketing products that are
modifications of existing products or new indications for existing products.
While
47
the FDA Modernization Act of 1997, when fully implemented, is expected to inject
more predictability into the product review process, streamline post-market
surveillance, and promote the global harmonization of regulatory procedures, the
process of obtaining the clearances can be onerous and costly.
We cannot assure that all the necessary approvals, including approval for
product improvements and new products, will be granted on a timely basis, if at
all. Delays in receipt of, or failure to receive, the approvals could have a
material adverse effect on our business. Moreover, after clearance is given, if
the product is shown to be hazardous or defective, the FDA and foreign
regulatory agencies have the power to withdraw the clearance or require us to
change the device, its manufacturing process or its labeling, to supply
additional proof of its safety and effectiveness or to recall, repair, replace
or refund the cost of the medical device. In addition, federal, state and
foreign regulations regarding the manufacture and sale of medical devices are
subject to future changes. We cannot predict what impact, if any, these changes
might have on its business. However, the changes could have a material impact on
our business.
We have received or acquired 128 premarket notification clearances, four
approved pre-market approval applications and 42 supplemental premarket approval
applications. We have one premarket notification application pending, but expect
to file new applications during the next year to cover new products and
variations on existing products. We have several supplemental premarket approval
applications pending, in each case for a modification to the labeling of an
existing product. The most significant of these supplemental applications
propose changes in the approved uses for the INTEGRA(R) Dermal Regeneration
Template.
We are also required to register with the FDA as a device manufacturer. As such,
we are subject to periodic inspection by the FDA for compliance with the FDA's
quality systems. These regulations require that we manufacture our products and
maintain our documents in a prescribed manner with respect to design,
manufacturing, testing and control activities. Further, we are required to
comply with various FDA requirements for labeling and promotion. The Medical
Device Reporting regulations require that we provide information to the FDA
whenever there is evidence to reasonably suggest that one of our devices may
have caused or contributed to a death or serious injury or, if a malfunction
were to recur, could cause or contribute to a death or serious injury. In
addition, the FDA prohibits us from promoting a medical device before marketing
clearance has been received or promoting an approved device for unapproved
indications. If the FDA believes that a company is not in compliance with
applicable regulations, it can institute proceedings to detain or seize
products, issue a warning letter, issue a recall order, impose operating
restrictions, enjoin future violations and assess civil penalties against that
company, its officers or its employees and can recommend criminal prosecution to
the Department of Justice. These actions could have a material impact on our
business. Other regulatory agencies may have similar powers.
Medical device laws are also in effect in many of the countries outside the
United States in which we do business. These laws range from comprehensive
device approval and quality system requirements for some or all of the our
medical device products to simpler requests for product data or certifications.
The number and scope of these requirements are increasing. In June 1998, the
European Union Medical Device Directive became effective, and all medical
devices must meet the Medical Device Directive standards and receive CE mark
certification. CE Mark certification involves a comprehensive Quality System
program, and submission of data on a product to the Notified Body in Europe. The
Medical Device Directive, the ISO 9000 series of standards, and EN46001 are
recognized international quality standards that are designed to ensure we
develop and manufacture quality medical devices. Each of our facilities is
audited on an annual basis by a recognized Notified Body to verify our
compliance with these standards. In 2000, each of our facilities was audited and
we have maintained our certification to these standards.
In addition, we are required to notify the FDA if we export specified medical
devices manufactured in the United States that have not been approved by the FDA
for distribution in the United States. We are also required to maintain certain
records relating to exports and make the records available to the FDA for
inspection, if required. We do not currently export medical devices manufactured
in the United States that have not been
48
approved by the FDA, although we have in the past.
OTHER UNITED STATES REGULATORY REQUIREMENTS
In addition to the regulatory framework for product approvals, we are and may be
subject to regulation under federal and state laws, including requirements
regarding occupational health and safety; laboratory practices; and the use,
handling and disposal of toxic or hazardous substances. We may also be subject
to other present and possible future local, state, federal and foreign
regulations.
Our research, development and manufacturing processes involve the controlled use
of certain hazardous materials. We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of these materials and certain waste products. Although we believe that our
safety procedures for handling and disposing of these materials comply with the
standards prescribed by the controlling laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of this type of an accident, we could be held liable
for any damages that result and any liability could exceed our resources.
Although we believe that we are in compliance in all material respects with
applicable environmental laws and regulations, we cannot guarantee that we will
not incur significant costs to comply with environmental laws and regulations in
the future, nor that our operations, business or assets will not be materially
adversely affected by current or future environmental laws or regulations.
PATENTS AND INTELLECTUAL PROPERTY
We pursue a policy of seeking patent protection of our technology, products and
product improvements both in the United States and in selected foreign
countries. When determined appropriate, we have enforced and plan to continue to
enforce and defend our patent rights. In general, however, we do not rely on our
patent estate to provide us with any significant competitive advantages. We rely
upon trade secrets and continuing technological innovations to develop and
maintain our competitive position. In an effort to protect our trade secrets, we
have a policy of requiring our employees, consultants and advisors to execute
proprietary information and invention assignment agreements upon commencement of
employment or consulting relationships with us. These agreements provide that
all confidential information developed or made known to the individual during
the course of their relationship with us must be kept confidential, except in
specified circumstances.
BioMend(R), Camino(R), Clinical Neuro Systems(TM), CollaCote(R), CollaPlug(R),
CollaStat(TM), CollaTape(R), Dissectron(R), DuraGen(R), Helistat(R),
Helitene(R), Heyer-Schulte(R), INTEGRA(R) Dermal Regeneration Template,
LICOX(R), NeuraGen(TM), Neuro Navigational(R), Novus(R), LPV(R), Ommaya(R),
Pudenz(TM), Redmond(TM), Ruggles(TM), Selector(R), Spetzler(R), Sundt(TM),
Ventrix(R), VitaCuff(R) are sOMe of the trademarks of Integra and its
Subsidiaries. All other brand names, trademarks and service marks appearing in
this prospectus are the property of their respective holders.
COMPETITION
The largest competitors of Integra NeuroSciences in the neurosurgery markets are
the PS Medical division of Medtronic, Inc., the Codman division of Johnson &
Johnson, the Valleylab and Radionics divisions of Tyco International Ltd., and
NMT Neurosciences, a division of NMT Medical, Inc. In addition, various of the
Integra NeuroSciences product lines compete with smaller specialized companies
or larger companies that do not otherwise focus on neurosurgery. The products of
Integra LifeSciences face diverse and broad competition, depending on the market
addressed by the product. In addition, certain companies are known to be
competing particularly in the area of skin substitution or regeneration,
including Organogenesis and Advanced Tissue Sciences. Finally, in certain cases
our products compete primarily against medical practices that treat a condition
without using a medical device, rather than any particular product (such as
autograft tissue as a substitute for INTEGRA(R) Dermal Regeneration Template).
Depending on the product line, we compete on the basis of our products'
features, strength of our sales organization or marketing partner,
sophistication of our technology, and cost effectiveness of our solution to the
customer's medical requirements.
49
FACILITIES
Our principal executive offices are located in Plainsboro, New Jersey. Principal
manufacturing and research facilities are located in Plainsboro, New Jersey, San
Diego, California, Anasco, Puerto Rico, Andover, England and Mielkendorf,
Germany, and we have a national distribution center in Cranbury, New Jersey. In
addition, we lease several smaller facilities to support additional
administrative, assembly, and storage operations. Our total office manufacturing
and research space approximates 180,000 square feet with lease payments of
approximately $125,000 per month. Our Integra LifeSciences products are
manufactured in Plainsboro, Anasco and Andover and distributed through the
national distribution center and the Andover facility. Our Integra NeuroSciences
products are manufactured in the Plainsboro, San Diego, Andover, Mielkendorf,
and Anasco facilities and are distributed through the national distribution
center and the Andover facility. All of our facilities are leased.
All of our manufacturing and distribution facilities are registered with the
FDA. Our facilities are subject to FDA inspection to assure compliance with
quality requirements requirements. We believe that our manufacturing facilities
are in substantial compliance with quality requirements, suitable for their
intended purposes and have capacities adequate for current and projected needs
for existing products. Some capacity of the plants is being converted, with any
needed modification, to meet the current and projected requirements of existing
and future products.
EMPLOYEES
At July 9, 2001, we had approximately 575 permanent employees engaged in
production and production support (including warehouse, engineering, and
facilities personnel), quality assurance/quality control, research and
development, regulatory and clinical affairs, sales/marketing and administration
and finance. None of our current employees are subject to a collective
bargaining agreement.
LEGAL PROCEEDINGS
In July 1996, we filed a patent infringement lawsuit in the United States
District Court for the Southern District of California against Merck KGaA, a
German corporation, Scripps Research Institute, a California nonprofit
corporation, and David A. Cheresh, Ph.D., a research scientist with Scripps,
seeking damages and injunctive relief. The complaint charged, among other
things, that the defendant Merck KGaA willfully and deliberately induced, and
continues to willfully and deliberately induce, defendants Scripps Research
Institute and Dr. David A. Cheresh to infringe certain of our patents. These
patents are part of a group of patents granted to The Burnham Institute and
licensed by us that are based on the interaction between a family of cell
surface proteins called integrins and the arginine-glycine-aspartic acid peptide
sequence found in many extracellular matrix proteins. The defendants filed a
countersuit asking for an award of defendants' reasonable attorney fees. This
case went to trial in February 2000, and on March 17, 2000, a jury returned a
unanimous verdict for us finding that Merck KGaA had willfully infringed and
induced the infringement of our patents, and awarded $15,000,000 in damages. The
court dismissed Scripps and Dr. Cheresh from the case. On October 6, 2000, the
United States District Court for the Southern District of California entered
judgment in our favor and against Merck KGaA in the case. In entering the
judgment, the court also granted us pre-judgment interest of approximately
$1,350,000, bringing the total amount to approximately $16,350,000, plus
post-judgment interest. Various post-trial motions are pending, including a
request by Merck KGaA for a judgment as a matter of law notwithstanding the
verdict, which could have the effect of reducing the judgment or reversing the
verdict of the jury. In addition, if we win these post-trial motions, we expect
Merck KGaA to appeal various decisions of the Court. No amounts for this
favorable verdict have been reflected in our financial statements.
We are also subject to other claims and lawsuits in the ordinary course of our
business, including claims by employees and with respect to our products. In the
opinion of management, the other claims are either adequately covered by
insurance or otherwise indemnified, and are not expected, individually or in the
aggregate, to result in a material adverse effect on our financial condition.
Our financial statements do not reflect any material amounts related to possible
unfavorable outcomes of the matters above or others. However, it is possible
that these contingencies could materially affect our results of operations,
financial position and cash flows in a particular period.
50
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to our executive
officers and directors as of July 18, 2001.
NAME AGE TITLE
- ----------------------------------- ---- ---------------------------------
Stuart M. Essig 39 President, Chief Executive Officer
and Director
George W. McKinney, III, Ph.D. 57 Executive Vice President, Chief
Operating Officer and Director
John B. Henneman, III 39 Senior Vice President, Chief
Administrative Officer and Secretary
David B. Holtz 35 Senior Vice President, Finance
and Treasurer
Judith E. O'Grady 51 Senior Vice President, Regulatory,
Quality Assurance and Clinical Affairs
Michael D. Pierschbacher, Ph.D. 49 Senior Vice President Research and
Development, Director of the Corporate
Research Center
Richard E. Caruso, Ph.D. 58 Director and Chairman of the Board
of Directors
James M. Sullivan 58 Director
Keith Bradley, Ph.D. 56 Director
Neal Moszkowski 35 Director
STUART M. ESSIG has served as President and Chief Executive Officer and a
director of Integra since December 1997. Before joining Integra, Mr. Essig
supervised the medical technology practice at Goldman, Sachs & Co. as a managing
director. Mr. Essig had ten years of broad health care experience at Goldman
Sachs serving as a senior merger and acquisitions advisor to a broad range of
domestic and international medical technology, pharmaceutical and biotechnology
clients. Mr. Essig received an A.B. degree from the Woodrow Wilson School of
Public and International Affairs at Princeton University and an M.B.A. and a
Ph.D. degree in Financial Economics from the University of Chicago, Graduate
School of Business. Mr. Essig also serves on the Board of Directors of Vital
Signs Incorporated and St. Jude Medical Corporation.
GEORGE W. MCKINNEY, III, PH.D. has served Integra as Executive Vice President
and Chief Operating Officer since May 1997 and as a member of the Board of
Directors since December 1992. Between 1997 and 1999 Dr. McKinney also served as
Vice Chairman. Between 1990 and 1997, Dr. McKinney was Managing Director of
Beacon Venture Management Corporation, a venture capital firm. Between 1992 and
1997, Dr. McKinney also served as President and Chief Executive Officer of Gel
Sciences, Inc. and GelMed, Inc., a privately held specialty materials firm with
development programs in both the industrial and medical products fields. Before
1990, Dr. McKinney held other positions in the venture capital industry, was
President and Chief Executive Officer of American Superconductor, Inc., and
served in various manufacturing, engineering and financial positions at Corning,
Inc. Dr. McKinney holds a B.S. in Management from MIT and a Ph.D. in Strategic
Planning from Stanford University School of Business. Dr. McKinney announced
that he will step down as Executive Vice President and Chief Operating Officer
when his employment agreement expires on December 31, 2001. Dr. McKinney plans
to be available as a consultant to us through June 30, 2002.
JOHN B. HENNEMAN, III is Integra's Senior Vice President, Chief Administrative
Officer and Secretary, and is responsible for the law department, business
development, human resources and investor relations. Mr.
51
Henneman was our General Counsel from September 1998 until September 2000. Prior
to joining Integra in August 1998, Mr. Henneman served Neuromedical Systems,
Inc., a public company developer and manufacturer of in vitro diagnostic
equipment, in various capacities for more than four years. From 1994 until June
1997, Mr. Henneman was Vice President of Corporate Development, General Counsel
and Secretary. From June 1997 through November 1997, he served in the additional
capacity of interim Co-Chief Executive Officer and from December 1997 to August
1998 Mr. Henneman was Executive Vice President, US Operations, and Chief Legal
Officer. In March 1999, Neuromedical Systems, Inc. filed a petition under
Chapter 11 of the federal bankruptcy laws. Mr. Henneman practiced law in the
Corporate Department of Latham & Watkins (Chicago, Illinois) from 1986 to 1994.
Mr. Henneman received his A.B. (Politics) from Princeton University in 1983, and
his J.D. from the University of Michigan Law School in 1986.
DAVID B. HOLTZ joined Integra as Controller in 1993 and has served as Vice
President, Finance and Treasurer since March 1997 and was promoted to Senior
Vice President, Finance and Treasurer in February 2001. His responsibilities
include managing all accounting and information systems functions. Before
joining Integra, Mr. Holtz was an associate with Coopers & Lybrand, L.L.P. in
Philadelphia and Cono Leasing Corporation, a private leasing company. He
received a B.S. degree in Business Administration from Susquehanna University in
1989 and has been certified as a public accountant.
JUDITH E. O'GRADY has served Integra since 1985 and was named Senior Vice
President of Regulatory Affairs, Quality Assurance and Clinical Research in May
1998. Ms. O'Grady has worked in the areas of medical devices and collagen
technology for over 20 years. Prior to joining Integra, Ms. O'Grady worked for
Colla-Tec, Inc., a Marion Merrell Dow Company. During her career she has held
positions with Surgikos, a Johnson & Johnson company, and was on the faculty of
Boston University College of Nursing and Medical School. Ms. O'Grady led the
team that obtained the FDA approval for INTEGRA(R)Dermal Regeneration Template,
the first regenerative product approved by the FDA, and has led teams
responsible for more than 100 510(K) clearances. She received her B.S. degree
from Marquette University and M.S.N. in Nursing from Boston University.
MICHAEL D. PIERSCHBACHER, PH.D. joined Integra in October 1995 as Senior Vice
President, Research and Development. In May 1998 he was named Senior Vice
President and Director of our Corporate Research Center. From June 1987 to
September 1995, Dr. Pierschbacher served as Senior Vice President and Scientific
Director of Telios Pharmaceuticals, Inc., which was acquired by us in connection
with the reorganization of Telios under Chapter 11 of the federal bankruptcy
code. He was a co-founder of Telios in May 1987 and is the co-discoverer and
developer of Telios' matrix peptide technology. Before joining Telios as a
full-time employee in October 1988, he was a staff scientist at The Burnham
Institute for five years and remained on staff there in an adjunct capacity
until the end of 1997. He received his post-doctoral training at Scripps
Clinical and Research Foundation and at the Burnham Institute. Dr. Pierschbacher
received his Ph.D. in Biochemistry from the University of Missouri.
RICHARD E. CARUSO, PH.D. has served as Integra's Chairman of the Board of
Directors since March 1992. Prior to December 1997, Dr. Caruso served as
Integra's Chief Executive Officer since March 1992 and as President since
September 1995. From 1969 to 1992, Dr. Caruso was a principal of LFC Financial
Corporation, a project finance company, where he was also a director and
Executive Vice President. He has 25 years experience in finance and
entrepreneurial ventures. Dr. Caruso is on the Board of Susquehanna University,
The Baum School of Art and The Uncommon Individual Foundation (Founder). He
received a B.S. degree from Susquehanna University, and M.S.B.A. degree from
Bucknell University and a Ph.D degree from the London School of Economics,
University of London (United Kingdom).
JAMES M. SULLIVAN has been a director since 1992. Since 1986, he has held
several positions with Marriott International, Inc. (and its predecessor,
Marriott Corp.), including Vice President of Mergers and Acquisitions, and his
current position of Executive Vice President of Development for the Lodging
Group of Marriott. From 1983 to 1986, Mr. Sullivan was Chairman, President and
Chief Executive Officer of Tenly Enterprises, Inc., a privately held company
operating 105 restaurants. Prior to 1983, he held senior management positions
with
52
Marriott Corp., Harrah's Entertainment, Inc., Holiday Inns, Inc., Kentucky Fried
Chicken Corp. and Heublein, Inc. He also was employed as a senior auditor with
Arthur Andersen & Co. and currently serves as a director of Global Vacation
Group, Inc. Mr. Sullivan received a B.S. degree in Accounting from Boston
College and an M.B.A. degree from the University of Connecticut.
KEITH BRADLEY, PH.D. has been a director since 1992. He is the Professor of
Management at The City University Business School, London, England, and a
Director of Ockham Holdings plc, a London Stock Exchange company. Dr. Bradley
was the founder and formerly Executive Director of the London School of Business
Performance Group, an interdisciplinary research institute which specializes in
organizational performance. He has extensive experience as a consultant to a
variety of business, government and international organizations and has
published widely on management and industrial policy. Dr. Bradley has served as
Visiting Professor at Harvard Business School, the UCLA Graduate School of
Management and the Wharton School of the University of Pennsylvania. Dr. Bradley
received a Diploma in Education from Culham College and a Ph.D. degree in
Economics from the University of Essex.
NEAL MOSZKOWSKI has been a director since March 29, 1999 and was the designee of
the holders of our Series B Preferred Stock. Mr. Moszkowski has been a partner
of Soros Private Equity Partners LLC since August 1998 and is currently an
employee of Soros Private Funds Management LLC. Prior thereto, Mr. Moszkowski
was an Executive Director of Goldman Sachs International and a Vice President of
Goldman, Sachs & Co. in its Principal Investment Area, which he joined in August
1993. He received a B.A. degree from Amherst College and an M.B.A. degree from
Stanford University. Mr. Moszkowski also serves as a director of Bluefly, Inc.
and MedicaLogic/Medscape, Inc.
-----------------------
Our executive officers serve at the discretion of the Board of Directors. The
only family relationship between any of our executive officers and directors is
that Mr. Holtz is the nephew of Dr. Caruso.
53
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of common stock and preferred stock as of July 12, 2001, by: (a) each
person or entity known to Integra to own beneficially five percent or more of
the outstanding shares of common stock or preferred stock, based upon our
records or Commission records; (b) each of our directors; (c) each of the
Executive Officers; and (d) all Executive Officers and directors of Integra as a
group. Each share of Series C Preferred Stock is currently convertible at the
discretion of the holder into 11.111 shares of common stock in each case subject
to certain adjustments. Except as otherwise indicated, each person has sole
voting power and sole investment power with respect to all shares beneficially
owned by that person.
COMMON STOCK
SERIES C PREFERRED
- ------------------------------------------------ ------------------
PERCENTAGE OF
COMMON
STOCK
SHARES SUBJECT
BENEFICIALLY OWNED
TO OPTIONS, TOTAL SHARES
- ------------------
WARRANTS AND BENEFICIALLY BEFORE
AFTER
NAME OF BENEFICIAL OWNER CONVERSIONS(1) OWNED(1) OFFERING
OFFERING SHARES PERCENT
- --------------------------------- ------------- -----------
- ------------------- ------ -------
Richard E. Caruso, Ph.D ................. 32,500 7,231,043(2) 34.7%
29.7% -- --
Trust Partnership ....................... -- 7,171,205(3) 34.5%
29.5% -- --
Frances C. Holtz ........................ -- 7,171,205(4) 34.5%
29.5% -- --
Quantum Industrial Partners LDC ......... 811,650 2,955,000(5) 13.7%
11.0% 48,699 90.2%
SFM Domestic Investments LLC ............ 88,350 802,800(6) 3.8%
3.0% 5,301 9.8%
Stuart M. Essig ......................... 542,419 560,556(7) 2.6%
2.3% -- --
John B. Henneman, III ................... 111,232 124,492(8) *
* -- --
George W. McKinney, III, Ph.D ........... 59,062 110,562(9) *
* -- --
Judith O'Grady .......................... 46,076 62,241(10) *
* -- --
Michael D. Pierschbacher, Ph.D .......... 46,671 61,694(11) *
* -- --
James M. Sullivan ....................... 35,500 39,041(12) *
* -- --
Neal Moszkowski ......................... 30,000 30,000(13) *
* -- --
Keith Bradley, Ph.D ..................... 10,500 10,500(14) *
* -- --
David B. Holtz .......................... 29,659 36,705(15) *
* -- --
All directors and Executive Officers
as a group (10 persons) ............... 943,619 8,266,834(16) 38.0%
32.8% -- --
- ----------
* Less than one percent (1%).
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of an individual to acquire them within 60 days upon the exercise of an
option or other convertible security are treated as outstanding for
purposes of determining beneficial ownership and the percentage
beneficially owned by the individual.
(2) Includes the 7,171,205 shares held by Trust Partnership, a Pennsylvania
general partnership of which Dr. Caruso is a partner and the President
(also see Note 3 below). Also includes 23,338 shares held by Provco Leasing
Corporation of which Dr. Caruso is President. Provco is a wholly-owned
subsidiary of Cono Industries, a corporation whose stockholders are trusts
whose beneficiaries include Dr. Caruso's children. Also includes 32,500
shares issuable upon exercise of the vested portion of options held by Dr.
Caruso. Dr. Caruso's address is 919 Conestoga Road, Building 2, Suite 106
Rosemont, Pennsylvania 19010.
(3) The partners of Trust Partnership are Pagliacci Trust, Rigoletto Trust,
Trust for Jonathan Henry Caruso, Trust for Peter James Caruso (the
beneficiaries of all those trusts being Dr. Caruso's children), Dr. Caruso
and Provco, each of which may be deemed to beneficially own the shares held
by Trust Partnership; however, the partners of Trust Partnership disclaim
beneficial ownership of all the shares except to the extent represented by
their respective equity and profit participation interests in Trust
Partnership. The Trust Partnership's address is c/o Richard E. Caruso,
Ph.D., 919 Conestoga Road, Building 2, Suite 106 Rosemont, Pennsylvania
19010.
(4) Frances C. Holtz is a trustee of the trusts referenced in (3), which
collectively have a controlling interest in Trust Partnership. As such, Ms.
Holtz may be deemed to beneficially own the shares held by Trust
Partnership; however, Ms. Holtz disclaims beneficial ownership of all those
shares. Ms. Holtz's address is 8111 Marshall Avenue, Margate, New Jersey
08402.
(5) Includes (i) 541,100 shares of common stock issuable upon conversion of
48,699 shares of Series C Preferred Stock held by Quantum Industrial
Partners and (ii) 270,550 shares of common stock issuable upon exercise of
warrants held by Quantum Industrial Partners. The principal address of
Quantum Industrial Partners is at Kaya Flamboyan 9, Willemsted, Curacao,
Netherlands Antilles. QIH Management Investor, L.P. is vested (pursuant to
constituent documents of Quantum Industrial Partners) with investment
discretion with respect to the portfolio assets held for the account of
Quantum Industrial Partners. Pursuant to an agreement between George Soros
and Soros Fund Management LLC, Mr. Soros has agreed to use his best efforts
to cause QIH management, Inc., as the sole general partner of QIH
54
Management Investor, L.P., to act at the discretion of Soros Fund
Management. Mr. Soros is the Chairman of Soros Fund Management. Each of QIH
Management Investor, L.P., QIH Management, Inc., Soros Fund Managment and
Mr. Soros may be deemed the beneficial owner of the Quantum Industrial
Partners Shares. Each has their principal business office at 888 Seventh
Avenue, 33rd Floor, New York, New York 10106. Quantum Industrial Partners
LDC is selling 187,500 of its shares of our common stock into this
offering. See "Selling Stockholders."
(6) Includes (i) 58,900 shares of common stock issuable upon conversion of
5,301 shares of Series C Preferred Stock held by SFM Domestic Investments
LLC; and (ii) 29,450 shares of common stock issuable upon exercise of
warrants held by SFM Domestic Investments LLC. The principal business
office of SFM Domestic Investments LLC is at 888 Seventh Avenue, 33rd
Floor, New York, New York 10106. George Soros is a managing member of SFM
Domestic Investments LLC and may be deemed beneficial owner of the SFM
Domestic Investments LLC Shares. SFM Domestic Investments LLC is selling
62,500 of its shares of our common stock into this offering. See "Selling
Stockholders."
(7) Includes 542,419 shares issuable upon exercise of the vested portion of
options held by Mr. Essig. The Restricted Units held by Mr. Essig do not
give him the right to acquire any shares within 60 days of July 12, 2001.
(8) Includes 111,232 shares issuable upon exercise of the vested portion of
options held by Mr. Henneman.
(9) Includes 59,062 shares issuable upon exercise of the vested portion of
options held by Dr. McKinney.
(10) Includes 46,076 shares issuable upon exercise of the vested portion of
options held by Ms. O'Grady.
(11) Includes 2,111 shares held by revocable trusts of which Dr. Pierschbacher
is co-trustee. Also includes 46,671 shares issuable upon exercise of the
vested portion of options held by Dr. Pierschbacher.
(12) Includes 55,500 shares issuable upon exercise of the vested portion of
options held by Mr. Sullivan.
(13) Consists of 30,000 shares issuable upon exercise of the vested portion of
options held by Mr. Moszkowski.
(14) Consists of 10,500 shares issuable upon exercise of the vested portion of
options held by Dr. Bradley.
(15) Include 29,659 shares issuable upon exercise of the vested portion of
options held by Mr. Holtz.
(16) See Notes 2 and 7 through 15 above.
55
CERTAIN TRANSACTIONS
We lease our manufacturing facility in Plainsboro, New Jersey from Plainsboro
Associates, a New Jersey general partnership. Ocirne, Inc., a subsidiary of Cono
Industries, owns a 50% interest in Plainsboro Associates. Cono is a corporation
whose stockholders are trusts whose beneficiaries include the children of Dr.
Richard E. Caruso, our Chairman and a principal stockholder of the Company. Dr.
Caruso is the President of Cono. We paid $210,000 in rent for this facility
during 2000.
During 2000, we signed a ten year lease related to certain production
equipment, from Medicus Corporation. The sole stockholder of Medicus is Trust
Partnership, a Pennsylvania general partnership, for which Dr. Caruso is a
partner and the President. Under the terms of the lease, we paid $45,000 to
Medicus Corporation during 2000.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock as stated in our Amended and Restated Certificate
of Incorporation consists of 60,000,000 shares of common stock, $.01 par value
per share, and 15,000,000 shares of preferred stock, $.01 par value per share.
The following summary of our common stock and preferred stock is not complete
and may not contain all the information you should consider before investing in
our common stock. This description is subject to and qualified in its entirety
by provisions of our Certificate of Incorporation and bylaws, which are included
as exhibits to the registration statement of which this prospectus is a part,
and by provisions of applicable Delaware law.
COMMON STOCK
As of July 12, 2001, there were 21,391,978 shares of common stock outstanding
and held of record by approximately 825 stockholders, assuming conversion of all
outstanding shares of preferred stock. Holders of common stock are entitled to
one vote for each share held on all matters submitted to a vote of stockholders
and do not have cumulative voting rights. Accordingly, holders of a majority of
the outstanding shares of common stock entitled to vote in any election of
directors may elect all the directors standing for election. Holders of common
stock are entitled to receive ratably the dividends, if any, as may be declared
by our board of directors out of funds legally available therefor. If we are
liquidated, dissolved or wound-up, holders of common stock are entitled to
receive ratably our net assets available for distribution after the payment of,
or adequate provision for, all of our debts and other liabilities, subject to
prior and superior rights of the holders of preferred stock. Holders of common
stock have no preemptive, subscription, redemption, sinking fund or conversion
rights. Immediately upon consummation of this offering, all of the
then-outstanding shares of common stock will be validly issued, fully paid and
nonassessable.
PREFERRED STOCK
The board of directors, without further stockholder authorization, is authorized
to issue, from time to time, up to 15,000,000 shares of preferred stock in one
or more series, to establish the number of shares to be included in any of these
series and to fix the designations, powers, preferences and rights of the shares
of each of these series and any qualifications, limitations or restrictions
thereof, including dividend rights and preferences over dividends on the common
stock, conversion rights, voting rights, redemption rights, the terms of any
sinking fund therefor and rights upon liquidation. The ability of the board of
directors to issue preferred stock, while providing flexibility in connection
with financing, acquisitions and other corporate purposes, could have the effect
of discouraging, deferring or preventing a change in control or an unsolicited
acquisition proposal, since the issuance of preferred stock could be used to
dilute the share ownership of a person or entity seeking to obtain control of
us. In addition, because the board of directors has the power to establish the
preferences, powers and rights of the shares of any of these series of preferred
stock, it may afford the holders of any preferred stock preferences, powers and
rights (including voting rights) senior to the rights of the holders of common
stock, which could adversely affect the rights of holders of common stock.
56
As of June 29, 2001, we had designated three series of preferred stock, but only
one was outstanding.
SERIES A PREFERRED STOCK. Our board of directors has authorized 2,000,000 shares
of Series A Convertible Preferred Stock, of which 500,000 were issued in
connection with a series of agreements with Century Medical, Inc., a
wholly-owned subsidiary of ITOCHU Corporation, under which Century Medical, Inc.
distributes certain of our products in Japan. Century Medical, Inc. has
converted its Series A Preferred Stock into Common Stock. We do not expect to
issue new Series A Preferred Stock.
SERIES B PREFERRED STOCK. Our board of directors has authorized 120,000 shares
of Series B Convertible Preferred Stock, 100,000 of which were issued in
connection with the acquisition of the NeuroCare Group in March 1999. The
purchase price for the acquisition was financed in part through the sale of $10
million of the Series B Preferred Stock and related warrants to SFM Domestic
Investments LLC and Quantum Industrial Partners LDC, affiliates of Soros Private
Equity Partners LLC. The shares of Series B Preferred Stock were converted into
2,617,800 shares of our common stock. The warrants issued at the time of the
sale of the Series B Preferred Stock were exercised in March 2001.
As of June 26, 2001, all of the holders of the Series B Preferred converted
their 100,000 shares of Series B Preferred Stock into 2,617,800 shares of common
stock. We do not expect to issue new Series B Preferred Stock.
SERIES C PREFERRED STOCK. Our board of directors has authorized 54,000 shares of
Series C Convertible Preferred Stock, all of which were issued on March 29, 2000
to investment affiliates of Soros Private Equity Partners LLC, resulting in
proceeds to Integra of $5.4 million. In connection with this investment, we also
issued to affiliates of Soros Private Equity Partners LLC warrants to purchase
300,000 shares of common stock at $9.00 per share. The warrants expire on
December 31, 2001. The shares of Series C Preferred Stock are convertible into
600,000 shares of our common stock.
DESIGNATION/RANKING. The Series C Preferred Stock rank equal to our Series B
Preferred Stock and senior to our common stock and all of our Series A Preferred
Stock with respect to the payment of distributions on liquidation, dissolution
or winding up of Integra or with respect to the payment of dividends.
DIVIDENDS. Holders of the Series C Preferred Stock are entitled to receive
annual cumulative dividends which accrue at the rate of 10% per annum, payable
upon the liquidation, dissolution or winding up of Integra.
CONVERSION. Holders of the Series C Preferred Stock are entitled, at their
option at any time, to convert the Series C Preferred Stock so held into the
number of fully paid and nonassessable shares of common stock as obtained by (i)
multiplying the number of shares of Series C Preferred Stock so to be converted
by $100.00 and (ii) dividing the result by the conversion price (which is $9.00
per share, subject to adjustment in accordance with the terms of the certificate
of designation for the Series C Preferred Stock).
VOTING RIGHTS. Holders of the Series C Preferred Stock are entitled to notice of
any stockholders meeting. Except as otherwise required by law, each outstanding
share of Series C Preferred Stock is entitled to the number of votes equal to
the number of full shares of common stock into which the share of Series C
Preferred Stock is convertible on the record date for any meeting of
stockholders. Except as otherwise required by law, the Series C Preferred Stock
and the common stock vote together as a single class on each matter submitted to
the stockholders, and not by separate class or series.
PREEMPTIVE RIGHTS. Our articles of incorporation provide the holders of shares
of Series C Preferred Stock with the preemptive right to subscribe for, purchase
or receive any newly issued shares of our common stock, for a period of fifteen
days after written notice is given of the issuance, a proportionate number of
shares to their holding based on shares then outstanding. These preemptive
rights are not available with respect to: (i) our capital stock which may be
issued to employees, consultants or directors pursuant to a stock incentive plan
or
57
other employee benefit arrangement approved by our board of directors, (ii) a
subdivision of the outstanding shares of our common stock into a larger number
of shares of common stock, (iii) capital stock issued as full or partial
consideration for a merger, acquisition, joint venture, strategic alliance,
license agreeement or other similar non-financing transaction, (iv) capital
stock issued in connection with a publicly registered offering, or (v) capital
stock issued upon exercise, conversion or exchange of any of our preferred
stock, options or warrants.
OPTIONAL REDEMPTION. If, at any time after March 15, 2002, for a period of not
less than thirty (30) consecutive trading days, the average closing price of our
common stock on the Nasdaq National Market has been equal to or greater than the
Target Market Price (as defined below), then we may redeem from any source of
funds legally available therefor, in whole or in part, any or all whole number
of shares of Series C Preferred Stock at any time outstanding for a cash amount
per share equal to the liquidation preference at the date of redemption.
Notwithstanding the foregoing, at any time and from time to time after March 1,
2004, we may redeem from any source of funds legally available therefor, in
whole or in part, any or all whole number of shares of Series C Preferred Stock
at any time outstanding for an amount per share to be redeemed equal to the
liquidation preference at the date of redemption. The "Target Market Price"
means an amount equal to 2.5 times the conversion price as last adjusted and
then in effect.
REGISTRATION RIGHTS
Under the terms of stockholder and registration rights agreements between us and
certain of our stockholders, holders of an aggregate of approximately 6,300,880
shares of our common stock (including shares issuable upon the exercise of
certain warrants, upon conversion of certain preferred securities, and shares
underlying certain "restricted units"), are entitled to demand that we register
those shares under the Securities Act. Additionally, if we propose to register
any of our securities under the Securities Act, either for our own account or
for the account of any other stockholder, the parties to certain of our
stockholder and registration rights agreements are entitled to notice of the
registration and to include their shares of common stock in the registration.
These registration rights are subject to limitations and conditions, including
the right of the underwriters of the offering to limit the number of shares
included in any registration thereunder. In general, we are required to
indemnify the holders of those registrable securities under described
circumstances and to bear the expense of registrations, except for the selling
stockholders' pro rata portion of the underwriting discounts and commissions.
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware General Corporation Law prohibits certain "business
combination" transactions between a Delaware corporation and any "interested
stockholder" owning 15% or more of the corporation's outstanding voting stock
for a period of three years after the date on which the stockholder became an
interested stockholder, unless:
o the board of directors approves, prior to the date, either the proposed
business combination or the proposed acquisition of stock which
resulted in the stockholder becoming an interested stockholder;
o upon consummation of the transaction in which the stockholder becomes
an interested stockholder, the interested stockholder owned at least
85% of those shares of the voting stock of the corporation which are
not held by the directors, officers or certain employee stock plans; or
o on or subsequent to the date on which the stockholder became an
interested stockholder, the business combination with the interested
stockholder is approved by the board of directors and also approved at
a stockholder's meeting by the affirmative vote of the holders of at
least two-thirds of the outstanding shares of the corporation's voting
stock other than shares held by the interested stockholder.
Under Delaware law, a "business combination" includes a merger, asset sale or
other transaction resulting in a financial benefit to the interested
stockholder.
58
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of common stock for each of the selling stockholders as of July 12,
2001.
NAME OF SHARES BENEFICIALLY SHARES TO
BE SHARES BENEFICIALLY
SELLING OWNED PRIOR TO SOLD IN
THE OWNED AFTER
STOCKHOLDERS OFFERING(1)
OFFERING(2) THE OFFERING
- ------------ Number Percent
Number Percent
------------ -------
- ------------ --------- -------
Quantum Industrial Partners LDC......... 2,955,000(3) 13.7%
187,500 2,767,500 11.0%
SFM Domestic Investments LLC............ 802,800(4) 3.8%
62,500 740,300 3.0%
- ----------
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of an individual to acquire them within 60 days upon the exercise of an
option or other convertible security are treated as outstanding for
purposes of determining beneficial ownership and the percentage
beneficially owned by the individual.
(2) Assumes the sale of all shares being offered.
(3) Includes (i) 541,100 shares of common stock issuable upon conversion of
48,699 shares of Series C Preferred Stock held by Quantum Industrial
Partners and (ii) 270,550 shares of common stock issuable upon exercise of
warrants held by Quantum Industrial Partners. The principal address of
Quantum Industrial Partners is at Kaya Flamboyan 9, Willemsted, Curacao,
Netherlands Antilles. QIH Management Investor, L.P. is vested (pursuant to
constituent documents of Quantum Industrial Partners) with investment
discretion with respect to the portfolio assets held for the account of
Quantum Industrial Partners. Pursuant to an agreement between George Soros
and Soros Fund Management LLC, Mr. Soros has agreed to use his best efforts
to cause QIH management, Inc., as the sole general partner of QIH
Management Investor, L.P., to act at the discretion of Soros Fund
Management. Mr. Soros is the Chairman of Soros Fund Management. Each of QIH
Management Investor, L.P., QIH Management, Inc., Soros Fund Managment and
Mr. Soros may be deemed the beneficial owner of the Quantum Industrial
Partners Shares. Each has their principal business office at 888 Seventh
Avenue, 33rd Floor, New York, New York 10106.
(4) Includes (i) 58,900 shares of common stock issuable upon conversion of
5,301 shares of Series C Preferred Stock held by SFM Domestic Investments
LLC; and (ii) 29,450 shares of common stock issuable upon exercise of
warrants held by SFM Domestic Investments LLC. The principal business
office of SFM Domestic Investments LLC is at 888 Seventh Avenue, 33rd
Floor, New York, New York 10106. George Soros is a managing member of SFM
Domestic Investments LLC and may be deemed beneficial owner of the SFM
Domestic Investments LLC Shares.
59
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial amount of our common stock in the public market after
this offering could adversely affect the prevailing market price of our common
stock and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
24,341,200 shares of our common stock, assuming no exercise of outstanding
options and warrants or conversion of outstanding preferred stock. Of these
shares, all shares previously sold in registered offerings, including all of the
shares sold in this offering, will be freely tradable without restriction or
further registration under the Securities Act, unless the shares are purchased
by "affiliates" as that term is defined in Rule 144 under the Securities Act.
Any shares purchased by an affiliate may not be resold except pursuant to an
effective registration statement or an applicable exemption from registration,
including an exemption under Rule 144 of the Securities Act. The remaining
shares of common stock held by existing stockholders are "restricted securities"
as that term is defined in Rule 144 under the Securities Act. These restricted
securities may be sold in the public market only if they are registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701 under
the Securities Act. These rules are summarized below.
In connection with this offering, persons owning an aggregate of 9,931,015
shares of our common stock after this offering have agreed with the underwriters
that, subject to exceptions, they will not sell or dispose of any of their
shares for 90 days after the date of this prospectus. U.S. Bancorp Piper Jaffray
Inc. may, in its sole discretion and at any time without notice, release all or
any portion of the shares subject to such restrictions. See "Underwriting."
The shares of common stock outstanding upon closing of this offering will be
available for sale in the public market as follows:
APPROXIMATE
NUMBER OF SHARES DESCRIPTION
- -----------------------
- --------------------------------------------------------------------------------
- ----------
14,021,000 After the date of this prospectus, including 3,750,000
freely tradable shares sold in this
offering (subject, in some cases, to volume
limitations).
24,101,000 After 90 days from the date of this prospectus, the
lock-up period will expire and these
shares will be saleable under Rule 144 (subject, in some
cases, to volume limitations).
In addition, after the offering there will be outstanding options to purchase
3,865,600 shares of common stock and outstanding warrants to purchase an
aggregate of 310,811 shares of common stock.
RULE 144
In general, under Rule 144 as currently in effect, a person who has beneficially
owned shares of our common stock for at least one year from the later of the
date those shares of common stock were acquired from us or from an affiliate of
ours would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of:
o one percent of the number of shares of common stock then outstanding,
or approximately 208,412 shares that can be sold prior to this offering
and 243,412 shares that can be sold immediately after this offering; or
o the average weekly trading volume of the common stock on the National
Association of Securities Dealers' Automated Quotation System during
the four calendar weeks preceding the filing of a notice on Form 144
with respect to the sale of any shares of common stock.
The sales of any shares of common stock under Rule 144 are also subject to
manner of sale provisions and notice requirements and to the availability of
current public information about us.
60
RULE 144(K)
Under Rule 144(k), a person who is not one of our affiliates at any time during
the three months preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years from the later of the date such
shares of common stock were acquired from us or from an affiliate of ours,
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 pursuant to the lock-up agreements or otherwise,
those shares may be sold immediately upon the completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, each of
our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is eligible
to resell those shares in reliance on Rule 144, but without compliance with some
of the restrictions, including the holding period, contained in Rule 144.
No precise prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
our common stock prevailing from time to time. We are unable to estimate the
number of our shares that may be sold in the public market pursuant to Rule 144
or Rule 701 because this will depend on the market price of our common stock,
the personal circumstances of the sellers and other factors. Nevertheless, sales
of significant amounts of our common stock in the public market could adversely
affect the market price of our common stock.
STOCK PLANS
We have filed a registration statement under the Securities Act covering
8,504,745 shares of common stock reserved for issuance under our stock award and
employee benefit plans.
As of June 30, 2001, there were options to purchase 4,779 shares outstanding
under our 1992 Stock Option Plan, options to purchase 387,223 shares outstanding
under the 1993 Incentive Stock Option and Non-Qualified Stock Option Plan,
options to purchase 566,227 shares outstanding under the 1996 Incentive Stock
Option and Non-Qualified Stock Option Plan, options to purchase 718,518 shares
outstanding under the 1998 Stock Option Plan, options to purchase 1,760,168
shares outstanding under the 1999 Stock Option Plan, and options to purchase
521,690 shares outstanding under the 2000 Equity Incentive Plan. All of these
shares will be eligible for sale in the public market from time to time, subject
to vesting provisions, Rule 144 volume limitations applicable to our affiliates
and, in the case of some of the options, the expiration of lock-up agreements
and the investors' agreement.
61
UNDERWRITING
The underwriters named below have agreed to buy, subject to the terms and
conditions of the purchase agreement, the number of shares listed opposite their
names below. The underwriters are committed to purchase and pay for all of the
shares if any are purchased, other than those shares covered by the
over-allotment option described below.
UNDERWRITERS NUMBER OF SHARES
--------------- ---------------------
U.S. Bancorp Piper Jaffray Inc.
ABN AMRO Rothschild LLC
CIBC World Markets Corp.
Adams, Harkness & Hill, Inc.
---------
Total 3,750,000
=========
The underwriters have advised us and Quantum Industrial Partners LDC and SFM
Domestic Investments LLC, the selling stockholders, that they propose to offer
the shares to the public initially at $ per share, and to certain dealers at the
same price less a concession of not more than $ per share. The underwriters may
allow and the dealers may reallow a concession of not more than $ per share on
sales to certain other brokers and dealers. After the offering, these figures
may be changed by the underwriters.
We and the selling stockholders have granted to the underwriters an option to
purchase up to an additional 562,500 shares of common stock at the same price to
the public, and with the same underwriting discount, as set forth in the table
above. Of the 562,500 shares subject to the overallotment option, up to 500,000
shares would be sold by us and up to 62,500 shares would be sold by the selling
stockholders. The underwriters may exercise this option any time during the
30-day period after the date of this prospectus, but only to cover
over-allotments, if any. To the extent the underwriters exercise the option,
each underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of the additional shares as it was
obligated to purchase under the purchase agreement.
The following table shows the underwriting fees to be paid to the underwriters
in connection with the offering. These amounts are shown assuming both no
exercise and full exercise of the over-allotment option.
NO EXERCISE FULL EXERCISE
------------- ------------
Per share $ $
Total to be paid by us $ $
Total to be paid by the selling stockholder $ $
-------- --------
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make in respect to those
liabilities.
The offering of our shares of common stock is made for delivery when, as and if
accepted by the underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The underwriters
reserve the right to reject an order for the purchase of shares in whole or
part.
We and each of our directors and executive officers and the selling stockholders
have agreed to certain restrictions on their ability to sell additional shares
of our common stock until 90 days after the date of this prospectus. We have
also agreed not to directly or indirectly offer for sale, sell, contract to
sell, grant any option
62
for the sale of, or otherwise issue or dispose of, any shares of common stock,
options or warrants to acquire shares of common stock, or any related security
or instrument, without the prior written consent of U.S. Bancorp Piper Jaffray
for a period of 90 days after the date of this prospectus. The agreements
provide exceptions for:
o sales to underwriters pursuant to the purchase agreement;
o sales of shares of our common stock under our employee stock purchase
plans; and
o other common exceptions.
Some of the underwriters or their affiliates have provided from time to time,
and expect to provide in the future, investment banking, financial advisory and
other related services to us and our affiliates, for which they have received
and may continue to receive customary fees and commissions.
To faciliate the offering, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price of the common stock during and
after the offering. Specifically, the underwriters may over-allot or otherwise
create a short position in the common stock for their own account by selling
more shares of common stock than have been sold to them by us and the selling
stockholders. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from the issuer in the offering. The
underwriters may close out any covered short position by either exercising their
option to purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. "Naked" short sales are sales
in excess of this option. The underwriters must close out any naked short
position by purchasing 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 common stock in the open market after
pricing that could adversely affect investors who purchase in the offering.
In addition, the underwriters may stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock on the open market and
may impose penalty bids. If penalty bids are imposed, selling concessions
allowed to syndicate members or other broker-dealers participating in the
offering are reclaimed if shares of common stock previously distributed in the
offering are repurchased, whether in connection with stabilization transactions
or otherwise. These transactions, including the underwriters' purchases to cover
syndicate short sales, 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. The
imposition of a penalty bid may also affect the price of the common stock to the
extent that it discourages resales of the common stock. The magnitude or effect
of any stabilization or other transactions is uncertain. 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 is being made available over the Internet or
on web sites maintained by one or more of the lead underwriters of this offering
and may be made available over the Internet or on web sites maintained by other
underwriters. Other than the prospectus in electronic format, the information on
any underwriter's web site and any information contained in any other web site
maintained by an underwriter is not part of the prospectus or the registration
statement of which the prospectus forms a part.
LEGAL MATTERS
Latham & Watkins in New York, New York will pass upon the validity of the shares
of common stock offered under this prospectus. Legal matters relating to the
validity of the shares of common stock offered under this prospectus will be
passed upon for the underwriters by Willkie Farr & Gallagher, New York, New
York.
63
EXPERTS
The financial statements as of December 31, 2000 and 1999 and for each of the
three years in the period ended December 31, 2000 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
64
WHERE YOU CAN FIND MORE INFORMATION
Integra is subject to the informational requirements of the Securities Exchange
Act of 1934, and files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports, proxy
statements and other information we file at the SEC's public reference room at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices
at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Please call the SEC at 1-800-SEC-0300 for further information on the public
reference rooms. You may also access filed documents at the SEC's Website at
www.sec.gov.
We have filed a registration statement on Form S-3 and related exhibits with the
SEC under the Securities Act of 1933. The registration statement contains
additional information about Integra and the securities. You may inspect the
registration statement and exhibits without charge and obtain copies from the
SEC at prescribed rates at the locations above.
The SEC allows us to incorporate by reference the information we file with it,
which means that we can disclose important information to you by referring to
those documents. The information incorporated by reference is an important part
of this prospectus, and information that we file later with the SEC will
automatically update and supersede this information. We incorporate by reference
the following documents we have filed, or may file, with the SEC:
o Our 2000 Annual Report on Form 10-K/A filed with the SEC on
May 24, 2001;
o Our Quarterly Report for the quarterly period ended March 31, 2001, on
Form 10-Q filed with the SEC on May 15, 2001;
o Our Proxy Statement for the 2001 Annual Meeting of Stockholders
filed with the SEC on April 20, 2001;
o Our Current Reports on Form 8-K filed with the SEC on January 8, 2001,
May 25, 2001 and August 2, 2001; and
o All documents filed by us with the SEC under Sections 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934 after the date of this
prospectus and before the termination of this offering.
A statement contained in a document incorporated by reference herein shall be
deemed to be modified or superceded for purposes of this prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which is also incorporated herein modifies or replaces such statement.
Any statements so modified or superceded shall not be deemed, except as so
modified or superceded, to constitute a part of this prospectus.
You may request a free copy of any of the documents incorporated by reference in
this prospectus by writing or telephoning us at the following address:
Integra LifeSciences Holdings Corporation
311 Enterprise Drive Plainsboro, NJ 08536
(609) 275-0500
Attn: Director of Finance
You should rely only on the information incorporated by reference or provided in
this prospectus and any supplement. We have not authorized anyone else to
provide you with different information. You should not assume that the
information in this prospectus is accurate as of any date other than the dates
on the front of these documents.
65
INDEX TO FINANCIAL STATEMENTS
PAGE
Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December
31, 2000................................................................ F-2
Consolidated Statements of Operations for the three months
ended March 31, 2001 (unaudited) and March 31, 2000 .................... F-3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 (unaudited) and March 31, 2000 ......................... F-4
Notes to Consolidated Financial Statements (unaudited).................... F-5
Report of Independent Accountants......................................... F-9
Consolidated Balance Sheets as of December 31, 2000 and
December 31, 1999 ...................................................... F-10
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 ....................................... F-11
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998 .......................................................... F-12
Consolidated Statements of Stockholders' Equity .......................... F-14
Notes to Consolidated Financial Statements ............................... F-17
F-1
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 DECEMBER 31, 2000
- -----------------------------------------
(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents ....................................................
$15,392 $14,086
Short-term investments .......................................................
3,982 1,052
Accounts receivable, net of allowances of $902 and $1,003 ....................
12,647 13,087
Inventories ..................................................................
18,509 16,508
Prepaid expenses and other current assets ....................................
1,937 1,484
---------- ----------
Total current assets .......................................................
52,467 46,217
Property, plant, and equipment, net ..........................................
11,173 11,599
Goodwill and other intangible assets, net ....................................
24,378 25,299
Other assets .................................................................
3,061 3,399
---------- ----------
Total assets .................................................................
$91,079 $86,514
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt ..............................................................
$9,150 $8,872
Accounts payable, trade ......................................................
3,651 3,363
Income taxes payable .........................................................
1,233 1,200
Customer advances and deposits ...............................................
3,213 823
Deferred revenue .............................................................
1,879 1,675
Accrued expenses and other current liabilities ...............................
5,349 5,107
---------- ----------
Total current liabilities ..................................................
24,475 21,040
Long-term debt ...............................................................
3,121 4,758
Deferred revenue .............................................................
4,543 4,728
Deferred income taxes ........................................................
1,717 1,788
Other liabilities ............................................................
349 419
---------- ----------
Total liabilities ............................................................
34,205 32,733
Commitments and contingencies
Stockholders' Equity:
Preferred stock; $0.01 par value; 15,000 authorized shares; 100 Series B
Convertible shares issued and outstanding at March 31, 2001 and December 31,
2000, $12,000 including a 10% annual cumulative dividend liquidation
preference; 54 Series C Convertible shares issued and outstanding at March
31, 2001 and December 31, 2000, $5,940 including a 10% annual cumulative
dividend liquidation
preference .................................................................
2 2
Common stock; $0.01 par value; 60,000 authorized shares; 17,658 and
17,334 issued and outstanding at March 31, 2001 and December 31,
2000, respectively .........................................................
177 173
Additional paid-in capital ...................................................
161,564 160,134
Treasury stock, at cost; 20 shares at March 31, 2001 and
December 31, 2000 ..........................................................
(180) (180)
Other ........................................................................
(58) (66)
Accumulated other comprehensive loss .........................................
(898) (553)
Accumulated deficit ..........................................................
(103,733) (105,729)
---------- ----------
Total stockholders' equity .................................................
56,874 53,781
---------- ----------
Total liabilities and stockholders' equity ...................................
$91,079 $86,514
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
F-2
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
- ---------------------------
2001 2000
- ---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
REVENUES
Product sales .......................................................
$ 20,284 $ 13,332
Other revenue .......................................................
1,400 1,199
- -------- --------
Total revenue .....................................................
21,684 14,531
COSTS AND EXPENSES
Cost of product sales ...............................................
8,594 6,687
Research and development ............................................
2,073 1,890
Selling and marketing ...............................................
4,751 2,949
General and administrative ..........................................
3,204 3,747
Amortization ........................................................
680 480
- -------- --------
Total costs and expenses ..........................................
19,302 15,753
Operating income (loss) .............................................
2,382 (1,222)
Other income (expense), net .........................................
(140) 249
- -------- --------
Net income (loss) before income taxes ...............................
2,242 (973)
Provision for income taxes ..........................................
246 62
-------- --------
Net income (loss) before accounting change ..........................
1,996 (1,035)
Cumulative effect of accounting change ..............................
-- (470)
-------- --------
Net income (loss) ...................................................
$ 1,996 $ (1,505)
======== ========
Basic net income (loss) per share:
Before accounting change ..........................................
$ 0.08 $ (0.32)
Cumulative effect of accounting change ............................
$ -- $ (0.03)
Basic net income (loss) per share .................................
$ 0.08 $ (0.35)
Diluted net income (loss) per share:
Before accounting change ..........................................
$ 0.07 $ (0.32)
Cumulative effect of accounting change ............................
$ -- $ (0.03)
Diluted net income (loss) per share ...............................
$ 0.07 $ (0.35)
Weighted average common shares outstanding
Basic .............................................................
19,618 17,224
Diluted ...........................................................
21,849 17,224
The accompanying notes are an integral part of these
consolidated financial statements
F-3
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2001 2000
---------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)
........................................................................ $
1,996 $ (1,505)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization
.......................................................... 1,431
1,082
Gain on sale of product line and investments
........................................... -- (326)
Other
................................................................................
.. (11) 24
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable
.................................................................. 393
(353)
Inventories
..........................................................................
(2,212) 104
Prepaid expenses and other current assets
............................................ (99) (31)
Non-current assets
...................................................................
301 (221)
Accounts payable, accrued expenses and other liabilities
............................. 342 734
Customer advances and deposits
....................................................... 2,390
(801)
Deferred revenue
.....................................................................
19 33
-------- --------
Net cash provided by (used in) operating activities
.................................... 4,550 (1,260)
-------- --------
INVESTING ACTIVITIES:
Proceeds from sale of product line and other assets
...................................... -- 150
Proceeds from sale/maturity of investments
............................................... --
15,072
Purchases of available-for-sale investments
.............................................. (2,891)
(10,601)
Cash used in business acquisition, net of cash acquired
.................................. -- (4,075)
Purchases of property and equipment
...................................................... (396)
(1,351)
-------- --------
Net cash used in investing activities
.................................................. (3,287)
(805)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from revolving credit facility
.............................................. 770 97
Repayment of term loan
...................................................................
(625) (375)
Repayment of note payable
................................................................ (1,540)
--
Proceeds from sale of preferred stock
.................................................... --
5,375
Proceeds from exercised stock options and warrants
....................................... 1,434 1,053
Preferred dividends paid
................................................................. --
(20)
-------- --------
Net cash provided by financing activities
.............................................. 39 6,130
-------- --------
Effect of exchange rate changes on cash
.................................................... 4
--
Net increase in cash and cash equivalents
.................................................. 1,306
4,065
Cash and cash equivalents at beginning of period
........................................... 14,086 19,301
-------- --------
Cash and cash equivalents at end of period
................................................. $ 15,392 $
23,366
======== ========
Non-cash investing activities:
Note issued in a business acquisition
.................................................. $-- $
2,654
The accompanying notes are an integral part of these
consolidated financial statements
F-4
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the March 31 unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) which the Company considers necessary for a fair presentation of the
financial position and results of operations of the Company. Operating results
for the three-month period ended March 31, 2001 are not necessarily indicative
of the results to be expected for the entire year. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted.
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, including disclosures of
contingent assets and liabilities and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
As of December 31, 2000, the Company had provided a $44.8 million valuation
allowance against its consolidated deferred tax asset due to the uncertainty of
its realization. Because the Company has generated taxable income during recent
quarters, management is continuing to reassess the potential realizability of
this asset through the generation of future taxable income. The recognition of
the deferred tax asset could affect the Company's income tax provision in the
near term.
These unaudited consolidated financial statements should be read in conjunction
with the Company's consolidated financial statements for the year ended December
31, 2000 included in the Company's Annual Report on Form 10-K/A.
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
2. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999 (as amended in March 2000 and June 2000) the staff of the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 101,
Revenue Recognition (the "SAB"). As the result of the adoption of the SAB, the
Company recorded a $470,000 cumulative effect of an accounting change to defer a
portion of a nonrefundable, up-front fee received and recorded in other revenue
in 1998. The cumulative effect of this accounting change was measured and
recorded as of January 1, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Statement No.
133, as amended by Statement No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," requires companies to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
such instruments at fair value. The Company's adoption of Statement No. 133 as
of January 1, 2001 did not have a material impact on the Company's results of
operations or financial position during the first quarter of 2001.
F-5
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share for the three months ended March
31 were as follows:
2001 2000
---------- -------
(IN THOUSANDS)
Net income (loss) .................................. $ 1,996 $ (1,505)
Dividends on Preferred Stock ....................... (385) (270)
Beneficial conversion feature on Preferred Stock ... -- (4,170)
-------- --------
Net income (loss) available to common stock ........ $ 1,611 $ (5,945)
======== ========
Average number of shares outstanding:
Basic .............................................. 19,618 17,224
Effect of dilutive stock options and warrants ...... 2,231 --
-------- --------
Diluted ............................................ 21,849 17,224
======== ========
Net income (loss) per share:
Basic .............................................. $ 0.08 $ (0.35)
======== ========
Diluted ............................................ $ 0.07 $ (0.35)
======== ========
Options to purchase 146,000 shares of common stock and preferred stock
convertible into 3,218,000 shares of common stock at March 31, 2001 were not
included in the computation of diluted net income per share for the three months
ended March 31, 2001 because their effect would have been antidilutive. The
exercise price of the options ranged from $13.88 to $20.75, which was in excess
of the average market price of the common stock for the period. Options and
warrants to purchase 3,732,600 shares of common stock and preferred stock
convertible into 3,468,000 shares of common stock at March 31, 2000 were not
included in the computation of diluted net loss per share for the three months
ended March 31, 2000 because their effect would have been antidilutive.
In connection with the issuance of 54,000 shares of Series C Preferred and
common stock warrants in March 2000, the Company reflected a $4.2 million
nonrecurring, non-cash dividend related to the beneficial conversion feature of
the Series C Preferred in the calculation of net loss per share applicable to
common stock for the three month period ended March 31, 2000. The beneficial
conversion feature is based upon the excess of the price of the underlying
common stock as compared to the fixed conversion price of the Series C
Preferred, after taking into account the value assigned to the common stock
warrants.
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months ended March 31 was as follows:
2001 2000
-----------------
(IN THOUSANDS)
Net income (loss) ............................... $ 1,996 $(1,505)
Unrealized gains (loss) on investments .......... (14) 124
Foreign currency translation adjustment ......... (331) --
------- ---------
Comprehensive income (loss) ..................... $ 1,651 $(1,381)
======= =========
F-6
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2001 2000
---------- ------------
(IN THOUSANDS)
Raw materials ................................ $ 6,734 $ 5,805
Work-in process .............................. 3,450 3,825
Finished goods ............................... 8,325 6,878
--------- ---------
$18,509 $16,508
========= =========
6. STOCKHOLDERS' EQUITY
In March 2001, warrants to purchase 240,000 shares of common stock at $3.82 per
share were exercised, for which the Company received proceeds of $916,800.
7. SEGMENT AND GEOGRAPHIC REPORTING
The Company's reportable business segments consist of the Integra NeuroSciences
division, which is a leading provider of implants, devices and monitors used in
neurosurgery, neurotrauma, and related critical care, and the Integra
LifeSciences division, which develops and manufactures a variety of medical
products and devices, including products based on the Company's proprietary
tissue regeneration technology, which are used to treat soft-tissue and
orthopedic conditions. Integra NeuroSciences sells primarily through a direct
sales organization, and Integra LifeSciences sells primarily through strategic
alliances and distributors. The Company has reclassified certain items within
its segments to conform to the current methodology for determining segment
profitability. These reclassifications were not material and did not change the
basic nature of the business segments. Selected financial information on the
Company's business segments is reported below (in thousands):
INTEGRA INTEGRA TOTAL
NEURO- LIFE REPORTABLE
SCIENCES SCIENCES SEGMENTS
--------- --------- -----------
(IN THOUSANDS)
First quarter ended March 31, 2001
Product sales .................... $14,477 $ 5,807 $20,284
Total revenue .................... 14,755 6,929 21,684
Operating expenses ............... 11,353 5,202 16,555
Operating income ................. 3,402 1,727 5,129
Depreciation included in segment
operating expenses ............. 417 298 715
First quarter ended March 31, 2000
Product sales .................... $ 8,820 $ 4,512 $13,332
Total revenue .................... 9,098 5,433 14,531
Operating expenses ............... 8,015 4,703 12,718
Operating income ................. 1,083 730 1,813
Depreciation included in segment
operating expenses ............. 260 285 545
F-7
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SEGMENT AND GEOGRAPHIC REPORTING (CONTINUED)
A reconciliation of the amounts reported for total reportable segments to the
consolidated financial statements is as follows:
ENDED
FIRST QUARTER MARCH 31,
2001 2000
---------- ----------
(IN THOUSANDS)
Operating expenses:
Total reportable segments ......................... $ 16,555 $ 12,718
Plus: Corporate general and administrative expenses 2,067 2,555
Amortization .................................... 680 480
--------- ---------
Consolidated total operating expenses ............. $ 19,302 $ 15,753
Operating income (loss):
Total reportable segments ......................... $ 5,129 $ 1,813
Less: Corporate general and administrative expenses 2,067 2,555
Amortization .................................... 680 480
--------- ---------
Consolidated operating income (loss) .............. $ 2,382 $ (1,222)
Product sales by major geographic area are summarized below:
UNITED
ASIA OTHER
STATES EUROPE
PACIFIC FOREIGN TOTAL
---------- ----------
- ---------- ---------- ----------
(IN
THOUSANDS)
First quarter 2001 ........................ $15,931 $ 2,384 $
1,115 $ 854 $20,284
First quarter 2000 ........................ 10,587 1,080
1,270 395 13,332
8. SUBSEQUENT EVENTS
On April 4, 2001, the Company acquired all of the outstanding stock of GMSmbH,
the German manufacturer of the LICOX(R) Brain Tissue Oxygen Monitoring System,
for $2.9 million, of which $2.3 million was paid at closing. Prior to the
acquisition, the Company's Integra NeuroSciences division had exclusive
marketing rights to the LICOX(R) products in the United States and certain other
markets. Revenues of the acquired GMS business were approximately $1.2 million
in 2000, consisting primarily of sales of the LICOX(R) products in Germany and
to various international distributors, including Integra.
On April, 27, 2001, the Company acquired Satelec Medical, a subsidiary of the
Satelec-Pierre Rolland group, for $3.6 million in cash. Satelec Medical, based
in France, manufactures and markets the Dissectron(R) ultrasonic surgical
aspirator console and a broad line of related handpieces. The Dissectron(R)
product is the leading ultrasonic surgical system in France. The Dissectron(R)
product has United States FDA 510(k) clearance for neurosurgical applications
and CE Mark Certification in the European Union. Revenues of the acquired
business were approximately $1.5 million in 2000.
On May 4, 2001, the Company notified the holders of the 100,000 shares of Series
B Preferred of its intention to redeem these shares on June 29, 2001 for $12.3
million. The holders of the Series B Preferred have the right to convert their
shares into common stock prior to this redemption. Because the conversion price
of $3.82 per share is substantially below the current market value of the
Company's common stock, we expect that the holders of the Series B Preferred
will convert their shares into common stock, although there can no assurance in
this regard. The Series B Preferred shares are convertible into 2,617,801 shares
of common stock.
F-8
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Integra LifeSciences
Holdings Corporation and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Integra
LifeSciences Holdings Corporation and Subsidiaries (the "Company") at December
31, 2000 and 1999 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion expressed above.
As discussed more fully in Note 2 to the consolidated financial statements, the
Company has restated its 2000 and 1999 consolidated financial statements to
account for the redemption features of the Series B and Series C Convertible
Preferred Stock ("Series B and Series C Preferred") issued in March 1999 and
March 2000, respectively. The carrying value of the Series B and Series C
Preferred, which was previously presented as redeemable preferred stock, outside
of stockholders' equity, has been reclassified as a component of stockholders'
equity. The restatement of the 2000 and 1999 consolidated financial statements
had no effect on the Company's net loss, net loss per share, total assets or
total liabilities.
As discussed more fully in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for nonrefundable fees received under
its various research, license and distribution agreements.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
February 23, 2001, except for Note 18,
as to which the date is March 16, 2001,
and Note 2, as to which the date is
May 14, 2001
F-9
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
- ----------------------------------
2000 1999
- ------------- -------------
(RESTATED--SEE NOTE 2)
(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents ....................................................
$ 14,086 $ 19,301
Short-term investments .......................................................
1,052 4,311
Accounts receivable, net of allowances of $1,003 and $944 ....................
13,087 8,365
Inventories ..................................................................
16,508 10,111
Prepaid expenses and other current assets ....................................
1,484 718
---------- ----------
Total current assets .......................................................
46,217 42,806
Property, plant, and equipment, net ..........................................
11,599 9,699
Goodwill and other intangible assets, net ....................................
25,299 13,219
Other assets .................................................................
3,399 529
---------- ----------
Total assets ...................................................................
$ 86,514 $ 66,253
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt ..............................................................
$ 8,872 $ 2,254
Accounts payable, trade ......................................................
3,363 994
Income taxes payable .........................................................
1,200 643
Customer advances and deposits ...............................................
823 3,901
Deferred revenue .............................................................
1,675 1,460
Accrued expenses and other current liabilities ...............................
5,107 5,540
---------- ----------
Total current liabilities ..................................................
21,040 14,792
Long-term debt ...............................................................
4,758 7,625
Deferred revenue .............................................................
4,728 5,049
Deferred income taxes ........................................................
1,788 392
Other liabilities ............................................................
419 406
---------- ----------
Total liabilities ..............................................................
32,733 28,264
Commitments and contingencies
Stockholders' Equity:
Preferred stock; $0.01 par value; 15,000 authorized shares; 0 and 500 Series A
Convertible shares issued and outstanding at December 31, 2000 and 1999,
respectively; 100 Series B Convertible shares issued and outstanding at
December 31, 2000 and 1999, $11,750 including a 10% annual cumulative
dividend liquidation preference; 54 Series C Convertible shares issued and
outstanding at December 31, 2000, $5,805 including a 10% annual cumulative
dividend liquidation preference ............................................
2 6
Common stock; $.01 par value; 60,000 authorized shares; 17,334 and
16,131 issued and outstanding at December 31, 2000 and 1999 ................
173 161
Additional paid-in capital ...................................................
160,134 132,340
Treasury stock, at cost; 20 and 1 shares at December 31, 2000 and
1999, respectively .........................................................
(180) (7)
Other ........................................................................
(66) (143)
Accumulated other comprehensive loss .........................................
(553) (64)
Accumulated deficit ..........................................................
(105,729) (94,304)
---------- ----------
Total stockholders' equity .................................................
53,781 37,989
---------- ----------
Total liabilities and stockholders' equity .....................................
$ 86,514 $ 66,253
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
F-10
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
- ---------------------------------------
2000
1999 1998
- ----------- ----------- -----------
(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES
Product sales ............................................................$
64,987 $ 40,047 $ 14,182
Other revenue ............................................................
6,662 2,829 3,379
- -------- --------- ---------
Total revenue ........................................................
71,649 42,876 17,561
COSTS AND EXPENSES
Cost of product sales ....................................................
29,511 22,678 7,580
Research and development .................................................
7,524 8,893 8,424
Selling and marketing ....................................................
15,371 9,487 5,901
General and administrative ...............................................
28,483 13,324 9,787
Amortization .............................................................
2,481 874 49
- -------- --------- ---------
Total costs and expenses .............................................
83,370 55,256 31,741
Operating loss ...........................................................
(11,721) (12,380) (14,180)
Interest income ..........................................................
804 1,006 1,250
Interest expense .........................................................
(1,277) (712) -
Gain on dispositions of product lines ....................................
1,146 4,161 -
Other income .............................................................
201 141 588
- -------- --------- ---------
Net loss before income taxes .............................................
(10,847) (7,784) (12,342)
Income tax expense (benefit) .............................................
108 (1,818) -
- -------- --------- ---------
Net loss before cumulative effect of accounting change ...................
(10,955) (5,966) (12,342)
Cumulative effect of change in accounting for
nonrefundable fees received under research, license
and distribution arrangements ..........................................
(470) -- --
- -------- --------- ---------
Net loss
.................................................................$(11,425)
$ (5,966) $(12,342)
======== ========= =========
Basic and diluted net loss per share:
Before cumulative effect of accounting change ..........................$
(0.95) $ (0.40) $ (0.77)
Accounting change ......................................................
(0.02) -- --
- -------- --------- ---------
Net loss per share ...................................................$
(0.97) $ (0.40) $ (0.77)
======== ========= =========
Weighted average common shares outstanding ...............................
17,553 16,802 16,139
======== ========= =========
Pro forma amounts assuming retroactive application of accounting change:
Total revenues ...........................................................$
71,649 $ 42,974 $ 16,993
Net loss .................................................................
(10,955) (5,868) (12,910)
Basic and diluted net loss per share .....................................
(0.95) (0.40) (0.80)
The accompanying notes are an integral part of these
consolidated financial statements
F-11
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
- ---------------------------------------
2000
1999 1998
- ----------- ----------- -----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss ...........................................................$(11,425)
$ (5,966) $(12,342)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization ...................................... 5,357
3,104 1,438
Gain on sale of product line and other assets ...................... (1,316)
(3,998) (64)
Deferred tax benefit ............................................... --
(1,807) --
Amortization of discount and interest on investments ............... (181)
(291) (481)
Stock based compensation ........................................... 13,587
370 319
Other, net ......................................................... 43
-- 145
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable .............................................. (3,475)
(510) (287)
Inventories ...................................................... (3,061)
2,829 527
Prepaid expenses and other current assets ........................ (571)
217 65
Non-current assets ............................................... (3,565)
(80) 64
Accounts payable, accrued expenses and other
current liabilities ............................................ 2,831
(677) 802
Customer advances and deposits ................................... (3,078)
3,652 --
Deferred revenue ................................................. (106)
5,659 --
--------
--------- ---------
Net cash (used in) provided by operating activities ................ (4,960)
2,502 (9,814)
--------
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of product line and other assets ................ 1,600
6,354 48
Proceeds from the sales/maturities of investments .................. 16,981
26,000 33,020
Purchases of available for sale investments ........................ (13,391)
(14,737) (23,774)
Purchases of property and equipment ................................ (3,268)
(2,309) (1,166)
Cash acquired in a business acquisition ............................ --
-- 1,118
Cash used in business acquisition, net of cash acquired ............ (16,187)
(14,944) --
Loans made ......................................................... (238)
-- --
--------
--------- ---------
Net cash (used in) provided by investing activities ................ (14,503)
364 9,246
--------
--------- ---------
The accompanying notes are an integral part of these
consolidated financial statements
F-12
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31,
- ---------------------------------------
2000
1999 1998
- ----------- ----------- -----------
(IN THOUSANDS)
FINANCING ACTIVITIES:
Net proceeds from revolving credit facility ........................... $
3,143 $ 4 $--
Repayments of term loan ...............................................
(2,250) (1,125) --
Proceeds from sales of preferred stock and warrants ...................
5,375 9,942 4,000
Proceeds from the issuance of common stock ............................
5,000 -- --
Proceeds from exercise of common stock purchase warrants ..............
50 1,950 --
Proceeds from stock issued under employee benefit plans ...............
3,156 467 95
Purchases of treasury stock ...........................................
(170) -- (286)
Collection of related party note receivable ...........................
35 -- --
Preferred dividends paid ..............................................
(67) (80) (47)
- --------- --------- ---------
Net cash provided by financing activities .............................
14,272 11,158 3,762
Effect of exchange rate changes on cash and cash equivalents ............
(24) -- --
- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents .................... $
(5,215) $ 14,024 $ 3,194
Cash and cash equivalents at beginning of period ........................
19,301 5,277 2,083
- --------- --------- ---------
Cash and cash equivalents at end of period .............................. $
14,086 $ 19,301 $ 5,277
========= ========= =========
Cash paid during the year for interest .................................. $
922 $ 654 $--
Cash paid during the year for income taxes ..............................
508 124 --
Supplemental disclosure of non-cash investing and financing activities:
Issuance of Restricted Units .......................................... $
13,515 $-- $--
Note issued in a business acquisition .................................
2,598 -- --
Common stock and warrants issued in settlement
of obligations ......................................................
641 15 56
Term loan assumed in connection with a business acquisition ...........
- -- 11,000 --
Common stock and warrants issued in business acquisition ..............
- -- -- 3,886
The accompanying notes are an integral part of these
consolidated financial statements
F-13
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMU-
PREFERRED
LATED
COMMON STOCK STOCK ADDITIONAL
COMPRE-
--------------------------------------
TREASURY PAID-IN
HENSIVE ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL
OTHER LOSS DEFICIT EQUITY
--------
- ----------------------------------------------- ------- ---------------------
(IN THOUSANDS)
Balance, December 31,
1997................ 14,952 $150 -- $-- $-- $111,877
$(301) $(26) $(75,945) $35,755
====== ====== ==== ======= ========= =======
======= ======== ========== --------
Net loss............. -- -- -- -- -- --
- -- -- (12,342) (12,342)
Unrealized losses
on investments..... -- -- -- -- -- --
- -- (14) -- (14)
Issuance of Series A
Preferred Stock .... -- -- 500 5 -- 3,995
- -- -- -- 4,000
Issuance of common
stock under
employee benefit
plans.............. 31 -- -- -- -- 95
- -- -- -- 95
Common stock and
warrants issued in
connection with a
business acquisition 800 8 -- -- -- 3,878
- -- -- -- 3,886
Unearned compensation
related to
non-employee stock
options............ -- -- -- -- -- 145
(145) -- -- --
Amortization of unearned
compensation....... -- -- -- -- -- --
263 -- -- 263
Warrant issued for
services rendered -- -- -- -- -- 56
- -- -- -- 56
Dividends paid on
Series A Preferred
Stock.............. -- -- -- -- -- (47)
- -- -- -- (47)
Purchases of
treasury stock..... -- -- -- -- (286) --
- -- -- -- (286)
Balance, December 31,
1998............... 15,783 $158 500 $ 5 $(286) $119,999
$(183) $(40) $(88,287) $31,366
====== ====== ==== ======= ========= =======
======= ======== ========== =======
The accompanying notes are an integral part of these
consolidated financial statements
F-14
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
ACCUMU-
PREFERRED
LATED
COMMON STOCK STOCK ADDITIONAL
COMPRE-
--------------------------------------
TREASURY PAID-IN
HENSIVE ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL
OTHER LOSS DEFICIT EQUITY
--------
- ----------------------------------------------- -------
- ------------------------
(IN THOUSANDS)
Net loss............. -- $-- -- $-- $-- $--
$-- $-- $ (5,966) $ (5,966)
Unrealized losses on
investments........ -- -- -- -- -- --
- -- (24) -- (24)
Issuance of Series B
Preferred Stock and
warrants........... -- -- 100 1 -- 9,941
- -- -- -- 9,942
Issuance of common
stock under employee
benefit plans...... 48 -- -- -- 264 203
- -- -- (51) 416
Warrants exercised
for cash........... 300 3 -- -- -- 1,947
- -- -- -- 1,950
Issuance of stock in
settlement of
obligation......... -- -- -- -- 15 --
- -- -- -- 15
Unearned compensation
related to
non--employee stock
options............ -- -- -- -- -- 241
(241) -- -- --
Amortization of unearned
compensation....... -- -- -- -- -- --
281 -- -- 281
Compensation recorded
in connection with
stock options granted
to employees....... -- -- -- -- -- 89
- -- -- -- 89
Dividends paid on
Series A Preferred
Stock............... -- -- -- -- -- (80)
- -- -- -- (80)
Balance, December 31,
1999............... 16,131 $161 600 $ 6 $ (7) $132,340
$(143) $(64) $(94,304) $37,989
====== ====== ==== ======= ========= =======
======= ======== ======== =======
The accompanying notes are an integral part of these
consolidated financial statements
F-15
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
ACCUMU-
PREFERRED
LATED
COMMON STOCK STOCK ADDITIONAL
COMPRE-
--------------------------------------
TREASURY PAID-IN
HENSIVE ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL
OTHER LOSS DEFICIT EQUITY
--------
- ----------------------------------------------- -------
- ------------------------
(IN THOUSANDS)
Net loss............. -- $-- -- $-- $-- $--
$-- $-- $ (11,425) $(11,425)
Unrealized losses on
investments........ -- -- -- -- -- --
- -- (32) -- (32)
Foreign currency
translation adjustment -- -- -- -- -- --
- -- (457) -- (457)
Issuance of Series C
Preferred Stock
and warrants....... -- -- 54 1 -- 5,374
- -- -- -- 5,375
Conversion of Series A
Preferred Stock 250 3 (500) (5) -- 2
- -- -- -- --
Private placement of
common stock....... 333 3 -- -- -- 4,997
- -- -- -- 5,000
Issuance of common
stock under employee
benefit plans...... 564 6 -- -- -- 3,201
- -- -- -- 3,207
Warrants exercised
for cash........... 11 -- -- -- -- 50
- -- -- -- 50
Issuance of stock in
settlement of
obligation......... 45 -- -- -- -- 641
- -- -- -- 641
Amortization of unearned
compensation....... -- -- -- -- -- --
72 -- -- 72
Tax benefit related to
stock options...... -- -- -- -- -- 51
- -- -- -- 51
Issuance of Restricted
Units.............. -- -- -- -- -- 13,515
- -- -- -- 13,515
Unearned compensation
related to
non--employee stock
options............ -- -- -- -- -- 30
(30) -- -- --
Dividends paid on
Series A Preferred
Stock.............. -- -- -- -- -- (67)
- -- -- -- (67)
Purchases of treasury
stock............. -- -- -- -- (173) --
- -- -- -- (173)
Collection of related
party note receivable -- -- -- -- -- --
35 -- -- 35
Balance, December 31,
2000............... 17,334 $173 154 $ 2 $(180) $160,134 $
(66) $(553) $(105,729) $ 53,781
====== ====== ==== ======= ========= =======
======= ======== ======== =========
The accompanying notes are an integral part of these
consolidated financial statements
F-16
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Integra LifeSciences Holdings Corporation (the "Company") develops, manufactures
and markets medical devices, implants and biomaterials. The Company's operations
consist of (1) Integra NeuroSciences, which is a leading provider of implants,
devices, and monitors used in neurosurgery, neurotrauma, and related critical
care and (2) Integra LifeSciences, which develops and manufactures a variety of
medical products and devices, including products based on our proprietary tissue
regeneration technology which are used to treat soft tissue and orthopedic
conditions. Integra NeuroSciences sells primarily through a direct sales
organization and Integra LifeSciences sells primarily through strategic
alliances and distributors.
There are certain risks and uncertainties inherent in the Company's business. To
date, the Company has experienced significant operating losses in funding the
research, development, manufacturing and marketing of its products and may
continue to incur operating losses. The industry and market segments in which
the Company operates are highly competitive, and the Company may not be able to
compete effectively with other companies with greater financial resources. In
general, the medical technology industry is characterized by intense
competition, which comes from established pharmaceutical and medical technology
companies and early stage companies that have alternative technological
solutions for the Company's primary clinical targets, as well as universities,
research institutions and other non-profit entities. The Company's competitive
position and profitability will depend on its ability to achieve market
acceptance for its products, implement production and marketing plans, secure
regulatory approval for products under development, obtain patent protection and
secure adequate capital resources.
The Company believes that current cash balances and funds available from
existing revenue sources will be sufficient to finance the Company's anticipated
operations for at least the next twelve months. The Company may in the future
seek to issue equity securities or enter into other financing arrangements with
strategic partners to raise funds in excess of its anticipated liquidity and
capital requirements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All intercompany accounts and
transactions are eliminated in consolidation.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
INVESTMENTS
The Company's current investment policy is to invest available cash balances in
high quality debt securities with maturities not to exceed 18 months. Realized
gains and losses are determined on the specific identification cost basis. All
investments are classified as available for sale, with unrealized gains and
losses reported in other comprehensive loss.
INVENTORIES
Inventories, consisting of purchased materials, direct labor and manufacturing
overhead, are stated at the lower of cost, determined on the first-in, first-out
method, or market.
F-17
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. The Company provides for
depreciation using the straight-line method over the estimated useful lives of
the assets as follows: buildings, 30 to 40 years; machinery and equipment, 3 to
15 years; furniture and fixtures, 5 to 7 years; and leasehold improvements, over
the lesser of the minimum lease term or the remaining life of the asset. The
cost of major additions and improvements is capitalized. Maintenance and repair
costs that do not improve or extend the lives of the respective assets are
charged to operations as incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill other intangible assets are stated at cost and are amortized on a
straight-line basis over periods ranging from two to fifteen years.
long-lived assets
Long-lived assets held and used by the Company, including goodwill and other
intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For purposes of evaluating the recoverability of long-lived assets
to be held and used, a recoverability test is performed using projected
undiscounted net cash flows applicable to the long-lived assets. If an
impairment exists, the amount of such impairment is calculated based on the
estimated fair value of the asset. Impairments to long-lived assets to be
disposed of are recorded based upon the fair value of the applicable assets.
PREFERRED STOCK
As described in Note 9, the Company issued 100,000 shares of Series B
Convertible Preferred Stock ("Series B Preferred") and warrants in March 1999
and 54,000 shares of Series C Convertible Preferred Stock ("Series C Preferred"
and, collectively, the "Series B and Series C Preferred") and warrants in March
2000. The Company has restated its 2000 and 1999 financial statements to account
for the redemption features of the Series B and Series C Preferred. The carrying
value of the Series B and Series C Preferred, which was previously presented as
redeemable preferred stock, outside of stockholders' equity, has been
reclassified as a component of stockholders equity. The effect of these
restatements are to increase stockholders' equity by $15.9 million and $10.3
million at December 31, 2000 and 1999, respectively, to the following amounts
(in thousands):
DECEMBER 31,
---------------------
2001 2000
----------- ---------
Before restatement ...................... $37,863 $27,659
After restatement ....................... 53,781 37,989
After further consideration, the Company has determined that the redemption
features of the Series B and Series C Preferred are within the control of the
Company and therefore, the carrying amount should be reflected in stockholders'
equity.
These restatements had no effect on the Company's net loss or net loss per
share, total assets or total liabilities for the years ended December 31, 2000
or 1999.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign subsidiaries are translated at the rate of
exchange at year-end, while sales and expenses are translated at the average
exchange rates in effect during the year. The net effect of these translation
adjustments is shown as a component of accumulated other comprehensive loss.
F-18
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
REVENUE RECOGNITION
Product sales are recognized when delivery has occurred and title has passed to
the customer, there is a fixed or determinable sales price, and collectibility
of that sales price is reasonably assured. Research grant revenue is recognized
when the related expenses are incurred. Under the terms of existing research
grants, the Company is reimbursed for allowable direct and indirect research
expenses. Non-refundable fees received under research, licensing and
distribution arrangements are recognized as revenue when received if the Company
has no continuing obligations to the other party. For those arrangements where
the Company has continuing performance obligations, revenue is recognized using
the lesser of the amount of non-refundable cash received or the result achieved
using percentage of completion accounting based upon the estimated cost to
complete its obligations. Royalty revenue is recognized over the period the
royalty products are sold.
SHIPPING AND HANDLING FEES AND COSTS
Amounts billed to customers for shipping and handling are included in products
sales. The related shipping and handling fees and costs incurred by the Company
are included in cost of product sales.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed in the period in which they are
incurred.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents and short-term
investments, which are held at major financial institutions, and trade
receivables. The Company's products are sold on an uncollateralized basis and on
credit terms based upon a credit risk assessment of each customer.
NET LOSS PER SHARE
Amounts used in the calculation of basic and diluted net loss per share were as
follows (in thousands, except per share data):
2000 1999 1998
----- ----- -----
Net loss ................................... $(11,425) $ (5,966) $(12,342)
Preferred stock dividends:
Series A Convertible Preferred Stock ..... (67) (80) (47)
Series B Convertible Preferred Stock ..... (1,000) (750) --
Series C Convertible Preferred Stock ..... (405) -- --
Beneficial conversion feature on Series C
Convertible Preferred Stock ............ (4,170) -- --
----------- ---------- -----------
Net loss applicable to common stock ........ $(17,067) $ (6,796) $(12,389)
Weighted average common shares
outstanding .............................. 17,553 16,802 16,139
Basic and diluted net loss per share ....... $ (0.97) $ (0.40) $ (0.77)
F-19
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic loss per share is computed by dividing net loss applicable to common stock
by the weighted average number of common shares outstanding for the period.
Diluted per share amounts reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock. Options and
warrants to purchase 5,067,726, 4,401,000, and 3,095,000 shares of common stock
and preferred stock convertible into 3,217,800, 2,867,800, and 250,000 shares of
common stock at December 31, 2000, 1999 and 1998, respectively were not included
in the computation of diluted loss per share because their effect would be
antidilutive. Restricted Units issued by the Company (see Note 10) that entitle
the holder to 2,250,000 shares of common stock are included from their date of
issuance in the weighted average calculation because no further consideration is
due related to the issuance of the underlying common shares.
COMPREHENSIVE LOSS
Comprehensive loss consists of net loss plus all other changes in net assets
from non-owner sources. Components of comprehensive loss consist of the
following:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
----------- ---------- ----------
(IN THOUSANDS)
Net loss ................................... $(11,425) $ (5,966) $(12,342)
Unrealized losses on investments ........... (32) (24) (14)
Foreign currency translation adjustment .... (457) -- --
Comprehensive loss ......................... $(11,914) $ (5,990) $(12,356)
STOCK BASED COMPENSATION
Employee stock based compensation is recognized using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" and Financial Accounting Standards Board Interpretation No.
44 "Accounting for Certain Transactions Involving Stock Compensation -an
interpretation of APB Opinion No. 25". For disclosures purposes, pro forma net
loss and loss per share are presented as if the fair value method had been
applied.
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, including disclosures of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Investments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivatives and hedging activities and supercedes
several existing standards. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The adoption of SFAS No. 133 will not have a material impact on the consolidated
financial statements.
In December 1999 (as amended in March 2000 and June 2000) the staff of the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 101,
Revenue Recognition (the "SAB"). As the result of the adoption of the SAB, we
recorded a $470,000 cumulative effect of an accounting change to defer a portion
F-20
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of a nonrefundable, up-front fee received and recorded in other revenue in 1998
(see Note 14). The cumulative effect of this accounting change was measured as
of January 1, 2000. As a result of this accounting change, other revenue for the
year ended December 31, 2000 includes $112,000 of amortization of the amount
deferred as of January 1, 2000.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 "Accounting for Certain Transactions Involving Stock Compensation -an
interpretation of APB Opinion No. 25" ("FIN No. 44"). FIN No. 44 clarifies the
application of APB Opinion 25 for certain issues. FIN No. 44 became effective
July 1, 2000, but certain conclusions cover specific events that occurred after
either December 15, 1998, or January 12, 2000. The adoption of FIN No. 44 did
not have an impact on our consolidated financial statements.
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities-a replacement of FASB
Statement No. 125" ("SFAS No. 140"). SFAS No. 140 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 140 is effective for fiscal years
ending after December 15, 2000. The adoption of SFAS No. 140 did not have any
impact on the Company's consolidated financial statements.
3. BUSINESS ACQUISITIONS AND DISPOSITIONS
On April 6, 2000, the Company purchased the Selector(R) Ultrasonic Aspirator,
Ruggles_ hand-held neurosurgical instruments and Spembly Medical cryosurgery
product lines, including certain assets and liabilities, from NMT Medical, Inc.
("NMT") for $11.6 million in cash.
On January 17, 2000, the Company purchased the business, including certain
assets and liabilities, of Clinical Neuro Systems, Inc. ("CNS") for $6.8
million. CNS designs, manufactures and sells neurosurgical external ventricular
drainage systems, including catheters and drainage bags, as well as cranial
access kits. The purchase price of the CNS business consisted of $4.0 million in
cash and a 5% $2.8 million promissory note issued to the seller. The promissory
note, which is payable in two principal payments of $1.4 million each, plus
accrued interest, in January 2001 and 2002, is collateralized by inventory,
property and equipment of the CNS business and by a collateral assignment of a
$2.8 million promissory note from one of the Company's subsidiaries.
On March 29, 1999 the Company acquired the business, including certain assets
and liabilities, of the NeuroCare group of companies ("NeuroCare"), a leading
provider of neurosurgical products. The $25.2 million acquisition price was
comprised of $14.2 million of cash and $11.0 million of assumed indebtedness
under a term loan from Fleet Capital Corporation ("Fleet"). The cash portion of
the purchase price was financed in part by affiliates of Soros Private Equity
Partners LLC, through the sale of $10.0 million of Series B Convertible
Preferred Stock.
On September 28, 1998, the Company acquired Rystan Company, Inc. ("Rystan") for
800,000 shares of common stock of the Company and two warrants each having the
right to purchase 150,000 shares of the Company's common stock. The total
purchase price was valued at $4.0 million. In January 1999, the Company
subsequently sold a Rystan product line, including the brand name and related
production equipment, for $6.4 million in cash and recognized a pre-tax gain of
$4.2 million after adjusting for the net cost of the assets sold and for
expenses associated with the divestiture.
These acquisitions have been accounted for using the purchase method of
accounting, and the results of operations of the acquired businesses have been
included in the consolidated financial statements since their
F-21
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED)
respective dates of acquisition. As adjusted for the sale of one of the Rystan
product lines in 1999, the allocation of the purchase price of these
acquisitions resulted in acquired intangible assets, consisting primarily of
completed technology, customer lists and trademarks of approximately $19.8
million, which are being amortized on a straight-line basis over lives ranging
from 2 to 15 years, and residual goodwill of approximately $9.1 million, which
is being amortized on a straight-line basis over 15 years.
Historical results of operations include the following (charges) / benefits
related to acquisitions:
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
---------- ---------- ---------
(IN THOUSANDS)
Inventory fair value purchase
accounting adjustments ................ $ (429) $(2,508) $ (300)
Severance costs associated with the
closure of an acquired facility ....... -- (1,024) --
Deferred tax benefits ................... -- 1,807 --
The following unaudited pro forma financial information summarizes the results
of operations for the periods indicated as if the acquisitions consummated in
2000 had been completed as of the beginning of each period:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999
----------- ------------
(IN THOUSANDS)
(UNAUDITED)
Total revenue .................................. $ 74,665 $ 57,425
Net loss ....................................... (11,111) (4,135)
Basic and diluted net loss per share ........... $ (0.96) $ (0.32)
The historical and pro forma amounts for years ended December 31, 2000 and 1999,
respectively, include $1.1 million ($0.07 per share) and $3.7 million ($0.22 per
share) gains, net of tax, from the sale of product lines. These pro forma
amounts are based upon certain assumptions and estimates. The pro forma results
do not necessarily represent results that would have occurred if the acquisition
had taken place on the basis assumed above, nor are they indicative of the
results of future combined operations.
4. INVESTMENTS
The Company's current investment balances are classified as available for sale
and all debt securities have maturities within one year. Investment balances as
of December 31, 2000 and 1999 were as follows:
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- -----
(IN THOUSANDS)
2000:
U.S. Government agency securities ....... $ 977 $-- $-- $ 977
Equity securities ....................... 173 10 (108) 75
---------------- -------- --------
Total ................................. $1,150 $ 10 $ (108) $1,052
1999:
U.S. Government agency securities ....... $3,975 $-- $-- $3,975
Equity securities ....................... 400 -- (64) 336
---------------- -------- --------
Total ................................. $4,375 $-- $ (64) $4,311
F-22
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
--------------------------
2000 1999
------- --------
(IN THOUSANDS)
Finished goods ......................... $ 6,878 $ 3,786
Work-in-process ........................ 3,825 2,224
Raw materials .......................... 5,805 4,101
-------- --------
$16,508 $10,111
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consists of the following:
DECEMBER 31,
--------------------------
2000 1999
------- --------
(IN THOUSANDS)
Buildings and leasehold improvements ............... $ 9,632 $ 7,805
Machinery and equipment ............................ 11,371 8,923
Furniture and fixtures ............................. 810 559
Construction in progress ........................... 470 390
-------- -------
22,283 17,677
Less: Accumulated depreciation and amortization .... (10,684) (7,978)
-------- -------
$ 11,599 $ 9,699
Depreciation and amortization expense associated with property, plant and
equipment for the years ended December 31, 2000, 1999 and 1998 was $2,876,000,
$2,229,000, and $1,413,000, respectively.
7. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles, net, consists of the following:
DECEMBER 31,
--------------------------
2000 1999
------- --------
(IN THOUSANDS)
Technology ......................................... $ 10,761 $ 3,730
Customer base ...................................... 3,227 1,810
Trademarks ......................................... 1,770 1,570
Other identifiable intangible assets ............... 3,899 2,661
Goodwill ........................................... 9,050 4,348
-------- --------
28,707 14,119
Less: Accumulated depreciation and amortization .... (3,408) (900)
--------- --------
$ 25,299 $ 13,219
Amortization expense associated with goodwill and other intangibles for the
years ended December 31, 2000, 1999 and 1998 was $2,481,000, $874,000, $49,000,
respectively.
F-23
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Debt
The Company's borrowings consisted of the following:
DECEMBER 31,
--------------------------
2000 1999
------- --------
(IN THOUSANDS)
Short term debt:
Bank loans
Current portion of term loan ...................$4,071 $2,250
Revolving credit facility ...................... 3,147 4
Current portion of note payable .................. 1,654 --
--------- ---------
$8,872 $2,254
Long term debt:
Bank loans
Term loan ......................................$3,554 $7,625
Note payable ..................................... 1,204 --
--------- ---------
$4,758 $7,625
The NeuroCare acquisition was partially funded through an $11.0 million term
loan provided by Fleet. Fleet has also provided a $4.0 million revolving credit
facility to fund working capital requirements. The term loan and revolving
credit facility (collectively, the "Fleet Credit Facility") generally bear
interest at a variable rate that is based upon the prime lending rate charged
for commercial loans in the United States. An option is available to the Company
to borrow certain portions of the Fleet Credit Facility at variable rates based
upon the London Interbank Overnight Rate ("LIBOR"), subject to certain
limitations and restrictions. At December 31, 2000 and 1999, respectively, the
weighted average interest rate on balances outstanding under the Fleet Credit
Facility was 9.8% and 9.5%, respectively.
The Fleet Credit Facility is collateralized by all the assets and ownership
interests of various subsidiaries of the company including Integra NeuroCare LLC
and NeuroCare Holding Corporation (the parent company of Integra NeuroCare LLC)
has guaranteed Integra NeuroCare LLC's obligations. Integra NeuroCare LLC is
subject to various financial and non-financial covenants under the Fleet Credit
Facility, including significant restrictions on its ability to transfer funds to
the Company or the Company's other subsidiaries. At December 31, 2000 and 1999,
respectively, approximately $20.5 million and $15.6 million of Integra NeuroCare
LLC's net assets were restricted under the provisions of the Fleet Credit
Facility. The financial covenants specify minimum levels of interest and fixed
charge coverage and net worth, and also specify maximum levels of capital
expenditures and total indebtedness to operating cash flow, among others.
Effective September 29, 1999 and December 31, 1999, certain of these financial
covenants were amended. These amendments did not change any other terms of the
Fleet Credit Facility. While the Company anticipates that Integra NeuroCare LLC
will be able to satisfy the requirements of these amended financial covenants,
there can be no assurance that Integra NeuroCare LLC will generate sufficient
earnings before interest, taxes, depreciation and amortization to meet the
requirements of such covenants.
Term loan repayments are due as follows (in thousands):
2001............. $4,071
2002............. 2,254
2003............. 1,300
-------
$7,625
F-24
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. DEBT (CONTINUED)
Notwithstanding the originally scheduled repayments, the term loan is subject to
mandatory prepayment amounts if certain levels of cash flow are achieved.
Included in the 2001 amount is approximately $2.1 million of anticipated
principal prepayment.
In connection with the purchase of the business, including certain assets and
liabilities, of CNS, the Company issued a 5% $2.8 million promissory note to the
seller. The promissory note, which is payable in two principal payments of $1.4
million each, plus accrued interest, in January 2001 and 2002, is collateralized
by inventory, property and equipment of the CNS business and by a collateral
assignment of a $2.8 million promissory note from one of the Company's
subsidiaries.
9. COMMON AND PREFERRED STOCK
PREFERRED STOCK TRANSACTIONS
The Company is authorized to issue up to 15,000,000 shares of preferred stock in
one or more series, of which 2,000,000 shares have been designated as Series A,
120,000 shares have been designated as Series B, and 54,000 shares have been
designated as Series C.
On March 29, 2000, the Company issued 54,000 shares of Series C Convertible
Preferred Stock ("Series C Preferred") and warrants to purchase 300,000 shares
of common stock at $9.00 per share to affiliates of Soros Private Equity
Partners LLC ("Soros") for $5.4 million, net of issuance costs. The Series C
Preferred ranks on a parity with the Company's Series B Convertible Preferred
Stock, and is senior to the Company's common stock and all other preferred stock
of the Company. The Series C Preferred is convertible into 600,000 shares of
common stock and has a liquidation preference of $5.8 million, including a 10%
cumulative annual dividend. This liquidation preference is payable upon i) the
redemption of the preferred shares at the Company's option, ii) the redemption
of the preferred shares in the event of the Company's sale of all or
substantially all of its assets or certain mergers or consolidations of the
Corporation into or with any other corporation, or iii) a legal liquidation of
the Company.
The Series C Preferred was issued with a beneficial conversion feature that
resulted in a nonrecurring, non-cash dividend of $4.2 million, which has been
reflected in the net loss per share applicable to common stock for the year
ended December 31, 2000. The beneficial conversion dividend is based upon the
excess of the price of the underlying common stock as compared to the fixed
conversion price of the Series C Preferred, after taking into account the value
assigned to the common stock warrants. The warrants issued with the Series C
Preferred expire on December 31, 2001.
In connection with the NeuroCare acquisition, the Company issued 100,000 shares
of Series B Convertible Preferred Stock ("Series B Preferred") and warrants to
purchase 240,000 shares of common stock at $3.82 per share to Soros for $9.9
million, net of issuance costs. The Series B Preferred ranks on a parity with
the Series C Preferred, and is senior to the Company's common stock and all
other preferred stock of the Company. The Series B Preferred is convertible into
2,617,800 shares of common stock and has a liquidation preference of $11.8
million, including a 10% cumulative annual dividend. This liquidation preference
is payable upon i) the redemption of the preferred shares at the Company's
option, ii) the redemption of the preferred shares in the event of the Company's
sale of all or substantially all of its assets or certain mergers or
consolidations of the Corporation into or with any other corporation, or iii) a
legal liquidation of the Company. The warrants issued with the Series B
Preferred were exercised in March 2001.
During the second quarter of 1998, the Company sold 500,000 shares of Series A
Convertible Preferred Stock ("Series A Preferred") for $4.0 million to Century
Medical, Inc. ("CMI"). CMI converted the Series A Preferred into 250,000 shares
of the Company's common stock in October 2000. The Series A Preferred paid an
annual
F-25
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMON AND PREFERRED STOCK (CONTINUED)
dividend of $0.16 per share, payable quarterly, and had a liquidation preference
of $4.0 million that was payable only upon the liquidation of the Company.
COMMON STOCK TRANSACTIONS
In September 2000, the Company completed a $5.0 million private placement of
333,334 shares of common stock to ArthroCare Corporation.
In September 1998, the Company issued 800,000 shares of common stock and two
warrants, each having the right to purchase 150,000 shares of the Company's
common stock at $6.00 and $7.00 per share, respectively, to GWC Health, Inc., a
subsidiary of Elan Corporation, plc., as consideration for the acquisition of
Rystan. Both of these warrants were exercised in October 1999.
STOCK SPLIT
The Company's stockholders approved a one-for-two reverse split of the Company's
common stock at the annual stockholders meeting held on May 18, 1998. All
outstanding common share and per share amounts have been retroactively adjusted
to reflect the reverse split.
STOCKHOLDERS' RIGHTS
As stockholders of the Company, Union Carbide Corporation affiliates of Soros
Private Equity Partners LLC, and GWC Health are entitled to certain registration
rights. The Company's President and Chief Executive Officer also has demand
registration rights under the Restricted Units issued in December 1997 and
December 2000 (see Note 10).
10. STOCK PURCHASE AND AWARD PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Company received stockholder approval for its Employee Stock Purchase Plan
("ESPP") in May 1998. The purpose of the ESPP is to provide eligible employees
of the Company with the opportunity to acquire shares of common stock at
periodic intervals by means of accumulated payroll deductions. Under the ESPP, a
total of 500,000 shares of common stock have been reserved for issuance. These
shares will be made available either from the Company's authorized but unissued
shares of common stock or from shares of common stock reacquired by the Company
as treasury shares. At December 31, 2000, approximately 354,000 shares remain
available for purchase under the ESPP.
STOCK OPTION PLANS
As of December 31, 2000, the Company had stock options outstanding under six
plans, the 1992 Stock Option Plan (the "1992 Plan"), the 1993 Incentive Stock
Option and Non-Qualified Stock Option Plan (the "1993 Plan"), the 1996 Incentive
Stock Option and Non-Qualified Stock Option Plan (the "1996 Plan"), the 1998
Stock Option Plan (the "1998 Plan"), the 1999 Stock Option Plan (the "1999
Plan") and the 2000 Equity Incentive Plan (the "2000 Plan" and collectively, the
"Plans"). No additional options can be granted out of the 1992 Plan and 175,000
shares reserved under the 1992 Plan were cancelled.
The Company has reserved 750,000 shares of common stock for issuance under both
the 1993 Plan and 1996 Plan, 1,000,000 shares under the 1998 Plan, and 2,000,000
shares each under the 1999 Plan and the 2000 Plan. The 1993 Plan, 1996 Plan,
1998 Plan, and the 1999 Plan permit the Company to grant both incentive and
non-qualified stock options to designated directors, officers, employees and
associates of the Company. The 2000
F-26
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK PURCHASE AND AWARD PLANS (CONTINUED)
Plan permits the Company to grant incentive and non-qualified stock options,
stock appreciation rights, restricted stock, performance stock, or dividend
equivalent rights to designated directors, officers, employees and associates of
the Company. Options issued under the Plans become exercisable over specified
periods, generally within four years from the date of grant, and generally
expire six years from the grant date.
For the three years ended December 31, 2000, option activity for all the Plans
was as follows:
WEIGHTED
AVERAGE
EXERCISE
PRICE SHARES
------------ ---------
(SHARES IN THOUSANDS)
Shares Outstanding:
December 31, 1997 .......................... $7.68 1,541
Granted .................................... $4.35 1,045
Exercised .................................. $8.00 (1)
Cancelled .................................. $8.21 (138)
December 31, 1998 .......................... $6.26 2,447
Granted .................................... $5.10 1,757
Exercised .................................. $4.24 (61)
Cancelled .................................. $5.56 (352)
December 31, 1999 .......................... $5.82 3,791
Granted .................................... $11.62 1,548
Exercised .................................. $5.68 (493)
Cancelled .................................. $6.90 (327)
December 31, 2000 .......................... $7.74 4,519
Shares Exercisable:
December 31, 1998 .......................... $8.45 730
December 31, 1999 .......................... $6.76 1,422
December 31, 2000 .......................... $6.27 1,759
Share available for grant, December 31, 2000 307
In June 1999, the Company granted fully vested non-qualified stock options with
an intrinsic value of $90,000 on the grant date to certain employees for which a
corresponding charge was recorded to general and administrative expense.
Otherwise, the exercise price of all other stock options granted under the Plans
was equal to or greater than the fair market value of the common stock on dates
of grant. The weighted average exercise price and fair market value of options
granted in 2000, 1999 and 1998 were as follows:
MARKET PRICE MARKET PRICE
MARKET PRICE
-----------------------------
- ---------------------------- ----------------------------
EXERCISE EXERCISE
EXERCISE
PRICE FAIR VALUE PRICE FAIR
VALUE PRICE FAIR VALUE
------------ ------------- -------------
- ------------- ------------- -------------
2000 ........................... $ -- $ -- $11.61
$8.20 $-- $--
1999 ........................... $3.46 $3.46 $ 5.11
$3.77 $7.61 $0.06
1998 ........................... $ -- $ -- $ 4.19
$2.59 $8.00 $1.98
F-27
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK PURCHASE AND AWARD PLANS (CONTINUED)
The following table summarizes information about stock options outstanding as of
December 31, 2000:
OPTIONS OUTSTANDING
OPTIONS EXERCISABLE
-------------------------------------------------
- ----------------------
WEIGHTED WEIGHTED
WEIGHTED
AVERAGE AVERAGE
AVERAGE
RANGE OF AS OF REMAINING EXERCISE
AS OF EXERCISE
EXERCISE PRICES 12/31/00 CONTRACTUAL LIFE PRICE
12/31/00 PRICE
------------------ ---------- -------------------- -----------
- --------- -----------
(OPTIONS IN THOUSANDS)
$3.375-$5.125 1,075 3.9 years $ 3.77
537 $ 3.81
$5.375-$5.875 1,224 5.6 years $ 5.86
605 $ 5.86
$5.906-$11.00 1,432 5.5 years $ 8.96
572 $ 7.87
$11.12-$23.00 788 5.5 years $ 13.86
45 $ 20.90
-------
- -------
4,519
1,759
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock Based Compensation" ("SFAS 123"). Had the compensation
cost for the Company's stock option plans been determined based on the fair
value at the grant date for awards in grant since 1995 consistent with the
provisions of SFAS No. 123, the Company's net loss and basic and diluted net
loss per share would have increased to the pro forma amounts indicated below:
2000 1999 1998
--------- ---------- ----------
(IN THOUSANDS)
Net loss applicable to common stock $(17,067) $6,796 $(12,389)
Pro forma net loss applicable to
common stock ..................... (20,503) (9,991) (15,070)
Basic and diluted net loss per share $(0.97) $(0.40) $(0.77)
Pro forma basic and diluted net
loss per share .... .............. (1.17) (0.59) (0.93)
As options vest over a varying number of years and awards are generally made
each year, the pro forma impacts shown here may not be representative of future
pro forma expense amounts. The pro forma additional compensation expense was
calculated based on the fair value of each option grant using the Black-Scholes
model with the following weighted-average assumptions:
2000 1999 1998
------- -------- -------
Dividend yield ........ 0 0 0
Expected volatility ... 90% 90% 80%
Risk free interest rate 6.5% 5.4% 5.2%
Expected option lives . 4.5 years year4 years
RESTRICTED UNITS
In December 2000, the Company issued 1,250,000 restricted units ("Restricted
Units") under the 2000 Plan as a fully vested equity based bonus to the
Company's President and Chief Executive Officer ("Executive") in connection with
the extension of his employment agreement. Each Restricted Unit represents the
right to receive one share of the Company's common stock. In connection with the
issuance of the Restricted Units, the Company incurred a non-cash compensation
charge of $13.5 million in the fourth quarter of 2000, which is
f-28
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK PURCHASE AND AWARD PLANS (CONTINUED)
included in general and administrative expenses. The Executive also received
1,000,000 Restricted Units in December 1997, each of which entitles him to
receive one share of the Company's common stock. The Restricted Units issued in
December 1997 were not issued under any of the Plans.
No other stock-based awards are outstanding under any of the Plans.
11. FINANCIAL INSTRUMENTS
Fair value of the Company's financial instruments are estimated as follows (in
thousands):
DECEMBER 31, 2000 DECEMBER 31, 1999
--------------------- -------------------
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
--------- ---------- ---------- -------
Nonderivatives:
Cash and cash equivalents .............. $14,086 $14,086 $19,301 $19,301
Short-term investments ................. 1,052 1,052 4,311 4,311
Term loans and revolving credit facility 10,772 10,772 9,879 9,879
Note payable ........................... 2,874 2,858 -- --
Fair value represents an estimate of the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation. The fair value of cash and cash equivalents and
short-term investments were estimated based on market prices. The carrying value
of the Company's term loan and borrowings under its revolving credit facility
approximate fair value because the interest rates on these financial instruments
are reset periodically to reflect current market rates. The carrying value of
the 5% note payable issued to the seller of the CNS business was discounted to
fair value to reflect a rate that the Company could obtain on similar debt.
12. LEASES
The Company leases administrative, manufacturing, research and distribution
facilities and various manufacturing, office and transportation equipment
through operating lease agreements.
In November 1992, a corporation whose shareholders are trusts whose
beneficiaries include beneficiaries of the Company's Chairman acquired from
independent third parties a 50% interest in the general partnership from which
the Company leases its manufacturing facility in Plainsboro, New Jersey. The
lease provides for rent escalations of 10.1% and 8.5% in the years 2002 and
2007, respectively, and expires in October 2012.
The lease agreement related to the Company's research facility in San Diego
provides for annual escalations.
In June 2000, the Company signed a ten year lease related to certain production
equipment from a corporation whose sole stockholder is a general partnership,
for which the Company's Chairman is a partner and the President. Under the terms
of the lease, the Company paid $45,000 to Medicus Corporation during 2000.
In May 1994, the Company entered into a 5 year lease agreement with a related
party of the Company's Chairman for a facility in West Chester, Pennsylvania. In
January 1998, the Company suspended its operations at this facility and in June
1998, entered into a lease termination agreement related to the facility that
required the Company to pay $330,000 for the facility's maintenance, certain
operating costs and other commitments through April 1999. Additionally, the
Company recorded an asset impairment charge of $145,000 in 1998
F-29
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LEASES (CONTINUED)
related to certain leasehold improvements made at the West Chester facility.
This charge was included in general and administrative expense.
Future minimum lease payments under operating leases at December 31, 2000 were
as follows (in thousands):
RELATED THIRD
PARTIES PARTIES TOTAL
--------- ---------- ----------
2001 ............................ $ 300 $1,053 $1,353
2002 ............................ 303 920 1,223
2003 ............................ 321 915 1,236
2004 ............................ 321 737 1,058
2005 ............................ 321 283 604
Thereafter....................... 2,075 577 2,652
------- ------- -------
Total minimum lease payments..... $3,641 $4,485 $8,126
======= ======= =======
Total rental expense for the years ended December 31, 2000, 1999, and 1998 was
$1,422,000, $958,000, and $780,000, respectively, and included $255,000,
$219,000, and $267,000 in related party expense, respectively.
13. Income Taxes
The income tax expense (benefit) consisted of the following (in thousands):
2000 1999 1998
---------- ------------ ----------
Current:
Federal .............................. $ 100 $ 100 $--
State ................................ (131) (111) --
Foreign .............................. 139 - --
Total current .......................... $ 108 $ (11) $--
Deferred:
Federal .............................. $ -- $(1,671) $--
State ................................ -- (136) --
Total deferred ......................... $ -- $(1,807) $--
Income tax expense (benefit) ........... $ 108 $(1,818) $--
F-30
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES (CONTINUED)
The temporary differences which give rise to deferred tax assets and
(liabilities) are presented below (in thousands):
DECEMBER 31,
---------------------
2000 1999
-------- ---------
Net operating loss and tax credit carryforwards ........ $ 33,676 $ 36,800
Inventory reserves and capitalization .................. 1,740 1,021
Other .................................................. 8,594 2,615
Depreciation and amortization .......................... -- --
Deferred revenue ....................................... 2,380 2,560
-------- --------
Total deferred tax assets before valuation allowance . 46,390 42,996
Valuation allowance .................................... (44,776) (41,434)
Depreciation and amortization .......................... (3,010) (1,562)
Other .................................................. (392) (392)
-------- --------
Net deferred tax liabilities ........................... $ (1,788) $ (392)
======== ========
The Company's valuation allowance was provided against the deferred tax assets
due to the uncertainty of realization. The net change in the Company's valuation
allowance was $3,342,000, $18,000, and $4,380,000 in 2000, 1999, and 1998,
respectively. The 1999 change in valuation allowance includes a non-cash benefit
of $1.8 million resulting from the deferred tax liabilities recorded in the
NeuroCare acquisition to the extent that consolidated deferred tax assets were
generated subsequent to the acquisition.
A reconciliation of the United States Federal statutory rate to the Company's
effective tax rate for the years ended December 31, 2000, 1999, and 1998 is as
follows:
2000 1999 1998
-------- ------- -------
Federal statutory rate ........................... (34.0%) (34.0%) (34.0%)
Increase (reduction) in income taxes
resulting from:
State income taxes ............................. 3.1% 6.9% --
Benefit from sale of state net operating
loss, net of federal effect .................. (4.3%) (5.5%) --
Foreign taxes booked at different rates ........ (0.5%) -- --
Alternative minimum tax, net of
state benefit ................................ 0.9% 1.3% --
Nondeductible items ............................ 2.1% 8.2% 1.8%
Other .......................................... 2.9% -- --
Change in valuation allowance .................. 30.8% (0.2%) 32.2%
------- ------- -----
Effective tax rate ............................... 1.0% (23.3%) --
======= ======= =====
At December 31, 2000, the Company had net operating loss carryforwards ("NOL's")
of approximately $41.6 million and $18.2 million for federal and state income
tax purposes, respectively, to offset future taxable income, if any. The federal
and state NOL's expire through 2018 and 2007, respectively. During 2000 and
1999, respectively, the Company recognized a tax benefit of $467,000 and
$645,000 from the sale of certain state net operating loss carryforwards through
a special program offered by the State of New Jersey.
F-31
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES (CONTINUED)
At December 31, 2000, several of the Company's subsidiaries had unused NOL and
tax credit carryforwards arising from periods prior to the Company's ownership.
Excluding the Company's Telios Pharmaceuticals, Inc. subsidiary ("Telios")),
approximately $9 million of these NOL's for federal income tax purposes expire
between 2001 and 2005. The Company's Telios subsidiary has approximately $84
million of net operating losses, which expire between 2002 and 2010. The amount
of Telios' net operating loss that is available and the Company's ability to
utilize such loss is dependent on the determined value of Telios at the date of
acquisition. The Company's has a valuation allowance of $45 million recorded
against all deferred tax assets, including the net operating losses, due to the
uncertainty of realization. The timing and manner in which these acquired net
operating losses may be utilized in any year by the Company are severely limited
by the Internal Revenue Code of 1986, as amended, Section 382 and other
provisions of the Internal Revenue Code and its applicable regulations.
14. DEVELOPMENT, DISTRIBUTION, AND LICENSE AGREEMENTS AND GOVERNMENT GRANTS
The Company has various development, distribution, and license agreements and
government grant awards under which it receives payments. Significant agreements
and grant awards include the following:
- -- In 1999, the Company and Ethicon, Inc., a division of Johnson & Johnson,
signed an agreement (the "Ethicon Agreement") providing Ethicon with exclusive
marketing and distribution rights to INTEGRA(R) Dermal Regeneration Template
worldwide, excluding Japan. Under the Ethicon Agreement, the Company will
continue to manufacture INTEGRA(R) Dermal Regeneration Template and will
collaborate with Ethicon to conduct research and development and clinical
research aimed at expanding indications and developing future products in the
field of skin repair and regeneration. Upon signing the Ethicon Agreement, the
Company received a nonrefundable payment from Ethicon of $5.3 million for the
exclusive use of the Company's trademarks and regulatory filings related to
INTEGRA(R) Dermal Regeneration Template and certain other rights. This amount
was initially recorded as deferred revenue and is being recognized as revenue in
accordance with the Company's revenue recognition policy for nonrefundable,
up-front fees received. The unamortized balance of $4.5 million at December 31,
2000 is recorded in deferred revenue, of which $0.5 million is classified as
short-term. Additionally, the Ethicon Agreement requires Ethicon to make
nonrefundable payments to the Company each year based upon minimum purchases of
INTEGRA(R) Dermal Regeneration Template.
The Ethicon Agreement also provides for annual research funding of $2.0 million
for the years 2000 through 2004, after which such funding amounts will be
determined based on a formula. Additional funding will be received upon the
occurrence of certain clinical and regulatory events and for funding certain
expansions of the Company's INTEGRA(R) Dermal Regeneration Template production
capacity. In 2000, the Company received $750,000 of event-related payments from
Ethicon which were recorded in Other revenue in accordance with the Company's
revenue recognition policy.
- -- The Company was awarded a three-year, $2.0 million Department of Commerce
grant award in April 1998 under the National Institute of Standards and
Technology program for continued work on a class of biodegradable polymers
licensed from Rutgers University.
- -- In March 1998, the Company entered into a series of agreements with Century
Medical, Inc ("CMI"), a wholly-owned subsidiary of ITOCHU Corporation, under
which CMI is underwriting the costs of the Japanese clinical trials and
regulatory approval processes for certain of the Company's neurosurgical
products and will distribute these products in Japan. In connection with these
agreements, CMI paid the Company a $1.0 million non-refundable, upfront fee as
partial reimbursement of research and development costs previously expended by
the Company, which was recorded in Other revenue when received in 1998. In
connection with the adoption of SAB 101 in 2000, the Company recorded a $470,000
cumulative effect of an accounting change to defer a portion of this up-front
fee (see Note 2).
F-32
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. DEVELOPMENT, DISTRIBUTION, AND LICENSE AGREEMENTS AND GOVERNMENT GRANTS
(CONTINUED)
- -- In January 1996, the Company and Cambridge Antibody Technology Limited
("CAT") entered into an agreement consisting of a license to CAT of certain
rights to use anti-TGF-(beta) antibodies for the treatment of fibrotic diseases.
The Company will receive royalties upon the sale by CAT of licensed products. In
September, 2000, Genzyme General ("Genzyme") and CAT announced a broad
collaboration for the development of human anti-TGF-beta monocloncal antibodies,
which collaboration would include the use of the intellectual property licensed
by the Company from The Burnham Institute ("Burnham"). In return for certain
payments to the Company and Burnham, and certain rights to other intellectual
property owned by or licensed to CAT, the Company and Burnham transferred
various rights to anti-TGF-(beta) antibodies to CAT and Genzyme. The Company
received a nonrefundable payment of $720,000 from CAT in connection with this
transaction, which was recorded in Other revenue in accordance with the
Company's revenue recognition policy.
15. COMMITMENTS AND CONTINGENCIES
As consideration for certain technology, manufacturing, distribution and selling
rights and licenses granted to the Company, the Company has agreed to pay
royalties on the sales of products that are commercialized relative to the
granted rights and licenses. Royalty payments under these agreements by the
Company were not significant for any of the periods presented.
Various lawsuits claims and proceedings are pending or have been settled by the
Company. The most significant of those are described below.
In July 1996, the Company filed a patent infringement lawsuit in the United
States District Court for the Southern District of California against Merck
KGaA, a German corporation, Scripps Research Institute, a California nonprofit
corporation, and David A. Cheresh, Ph.D., a research scientist with Scripps,
seeking damages and injunctive relief. The complaint charged, among other
things, that the defendant Merck KGaA willfully and deliberately induced, and
continues to willfully and deliberately induce, defendants Scripps Research
Institute and Dr. David A. Cheresh to infringe certain of the Company's patents.
These patents are part of a group of patents granted to The Burnham Institute
and licensed by the Company that are based on the interaction between a family
of cell surface proteins called integrins and the arginine-glycine-aspartic acid
(known as "RGD") peptide sequence found in many extracellular matrix proteins.
The defendants filed a countersuit asking for an award of defendants' reasonable
attorney fees. This case went to trial in February 2000, and on March 17, 2000,
a jury returned a unanimous verdict for the Company, finding that Merck KGaA had
willfully infringed and induced the infringement of the Company's patents, and
awarded $15,000,000 in damages. The court dismissed Scripps and Dr. Cheresh from
the case. On October 6, 2000, the United States District Court for the Southern
District of California entered judgment in the Company's favor and against Merck
KGaA in the case. In entering the judgment, the court also granted the Company
pre-judgment interest of approximately $1,350,000, bringing the total amount to
approximately $16,350,000, plus post-judgment interest. Various post-trial
motions are pending, including requests by Merck KGaA for a new trial or a
judgment as a matter of law notwithstanding the verdict, which could have the
effect of reducing the judgment or reversing the verdict of the jury. In
addition, if the Company wins these post-trial motions, we expect Merck KGaA to
appeal various decisions of the Court. No amounts for this favorable verdict
have been reflected in the Company's financial statements.
Bruce D. Butler, Ph.D., Bruce A. McKinley, Ph.D., and C. Lee Parmley (the "Optex
Claimants"), each parties to a Letter Agreement (the "Letter Agreement") with
Camino NeuroCare, Inc., a wholly-owned subsidiary of the Company ("Camino"),
dated as of December 18, 1996, alleged that Camino breached the terms of the
Letter Agreement prior to the Company's acquisition of the NeuroCare Group
(Camino's prior parent company). In August, 2000, the Company and the Optex
Claimants reached an agreement whereby the Company paid the Optex Claimants
$250,000 cash and issued 45,000 shares of the Company's common stock, valued at
$641,250, in settlement of all claims under the Letter Agreement. Subsequent to
the settlement of this matter, the Company
F-33
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
received $350,000 from the seller of the NeuroCare Group through assertion of
the Company's right of indemnification. The Company did not record any provision
for this matter, as liabilities recorded at the time of the Company's
acquisition of the NeuroCare Group and the $350,000 indemnification payment were
adequate to cover this liability.
In 1995, the Company's subsidiary filed a complaint against a distributor
claiming the distributor breached a distribution agreement by, among other
things, not paying the Company's subsidiary for certain products delivered. In
1998, the Company and the distributor entered into a settlement agreement in
which the distributor agreed to pay an aggregate of $550,000 in installments
over the remainder of 1998. The Company recorded a net gain in other income in
1998 of $550,000 as a result of the settlement.
The Company is also subject to other claims and lawsuits in the ordinary course
of our business, including claims by employees or former employees and with
respect to our products. In the opinion of management, such other claims are
either adequately covered by insurance or otherwise indemnified, and are not
expected, individually or in the aggregate, to result in a material adverse
effect on the Company's financial condition. The Company's financial statements
do not reflect any material amounts related to possible unfavorable outcomes of
the matters above or others. However, it is possible that the Company's results
of operations, financial position and cash flows in a particular period could be
materially affected by these contingencies.
16. SEGMENT AND GEOGRAPHIC INFORMATION
The Company's operations consist of (1) Integra NeuroSciences, which is a
leading provider of implants, devices, and monitors used in neurosurgery,
neurotrauma, and related critical care and (2) Integra LifeSciences, which
develops and manufactures a variety of medical products and devices, including
products based on the Company's proprietary tissue regeneration technology which
are used to treat soft tissue and orthopedic conditions. Integra NeuroSciences
sells primarily through a direct sales organization and Integra LifeSciences
sells primarily through strategic alliances and distributors.
Selected financial information on the Company's business segments is reported
below:
INTEGRA INTEGRA TOTAL
NEURO- LIFE REPORTABLE
SCIENCES SCIENCES SEGMENTS
----------- ----------- -----------
(IN THOUSANDS)
2000
- ------
Product sales ........................ $ 44,845 $ 20,142 $ 64,987
Total revenue ........................ 46,045 25,604 71,649
Operating expenses ................... 39,516 21,670 61,186
Operating income ..................... 6,529 3,934 10,463
Depreciation included in segment
operating expenses ................. 1,457 1,158 2,615
1999
- ------
Product sales ........................ $ 22,412 $ 17,635 $ 40,047
Total revenue ........................ 22,662 20,214 42,876
Operating expenses ................... 25,943 22,274 48,217
Operating loss ....................... (3,281) (2,060) (5,341)
Depreciation included in segment
operating expenses ................. 1,062 870 1,932
F-34
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
INTEGRA INTEGRA TOTAL
NEURO- LIFE
REPORTABLE
SCIENCES SCIENCES
SEGMENTS
----------- -----------
- -----------
(IN THOUSANDS)
1998
- ------
Product sales ........................ $-- $ 14,182 $ 14,182
Total revenue ........................ 1,027 16,534 17,561
Operating expenses ................... 2,010 22,443 24,453
Operating loss ....................... (983) (5,909) (6,892)
Depreciation included in segment
operating expenses ................. 41 1,034 1,075
Product sales and the related cost of product sales between segments are
eliminated in computing segment operating results. The Company does not
disaggregate nonoperating revenues and expenses nor identifiable assets on a
segment basis.
A reconciliation of the amounts reported for total reportable segments to the
consolidated financial statements is as follows:
2000 1999 1998
------- --------- ----------
(IN THOUSANDS)
Operating expenses:
Total reportable segments .................. $ 61,186 $ 48,217 $ 24,453
Plus: Corporate general and
administrative expenses .................. 19,703 6,165 7,239
Amortization ............................. 2,481 874 49
--------- --------- ---------
Consolidated total operating expenses ...... $ 83,370 $ 55,256 $ 31,741
Operating income (loss):
Total reportable segments .................. $ 10,463 $ (5,341) $ (6,892)
Less: Corporate general and
administrative expenses .................. 19,703 6,165 7,239
Amortization ............................. 2,481 874 49
--------- --------- ---------
Consolidated operating loss ................ $(11,721) $(12,380) $(14,180)
Included in corporate general and administrative expenses in 2000 was the $13.5
million stock-based charge recorded in connection with the issuance of the
Restricted Units in the fourth quarter of 2000.
Product sales and long-lived assets by major geographic area are summarized
below:
UNITED ASIA OTHER
CONSOLI-
STATES EUROPE PACIFIC FOREIGN
DATED
---------- ---------- ---------- ----------
- ----------
(IN THOUSANDS)
Product sales:
2000 .................... $51,379 $ 6,759 $ 4,628 $ 2,221
$64,987
1999 .................... 30,982 4,664 3,299 1,102
40,047
1998 .................... 11,867 1,799 507 9
14,182
Long-lived assets:
2000 .................... $33,428 $ 6,869 $-- $--
$40,297
1999 .................... 23,447 -- -- --
23,447
1998 .................... 7,780 -- -- --
7,780
F-35
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SELECTED QUARTERLY INFORMATION (UNAUDITED)
FOURTH
QUARTER THIRD QUARTER SECOND
QUARTER FIRST QUARTER
---------- ----------------------
- ---------------------- --------------------
PREVIOUSLY PREVIOUSLY
PREVIOUSLY
REPORTED REPORTED RESTATED REPORTED
RESTATED REPORTED RESTATED
---------- ---------- ---------- -----------
- --------- ----------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Year Ended December 31, 2000:
Total revenue .................. $ 20,251 $ 19,559 $ 19,781 $ 16,915
$ 17,086 $ 14,407 $ 14,531
Cost of product sales .......... 8,108 7,345 7,504 7,062
7,212 6,592 6,687
Total other operating
expenses ..................... 24,037 10,258 10,294 10,469
10,462 9,065 9,066
Operating income (loss) ........ (11,894) 1,956 1,983 (616)
(588) (1,250) (1,222)
Net income (loss) before
cumulative effect of
accounting change ............ (11,776) 1,717 1,744 84
112 (1,063) (1,035)
Cumulative effect of
accounting change ............ -- -- -- --
-- -- (470)
-------- -------- -------- --------
- -------- -------- --------
Net income (loss) .............. $(11,776) $ 1,717 $ 1,744 $ 84
$ 112 $ (1,063) $ (1,505)
Basic net income (loss) per
share before cumulative
effect of accounting
change ....................... $ (0.67) $ 0.08 $ 0.08 $ (0.02)
$ (0.02) $ (0.32) $ (0.32)
Cumulative effect of
accounting change ............ -- -- -- --
-- -- (0.03)
-------- -------- -------- --------
- -------- -------- --------
Basic net income (loss)
per share .................... $ (0.67) $ 0.08 $ 0.08 $ (0.02)
$ (0.02) $ (0.32) $ (0.35)
Diluted net income (loss)
per share before
cumulative effect of
accounting change ............ $ (0.67) $ 0.07 $ 0.07 $ (0.02)
$ (0.02) $ (0.32) $ (0.32)
Cumulative effect of
accounting change ............ -- -- -- --
-- -- (0.03)
-------- -------- -------- --------
- -------- -------- --------
Diluted net income (loss)
per share .................... $ (0.67) $ 0.07 $ 0.07 $ (0.02)
$ (0.02) $ (0.32) $ (0.35)
F-36
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SELECTED QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
FOURTH QUARTER THIRD QUARTER SECOND
QUARTER FIRST QUARTER
------------------- ----------------------
- ---------------------- --------------------
PREVIOUSLY PREVIOUSLY PREVIOUSLY
PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED REPORTED
RESTATED REPORTED RESTATED
-------- ---------- ---------- ---------- -----------
- --------- ----------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Year Ended December 31, 1999:
Total revenue ....... $ 12,845 $ 12,963 $ 12,127 $ 12,243 $ 12,550
$ 12,681 $ 4,968 $ 4,989
Cost of product
sales ............. 5,785 5,921 6,051 6,192 7,689
7,842 2,694 2,723
Total other
operating
expenses .......... 8,383 8,365 8,773 8,748 9,693
9,671 5,802 5,794
--------- --------- --------- --------- ---------
- --------- --------- ---------
Operating income
(loss) ............ (1,323) (1,323) (2,697) (2,697) (4,832)
(4,832) (3,528) (3,528)
Net income (loss).... $ (1,277) $ (1,277) $ (2,570) $ (2,570) $(4,823)
$ (4,823) $ 886 $ 886
Basic net income
(loss) per
share ............. $ (0.06) $ (0.06) $ (0.14) $ (0.14) $ (0.23)
$ (0.23) $ 0.02 $ 0.02
Diluted net income
(loss) per
share $ (0.06) $ (0.06) $ (0.14) $ (0.14) $ (0.23)
$ (0.23) $ 0.02 $ 0.02
As the result of the adoption of SEC Staff Accounting Bulletin No. 101 Revenue
Recognition, the Company recorded a $470,000 cumulative effect of an accounting
change in the first quarter of 2000 to defer a portion of an up-front licensing
fee received and recorded in other revenue in 1998. The cumulative effect of
this accounting change was measured as of January 1, 2000. As a result of this
accounting change, other revenue in each of the first three quarterly periods in
the year ended December 31, 2000 has been restated to reflect an additional
$28,000 of amortization related to this licensing fee.
As the result of the adoption of EITF 00-10 Accounting for Shipping and Handling
Fees and Costs, we have reclassified shipping and handling fees billed to
customers into products sales and the related expenses in cost of product sales
for all quarterly periods presented. The adoption of this accounting policy did
not affect operating results or net income (loss).
18. SUBSEQUENT EVENTS
On March 16, 2001, the Company signed an agreement to acquire all of the stock
of GMSmbH ("GMS"), the German manufacturer of the LICOX(R) Brain Tissue Oxygen
Monitoring System (the "LICOX system"), for approximately $1.2 million in cash
and approximately $1.3 million in assumed debt. The LICOX system allows for
continuous qualitative regional monitoring of dissolved oxygen in body fluids
and tissues. Prior to the acquisition of GMS, the Integra NeuroSciences division
served as the distributor of the LICOX system in the United States and the
United Kingdom. The acquisition is expected to close in the second quarter of
2001.
F-37
3,750,000 SHARES
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
COMMON STOCK
----------
PROSPECTUS
----------
U.S. BANCORP PIPER JAFFRAY
ABN AMRO ROTHSCHILD LLC
CIBC WORLD MARKETS
ADAMS, HARKNESS & HILL, INC.
, 2001
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION OF INTEGRA
The following table sets forth the various expenses in connection with the sale
and distribution of the securities being registered, other than the underwriting
discounts and commissions. All amounts shown are estimates except for the SEC
registration fee and the NASD filing fee. All of these fees are being paid by
Integra.
Registration fee .......................... $ 24,581
NASD Filing Fee ........................... $ 10,400
Blue Sky Fees and Expenses ................ 5,000
Legal fees and expenses ................... 250,000
Accounting fees and expenses .............. 75,000
Printing and engraving expenses ........... 110,000
Miscellaneous ............................. 125,019
Total ..................................... $600,000
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Officers and directors of Integra are covered by certain provisions of the DGCL,
the charter, the bylaws and insurance policies which serve to limit, and, in
certain instances, to indemnify them against, certain liabilities which they may
incur in such capacities. These various provisions are described below.
ELIMINATION OF LIABILITY IN CERTAIN CIRCUMSTANCES. In June 1986, Delaware
enacted legislation which authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. This duty of
care requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all significant information
reasonably available to them. Absent the limitations now authorized by such
legislation, directors are accountable to corporations and their stockholders
for monetary damages for conduct constituting negligence or gross negligence in
the exercise of their duty of care. Although the statute does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The charter limits the
liability of directors to Integra or its stockholders (in their capacity as
directors but not in their capacity as officers) to the fullest extent permitted
by such legislation. Specifically, the directors of Integra will not be
personally liable for monetary damages for breach of a director's fiduciary duty
as director, except for liability: (1) for any breach of the director's duty of
loyalty to Integra or its stockholders; (2) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law; (3)
for unlawful payments of dividends or unlawful share repurchases or redemptions
as provided in Section 174 of the DGCL; or (4) for any transaction from which
the director derived an improper personal benefit.
INDEMNIFICATION AND INSURANCE. As a Delaware corporation, Integra has the power,
under specified circumstances generally requiring the director or officer to act
in good faith and in a manner he reasonably believes to be in or not opposed to
Integra's best interests, to indemnify its directors and officers in connection
with actions, suits or proceedings brought against them by a third party or in
the name of Integra, by reason of the fact that they were or are such directors
or officers, against expenses, judgments, fines and amounts paid in settlement
in connection with any such action, suit or proceeding. The bylaws generally
provide for mandatory indemnification of Integra's directors and officers to the
full extent provided by Delaware corporate law. In addition, Integra has entered
into indemnification agreements with its directors and officers which generally
provide for mandatory indemnification under circumstances for which
indemnification would otherwise be discretionary under Delaware law.
II-1
Integra intends to purchase and maintain insurance on behalf of any person who
is or was a director or officer of Integra, or is or was a director or officer
of Integra serving at the request of Integra as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not Integra would have the power or obligation to indemnify him
against such liability under the provisions of the bylaws.
ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
----------
- --------------------------------------------------------------------------------
- --------------------------------------
1.1 Form of Underwriting Agreement.
2.1(1) Asset Purchase Agreement, dated as of January 14, 2000, by and among
Clinical Neuro Systems, Inc., Surgical Sales
Corporation (trading as CONNELL NEUROSURGICAL) and George J.
Connell.
2.2(2) Purchase Agreement, dated January 5, 1999, among Integra
LifeSciences Corporation, Rystan Company, Inc., and
Healthpoint, Ltd.**
2.3(3) Asset Purchase Agreement, dated as of March 29, 1999, by and among
Heyer-Schulte Neurocare, L.P., Neuro Navigational,
L.L.C., Integra Neurocare LLC and Redmond Neurocare LLC**.
2.4(6) Purchase Agreement, dated March 20, 2000, by and among NMT Medical,
Inc., NMT Neurosciences (US), Inc., NMT
Neurosciences Holdings (UK) Ltd., NMT Neurosciences (UK) Ltd.,
Spembly Medical Ltd., Spembly Cryosurgery Ltd., Swedemed
AB, Integra NeuroSciences Holdings (UK) Ltd. and Integra Selector
Corporation.
2.5(6) Asset Purchase Agreement, dated March 20, 2000, by and among NMT
Neurosciences (US), Inc., NMT Medical, Inc. and
Integra Selector Corporation.
4.1(4) Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock as filed with the Delaware Secretary of
State on April 14, 1998.
4.2(5) Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock as filed with the Delaware Secretary of
State on March 12, 1999.
4.3(3) Warrant to Purchase 60,000 shares of Common Stock of Integra
LifeSciences Corporation issued to SFM Domestic Investments LLC.
4.4(3) Warrant to Purchase 180,000 shares of Common Stock of Integra
LifeSciences Corporation issued to Quantum Industrial Partners LDC.
4.5(7) Certificate of Designation, Rights and Preferences of Series C
Convertible Preferred Stock of Integra LifeSciences Holdings
Corporation dated March 21, 2000.
4.6(7) Certificate of Amendment of Certificate of Designation, Rights and
Preferences of Series B Convertible Preferred Stock of Integra
LifeSciences Holdings Corporation dated March 21, 2000.
4.7(7) Warrant to Purchase 270,550 Shares of Common Stock of Integra
LifeSciences Holdings Corporation issued to Quantum Industrial
Partners LDC.
4.8(7) Warrant to Purchase 29,450 Shares of Common Stock of Integra
LifeSciences Holdings Corporation issued to SFM Domestic Investments
LLC.
4.9(8) Stock Option Grant and Agreement dated December 22, 2000 between
Integra LifeSciences Holdings Corporation and Stuart
M. Essig.
4.10(8)Stock Option Grant and Agreement dated December 22, 2000 between
Integra LifeSciences Holdings Corporation and
Stuart M. Essig.
4.11(8)Restricted Units Agreement dated December 22, 2000 between Integra
LifeSciences Holdings Corporation and Stuart
M. Essig.
4.12(9)Second Amendment to Certificate of Rights, Designations and
Preferences of Series B Convertible Preferred Stock.
4.13(9)First Amendment to Certificate of Rights, Designations and
Preferences of Series C Convertible Preferred Stock.
II-2
ITEM 16. EXHIBITS (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION
---------
- --------------------------------------------------------------------------------
- ---------------------------------------
5.1 Opinion of Latham & Watkins regarding legality of securities being
registered hereunder.
12.1* Statement of the Calculation of Ratio of Earnings to Fixed Charges
and Statement of the Calculation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends.
21.1 Subsidiaries of the Company
23.1 Consent of Latham & Watkins (contained in their opinion filed as
Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP, independent accountants
24.1* Power of Attorney (included in signature page)
- -------------
* Previously filed with the original filing of this Registration Statement on
Form S-3 (Registration No. 333-62176) on June 1, 2001.
** Schedules and other attachments to the indicated exhibit were omitted. We
agree to furnish supplementally to the SEC upon request a copy of any
omitted schedules or attachments.
(1) Filed as an exhibit to Integra's Current Report on Form 8-K dated January
14, 2000, and incorporated herein by reference.
(2) Filed as an exhibit to Integra's Current Report on Form 8-K dated January
5, 1999, and incorporated herein by reference.
(3) Filed as an exhibit to Integra's Current Report on Form 8-K dated March 29,
1999, and incorporated herein by reference.
(4) Filed as an exhibit to Integra's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, as filed with the SEC on May 15, 1998, and
incorporated by reference herein.
(5) Filed as an exhibit to Integra's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, as filed with the , and incorporated herein
by reference.
(6) Filed as an exhibit to Integra's Current Report on Form 8-K dated March 20,
2000, and incorporated herein by reference.
(7) Filed as an exhibit to Integra's Current Report on Form 8-K dated March 29,
2000, and incorporated herein by reference.
(8) Filed as an exhibit to Integra's Current Report on Form 8-K dated December
22, 2000, and incorporated herein by reference.
(9) Filed as an exhibit to Integra's Current Report on Form 8-K dated May 15,
2001, and incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement 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.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant under provisions described in
Item 15 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 Securities Act of 1933
and is, therefore, unenforceable. If 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 Securities Act of 1933
and will be governed by the final adjudication of such issue.
(c) 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 a part of this Registration
II-3
Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933
shall be deemed 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 such time
shall be deemed to be the initial bona fide offering
thereof.
II-4
SIGNATURES
Under the requirements of the Securities Act of 1933, as amended, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3, and has duly caused this Amendment No. 3 to
this Registration Statement on Form S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Plainsboro, State of New
Jersey, on August 3, 2001.
INTEGRA LIFESCIENCES HOLDINGS
CORPORATION
By: /s/ JOHN B. HENNEMAN, III
-------------------------------
John B. Henneman, III
Senior Vice President,
Chief Administrative Officer
Under the requirements of the Securities Act of 1933, as amended, this Amendment
No. 3 to this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------- --------------------------- -------------
President, Chief Executive August 3, 2001
* Officer and Director
- -----------------------------
Stuart M. Essig
Executive Vice President, August 3, 2001
Chief Operating Officer
* and Director
- -----------------------------
George W. McKinney, III, Ph.D.
* Senior Vice President, August 3, 2001
Finance
- -----------------------------
David B. Holtz
* Chairman and Director August 3, 2001
- -----------------------------
Richard E. Caruso, Ph.D
* Director August 3, 2001
- -----------------------------
James M. Sullivan
* Director August 3, 2001
- -----------------------------
Keith Bradley, Ph.D.
* Director August 3, 2001
- ----------------------------
Neal Moszkowski
/s/ JOHN B. HENNEMAN, III
----------------------------
*By: John. B. Henneman, III
ATTORNEY-IN-FACT
II-5
3,750,000 SHARES
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
COMMON STOCK
FORM OF UNDERWRITING AGREEMENT
_____________________, 2001
U.S. BANCORP PIPER JAFFRAY INC.
ABN AMRO ROTHSCHILD INCORPORATED
CIBC World Markets CORP.
ADAMS, HARKNESS & Hill, INC.
c/o U.S. Bancorp Piper Jaffray Inc.
800 Nicollet Mall
Mail Station J1012005
Minneapolis, Minnesota 55402-7020
Ladies and Gentlemen:
Integra LifeSciences Holdings Corporation, a Delaware corporation (the
"Company"), Quantum Industrial Partners LDC, a Cayman Islands limited duration
company ("Quantum"), and SFM Domestic Investments LLC, a Delaware limited
liability company ("SFM" and, together with Quantum, the "Selling
Stockholders"), severally propose to sell to the several underwriters named in
Schedule I hereto (the "Underwriters") an aggregate of 3,750,000 shares (the
"Firm Shares") of common stock, $.01 par value per share (the "Common Stock"),
of the Company, of which 3,500,000 shares will be sold by the Company and
250,000 shares will be sold by the Selling Stockholders. The respective number
of Firm Shares to be sold by the Selling Stockholders are set forth opposite
their names on Schedule II hereto. The Company and the Selling Stockholders have
also granted to the several Underwriters an option to purchase up to 562,500
additional shares of Common Stock to cover over-allotments (the "Option
Shares"). The Firm Shares and any Option Shares purchased pursuant to this
Purchase Agreement are herein collectively called the "Securities."
The Company and the Selling Stockholders hereby confirm their agreement
with respect to the sale of the Securities to the Underwriters.
1. REGISTRATION STATEMENT AND PROSPECTUS. A registration
statement on Form S-3 (File No. 333-62176) with respect to the Securities,
including a preliminary form of prospectus, has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations ("Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission; one or more amendments to such registration statement
have also been so prepared and have been, or will be, so filed; and, if the
Company has elected to rely upon Rule 462(b) of the Rules and Regulations to
increase the size of the offering registered under the Act, the Company will
prepare and file with the Commission a registration statement with respect to
such increase pursuant to Rule 462(b). Copies of such registration statement(s)
and amendments and each related preliminary prospectus have been delivered to
you. The Company has complied with the conditions for the use of Form S-3.
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to the
registration statement and an amended
prospectus (including a term sheet meeting the requirements of Rule 434 of the
Rules and Regulations). If the Company has elected to rely upon Rule 430A of the
Rules and Regulations, it will prepare and file a prospectus (or a term sheet
meeting the requirements of Rule 434) pursuant to Rule 424(b) that discloses the
information previously omitted from the prospectus in reliance upon Rule 430A.
Such registration statement as amended at the time it is or was declared
effective by the Commission, and, in the event of any amendment thereto after
the effective date and prior to the First Closing Date (as hereinafter defined),
such registration statement as so amended (but only from and after the
effectiveness of such amendment), including (i) the documents incorporated by
reference in the prospectus contained in such registration statement at the time
of its effectiveness, (ii) a registration statement (if any) filed pursuant to
Rule 462(b) of the Rules and Regulations increasing the size of the offering
registered under the Act and (iii) information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rules 430A(b)
and 434(d) of the Rules and Regulations, is hereinafter called the "Registration
Statement." The prospectus included in the Registration Statement at the time it
is or was declared effective by the Commission is hereinafter called the
"Prospectus," except that if any prospectus (including any term sheet meeting
the requirements of Rule 434 of the Rules and Regulations provided by the
Company for use with a prospectus subject to completion within the meaning of
Rule 434 in order to meet the requirements of Section 10(a) of the Rules and
Regulations) filed by the Company with the Commission pursuant to Rule 424(b)
(and Rule 434, if applicable) of the Rules and Regulations or any other such
prospectus provided to the Underwriters by the Company for use in connection
with the offering of the Securities (whether or not required to be filed by the
Company with the Commission pursuant to Rule 424(b) of the Rules and
Regulations) differs from the prospectus on file at the time the Registration
Statement is or was declared effective by the Commission, the term "Prospectus"
shall refer to such differing prospectus (including any term sheet within the
meaning of Rule 434 of the Rules and Regulations) from and after the time such
prospectus is filed with the Commission or transmitted to the Commission for
filing pursuant to such Rule 424(b) (and Rule 434, if applicable) or from and
after the time it is first provided to the Underwriters by the Company for such
use. The term "Preliminary Prospectus" as used herein means any preliminary
prospectus included in the Registration Statement prior to the time it becomes
or became effective under the Act and any prospectus subject to completion as
described in Rule 430A or 434 of the Rules and Regulations. Any reference herein
to a Prospectus or Preliminary Prospectus shall be deemed to refer to and
include the documents incorporated therein by reference pursuant to Item 12 of
Form S-3 under the Act as of the date of such Prospectus or Preliminary
Prospectus, as the case may be.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDERS.
(a) The Company represents and warrants to, and agrees
with, the Underwriters as follows:
(i) No order preventing or suspending the use of
any Preliminary Prospectus has been issued by the Commission and each
Preliminary Prospectus, at the time of filing thereof, did not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; except that the foregoing shall not apply to statements
in or omissions from any Preliminary Prospectus in reliance upon, and
in conformity with, written information furnished to the Company by
you, or by any Underwriter through you, specifically for use in the
preparation thereof.
(ii) As of the time the Registration Statement
(or any post-effective amendment thereto, including a registration
statement (if any) filed pursuant to Rule 462(b) of the Rules and
Regulations increasing the size of the offering registered under the
Act) is or was declared effective by the Commission, upon the filing or
first delivery to the Underwriters of the
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Prospectus (or any supplement to the Prospectus (including any term
sheet meeting the requirements of Rule 434 of the Rules and
Regulations)) and at the First Closing Date and Second Closing Date (as
hereinafter defined), (A) the Registration Statement and Prospectus (in
each case, as so amended and/or supplemented) conformed or will conform
in all material respects to the requirements of the Act and the Rules
and Regulations, (B) the Registration Statement (as so amended) did not
or will not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (C) the Prospectus (as
so supplemented), including any prospectus wrapper did not or will not
include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they are or
were made, not misleading; except that the foregoing shall not apply to
statements in or omissions from any such document in reliance upon, and
in conformity with, written information furnished to the Company by
you, or by any Underwriter through you, specifically for use in the
preparation thereof. If the Registration Statement has been declared
effective by the Commission, no stop order suspending the effectiveness
of the Registration Statement has been issued, and no proceeding for
that purpose has been initiated or, to the Company's knowledge,
threatened by the Commission.
(iii) The consolidated financial statements of the
Company and its subsidiaries, together with the notes thereto, set
forth in or incorporated by reference in the Registration Statement and
Prospectus comply in all material respects with the requirements of the
Act and the Rules and Regulations and fairly present the consolidated
financial condition of the Company and its subsidiaries, as of the
dates indicated, the results of operations, changes in cash flows and
changes in stockholders' equity of the Company and its subsidiaries, as
the case may be, for the periods therein specified in conformity with
generally accepted accounting principles consistently applied
throughout the periods involved (subject, in the case of unaudited
financial statements, to normal year-end adjustments and except as
otherwise stated therein); the supporting schedules included in or
incorporated by reference in the Registration Statement present fairly
the information required to be stated therein and comply in all
material respects with the requirements of the Act and the Rules and
Regulations; and the other financial and statistical information and
data set forth in the Registration Statement and Prospectus or
incorporated by reference in are, in all material respects, accurately
presented and prepared on a basis consistent with such financial
statements and the books and records of the Company and its
subsidiaries, as the case may be. No other financial statements or
schedules are required to be included in or incorporated by reference
in the Registration Statement or Prospectus. Pricewaterhouse Coopers
LLP, which has expressed their opinion with respect to financial
statements and schedules and included in or incorporated by reference
in the Registration Statement and Prospectus, are independent public
accountants as required by the Act and the Rules and Regulations.
(iv) The pro forma financial data of the Company
and its subsidiaries and the related notes thereto set forth in the
Registration Statement and the Prospectus have been prepared on a basis
consistent with the historical financial statements of the Company and
its subsidiaries, give effect to the assumptions used in the
preparation thereof on a reasonable basis and in good faith and present
fairly the historical and proposed transactions contemplated by the
Registration Statement and the Prospectus. Such pro forma financial
data have been prepared in accordance with the applicable requirements
of the Act and the Rules and Regulations.
(v) Each of the Company and its subsidiaries has
been duly organized and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation. Each of
the Company and its subsidiaries has full corporate power and authority
to
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own its properties and conduct its business as currently being carried
on and as described in the Registration Statement and Prospectus, and
is duly qualified to do business as a foreign corporation in good
standing in each jurisdiction in which it owns or leases real property
or in which the conduct of the business makes such qualification
necessary and in which the failure to so qualify would have a material
adverse effect upon its business, condition (financial or otherwise)
prospects, results of operations, assets, liabilities or properties of
the Company and its subsidiaries, taken as a whole (a "Material Adverse
Effect").
(vi) Except as otherwise stated in the
Registration Statement and the Prospectus, subsequent to the respective
dates as of which information is given in the Registration Statement
and the Prospectus, neither the Company nor any of its subsidiaries has
incurred any material liabilities or obligations, direct or contingent,
or entered into any material transactions, or declared or paid any
dividends or made any distribution of any kind with respect to its
capital stock and, except as otherwise stated in the Registration
Statement and the Prospectus, there has not been any change in the
capital stock (other than a change in the number of outstanding shares
of Common Stock due to the issuance of shares upon the exercise of
outstanding options or warrants), or any material change in the
short-term or long-term debt, or any issuance of options, warrants,
convertible securities or other rights to purchase the capital stock,
of the Company or any of its subsidiaries, or any material adverse
change, or any development involving a prospective material adverse
change, in the condition (financial or otherwise), business, prospects,
results of operations, assets, liabilities or properties of the Company
and its subsidiaries, taken as a whole (a "Material Adverse Change").
(vii) Except as otherwise stated in the
Registration Statement and the Prospectus, there is not pending or, to
the knowledge of the Company, threatened or contemplated, any action,
suit or proceeding to which the Company or any of its subsidiaries is a
party before or by any court or governmental agency, authority or body,
or any arbitrator, which could reasonably be expected to result in any
Material Adverse Change.
(viii) There are no contracts or documents of the
Company or any of its subsidiaries that are required to be filed as
exhibits to the Registration Statement by the Act or by the Rules and
Regulations that have not been so filed or incorporated by reference
therein.
(ix) This Agreement has been duly authorized,
executed and delivered by the Company. The execution, delivery and
performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a breach or violation of any of
the terms and provisions of, or constitute a default under, any
statute, any agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it is bound or to which any of its
properties is subject, the Company's charter or by-laws, or any order,
rule, regulation or decree of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any
of its properties; no consent, approval, authorization or order of, or
filing with, any court or governmental agency or body is required for
the execution, delivery and performance of this Agreement or for the
consummation of the transactions contemplated hereby, including the
Company's issuance or sale of the Securities to be sold by it
hereunder, except such as may be required under the Act or state
securities or blue sky laws; and the Company has full power and
authority to enter into this Agreement and to authorize, issue and sell
the Securities as contemplated by this Agreement.
(x) The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization." All of the
issued and outstanding shares of capital stock of the Company,
including any
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outstanding shares of Common Stock, will be at the First Closing and
the Second Closing duly authorized and validly issued, fully paid and
nonassessable, have been issued in compliance with all federal and
state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase
securities, and the holders thereof are not subject to personal
liability by reason of being such holders; the Securities which may be
sold hereunder by the Company have been duly authorized and, when
issued, delivered and paid for in accordance with the terms hereof,
will have been validly issued and will be fully paid and nonassessable,
and the holders thereof will not be subject to personal liability by
reason of being such holders; and the capital stock of the Company,
including the Common Stock, conforms to the description thereof in the
Registration Statement and Prospectus. Except as otherwise stated in
the Registration Statement and Prospectus, there are no preemptive
rights or other rights to subscribe for or to purchase, or any
restriction upon the voting or transfer of, any shares of Common Stock
pursuant to the Company's charter, by-laws or any agreement or other
instrument to which the Company is a party or by which the Company is
bound, or, to the knowledge of the Company, to which any stockholder is
a party or by which any stockholder is bound. Neither the filing of the
Registration Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any rights for or relating
to the registration of any shares of Common Stock or other securities
of the Company which have not been fully satisfied or validly waived.
All of the issued and outstanding shares of capital stock of each of
the Company's subsidiaries have been duly and validly authorized and
issued and are fully paid and nonassessable, and, the Company owns of
record and beneficially, free and clear of any security interests,
claims, liens, proxies, equities or other encumbrances, all of the
issued and outstanding shares of capital stock of each subsidiary of
the Company. Except as otherwise stated in the Registration Statement
and the Prospectus, there are no options, warrants, agreements,
contracts or other rights in existence to purchase or acquire from the
Company or any subsidiary of the Company any shares of the capital
stock of the Company or any subsidiary of the Company.
(xi) The Company and each of its subsidiaries
holds, and is operating in compliance in all respects with, all
franchises, grants, authorizations, licenses, permits, easements,
consents, certificates and orders of any governmental or
self-regulatory body, including without limitation the Food and Drug
Administration of the U.S. Department of Health and Human Services (the
"FDA"), required for the conduct of its business, except where the
failure to so hold or comply would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
All such franchises, grants, authorizations, licenses, permits,
easements, consents, certifications and orders are valid and in full
force and effect; and the Company and each of its subsidiaries is and
has been in compliance in all respects with all applicable federal,
state, local and foreign laws, regulations, orders and decrees, except
where the failure to so hold or comply would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse
Effect.
(xii) The Company and its subsidiaries have good
and marketable title to all property described in the Registration
Statement and Prospectus as being owned by them, in each case free and
clear of all liens, claims, security interests or other encumbrances
except such as otherwise stated in the Registration Statement and the
Prospectus; and the property held under lease by the Company and its
subsidiaries is held by them under valid, subsisting and enforceable
leases with only such exceptions with respect to any particular lease
as do not interfere in any material respect with the conduct of the
business of the Company or its subsidiaries taken as a whole.
(xiii) The Company and each of its subsidiaries
owns or possesses all patents, patent applications, trademarks, service
marks, trade names, trademark registrations, service mark
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registrations, copyrights, licenses, inventions, trade secrets and
rights necessary for the conduct of the business of the Company and its
subsidiaries as currently carried on and as described in the
Registration Statement and Prospectus ("Intellectual Property Rights");
except as stated in the Registration Statement and Prospectus, (A) no
name that the Company or any of its subsidiaries uses and no other
aspect of the business of the Company or any of its subsidiaries will
involve or give rise to any infringement of, or license or similar fees
for, the Intellectual Property Rights or other similar rights of others
material to the business or prospects of the Company and neither the
Company nor any of its subsidiaries has received any notice alleging
any such infringement or fee, (B) the Company is not under any
obligation to pay any material third-party royalties or fees of any
kind whatsoever with respect to the Intellectual Property Rights
developed, employed or used in the Company's business as currently
conducted and as proposed to be conducted as discussed in the
Prospectus, (C) there is no pending or threatened action, suit,
proceeding or claim by others challenging the Company's rights to the
Intellectual Property Rights and the Company is unaware of any facts
which would form a reasonable basis for any such claim, (D) there is no
pending or threatened action, suit, proceeding or claim by others
challenging the validity or scope of any such Intellectual Property
Rights, and the Company is unaware of facts that would form a
reasonable basis for any such claim and (E) there is no pending,
threatened, threatened action, suit, proceeding or claim by others that
the Company infringes or otherwise violates any patent, trademark,
service mark, trade name, trademark registrations, service mark
registrations, copyrights, licenses, inventions or trade secrets or
other proprietary rights of others and the Company is unaware of any
other fact which would form a reasonable basis for such claim.
(xiv) To the Company's best knowledge, there is no
U.S. patent or published U.S. patent application which contains claims
that dominate or may dominate any Intellectual Property Rights
described in the Registration Statement or the Prospectus as being
owned or licensed to the Company or that interferes with the issued or
pending claims of any such Intellectual Property Rights. The Company is
unaware of any prior art that may render any U.S. patent held by the
Company invalid or any U.S. patent application held by the Company
unpatentable which has not been disclosed to the U.S. Patent and
Trademark Office.
(xv) Neither the Company nor any of its
subsidiaries is in violation of its respective charter, by-laws or
certificate or in breach of or otherwise in default in the performance
of any material obligation, agreement or condition contained in any
bond, debenture, note, indenture, loan agreement or any other material
contract, lease or other instrument to which it is subject or by which
any of them may be bound, or to which any of the material property or
assets of the Company or any of its subsidiaries is subject.
(xvi) The Company and its subsidiaries have filed
all federal, state, local and foreign income and franchise tax returns
required to be filed and are not in default in the payment of any taxes
which were payable pursuant to said returns or any assessments with
respect thereto, other than any which the Company or any of its
subsidiaries is contesting in good faith.
(xvii) The Company has not distributed and will not
distribute any prospectus or other offering material in connection with
the offering and sale of the Securities other than any Preliminary
Prospectus or the Prospectus or other materials permitted by the Act to
be distributed by the Company.
(xviii) The Securities have been approved for
listing on the Nasdaq National Market System, subject to official
notice of issuance and, on the date the Registration Statement became
or becomes effective.
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(xix) Other than the subsidiaries of the Company
listed in Exhibit 21.1 to the Registration Statement, the Company owns
no capital stock or other equity or ownership or proprietary interest
in any corporation, partnership, association, trust or other entity.
(xx) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that
(A) transactions are executed in accordance with management's general
or specific authorization; (B) transactions are recorded as necessary
to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability
for assets; (C) access to assets is permitted only in accordance with
management's general or specific authorization; and (D) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(xxi) Other than as contemplated by this
Agreement, the Company has not incurred any liability for any finder's
or broker's fee or agent's commission in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(xxii) Neither the Company nor any of its
subsidiaries is, and upon issuance and sale of the Securities as
contemplated herein and the application of the net proceeds therefrom
as described in the Prospectus will not be, an "investment company" or
an entity "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended.
(xxiii) No material labor dispute with the employees
of the Company or any of its subsidiaries exists or is threatened or
imminent.
(xxiv) The Company and its subsidiaries are insured
by insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the
business in which they are engaged; neither the Company nor any of its
subsidiaries has been refused any insurance coverage sought or applied
for; and neither the Company nor any of its subsidiaries has any reason
to believe that it will not be able to renew its existing insurance
coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.
(xxv) The Company and each of its subsidiaries (A)
are in compliance with any and all applicable foreign, federal, state
and local laws and regulations relating to the protection of human
health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), except where
the failure to be in compliance would not have a Material Adverse
Effect, (B) have received all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their
respective businesses, except where the failure to be in compliance
would not have a Material Adverse Effect and (C) are in compliance with
all terms and conditions of such permits, licenses or other approvals
except where the failure to comply with the terms and conditions of
such permits, licenses or other approvals would not, singly or in the
aggregate, have a Material Adverse Effect.
(xxvi) There has been no storage, disposal,
generation, manufacture, refinement, transportation, handling or
treatment of medical wastes, toxic wastes, hazardous wastes or
hazardous substances by the Company or any of its subsidiaries at or
upon or from any of the property now or previously owned or leased by
the Company or any of its subsidiaries in violation of any applicable
law, ordinance, rule, regulation, order, judgment, decree or permit or
-7-
which would require remedial action under any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit, except
for any violation or remedial action which would not have, or could not
be reasonably likely to have, singularly or in the aggregate with all
such violations and remedial actions a Material Adverse Effect; there
has been no material spill, discharge, leak, emission, injection,
escape, dumping or release of any kind onto such property or of any
medical wastes, toxic wastes, hazardous wastes or hazardous substances
due to or caused by the Company or any of its subsidiaries or with
respect to which the Company or any of its subsidiaries had knowledge,
except for any such spills, discharges, leaks, emissions, injections,
escapes, dumpings or releases which would not, or could not be
reasonably likely to have, singularly or in the aggregate with all such
spills, discharges, leaks, emissions, injections, escapes, dumpings and
releases a Material Adverse Effect; and the terms "medical wastes,"
"toxic wastes," "hazardous wastes" and "hazardous substances" shall
have the meanings specified in any applicable local, state, federal and
foreign laws or regulations with respect to environmental protection.
(xxvii) The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement
Income Security Act of 1974, as amended, and the regulations and
published interpretations thereunder (collectively, "ERISA")
established or maintained by the Company, its subsidiaries or their
"ERISA Affiliates" (as defined below) are in compliance in all material
respects with ERISA. "ERISA Affiliate" means, with respect to the
Company or a subsidiary, any member of any group of organizations
described in Sections 414(b), (c), (m) or (o) of the Internal Revenue
Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company or such
subsidiary is a member. No "reportable event" (as defined under ERISA)
has occurred or is reasonably expected to occur with respect to any
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company, its subsidiaries or any
of their ERISA Affiliates, if such "employee benefit plan" were
terminated, would have any "amount of unfunded benefit liabilities" (as
defined under ERISA). Neither the Company, its subsidiaries nor any of
their ERISA Affiliates has incurred or reasonably expects to incur any
liability under (A) Title IV of ERISA with respect to termination of or
withdrawal from, any "employee benefit plan" or (B) Sections 412, 4971,
4975 or 4980B of the Code. Each "employee benefit plan" established or
maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 40 1 (a) of
the Code is so qualified and nothing has occurred, whether by action or
failure to act, which would cause the loss of such qualification.
(xxviii) Neither the Company nor any of its
affiliates is presently doing business with the government of Cuba or
with any person or affiliate located in Cuba.
(xxix) The Company has not taken and will not take,
directly or indirectly, any action designed to or that might be
reasonably expected to cause or result in stabilization or manipulation
of the price of the Common Stock to facilitate the sale or resale of
the Common Stock.
(xxx) Neither the Company nor any of its
subsidiaries nor, to the best of the Company's knowledge, any employee
or agent of the Company or any subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state
or foreign office in violation of any law of the character required to
be disclosed in the Prospectus.
(xxxi) Except as otherwise stated in the
Registration Statement and the Prospectus, the Company is not currently
prohibited from paying any dividends or from making any other
distribution on the Company's or such subsidiary's capital stock,
respectively, out of
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positive retained earnings or from repaying to the Company or its
stockholders, respectively, any loans or advances to such subsidiary
from the Company or to the Company from such stockholders, as the case
may be.
(xxxii) The documents incorporated by reference in
the Prospectus, at the time they were or hereafter are filed with the
Commission, complied or when so filed will comply, as the case may be,
in all material respects with the requirements of the Securities
Exchange Act of 1934, and the rules and regulations promulgated
thereunder, and, when read together and with the other information in
the Prospectus and as such documents maybe modified or superseded by
the Prospectus, did not and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were or are made, not
misleading.
(b) Each Selling Stockholder severally represents and
warrants to, and agrees with, the several Underwriters as follows:
(i) Such Selling Stockholder is the record and
beneficial owner of, and has, and on the First Closing Date and the
Second Closing Date will have, valid and marketable title to the
Securities to be sold by it, free and clear of all security interests,
claims, liens, restrictions on transferability, legends, proxies,
equities or other encumbrances; and upon delivery of and payment for
such Securities hereunder, the several Underwriters will acquire valid
and marketable title thereto, free and clear of any security interests,
claims, liens, restrictions on transferability, legends, proxies,
equities or other encumbrances or adverse claims. Such Selling
Stockholder is selling the Securities to be sold by it for its own
account and is not selling such Securities, directly or indirectly, for
the benefit of the Company, and no part of the proceeds of such sale
received by such Selling Stockholder will inure, either directly or
indirectly, to the benefit of the Company other than as described in
the Registration Statement and Prospectus.
(ii) The certificates representing the Securities
to be sold by such Selling Stockholder have been or will be duly and
properly endorsed in blank for transfer, or are or will be at the First
Closing and the Second Closing accompanied by all documents duly and
properly executed that are necessary to validate the transfer of title
thereto, to the Underwriters, free of any legend, restriction on
transferability, proxy, lien or claim, whatsoever.
(iii) Such Selling Stockholder has the power and
authority to enter into this Agreement, the Power of Attorney (as
defined below) and the Custody Agreement (as defined below) and to
sell, transfer and deliver the Securities to be sold by it hereunder.
(iv) This Agreement, the Power of Attorney and
the Custody Agreement have been duly authorized, executed and delivered
by or on behalf of such Selling Stockholder. Each of the Power of
Attorney and the Custody Agreement constitutes a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with
its terms, except as rights to indemnity and contribution hereunder may
be limited by federal or state securities laws and except as such
enforceability may be limited by bankruptcy, insolvency, reorganization
or laws affecting the rights of creditors generally and subject to
general principles of equity. The execution and delivery of this
Agreement, the Power of Attorney and the Custody Agreement and the
performance of the terms hereof and thereof and the consummation of the
transactions herein and therein contemplated will not result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder is
bound, or any law, regulation, order or decree applicable to such
Selling Stockholder; no consent, approval, authorization or
-9-
order of, or filing with, any court or governmental agency or body is
required for the execution, delivery and performance of this Agreement,
the Power of Attorney and the Custody Agreement or for the consummation
of the transactions contemplated hereby or thereby, including the sale
of the Securities being sold by such Selling Stockholder, except such
as may be required under the Act or state securities laws or blue sky
laws.
(v) Such Selling Stockholder has not distributed
and will not distribute any prospectus or other offering material in
connection with the offering and sale of the Securities other than any
Preliminary Prospectus or the Prospectus or other materials permitted
by the Act to be distributed by such Selling Stockholder.
(vi) Such Selling Stockholder has reviewed those
parts of the Registration Statement and Prospectus under the captions
"Principal and Selling Stockholders" which provide information about
such Selling Stockholder and with regard to such information only (A)
the Registration Statement does not and will not as of the First
Closing Date or the Second Closing Date contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
(B) the Prospectus does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, in each case insofar as it relates to such Selling
Stockholder or its affiliates.
(vii) Such Selling Stockholder (A) has no reason
to believe that the representations and warranties of the Company
contained in this Section 2 are not true and correct, (B) is familiar
with the Registration Statement and (C) has no knowledge of any
material fact, condition or information not disclosed in the Prospectus
or any supplement thereto which has had or may have a Material Adverse
Effect; provided, however, that the representations in this
subparagraph 2(b)(vii) shall not be construed as imposing on such
Selling Stockholder the duty to independently investigate or verify the
statements made therein, and the sale of Securities by such Selling
Stockholder pursuant hereto is not prompted by any adverse information
concerning the Company or any of its subsidiaries which is not set
forth in the Prospectus or any supplement thereto.
(viii) Such Selling Stockholder has not taken and
will not take, directly or indirectly, any action designed to or which
has constituted or which might reasonably be expected to cause or
result, under the Securities Exchange Act of 1934 (the "Exchange Act")
or otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities.
(ix) Certificates in negotiable form for such
Selling Stockholder's Securities have been placed in custody, for
delivery pursuant to the terms of this Agreement, under a Power of
Attorney and a Custody Agreement, both executed and delivered by the
Selling Stockholder, in the form heretofore furnished to you (the
"Power of Attorney" and the "Custody Agreement") with each of John B.
Henneman, III [others] as attorney-in-fact and with [ ] as custodian
(the "Custodian"); the Securities represented by the certificates so
held in custody for each of the Selling Stockholders are subject to the
interests hereunder of the Underwriters, the Company and the other
Selling Stockholders; the arrangements for custody and delivery of such
certificates, made by the Selling Stockholder hereunder and under the
Power of Attorney and the Custody Agreement, are not subject to
termination by any acts of such Selling Stockholder, or by operation of
law, whether by the occurrence of any event, including, without
limitation, the commencement of any bankruptcy, insolvency or similar
proceedings involving such Selling Stockholder; and if any such event
shall occur before the delivery of such Securities hereunder,
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certificates for the Securities will be delivered by the Custodian in
accordance with the terms and conditions of this Agreement, the Power
of Attorney and the Custody Agreement as if such event had not
occurred, regardless of whether or not the Custodian shall have
received notice of such.
(c) Any certificate signed by any officer of the Company
and delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby; any certificate signed by or on behalf of a Selling Stockholder
and delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by that Selling Stockholder to each Underwriter as
to the matters covered thereby.
3. PURCHASE, SALE AND DELIVERY OF SECURITIES.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to issue and sell 3,500,000 Firm Shares and each
Selling Stockholder agrees to sell the number of Firm Shares set forth opposite
such Selling Stockholders's name on Schedule II hereto to the several
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company and the Selling Stockholders the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto. The
purchase price for each Firm Share shall be [$__________] per share. The
obligation of each Underwriter to the Company and the Selling Stockholders shall
be to purchase from the Company and the Selling Stockholders that number of Firm
Shares (as adjusted by U.S. Bancorp Piper Jaffray Inc. to exclude fractional
shares) which represents the same proportion of the number of Firm Shares to be
sold by each of the Company and the Selling Stockholders pursuant to this
Agreement as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto represents to the total number of Firm Shares
to be purchased by all Underwriters pursuant to this Agreement. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraph (c) of this Section 3 and in Section 8 hereof, the
agreement of each Underwriter is to purchase only the respective number of Firm
Shares specified in Schedule I.
The Firm Shares will be delivered by the Company and the Custodian to
you for the accounts of the several Underwriters against payment of the purchase
price therefor by wire/same day funds payable to the order of the Company at the
offices of U.S. Bancorp Piper Jaffray Inc., 800 Nicollet Mall, Mail Station:
J1012005, Minneapolis, Minnesota, 55402-7020 or such other location as may be
mutually acceptable, at 9:00 a.m. Central time on the third (or if the
Securities are priced, as contemplated by Rule 15c6-1(c) under the Exchange Act,
after 4:30 p.m. Eastern time, the fourth) full business day following the date
hereof, or at such other time and date as you and the Company determine pursuant
to Rule 15c6-1(a) under the Exchange Act, such time and date of delivery being
herein referred to as the "First Closing" and the "First Closing Date,"
respectively. If U.S. Bancorp Piper Jaffray Inc. so elects, delivery of the Firm
Shares may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by U.S. Bancorp Piper Jaffray Inc.
Certificates representing the Firm Shares, in definitive form and in such
denominations and registered in such names as you may request upon at least two
business days' prior notice to the Company and the Custodian, will be made
available for checking and packaging not later than 10:30 a.m., Central time, on
the business day next preceding the First Closing Date at the offices of Piper
U.S. Bancorp Jaffray Inc., 800 Nicollet Mall, Mail Station: J1012005,
Minneapolis, Minnesota, 55402-7020, or such other location as may be mutually
acceptable.
(b) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company and the Selling Stockholders hereby grant to the several
Underwriters an option to purchase all or any portion of the Option Shares at
the same purchase price as the Firm Shares, for use solely in covering any
over-allotments made by the
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Underwriters in the sale and distribution of the Firm Shares. The maximum number
of Option Shares to be sold by the Company is 500,000, and the maximum number of
Option Shares to be sold by each of the Selling Stockholders is set forth such
Selling Stockholder's name on Schedule II hereto. The option granted hereunder
may be exercised at any time (but not more than once) within 30 days after the
effective date of this Agreement upon notice (confirmed in writing) by U.S.
Bancorp Piper Jaffray Inc. to the Company and the Selling Stockholders setting
forth the aggregate number of Option Shares as to which the several Underwriters
are exercising the option, the names and denominations in which the certificates
for the Option Shares are to be registered and the date and time, as determined
by you, when the Option Shares are to be delivered, such time and date being
herein referred to as the "Second Closing" and "Second Closing Date,"
respectively; provided, however, that the Second Closing Date shall not be
earlier than the First Closing Date nor earlier than the second business day
after the date on which the option shall have been exercised. The number of
Option Shares to be purchased by each Underwriter shall be the same percentage
of the total number of Option Shares to be purchased by the several Underwriters
as the number of Firm Shares to be purchased by such Underwriter is of the total
number of Firm Shares to be purchased by the several Underwriters, as adjusted
by U.S. Bancorp Piper Jaffray Inc. in such manner as U.S. Bancorp Piper Jaffray
Inc. deems advisable to avoid fractional shares. No Option Shares shall be sold
and delivered unless the Firm Shares previously have been, or simultaneously
are, sold and delivered.
The Option Shares will be delivered by the Company and the
Selling Stockholders to you for the accounts of the several Underwriters against
payment of the purchase price therefor by wire/same day funds payable to the
order of the Company and the Custodian, as applicable, at the offices of U.S.
Bancorp Piper Jaffray Inc., 800 Nicollet Mall, Mail Station: J1012005,
Minneapolis, Minnesota, 55402-7020, or such other location as may be mutually
acceptable at 9:00 a.m., Central time, on the Second Closing Date. If U.S.
Bancorp Piper Jaffray Inc. so elects, delivery of the Option Shares may be made
by credit through full fast transfer to the accounts at The Depository Trust
Company designated by U.S. Bancorp Piper Jaffray Inc. Certificates representing
the Option Shares in definitive form and in such denominations and registered in
such names as you have set forth in your notice of option exercise, will be made
available for checking and packaging not later than 10:30 a.m., Central time, on
the business day next preceding the Second Closing Date at the office of U.S.
Bancorp Piper Jaffray Inc., 800 Nicollet Mall, Mail Station: J1012005,
Minneapolis, Minnesota, 55402-7020, or such other location as may be mutually
acceptable.
(c) It is understood that any of the Underwriters may
(but shall not be obligated to) make payment to the Company or the Selling
Stockholders, on behalf of any other Underwriter for the Securities to be
purchased by such Underwriter. Any such payment by you shall not relieve any
such Underwriter of any of its obligations hereunder. Nothing herein contained
shall result in any of the Underwriters being deemed an unincorporated
association or partner with the Company or the Selling Stockholders.
4. Covenants.
(a) The Company covenants and agrees with the several
Underwriters as follows:
(i) If the Registration Statement has not
already been declared effective by the Commission, the Company will use
its best efforts to cause the Registration Statement and any
post-effective amendments thereto to become effective as promptly as
possible; the Company will notify you promptly of the time when the
Registration Statement or any post-effective amendment to the
Registration Statement has become effective or any supplement to the
Prospectus (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations) has been filed and of any request by the
Commission for any amendment or
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supplement to the Registration Statement or Prospectus or additional
information; if the Company has elected to rely on Rule 430A of the
Rules and Regulations, the Company will prepare and file a Prospectus
(or term sheet within the meaning of Rule 434 of the Rules and
Regulations) containing the information omitted therefrom pursuant to
Rule 430A of the Rules and Regulations with the Commission within the
time period required by, and otherwise in accordance with the
provisions of, Rules 424(b), 430A and 434, if applicable, of the Rules
and Regulations; if the Company has elected to rely upon Rule 462(b) of
the Rules and Regulations to increase the size of the offering
registered under the Act, the Company will prepare and file a
registration statement with respect to such increase with the
Commission within the time period required by, and otherwise in
accordance with the provisions of, Rule 462(b) of the Rules and
Regulations; the Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus (including any term sheet within
the meaning of Rule 434 of the Rules and Regulations) that, in your
opinion, may be necessary or advisable in connection with the
distribution of the Securities by the Underwriters; the Company will
not file any amendment or supplement to the Registration Statement or
Prospectus (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations or any document that is incorporated by
reference in the Registration Statement or Prospectus) to which you
shall reasonably object by notice to the Company after having been
furnished a copy a reasonable time prior to the filing; and the Company
will file on a timely basis all reports and any definitive proxy or
information statements required to be filed by the Company with the
Commission subsequent to the date of the Prospectus and prior to the
termination of the offering of Shares by the Underwriters.
(ii) The Company will advise you, promptly after
it receives notice or obtains knowledge thereof, of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement, of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceeding for any such purpose; and
the Company will promptly use its best efforts to prevent the issuance
of any stop order or to obtain its withdrawal if such a stop order
should be issued.
(iii) Within the time during which a prospectus
(including any term sheet within the meaning of Rule 434 of the Rules
and Regulations) relating to the Securities is required to be delivered
under the Act, the Company will comply as far as it is able with all
requirements imposed upon it by the Act, as now and hereafter amended,
and by the Rules and Regulations, as from time to time in force, so far
as necessary to permit the continuance of sales of or dealings in the
Securities as contemplated by the provisions hereof and the Prospectus.
If during such period any event occurs as a result of which the
Prospectus would include an untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in
the light of the circumstances then existing, not misleading, or if
during such period it is necessary to amend the Registration Statement
or supplement the Prospectus to comply with the Act, the Company will
promptly notify you and will amend the Registration Statement or
supplement the Prospectus (at the expense of the Company) so as to
correct such statement or omission or effect such compliance.
(iv) The Company will use its best efforts to
qualify the Securities for sale under the securities laws of such
jurisdictions (domestic or foreign) as you reasonably designate and to
continue such qualifications in effect so long as required for the
distribution of the Securities, except that the Company shall not be
required in connection therewith to qualify as a foreign corporation or
to execute a general consent to service of process in any state.
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(v) The Company will furnish to the Underwriters
copies of the Registration Statement (three of which will include all
exhibits), one set of executed signature pages to the Registration
Statement, each Preliminary Prospectus, the Prospectus, and all
amendments and supplements (including any term sheet within the meaning
of Rule 434 of the Rules and Regulations) to such documents, in each
case as soon as available and in such quantities as you may from time
to time reasonably request.
(vi) During a period of five years commencing
with the date hereof, the Company will furnish to each Underwriter
copies of all periodic and special reports furnished to the
stockholders of the Company and all information, documents and reports
filed with the Commission, the NASD, the Nasdaq National Market or any
securities exchange.
(vii) The Company will make generally available to
its security holders as soon as practicable, but in any event not later
than 15 months after the end of the Company's current fiscal quarter,
an earnings statement (which need not be audited) covering a 12-month
period beginning after the effective date of the Registration Statement
that shall satisfy the provisions of Section 11(a) of the Act and Rule
158 of the Rules and Regulations and will advise the Underwriters in
writing when such statement has been so made available.
(viii) The Company, whether or not the transactions
contemplated hereunder are consummated or this Agreement is prevented
from becoming effective under the provisions of Section 9(a) hereof or
is terminated, will pay or cause to be paid (A) all expenses (including
transfer taxes allocated to the respective transferees) incurred in
connection with the delivery to the Underwriters of the Securities, (B)
all expenses and fees (including, without limitation, fees and expenses
of the Company's accountants and counsel but, except as otherwise
provided below, not including fees of the Underwriters' counsel) in
connection with the preparation, printing, filing, delivery, and
shipping of the Registration Statement (including the financial
statements therein and all amendments, schedules, and exhibits
thereto), the Securities, each Preliminary Prospectus, the Prospectus,
and any amendment thereof or supplement thereto, and the printing,
delivery, and shipping of this Agreement and other underwriting
documents, including Blue Sky Memoranda, (C) all filing fees and fees
and disbursements of the Underwriters' counsel incurred in connection
with the qualification of the Securities for offering and sale by the
Underwriters or by dealers under the securities or blue sky laws of the
states and other jurisdictions which you shall designate in accordance
with Section 4(a)(iv) hereof, (D) the fees and expenses of any transfer
agent or registrar, (E) the filing fees and other fees and expenses
(including, without limitation, the reasonable fees and disbursements
of counsel for the Underwriters) incident to any required review by the
NASD of the terms of the sale of the Securities, (F) listing fees, and
(G) all other costs and expenses incident to the performance of its
obligations hereunder that are not otherwise specifically provided for
herein. If the sale of the Securities provided for herein is not
consummated by reason of action by the Company pursuant to Section 9(a)
hereof which prevents this Agreement from becoming effective, or by
reason of any failure, refusal or inability on the part of the Company
or the Selling Stockholders to perform any agreement on its or their
part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the
Company or the Selling Stockholders is not fulfilled, the Company will
reimburse the several Underwriters for all out-of-pocket disbursements
(including fees and disbursements of counsel) incurred by the
Underwriters in connection with their investigation, preparing to
market and marketing the Securities or in contemplation of performing
their obligations hereunder. The Company shall not in any event be
liable to any of the Underwriters for loss of anticipated profits from
the transactions covered by this Agreement.
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(ix) The Company will apply the net proceeds from
the sale of the Securities to be sold by it hereunder for the purposes
set forth in the Prospectus.
(x) The Company will not, without U.S. Bancorp
Piper Jaffray Inc.'s prior written consent, offer for sale, sell,
contract to sell, grant any option for the sale of or otherwise issue
or dispose of any Common Stock or any securities convertible into or
exchangeable for, or any options or rights to purchase or acquire,
Common Stock, except (A) for the sale by the Company of the Securities
to the Underwriters pursuant to this Agreement, (B) for the issuance by
the Company of shares of Common Stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof
of which the Underwriters have been advised in writing and which are
disclosed in the Registration Statement and the Prospectus, and (C) for
the grant by the Company of any option or right to purchase shares of
Common Stock pursuant to the Company's [stock option plans], each as in
effect on the date of this Agreement, so long as each recipient of
options or rights to purchase 1,000 or more shares of Common Stock
executes the letter contemplated by paragraph (xi) below.
(xi) The Company either has caused to be
delivered to U.S. Bancorp Piper Jaffray or will cause to be delivered
to U.S. Bancorp Piper Jaffray prior to the effective date of the
Registration Statement a letter in the form of Exhibit A hereto from
each of the Company's directors and officers and stockholders
identified in Schedule III hereto stating that such person agrees that
such person will not, without U.S. Bancorp Piper Jaffray's prior
written consent, offer for sale, sell, contract to sell or otherwise
dispose of any shares of Common Stock or rights to purchase Common
Stock, except to the Underwriters pursuant to this Agreement, for a
period of 90 days after the date of the Prospectus.
(xii) The Company has not taken and will not take,
directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in, or which has constituted,
the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities, and has not
effected any sales of Common Stock which are required to be disclosed
in response to Item 701 of Regulation S-K under the Act which have not
been so disclosed in the Registration Statement.
(xiii) The Company will not incur any liability for
any finder's or broker's fee or agent's commission in connection with
the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
(xiv) The Company will inform the Florida
Department of Banking and Finance at any time prior to the consummation
of the distribution of the Securities by the Underwriters if it
commences engaging in business with the government of Cuba or with any
person or affiliate located in Cuba. Such information will be provided
within 90 days after the commencement thereof or after a change occurs
with respect to previously reported information.
(xv) The Company shall not invest, or otherwise
use the proceeds received by the Company from its sale of Securities as
contemplated herein in such a manner as would require the Company or
any of its subsidiaries to register as an investment company under the
1940 Act.
(b) Each of the Selling Stockholders severally covenants
and agrees with the several Underwriters as follows:
(i) Except as otherwise agreed to by the Company
and such Selling Stockholders, such Selling Stockholders will pay all
taxes, if any, on the transfer and sale,
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respectively, of the Securities being sold by such Selling Stockholder,
and the fees of counsel to such Selling Stockholder and all other costs
and expenses incident to the performance of its obligations hereunder
that are not otherwise specifically provided for in this Agreement,
provided, however, that such Selling Stockholder severally will
reimburse the Company for any reimbursement made by the Company to the
Underwriters pursuant to Section 4(a)(viii) hereof to the extent such
reimbursement resulted from the willful failure or refusal on the part
of such Selling Stockholder to comply under the terms or fulfill any of
the conditions of this Agreement.
(ii) If this Agreement is terminated by the
Underwriters because of any willful failure, refusal or inability on
the part of such Selling Stockholder to perform any agreement to be
performed by such Selling Stockholder, or because any other condition
of the Underwriters' obligations hereunder required to be fulfilled by
such Selling Stockholder is not fulfilled, such Selling Stockholder
will reimburse the several Underwriters for all out-of-pocket
disbursements (including fees and disbursements of counsel for the
Underwriters) incurred by the Underwriters in connection with their
investigation, preparing to market and marketing the Securities or in
contemplation of performing their obligations hereunder. Such Selling
Stockholder will not in any event be liable to any of the Underwriters
for loss of anticipated profits from the transactions covered by this
Agreement.
(iii) The Securities to be sold by such Selling
Stockholder are subject to the interest of the several Underwriters,
and the obligations of such Selling Stockholder hereunder are
irrevocable and shall not be terminated, except as provided in this
Agreement, by any act of such Selling Stockholder, by operation of law,
whether by the liquidation, dissolution or merger of such Selling
Stockholder, or by the occurrence of any other event. If such Selling
Stockholder should liquidate, dissolve, be a party to a merger or if
any other such event should occur before the delivery of the Securities
hereunder, certificates for the Securities will be delivered in
accordance with the terms and conditions of this Agreement as if such
liquidation, dissolution, merger, death or other event had not
occurred.
(iv) Such Selling Stockholder or any of its
affiliates has not taken and will not take, directly or indirectly, any
action designed to or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities, and has
not effected any sales of Common Stock which, if effected by the
Company, would be required to be disclosed in response to Item 701 of
Regulation S-K.
(v) Such Selling Stockholder will immediately
notify you if any event occurs, or of any change in information
relating to such Selling Stockholder, which results in the Prospectus
(as supplemented) including an untrue statement of a material fact
relating to the Selling Stockholders or omitting to state any material
fact relating to such Selling Stockholder necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
(vi) In order to document the Underwriters'
compliance with the reporting and withholding provisions of the Tax
Equity and Fiscal Responsibility Act of 1982 and the Interest and
Dividend Tax Compliance Act of 1983 with respect to the transactions
herein contemplated, such Selling Stockholder agrees to deliver to you
prior to or at the First Closing Date a properly completed and executed
United States Treasury Department Form W-8 or W-9 (or other applicable
form or statement specified by Treasury Department regulations in lieu
thereof).
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(vii) Such Selling Stockholder either has caused
to be delivered to U.S. Bancorp Piper Jaffray or will cause to be
delivered to U.S. Bancorp Piper Jaffray prior to the effective date of
the Registration Statement a letter from such Selling Stockholder in
the form of Exhibit A hereto stating that such Selling Stockholder
agrees that it will not, without U.S. Bancorp Piper Jaffray's prior
written consent, offer for sale, sell, contract to sell or otherwise
dispose of any shares of Common Stock or rights to purchase Common
Stock or rights to purchase Common Stock, except to the Underwriters
pursuant to this Agreement, for a period of 90 days after the date of
the Prospectus.
5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the Underwriters hereunder are subject to the accuracy, as of the date hereof
and at each of the First Closing Date and the Second Closing Date (as if made at
such Closing Date), of and compliance with all representations, warranties and
agreements of the Company and the Selling Stockholders contained herein, to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become
effective not later than 5:00 p.m., Central time, on the date of this Agreement,
or such later time and date as you shall approve and all filings required by
Rules 424, 430A and 434 of the Rules and Regulations shall have been timely
made; no stop order suspending the effectiveness of the Registration Statement
or any amendment thereof shall have been issued; no proceedings for the issuance
of such an order shall have been initiated or threatened; and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to your
satisfaction.
(b) No Underwriter shall have advised the Company that
the Registration Statement or the Prospectus, or any amendment thereof or
supplement thereto (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations), contains an untrue statement of fact which, in your
opinion, is material, or omits to state a fact which, in your opinion, is
material and is required to be stated therein or necessary to make the
statements therein not misleading.
(c) Except as otherwise stated in the Registration
Statement and the Prospectus, subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, neither
the Company nor any of its subsidiaries shall have incurred any material
liabilities or obligations, direct or contingent, or entered into any material
transactions, or declared or paid any dividends or made any distribution of any
kind with respect to its capital stock; and, except as contemplated in the
Prospectus, there shall not have been any change in the capital stock (other
than a change in the number of outstanding shares of Common Stock due to the
issuance of shares upon the exercise of outstanding options or warrants, or any
material change in the short-term or long-term debt of the Company, or any
issuance of options, warrants, convertible securities or other rights to
purchase the capital stock of the Company or any of its subsidiaries, which
would constitute a Material Adverse Change that, in your judgment, makes it
impractical or inadvisable to offer or deliver the Securities on the terms and
in the manner contemplated in the Prospectus.
(d) On each Closing Date, there shall have been furnished
to you the opinion of Latham & Watkins [and John B. Henneman, III, Senior Vice
President, Chief Administrative Officer and Secretary], counsel for the Company,
dated such Closing Date and addressed to you, to the effect that:
(i) The Company and each of its subsidiaries has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of
-17-
incorporation. Each of the Company and its subsidiaries has full
corporate power and authority to own its properties and conduct its
business as currently being carried on and as described in the
Registration Statement and Prospectus and is duly qualified to do
business as a foreign corporation in good standing in each jurisdiction
in which it is required to be so qualified, except where the failure to
be so qualified would not have a Material Adverse Effect.
(ii) The capital stock of the Company conforms as
to legal matters to the description thereof contained in the Prospectus
under the caption "Description of Capital Stock." All of the issued and
outstanding shares of the capital stock of the Company, including the
Securities to be sold by the Selling Stockholders, hereunder have been
duly authorized and validly issued and are fully paid and
nonassessable, and the holders thereof are not subject to personal
liability by reason of being such holders. The Securities to be issued
and sold by the Company hereunder have been duly authorized and, when
issued, delivered and paid for in accordance with the terms of this
Agreement, will have been validly issued and will be fully paid and
nonassessable, and the holders thereof will not be subject to personal
liability by reason of being such holders. Except as otherwise stated
in the Registration Statement and Prospectus, there are no preemptive
rights or other rights to subscribe for or to purchase, or any
restriction upon the voting or transfer of, any shares of Common Stock
pursuant to the Company's charter, by-laws or any agreement or other
instrument known to such counsel to which the Company is a party or by
which the Company is bound. To such counsel's knowledge, neither the
filing of the Registration Statement nor the offering or sale of the
Securities as contemplated by this Agreement gives rise to any rights
for or relating to the registration of any shares of Common Stock or
other securities of the Company, which have not been fully satisfied or
validly waived.
(iii) All of the issued and outstanding shares of
capital stock of each of the Company's subsidiaries have been duly and
validly authorized and issued and are fully paid and nonassessable,
and, the Company or its subsidiaries owns of record, free and clear of
any security interests, claims, liens, proxies, equities or other
encumbrances, all of the issued and outstanding shares of capital stock
of each subsidiary of the Company. To such counsel's knowledge, except
as described in the Registration Statement and Prospectus, there are no
options, warrants, agreements, contracts or other rights in existence
to purchase or acquire from the Company or any subsidiary any shares of
the capital stock of the Company or any subsidiary of the Company.
(iv) The Registration Statement has become
effective under the Act and, to the knowledge of such counsel, no stop
order suspending the effectiveness of the Registration Statement has
been issued and no proceeding for that purpose has been instituted or,
to the knowledge of such counsel, threatened by the Commission.
(v) The descriptions in or incorporated by
reference the Registration Statement and Prospectus of statutes, legal
and governmental proceedings, contracts and other documents are
accurate and present fairly the information required to be shown; and
such counsel does not know of any statutes or legal or governmental
proceedings required to be described in the Prospectus that are not
described as required, or of any contracts or documents of a character
required to be described in the Registration Statement or Prospectus or
incorporated by reference therein or included as exhibits to the
Registration Statement or such documents that are not described or
included as required.
(vi) The Company has full corporate power and
authority to enter into this Agreement, and this Agreement has been
duly authorized, executed and delivered by the Company; the execution,
delivery and performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a breach or
violation of any of the terms
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and provisions of, or constitute a default under any statute, rule or
regulation, any agreement or instrument known to such counsel to which
the Company or any of its subsidiaries is a party or by which it is
bound or to which any of its property is subject, the Company's or any
of its subsidiaries' charter or by-laws, or any order or decree known
to such counsel of any court or governmental agency or body having
jurisdiction over the Company, any of its subsidiaries or any of its
respective properties; and no consent, approval, authorization or order
of, or filing with, any court or governmental agency or body is
required for the execution, delivery and performance of this Agreement
or for the consummation of the transactions contemplated hereby,
including the Company's issuance or sale of the Securities to be sold
by it hereunder, except such as may be required under the Act or state
securities laws.
(vii) Neither the Company nor any of its
subsidiaries is and, after giving effect to the offering and sale of
the Securities and the application of the proceeds thereof as described
in the Registration Statement and the Prospectus, neither the Company
nor any material subsidiary will be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(viii) To the best of such counsel's knowledge and
other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any
of its subsidiaries is the subject that, individually or in the
aggregate, would reasonably be expected to have a Material Adverse
Effect, would adversely affect the sale of the Securities or would
affect the validity of this Agreement; and, to the best of such
counsel's knowledge, no such proceedings are threatened by governmental
authorities or others.
(ix) Except as otherwise stated in the
Registration Statement and the Prospectus and except for patent
application proceedings, there are no pending legal or governmental
proceedings to which the Company is a party which challenge the patent
rights of the Company, and to such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or others.
(x) To such counsel's knowledge, without such
counsel having conducted an independent review of any third-party
patents or products by others and except as disclosed in the
Registration Statement and the Prospectus, the Company is not
infringing or otherwise violating any Intellectual Property Rights of
others, and, to such counsel's knowledge, except as disclosed in the
Registration Statement and the Prospectus, there are no infringements
by others of the Company's Intellectual Property Rights.
(xi) Neither the Company nor any of its
subsidiaries is in violation of its Certificate of Incorporation or
By-laws or other organizational documents or, except for such defaults
that would not have a Material Adverse Effect, in default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a
party or by which it or any of its properties may be bound.
(xii) The Registration Statement and the
Prospectus, and any amendment thereof or supplement thereto (including
any term sheet within the meaning of Rule 434 of the Rules and
Regulations), comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations (except for the
financial statements, schedules and other financial data, as to which
counsel need express no opinion). The documents incorporated by
reference in the Prospectus or any further amendment or supplement
thereto made by the
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Company prior to such Closing Date (except for the financial
statements, schedules, and other financial data, as to which counsel
need express no opinion), when they became effective or were filed with
the Commission, as the case may be, complied as to form in all material
respects with the requirements of Exchange Act, and the rules and
regulations of the Commission thereunder. On the basis of conferences
with officers of the Company, examination of documents referred to in
the Registration Statement and Prospectus and such other procedures as
such counsel deemed appropriate, nothing has come to the attention of
such counsel that causes such counsel to believe that the Registration
Statement or any amendment thereof, at the time the Registration
Statement became effective and as of such Closing Date (including any
Registration Statement filed under Rule 462(b) of the Rules and
Regulations), contained or contains any untrue statement of a material
fact or omitted or omits to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus (as of its date and as of such
Closing Date), as amended or supplemented, includes any untrue
statement of material fact or omits to state a material fact necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading; it being understood that the
foregoing statement may be contained in a separate letter addressed to
the Underwriters and that such counsel need express no opinion as to
the financial statements, schedules or other financial data included in
any of the documents mentioned in this sentence.
(e) On each Closing Date, there shall have been furnished
to you the opinion of [__________________], special regulatory counsel for the
Company, dated such Closing Date and addressed to you to the effect that:
(i) The statements under the captions "Risk
Factors -- To Market Our Products under Development We Will First Need
to Obtain Regulatory Approval -- Further, If We Fail to Comply with the
Extensive Governmental Regulations That Affect Our Business, We Could
Be Subject to Penalties and Could Be Precluded from Marketing Our
Products -- Certain of Our Products Contain Materials Derived from
Animal Sources, and May as a Result Become Subject to Additional
Regulation -- We Are Subject to Other Regulatory Requirements Relating
to Occupational Health and Safety and the Use of Hazardous Substances
which May Impose Significant Compliance Costs on Us" and "Business --
Government Regulation", in each case insofar as they purport to
describe the provision of law, documents and proceedings referred
therein, fairly summarize the matters therein described (collectively,
the "Covered Sections").
(ii) To such counsel's knowledge, the Company has
such permits, licenses, franchises, authorizations and clearances of
the FDA and/or any committee thereof, that are necessary to own its
properties and are material to conduct its business in the manner
described in the Prospectus ("FDA Permits"), subject to such exceptions
and qualifications as may be set forth in the Prospectus, the Company
has fulfilled and performed all of its material obligations with
respect to the FDA Permits, and no event has occurred which allows, or
after notice or lapse of time would allow, revocation or termination
thereof or results in any other material impairment of the rights of
the holder of any FDA Permit, subject in each case to such exceptions
and qualifications as may be set forth in the Prospectus and except
where such revocation, termination or impairment would not have a
Material Adverse Effect.
(iii) On the basis of conferences with officers of
the Company, examination of documents referred to in the Covered
Sections of the Registration Statement and Prospectus and such other
procedures as such counsel deemed appropriate, nothing has come to the
attention of such counsel that causes such counsel to believe that the
Covered Sections of the Registration Statement or any amendment
thereof, at the time the Registration Statement became effective and as
of such Closing Date (including any Registration Statement filed under
Rule 462(b) of the
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Rules and Regulations), contained or contains any untrue statement of a
material fact or omitted or omits to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus (as of its date and as of such
Closing Date), as amended or supplemented, with respect to the Covered
Sections includes any untrue statement of material fact or omits to
state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
it being understood that the foregoing statement may be contained in a
separate letter addressed to the Underwriters and that such counsel
need express no opinion as to the financial statements, schedules or
other financial data included in any of the documents mentioned in this
sentence.
(f) On each Closing Date, there shall have been furnished
to you such opinion or opinions from Willkie Farr & Gallagher, counsel for the
several Underwriters, dated such Closing Date and addressed to you, with respect
to the formation of the Company, the validity of the Securities, the
Registration Statement, the Prospectus and other related matters as you
reasonably may request, and such counsel shall have received such papers and
information as they request to enable them to pass upon such matters.
(g) On each Closing Date, there shall have been furnished
to you the opinion of _______________, counsel for the Selling Stockholders,
dated such Closing Date and addressed to you, to the effect that:
(i) The Selling Stockholders are, to such
counsel's knowledge, the sole record owner of the Securities to be sold
by the Selling Stockholders. Upon delivery of the certificates for the
Securities to be sold by the Selling Stockholders pursuant to this
Agreement, and payment therefor by the Underwriters, good and valid
title to such Securities will pass to the Underwriters and the
Underwriters will acquire all the rights of the Selling Stockholders in
the Securities (assuming the Underwriters have no knowledge of an
adverse claim), free and clear of any security interests, claims, liens
or other encumbrances.
(ii) The Selling Stockholders have the power and
authority to enter into this Agreement, the Power of Attorney and
Custody Agreement and to perform and discharge the Selling
Stockholders' obligations hereunder and thereunder; and this Agreement
has been duly and validly authorized, executed and delivered by the
Selling Stockholders. Each of the Power of Attorney and Custody
Agreement is a valid and binding agreement of the Selling Stockholders,
enforceable in accordance with its terms (except as rights to indemnity
and contribution hereunder may be limited by federal or state
securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally and subject to general principles of
equity).
(iii) The execution and delivery of this
Agreement, the Power of Attorney and Custody Agreement and the
performance of the terms hereof and thereof and the consummation of the
transactions herein and therein contemplated will not result in a
breach or violation of any of the terms and provisions of, or
constitute a default under the Selling Stockholders' charter, by-laws
or other similar organizational documents, any statute, rule or
regulation, or any agreement or instrument or any order or decree known
to such counsel of any court or government agency or body having
jurisdiction over the Selling Stockholders or any of their respective
properties; and no consent, approval, authorization or order of, or
filing with, any court or governmental agency or body is required for
the execution, delivery and performance of this Agreement or for the
consummation of the transactions contemplated hereby and thereby,
including the sale of the Securities being sold by the Selling
Stockholders, except in each case
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those which, if not made or obtained, would not, individually or in the
aggregate, have a material adverse effect on the ability of the Selling
Stockholders to perform their obligations hereunder such as may be
required under the Act or state securities laws or blue sky laws.
(h) On each Closing Date you shall have received a letter
from PricewaterhouseCoopers LLP, dated such Closing Date and addressed to you,
confirming that they are independent public accountants within the meaning of
the Act and are in compliance with the applicable requirements relating to the
qualifications of accountants under Rule 2-01 of Regulation S-X of the
Commission, and stating, as of the date of such letter (or, with respect to
matters involving changes or developments since the respective dates as of which
specified financial information is given in the Prospectus, as of a date not
more than five days prior to the date of such letter), the conclusions and
findings of said firm with respect to the financial information and other
matters covered by its letter delivered to you concurrently with the execution
of this Agreement, and the effect of the letter so to be delivered on such
Closing Date shall be to confirm the conclusions and findings set forth in such
prior letter.
(i) On such Closing Date, there shall have been furnished
to you a certificate, dated such Closing Date and addressed to you, signed by
each of the chief executive officer, the chief administrative officer and the
chief financial officer of the Company, to the effect that:
(i) The representations and warranties of the
Company in this Agreement are true and correct, as if made at and as of
such Closing Date, and the Company has complied with all the agreements
and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date;
(ii) No stop order or other order suspending the
effectiveness of the Registration Statement or any amendment thereof or
the qualification of the Securities for offering or sale has been
issued, and no proceeding for that purpose has been instituted or, to
the best of their knowledge, is contemplated by the Commission or any
state or regulatory body; and
(iii) The signers of said certificate have
carefully examined the Registration Statement and the Prospectus, and
any amendments thereof or supplements thereto (including any term sheet
within the meaning of Rule 434 of the Rules and Regulations), and (A)
the Registration Statement, or any amendment thereof, does not contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading, and the Prospectus, as amended or supplemented,
does not include any untrue statement of material fact or omit to state
a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, (B) since
the effective date of the Registration Statement, there has occurred no
event required to be set forth in an amended or supplemented prospectus
which has not been so set forth, (C) subsequent to the respective dates
as of which information is given in the Registration Statement and the
Prospectus, neither the Company nor any of its subsidiaries has
incurred any material liabilities or obligations, direct or contingent,
or entered into any material transactions, not in the ordinary course
of business, or declared or paid any dividends or made any distribution
of any kind with respect to its capital stock, and except as disclosed
in the Prospectus, there has not been any change in the capital stock
(other than a change in the number of outstanding shares of Common
Stock due to the issuance of shares upon the exercise of outstanding
options or warrants), or any material change in the short-term or
long-term debt, or any issuance of options, warrants, convertible
securities or other rights to purchase the capital stock, of the
Company, or any of its subsidiaries, or any event or development which
would constitute a Material Adverse
-22-
Change, and (D) except as stated in the Registration Statement and the
Prospectus, there is not pending, or, to the knowledge of the Company,
threatened or contemplated, any action, suit or proceeding to which the
Company or any of its subsidiaries is a party before or by any court or
governmental agency, authority or body, or any arbitrator, which could
reasonably be expected to result in a Material Adverse Effect.
(j) On each Closing Date, there shall have been furnished
to you a certificate or certificates, dated such Closing Date and addressed to
you, signed by each of the Selling Stockholders to the effect that the
representations and warranties of such Selling Stockholder contained in this
Agreement are true and correct as if made at and as of such Closing Date, and
such Selling Stockholder has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or prior to such
Closing Date.
(k) The Nasdaq Stock Market, Inc. shall have approved the
Securities for listing on the Nasdaq National Market, subject only to official
notice of issuance and evidence of satisfactory distribution.
(l) The "lock-up" agreements, each substantially in the
form of Exhibit A hereto, between you and the directors, officers and
stockholders of the Company listed on Schedule II relating to sales and certain
other dispositions of Common Stock, or certain other securities, delivered to
you, shall be in full force and effect.
(m) The Company shall have furnished to you and counsel
for the Underwriters such additional documents, certificates and evidence as you
or they may have reasonably requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and counsel for the Underwriters. The Company will furnish you
with such conformed copies of such opinions, certificates, letters and other
documents as you shall reasonably request.
6. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise (including in settlement of any litigation if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, including the information deemed
to be a part of the Registration Statement at the time of effectiveness pursuant
to Rules 430A and 434(d) of the Rules and Regulations, if applicable, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto
(including any term sheet within the meaning of Rule 434 of the Rules and
Regulations), or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by it in connection with
investigating or defending against such loss, claim, damage, liability or
action; provided, however, that the Company shall not be liable in any such case
to the extent that any such loss, claim, damage, liability or action arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any such amendment or supplement, in reliance
upon and in conformity with written information furnished to the Company by you,
or by any Underwriter through you, specifically for use in the preparation
thereof.
-23-
In addition to their other obligations under this Section 6(a), the
Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
this Section 6(a), it will reimburse each Underwriter on a monthly basis for all
reasonable legal fees or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters that received such payment shall promptly return it
to the party or parties that made such payment, together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) announced from time
to time by U.S. Bank (the "Prime Rate"). Any such interim reimbursement payments
which are not made to the Underwriters or the Selling Stockholders within 30
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Selling Stockholder, jointly and severally,
agrees to indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise (including in settlement of any
litigation if such settlement is effected with the written consent of such
Selling Stockholder), insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement, including the information deemed to be a part of the Registration
Statement at the time of effectiveness pursuant to Rules 430A and 434(d) of the
Rules and Regulations, if applicable, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto (including any term sheet
within the meaning of Rule 434 of the Rules and Regulations), or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending against
such loss, claim, damage, liability or action; provided however that each
Selling Stockholder shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or any such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by you, or by any Underwriter
through you, specifically for use in the preparation thereof; provided further
that such indemnity obligation shall not exceed the net proceeds received by any
such Selling Stockholder from the sale of Securities hereunder (before deducting
expenses).
(c) Each Underwriter will indemnify and hold harmless the
Company and the Selling Stockholders against any losses, claims, damages or
liabilities to which the Company or the Selling Stockholders may become subject,
under the Act or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto (including
any term sheet within the meaning of Rule 434 of the Rules and Regulations), or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any such amendment or supplement, in reliance
-24-
upon and in conformity with written information furnished to the Company or the
Selling Stockholders by you, or by such Underwriter through you, specifically
for use in the preparation thereof, and will reimburse the Company for any legal
or other expenses reasonably incurred by the Company or the Selling Stockholders
in connection with investigating or defending against any such loss, claim,
damage, liability or action.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
that it may have to any indemnified party to the extent it is not materially
prejudiced as a result of such omission and in any event shall not relieve it
from any liability it may have otherwise than under this Agreement. In case any
such action shall be brought against any indemnified party, and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate in, and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation; provided,
however, that if the defendants in any such action include both the indemnified
party or parties and the indemnifying party, and the indemnified party or
parties shall have concluded that there may be legal defenses or claims
available to it or them which are different from or additional to those
available to the indemnifying party, or if there is a conflict of interest which
would prevent counsel for the indemnifying party or parties from also
representing the indemnified party or parties, and that it is advisable for the
indemnified party or parties to be represented by separate counsel, then the
indemnified party or parties shall have the right to employ a single counsel (in
addition to any local counsel) to represent the indemnified party or the
indemnified parties as a group, in which event the reasonable fees and expenses
of the separate counsel shall be borne by the indemnifying party or parties. An
indemnifying party shall not be obligated under any settlement agreement
relating to any action under this Section 6 to which it has not agreed in
writing, which consent shall not be unreasonably withheld. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(e) If the indemnification provided for in this Section 6
is unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a), (b) or
(c)) above, (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other from the offering of the Securities or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholders on the one hand and the Underwriters on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same
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proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company and the Selling Stockholders or
the Underwriters and the parties' relevant intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Company, the Selling Stockholders and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this subsection
(e) were to be determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to in the
first sentence of this subsection (e). The amount paid by an indemnified party
as a result of the losses, claims, damages or liabilities referred to in the
first sentence of this subsection (e) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending against any action or claim which is the subject of
this subsection (e). Notwithstanding the provisions of this subsection (e), (i)
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages that such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission and (ii)
a Selling Stockholder's contribution obligation hereunder shall not exceed the
net proceeds received such Selling Stockholders from the sale of the Securities
hereunder (before deducting expenses). No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling
Stockholders under this Section 6 shall be in addition to any liability which
the Company and the Selling Stockholders may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 6 shall be in addition to any liability that the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company (including any person who, with
his consent, is named in the Registration Statement as about to become a
director of the Company), to each officer of the Company who has signed the
Registration Statement and to each person, if any, who controls the Company and
the Selling Stockholders within the meaning of the Act.
7. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, and agreements of the Company and the Selling
Stockholders contained herein or in certificates delivered pursuant hereto, and
the agreements of the several Underwriters, the Company and the Selling
Stockholders contained in Section 6 hereof, shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter or any controlling person thereof, or the Company or any of its
officers, directors, or controlling persons, or the Selling Stockholders or any
controlling person thereof and shall survive delivery of, and payment for, the
Securities to and by the Underwriters hereunder.
8. SUBSTITUTION OF UNDERWRITERS.
(a) If any Underwriter shall fail to take up and pay for
the amount of Firm Shares agreed by such Underwriter to be purchased hereunder,
upon tender of such Firm Shares in accordance with the terms hereof, and the
amount of Firm Shares not purchased does not aggregate more than 10% of the
total aggregate amount of Firm Shares set forth in Schedule I hereto, the
remaining Underwriters shall
-26-
be obligated to take up and pay for (in proportion to their respective
underwriting obligations hereunder as set forth in Schedule I hereto, as
applicable, except as may otherwise be determined by you) the Firm Shares that
the withdrawing or defaulting Underwriter agreed but failed to purchase.
(b) If any Underwriter shall fail to take up and pay for
the amount of Firm Shares agreed by such Underwriter to be purchased hereunder,
upon tender of such Firm Shares in accordance with the terms hereof, and the
amount of Firm Shares not purchased aggregates more than 10% of the total
aggregate amount of Firm Shares set forth in Schedule I hereto, and arrangements
satisfactory to you for the purchase of such Firm Shares, as applicable by other
persons are not made within 36 hours thereafter, this Agreement shall terminate.
In the event of any such termination, neither the Company nor the Selling
Stockholders shall be under any liability to any Underwriter (except to the
extent provided in Section 4(a)(viii) and Section 6 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the amount of Firm
Shares agreed by such Underwriter to be purchased hereunder) be under any
liability to the Company or the Selling Stockholders (except to the extent
provided in Section 6 hereof).
If Firm Shares to which a default relates are to be purchased by the
non-defaulting Underwriters or by any other party or parties, you or the Company
shall have the right to postpone the First Closing Date for not more than seven
business days in order that the necessary changes in the Registration Statement,
Prospectus and any other documents, as well as any other arrangements, may be
effected. As used herein, the term "Underwriter" includes any person substituted
for an Underwriter under this Section 8.
9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at 10:00 a.m.,
Central time, on the first full business day following the effective date of the
Registration Statement, or at such earlier time after the effective time of the
Registration Statement as you in your discretion shall first release the
Securities for sale to the public; provided, that if the Registration Statement
is effective at the time this Agreement is executed, this Agreement shall become
effective at such time as you in your discretion shall first release the
Securities for sale to the public. For the purpose of this Section, the
Securities shall be deemed to have been released for sale to the public upon
release by you of the publication of a newspaper advertisement relating thereto
or upon release by you of telexes offering the Securities for sale to securities
dealers, whichever shall first occur. By giving notice as hereinafter specified
before the time this Agreement becomes effective, you or the Company may prevent
this Agreement from becoming effective without liability of any party to any
other party, except that the provisions of Section 4(a)(viii) and Section 6
hereof shall at all times be effective.
(b) You shall have the right to terminate this Agreement
by giving notice as hereinafter specified at any time at or prior to the First
Closing Date, and the option referred to in Section 3(b), if exercised, may be
cancelled at any time prior to the Second Closing Date, if (i) the Company or
the Selling Stockholders shall have failed, refused or been unable, at or prior
to such Closing Date, to perform any agreement on its part to be performed
hereunder, (ii) any other condition of the Underwriters' obligations hereunder
is not fulfilled, (iii) trading on the New York Stock Exchange, the Nasdaq
National Market or the American Stock Exchange shall have been wholly suspended,
(iv) minimum or maximum prices for trading shall have been fixed, or maximum
ranges for prices for securities shall have been required, on the New York Stock
Exchange, the Nasdaq National Market or the American Stock Exchange, by such
Exchange or by order of the Commission or any other governmental authority
having jurisdiction, (v) a banking moratorium shall have been declared by
Federal or New York authorities, or (vi) there has occurred any material adverse
change in the financial markets in the United
-27-
States or an outbreak of major hostilities (or an escalation thereof) in which
the United States is involved, a declaration of war by Congress, any other
substantial national or international calamity or any other event or occurrence
of a similar character shall have occurred since the execution of this Agreement
that, in your judgment, makes it impractical or inadvisable to proceed with the
completion of the sale of and payment for the Securities. Any such termination
shall be without liability of any party to any other party except that the
provisions of Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at
all times be effective.
(c) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section, the
Company and the Selling Stockholders shall be notified promptly by you by
telephone, confirmed by letter. If the Company elects to prevent this Agreement
from becoming effective, you and the Selling Stockholders shall be notified by
the Company by telephone, confirmed by letter.
10. DEFAULT BY THE COMPANY. If the Company shall fail at the First
Closing Date to sell and deliver the number of Securities which it is obligated
to sell hereunder, then this Agreement shall terminate without any liability on
the part of any non-defaulting party.
No action taken pursuant to this Section shall relieve the Company from
liability, if any, in respect of such default.
11. INFORMATION FURNISHED BY UNDERWRITERS. The statements set
forth in (i) the second and sixth paragraphs of text under the caption
"Underwriting" concerning the terms of the offering by the Underwriters, (ii)
the eighth paragraph of text under the caption "Underwriting" concerning other
related services provided to the Company by the underwriters for which they
receive fees and (iii) the ninth and tenth paragraphs of text under the caption
"Underwriting" concerning stabilization and over-allotment in the Prospectus
constitute the written information furnished by or on behalf of the Underwriters
referred to in Section 2 and Section 6 hereof.
12. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing and, if to the Underwriters, shall
be delivered by mail, hand delivery or facsimile transmission c/o U.S. Bancorp
Piper Jaffray Inc., 800 Nicollet Mall, Suite 800, Mail Station: J1012005,
Minneapolis, Minnesota 55402-7020, except that notices given to an Underwriter
pursuant to Section 6 hereof shall be sent to such Underwriter at the address
stated in the Underwriters' Questionnaire furnished by such Underwriter in
connection with this offering; if to the Company, shall be delivered by mail,
hand delivery or facsimile transmission to it at 311 C Enterprise Drive,
Plainsboro, New Jersey 08536 Attention: Jack B. Henneman, III; if for the
Selling Stockholders, _______________ Attention: _______________; All notices
given by facsimile shall be promptly confirmed by letter. Any party to this
Agreement may change such address for notices by sending to the parties to this
Agreement written notice of a new address for such purpose.
13. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns and the controlling persons, officers and
directors referred to in Section 6. Nothing in this Agreement is intended or
shall be construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any provision
herein contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Securities from any of
the several Underwriters.
14. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of [New York].
-28-
[Signature Page Follows]
-29-
Please sign and return to the Company and the Selling Stockholders the
enclosed duplicates of this letter whereupon this letter will become a binding
agreement among the Company, the Selling Stockholders and the several
Underwriters in accordance with its terms.
Very truly yours,
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
By
---------------------------------------
Name:
Title:
QUANTUM INDUSTRIAL PARTNERS LDC
By
---------------------------------------
Name:
Title:
SFM DOMESTIC INVESTMENTS LLC
By
---------------------------------------
Name:
Title:
Confirmed as of the date first above
mentioned, on behalf of themselves
and the other several Underwriters
named in Schedule I hereto.
U.S. BANCORP PIPER JAFFRAY INC.
ABN AMRO ROTHSCHILD INCORPORATED
CIBC WORLD MARKETS CORP.
ADAMS, HARKNESS & HILL, INC.
By: U.S. Bancorp Piper Jaffray Inc.
By
---------------------------------------
Name:
Title:
SCHEDULE I
UNDERWRITER NUMBER OF FIRM SHARES (1)
U.S. Bancorp Piper Jaffray Inc....................
---------------
ABN AMRO Incorporated.............................
---------------
CIBC World Markets Corp...........................
---------------
Adams Harkness & Hill, Inc. ......................
---------------
Total.............................................
===============
- ----------
(1) The Underwriters may purchase up to an additional 562,500 Option Shares, to
the extent the option described in Section 3(b) of the Agreement is
exercised, in the proportions and in the manner described in the Agreement.
SCHEDULE II
Maximum Number
Number of of Option Shares
Name of Selling Stockholder Firm Shares to be Sold
--------------------------- ----------- ----------
Quantum Industrial Partner LDC _____ _____
SFM Domestic Investments LDC _____ _____
SCHEDULE III
Stuart M. Essig
George W. McKinney, III, Ph.D.
John B. Henneman, III
Judith E. O'Grady
Michael D. Pierschbacher, Ph.D.
David B. Holtz
Richard E. Caruso, Ph.D.
James M. Sullivan
Keith Bradley, Ph.D.
Neal Moszkowski
SFM Domestic Investments LLC
Quantum Industrial Partners LDC
Frances C. Holtz
Trust Partnership, the partners of which are:
Pagliacci Trust
Rigoletto Trust
Trust for Jonathan Henry Caruso
Trust for Peter James Caruso
Richard E. Caruso, Ph.D.
Provco
EXHIBIT A
LOCK-UP AGREEMENT
July __, 2001
U.S. Bancorp Piper Jaffray Inc.
800 Nicollet Mall
Mail Station J1012005
Minneapolis, Minnesota 55402
Re: Integra LifeSciences Corporation
Ladies and Gentlemen:
The undersigned understands that you will act as a representative
for a group of underwriters (the "Underwriters") who propose to enter into a
Purchase Agreement (the "Purchase Agreement") with Integra LifeSciences
Corporation (the "Company") and certain stockholders party thereto providing for
the public offering (the "Offering") by the Underwriters of Common Stock of the
Company (the "Common Stock") pursuant to the Company's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission.
To induce the Underwriters that may participate in the Offering to
continue their efforts in connection with the Offering, and for other good and
valuable consideration, receipt of which is hereby acknowledged, the undersigned
hereby agrees, from the date hereof until the date that is 90 days after the
date of the Purchase Agreement, not to, without the prior written consent of
U.S. Bancorp Piper Jaffray Inc. (which consent may be withheld in its sole
discretion), directly or indirectly, offer for sale, sell, contract to sell,
grant any option for the sale of (including without limitation any short sale),
pledge, transfer, establish an open "put equivalent position" within the meaning
of Rule 16A-1(h) or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or any security or instrument related
to such Common Stock, options or warrants, or publicly announce the
undersigned's intention to do any of the foregoing. Notwithstanding the
foregoing, the undersigned may sell or otherwise transfer shares of Common Stock
(i) as a BONA FIDE gift or gifts, provided that the undersigned provides prior
written notice of such gift or gifts to you and the donee or donees thereof
agree in writing with you to be bound by the restrictions set forth herein, (ii)
acquired in the public market on or after the date of the Purchase Agreement or
(iii) to any affiliate (as such term is defined in Rule 405 of the Securities
Act of 1933), provided that, such affiliate agrees in writing with you to be
bound by the restrictions set forth herein.
In addition, the undersigned hereby waives any and all notice
requirements and rights with respect to registration of securities pursuant to
any agreement, understanding or otherwise setting forth the terms of any
security of the Company held by the undersigned, including any registration
rights agreement to which the undersigned and the Company may be party, provided
that such waiver shall apply only to the Offering, and any other action taken by
the Company in connection with the Offering.
Furthermore, the undersigned hereby agrees and consents to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of securities of the Company held by the undersigned except in
compliance with this Lock-Up Agreement.
The undersigned recognizes that the Offering will be of benefit to
the undersigned and will benefit the Company by, among other things, raising
additional capital for its operations. The undersigned acknowledges that the
Underwriters are relying on the representations and agreements of the
undersigned contained in this Lock-Up Agreement in carrying out the Offering and
in entering into underwriting arrangements with respect to the Offering. This
Lock-Up Agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives and assigns of the
undersigned. If the Offering does not close by November 1, 2001, this Lock-Up
Agreement shall terminate immediately upon such date and you will release us
from our obligations under this Agreement.
Very truly yours,
Signature:
Printed Name:
-------------------------------------
Address:
------------------------------------------
(Indicate capacity of person signing if signing as
custodian or trustee or on behalf of an entity)
Address:
------------------------------------------
------------------------------------------
------------------------------------------
Accepted as of the date
first set forth above:
U.S. BANCORP PIPER JAFFRAY INC.
By:
----------------------------
Managing Director
[Latham & Watkins Letterhead]
August 3, 2001
Integra LifeSciences Holding Corporation
311 Enterprise Drive
Plainsboro, NJ 08536
RE: INTEGRA LIFESCIENCES HOLDINGS CORPORATION
---------------------------------------------
Ladies and Gentlemen:
In connection with the registration of 4,312,500 shares of common
stock of the Company, par value $0.01 per share (the "Shares"), under the
Securities Act of 1933, as amended (the "Act"), by Integra LifeSciences Holdings
Corporation, a Delaware corporation (the "Company"), on Form S-3 filed with the
Securities and Exchange Commission (the "Commission") on June 1, 2001 (File No.
333-62176), as amended by Amendment No. 1 filed with the Commission on July 9,
2000, Amendment No. 2 filed with the Commission on July 20, 2001 and Amendment
No. 3 filed with the Commission on August 3, 2001 (collectively, the
"Registration Statement"), you have requested our opinion with respect to the
matters set forth below.
In our capacity as your special counsel in connection with such
registration, we are familiar with the proceedings taken and proposed to be
taken by the Company in connection with the authorization, issuance and sale of
the Shares, and for the purposes of this opinion, have assumed such proceedings
will be timely completed in the manner presently proposed. In addition, we have
made such legal and factual examinations and inquiries, including an examination
of originals or copies certified or otherwise identified to our satisfaction of
such documents, corporate records and instruments, as we have deemed necessary
or appropriate for purposes of this opinion.
Integra LifeSciences Holdings Corporation
August 3, 2001
Page 2
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity to authentic original documents of all documents submitted to us as
copies.
We are opining herein as to the effect on the subject transaction only
of the internal laws of the State of New York and the General Corporation Law of
the State of Delaware, and we express no opinion with respect to the
applicability thereto, or the effect thereon, of the laws of any other
jurisdiction or, in the case of Delaware, any other laws, or as to any matters
of municipal law or the laws of any local agencies within any state.
Subject to the foregoing, it is our opinion that the Shares have been
duly authorized, and, upon issuance, delivery and payment therefor in the manner
contemplated by the Registration Statement, will be validly issued, fully paid
and nonassessable.
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained under the
heading "Legal Matters".
Very truly yours,
/s/ Latham & Watkins
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-3 of our
reports dated February 23, 2001, except for note 18, as to which the date is
March 16, 2001 and Note 2, as to which the date is May 14, 2001, relating to the
financial statements, which appear in such Registration Statement, and financial
statement schedules, which are incorporated by reference in such Registration
Statement, of Integra LifeSciences Holdings Corporation. We also consent to the
references to us under the heading, "Experts" and "Selected Consolidated
Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
August 2, 2001
