SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. 0-26224
DECEMBER 31, 2001
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0317849
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
311 ENTERPRISE DRIVE
PLAINSBORO, NEW JERSEY 08536
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(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 275-0500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of March 15, 2002 was approximately $504
million.
The number of shares of the registrant's Common Stock outstanding as of March
15, 2002 was 26,268,003.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating to its
scheduled May 21, 2002 Annual Meeting of Stockholders are incorporated by
reference in Part III of this report.
PART I
ITEM 1. BUSINESS
The terms we, our, us, Company and Integra refer to Integra LifeSciences
Holdings Corporation and its subsidiaries unless the context suggests otherwise.
Integra is a global, diversified medical device company that develops,
manufactures, and markets medical devices, implants and biomaterials primarily
for use in neurosurgery, orthopedics and soft tissue repair. Our business is
divided into two divisions: Integra NeuroSciences(TM) and Integra
LifeSciences(TM).
Integra was founded in 1989 and over the next decade developed technologies and
built a product portfolio directed toward tissue regeneration. In 1999, we
entered into the neurosurgery market through an acquisition and the launch of
our DuraGen(TM) Dural Graft Matrix product for the repair of the dura mater.
Since that time, Integra NeuroSciences has grown to comprise more than 74% of
our total revenues, which increased to $93.4 million in 2001, an average growth
rate of 47% per annum over the period 1999 to 2001. The growth in our overall
business has been accelerated through six acquisitions, the introduction of six
significant new products, and the expansion of the Integra NeuroSciences' direct
sales force.
INTEGRA NEUROSCIENCES DIVISION
Our Integra NeuroSciences division is a leading provider of implants, devices,
and systems used in neurosurgery, neurotrauma, and related critical care and is
a distributor of disposables and supplies used in the diagnosis and monitoring
of neurological disorders.
We market the majority of these products directly 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
direct sales and marketing infrastructure in the United States and Europe and
through a distribution network elsewhere. Integra NeuroSciences' direct selling
effort in the United States and Europe currently includes more than 80 people
and is comprised of direct salespeople (called neurospecialists) and their
management, and a team of clinical educators who educate and train both the
neurospecialists and our customers in the use of our products. The United States
sales force is led by a national sales manager and seven regional managers. We
are planning to increase the number of domestic neurospecialists from 44 to 63
in 2002. We believe the expansion of our sales force allows for smaller, more
focused territories, better coverage of our customers, greater participation in
trade shows and more extensive marketing efforts.
INTEGRA LIFESCIENCES DIVISION
Our Integra LifeSciences division develops and manufactures a variety of medical
products and devices, including products based on our proprietary tissue
regeneration technology that are used to treat soft tissue and orthopedic
conditions. For the majority of the products manufactured by the Integra
LifeSciences division, we have partnered with market leaders for the development
and marketing efforts related to these products. These non-neurosurgical
products address large, diverse markets, and we believe that they can be
promoted more-cost effectively through leveraging marketing partners than
through developing a sales infrastructure ourselves. This strategy allows us to
achieve our growth objectives cost-effectively while enabling us to focus our
management efforts on developing new products. We have strategic alliances with
Ethicon, a division of Johnson & Johnson, the Genetics Institute division of
Wyeth (formerly American Home Products Corporation), Medtronic Sofamor Danek,
and Sulzer Dental.
Geographic financial information about our segments, including product sales and
long-lived assets, is set forth in our financial statements under Notes to
Consolidated Financial Statements, Note 13 - Division and Geographic
Information.
2
STRATEGY
Our goal is to become a global leader in the development, manufacturing and
marketing of medical devices, implants and biomaterials in the markets in which
we compete. Key elements of our strategy include the following:
EXPAND INTEGRA NEUROSCIENCES' MARKET PRESENCE. Through acquisitions and internal
growth, we have rapidly grown Integra NeuroSciences into a leading provider of
products used in the diagnosis, monitoring and treatment of chronic diseases and
acute injuries involving the brain, spine and nervous system. We believe that
additional growth potential in the Integra NeuroSciences division exists
through:
o expanding our product portfolio and market reach through additional
acquisitions;
o increasing the penetration of our existing products into closely related
markets, such as the ear, nose and throat (ENT), neurology, and spine
markets;
o continuing the development and promotion of innovative new products, such as
the NeuraGen(TM)Nerve Guide and the LICOX(R)Brain Tissue Oxygen Monitoring
System; and
o increasing the market share of existing product lines.
ADDITIONAL STRATEGIC ACQUISITIONS. Since March 1999 we have completed six
acquisitions focused primarily in the Integra NeuroSciences division. We are
seeking additional acquisitions in this market and in other specialty medical
technology markets characterized by high margins, fragmented competition and
focused target customers.
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 in the Integra LifeSciences
division. Significant ongoing strategic alliances include those with Ethicon to
market our INTEGRA(R) Dermal Regeneration Template and Genetics Institute and
Medtronic Sofamor Danek to develop products for use in orthopedics. We intend to
pursue additional strategic alliances selectively.
CONTINUE TO DEVELOP NEW AND INNOVATIVE MEDICAL PRODUCTS. As evidenced by our
development of the INTEGRA(R) Dermal Regeneration Template, Biomend(R) and
Biomend(R) Extend Absorbable Collagen Matrix, DuraGen(R) Dural Graft Matrix and
the NeuraGen(TM) Nerve Guide, we have a leading proprietary absorbable implant
franchise. We currently are developing a variety of innovative neurosurgical and
other medical products, including a new class of absorbable biomaterials for the
orthopedic implant market. In addition, we are seeking expanded applications for
our existing products.
BUSINESS DIVISIONS
[INTEGRA NEUROSCIENCES LOGO]
OVERVIEW
The products sold by the Integra NeuroSciences' division include medical
devices, implants, systems and instruments used in the diagnosis, monitoring and
treatment of chronic diseases and acute injuries involving the brain, spine and
nervous system, and disposable medical supplies, such as electrodes, for
neurological testing. These products are used primarily by neurosurgeons and
nurses in the intensive care unit and the operating room and by neurologists in
hospital and out-patient settings. Additionally, we sell products used by
cardiovascular surgeons to divert blood to vital organs, such as the brain,
during surgical procedures involving blood vessels. According to industry
sources and our estimates, the aggregate size of the market addressed by our
Integra NeuroSciences products exceeds $400 million and is expected to grow at
an annual rate of 6-8%.
3
Our Integra NeuroSciences division offers one of the most comprehensive product
lines serving the neuro intensive care unit and operating room. We have
established market positions in intracranial monitoring, dural repair, tumor
ablation, neurosurgical shunting, specialty neurosurgical instrumentation,
carotid shunting, and central nervous system diagnostic and monitoring supplies,
and are developing a market position in peripheral nerve repair. Integra
NeuroSciences' products can be segmented by use into the following functional
areas: i) the neuro intensive care unit, ii) the neurosurgical operating room,
and iii) all other. The table below provides a summary of Integra NeuroSciences'
products:
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PRODUCT LINES APPLICATION
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NEURO INTENSIVE CARE UNIT
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Camino(R) and Ventrix(R) fiber Access, drainage and continuous
optic-based intracranial monitoring monitoring of intracranial pressure,
systems, LICOX(R) oxygen monitoring oxygen and temperature following injury
systems, Integra Systems of CSF or neurosurgical procedures
Drainage and Cranial Access
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NEUROSURGICAL OPERATING ROOM
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DuraGen(R)Dural Graft Matrix Graft to close brain and spine membrane
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NeuraGen(TM)Nerve Guide Repair of peripheral nerves
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Selector(R)Integra Ultrasonic Use of ultrasonic energy to
Aspirator; Dissectron(R)Ultrasonic ablate tumors
Aspirator
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Heyer-Schulte(R)neurosurgical shunts Specifically designed for the
management of hydrocephalus, a chronic
condition involving excess
cerebrospinal fluid in the brain
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Redmond(TM)-Ruggles(TM)neurosurgical Specialized surgical instruments for
and spinal instruments; Neuro use in brain or spinal surgery
Navigational(R)flexible endoscopes
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Helitene(R)Absorbable Fibrillar Control of bleeding
Hemostatic Agent
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ALL OTHER
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Integra NeuroSupplies(TM) Disposables and supplies used in the
diagnosis and monitoring of
neurological, ENT and pulmonary
disorders
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Sundt(TM)and other carotid shunts For shunting blood during surgical
procedures involving blood vessels
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4
MARKETS AND PRODUCTS
NEURO INTENSIVE CARE UNIT
THE MONITORING OF BRAIN PARAMETERS. Intracranial monitors are used by
neurosurgeons in diagnosing and treating cases of severe head trauma and other
diseases. 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.
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. Integra NeuroSciences currently has over 3,000 intracranial
monitors installed worldwide. 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 underlying 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.
EXTERNAL DRAINAGE AND CRANIAL ACCESS. External drainage systems and cranial
access kits are used by neurosurgeons to gain access to the cranial cavity and
to drain excess cerebrospinal fluid from the ventricles of the brain into an
external container. Integra NeuroSciences manufactures and markets a broad line
of cranial access kits and ventricular and lumbar external drainage systems
under the Integra CSF Drainage and Cranial Access Systems brand name.
NEUROSURGICAL OPERATING ROOM
REPAIR OF THE DURA MATER. The dura mater is the thick membrane that contains the
cerebrospinal fluid within the brain and the spine. The dura mater often must be
penetrated during brain surgery and is often damaged during spinal surgery. In
either case, surgeons often close or repair the dura mater with a graft. The
graft may consist of 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. The
worldwide market for dural repair, including cranial and spinal applications, is
estimated to be $200 million.
The DuraGen(R) Dural Graft Matrix is an absorbable collagen matrix indicated for
the repair of the dura mater surrounding the brain and spine. We believe that
the other methods for repairing the dura mater 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 mater
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 or spinal cavity.
REPAIR OF PERIPHERAL NERVES. 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. We estimate the market for the repair of
severed peripheral nerves is $40 million.
The NeuraGen(TM) Nerve Guide is an absorbable implant for the repair of severed
peripheral nerves. The NeuraGen(TM) product is a collagen tube designed to
provide a protective environment for the regenerating nerve and to provide a
conduit through which regenerating nerves can bridge the gap caused by the
injury. The NeuraGen(TM) Nerve Guide offers a rapid method for rejoining severed
peripheral nerves.
We received FDA 510(k) clearance for the NeuraGen(TM) product in June 2001 and
launched the product in the United States in October 2001. In addition to
targeting the neurosurgical operating room, we are also marketing the
NeuraGen(TM) product to the non-hospital and private practice-based neurologist
customer base served by our Integra NeuroSupplies business and to hand surgeons.
5
NEUROSURGICAL SYSTEMS FOR TUMOR ABLATION. More than 145,000 primary and
metastatic brain tumors are diagnosed annually in the United States. Our
Selector(R) Integra Ultrasonic Aspirator and Dissectron(R) Ultrasonic Surgical
Aspirator systems address the market for the surgical destruction and removal of
malignant and non-malignant tumors and other tissue.
The Selector(R) Integra Ultrasonic Aspirator and Dissectron(R) Ultrasonic
Surgical Aspirator use very high frequency sound waves to pulverize cancer
tumors and allow 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. The Dissectron(R) product is not sold
in the United States.
HYDROCEPHALUS MANAGEMENT. Hydrocephalus is an incurable condition resulting from
an imbalance between the amount of cerebrospinal fluid produced by the brain and
the rate at which cerebrospinal fluid is absorbed by the body. 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.
Our Heyer-Schulte(R) line of hydrocephalus management shunting products 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.
We believe that the use of shunts containing programmable valves has increased
in recent years. Programmable valves allow the neurosurgeon to adjust the
pressure settings of a shunt while it is implanted in the patient. Shunts that
do not incorporate programmable valve technology must be removed from the
patient for subsequent pressure adjustments, a process that requires an
additional surgical procedure. Because we do not market hydrocephalus management
shunts with programmable valves, we believe that future domestic sales of the
Heyer-Schulte(R) product line may be negatively affected by the increasing use
of programmable valves.
NEUROSURGICAL AND SPINAL INSTRUMENTATION. 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 and a line of
disposable neuroendoscopy products sold under the Neuro Navigational(R) brand
name.
The Redmond(TM)-Ruggles(TM) 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 the Redmond(TM) and Ruggles(TM) products to
Integra's specifications. The Neuro Navigational(R) product line consists of
fiber optic instruments used to facilitate minimally invasive neurosurgery,
including third ventriculostomies, which are increasingly substituted for shunt
placement for patients who meet the criteria.
SURGICAL HEMOSTATIC AGENTS. Hemostatic agents are used to control bleeding. Our
Helitene(R) Absorbable Fibrillar Collagen Hemostatic Agent has been marketed for
surgical applications for over 15 years. In June 2001, the FDA approved a
premarket approval (PMA) application supplement removing the labeling exclusion
for neurosurgical uses of the Helitene(R) product. Helitene(R) is a
collagen-based hemostatic agent in fibrillar form that effectively controls
bleeding within two to five minutes when applied directly to the bleeding site
and is designed to be totally absorbable if left in the body after hemostasis.
6
ALL OTHER
NEUROLOGICAL SUPPLIES. With the acquisition of NeuroSupplies, Inc. in December
2001, we expanded into the neurological supplies market. We distribute a wide
variety of disposables and supplies, including surface electrodes, needle
electrodes, recording transducers and stimulators, and respiratory sensors, that
are used in the diagnosis and monitoring of neurological disorders. These
products are designed to monitor and perform tests of the nervous system and
brain, including electromyography (EMG), evoked potential (EP) and
electroencephalography (EEG) tests, and to test sleep disorders.
These products are sold primarily through a catalog to more than 6,000
neurologists, hospitals, sleep clinics, and other physicians under the Integra
NeuroSupplies(TM) name. Neurologists are the referring physicians for Integra's
existing neurosurgeon customers. We expect that our sales and marketing
infrastructure will be able to deepen the penetration of Integra NeuroSupplies'
products into hospitals, Integra NeuroSciences' principal call point. We also
believe that Integra NeuroSupplies' non-hospital and private practice-based
customers may be receptive to certain of our existing products, including the
NeuraGen(TM) and Helitene(R) products and our line of external ventricular
drainage products.
HEMODYNAMIC SHUNTS. Our Sundt(TM) and other carotid shunts are used to divert
blood to vital organs, such as the brain, during surgical procedures involving
blood vessels. These products are used by vascular surgeons and neurosurgeons
and are now sold direct in the United States through the Integra NeuroSciences
sales force.
[INTEGRA LIFESCIENCES LOGO]
OVERVIEW
The Integra LifeSciences division develops and manufactures implants and other
medical devices that are used primarily for the treatment of defects, diseases
and injuries involving soft tissue and bone and for infection control. Many of
the current products of Integra LifeSciences are built on our expertise in
absorbable collagen products.
The Integra LifeSciences division is responsible for all of our products outside
the neurosurgical market. Because these non-neurosurgical products address
large, diverse markets, Integra LifeSciences' marketing, research and
development programs are generally constructed around strategic alliances with
leading medical device companies. We believe that these products can be more
cost effectively promoted through leveraging marketing partners than through
developing a sales infrastructure ourselves. According to industry sources and
our estimates, the aggregate size of the markets addressed by Integra
LifeSciences' products exceeds $1 billion.
Integra LifeSciences has established a reputation for being a value-added and
dependable contract development and manufacturing partner. Integra LifeSciences
has developed an expertise in the development, manufacture and supply of a
variety of absorbable materials. Integra LifeSciences can also provide
experienced personnel to support product quality and regulatory review efforts.
7
Although the Integra LifeSciences products serve a wide variety of markets, they
can be segmented into two general groups: i) tissue repair products and ii)
other medical devices. The table below provides a summary of our Integra
LifeSciences products, their application, and marketing/development partner:
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PRODUCT LINES APPLICATION MARKETING/DEVELOPMENT
PARTNER
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TISSUE REPAIR PRODUCTS
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INTEGRA(R)Dermal Regenerate dermis and Ethicon, Inc., a division
Regeneration Template repair skin defects of Johnson & Johnson, and
Century Medical, Inc. in
Japan
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BioMend(R)and Used in guided tissue Sulzer Dental, a division
BioMend(R)Extend regeneration in of Sulzer Medica Ltd.
Absorbable Collagen periodontal surgery
Membrane
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Orthopedic Biomaterials:
Absorbable Collagen Fracture management/ Genetics Institute
Sponge and other matrices enabling spinal fusion division of Wyeth;
for use with bone Medtronic Sofamor Danek
morphogenetic protein (FDA Panel recommendation
(rhBMP-2) received in January 2002)
Tyrosine polycarbonates Fixation or alignment of Bionx Implants, Inc.
for fixation devices fractures (development program)
such as absorbable screws,
plates, pins, wedges
and nails
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OTHER MEDICAL DEVICES
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Infection Control:
VitaCuff(R) Provides protection Arrow International, Inc.,
against infection arising Bard Access Systems, Inc.,
from long-term catheters Tyco International
BioPatch(R)(1) Anti-microbial wound Ethicon, Inc.
dressing
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CollaCote(R), Used to control bleeding Sulzer Dental
CollaTape(R) and in dental surgery
CollaPlug(R) absorbable
wound dressings
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Instat(R)(1) and Control of bleeding Ethicon and various
Helistat(R) Absorbable distributors
Collagen Hemostats
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Spembly Medical Allow surgeon to use low Various distributors
cryosurgery products temperature to more
easily extract diseased
tissue
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(1) BioPatch and Instat are registered trademarks of Johnson & Johnson.
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MARKETS AND PRODUCTS
TISSUE REPAIR PRODUCTS
SKIN REPLACEMENT. 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 the 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. We estimate this market to be in excess of $1 billion.
INTEGRA(R) Dermal Regeneration Template is designed to enable the human body to
regenerate functional dermal tissue. The product 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
sufficient autograft is not available at the time of excision or not desirable
due to the physiological condition of the patient. The INTEGRA(R) Dermal
Regeneration Template is sold exclusively by the Ethicon division of Johnson &
Johnson worldwide, except in Japan. Century Medical, Inc. has rights to
distribute the product in Japan.
Through our 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.
GUIDED TISSUE REGENERATION IN PERIODONTAL SURGERY. 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 Membranes are sold through
the Sulzer Dental division of Sulzer Medica.
ORTHOPEDIC BIOMATERIALS. We sell or are developing the following new absorbable
materials for the orthopedic implant market:
- Absorbable Collagen Sponges and other matrices for use in
developing bone regeneration implants; and
- Tyrosine-derived polycarbonates designed to enhance the rate and
quality of healing and tissue regeneration when implanted in bone.
BONE REGENERATION. Integra LifeSciences supplies the Genetics Institute division
of Wyeth 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 rhBMP-2 for clinical evaluation in several areas of bone repair and
augmentation, including orthopedic, oral and maxillofacial surgery applications.
Spine applications are being developed through a related collaboration with
Medtronic Sofamor Danek in North America. On January 10, 2002, the Orthopedic
and Rehabilitation Devices Panel of the United States Food and Drug
Administration (FDA) unanimously recommended for approval, with conditions,
Medtronic Sofamor Danek's InFUSE(TM) Bone Graft used with the LT-CAGE(TM) Lumbar
Tapered Fusion Device for use in spinal fusion procedures. The InFUSE Bone Graft
uses rhBMP-2 applied to an Absorbable Collagen Sponge supplied by Integra in
place of a painful secondary procedure to harvest small pieces of bone from the
patient's own hip (autograft). When used with the LT-CAGE Lumbar Tapered Fusion
Device, the InFUSE Bone Graft will be indicated to treat certain types of spinal
degenerative disc disease, a common cause of low back pain. The FDA panel
conditions for approval included three additional post-approval studies in the
areas of antibody response during pregnancy, dosing and tumorogenicity.
9
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 the treatment of acute long-bone fractures requiring
open surgical management. In June 2001, Genetics Institute announced that it had
received a non-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.
Additionally, we also receive development funding and other payments from
Medtronic Sofamor Danek related to the development of additional matrices for
various applications.
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 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. No medical device
containing the material has yet been approved for sale.
Integra is continuing and has concluded several materials transfer and research
collaborations for tyrosine-derived polycarbonates. These collaborations, which
include evaluation for use in orthopedic, craniomaxillofacial, spinal and drug
delivery applications, have progressed through animal studies. To date no human
studies have been undertaken.
We produced a Device Master File for the polymer technology and filed it with
the FDA in April 2001. Information contained in the Device Master File may be
used by Integra's strategic partners for Premarket Approval Applications,
Investigational Device Exemptions, and 510(k) Premarket Notification
submissions, as more fully described below under "Government Regulation".
OTHER MEDICAL DEVICES
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
under the names CollaCote(R), CollaTape(R) and CollaPlug(R), through various
other distributors under the Helistat(R) Absorbable Collagen Hemostatic Agent
name and through Ethicon under the Instat(R) Absorbable Collagen Hemostat name).
Finally, our Spembly Medical cryosurgery products allow surgeons to use low
temperatures to more easily extract diseased tissue in ophthalmic, general,
gynecological, urological and cardiac applications.
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. The Ethicon division of Johnson & Johnson distributes the INTEGRA(R)
Dermal Regeneration Template throughout the world, except in Japan. As part of
this 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 is
providing $2 million of annual funding for research, development and certain
clinical trials through
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2004 and thereafter different amounts 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.
We expect to receive an additional $500,000 clinical and regulatory payment in
the first quarter of 2002. 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 ten-year agreement
expires in 2009, 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.
CENTURY MEDICAL, INC. Century Medical Inc., a subsidiary of ITOCHU Corporation,
has obtained exclusive importation and sales rights for INTEGRA(R) Dermal
Regeneration Template, the DuraGen(R) Dural Graft Matrix and the NeuraGen(TM)
Nerve Guide in Japan. Under the related sales and importation agreements,
Century Medical 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 will 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.
GENETICS INSTITUTE AND MEDTRONIC SOFAMOR DANEK. Integra LifeSciences has several
programs oriented toward the orthopedic market. These programs include the
alliances with Genetics Institute and Medtronic Sofamor Danek for the
development of collagen and other absorbable matrices to be used in conjunction
with Genetics Institute's recombinant human bone morphogenetic protein-2 in a
variety of bone regeneration applications. Our agreement with Genetics Institute
requires us to supply Absorbable Collagen Sponges at specified prices to
Genetics Institute, including those that Genetics Institute sells to Medtronic
Sofamor Danek with rhBMP-2 for use in Medtronic Sofamor Danek's InFUSE(TM)
product. 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.
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.
RESEARCH STRATEGY
Our research programs focus on developing new products based our biomaterials,
peptide chemistry and collagen engineering technologies and our expertise in
fiber optics. A portion of these research and development activities are funded
by government grants and contract development revenues from strategic alliance
partners. We spent approximately $8.0 million, $7.5 million, and $8.9 million in
2001, 2000, and 1999, respectively, on research and development activities.
Research and development activities funded by government grants and contract
development revenues amounted to $3.9 million, $2.8 million, and $1.6 million in
2001, 2000, and 1999, respectively.
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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 and
intracranial monitoring. 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 products for both tissue
regeneration and neurosciences applications. These efforts have led to the
successful development of new products, such as the NeuraGen(TM) Nerve Guide and
DuraGen(R) Dural Graft Matrix.
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 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 more than 130 pre-market notification clearances,
four approved pre-market approval applications and 47 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 one supplemental pre-market
approval application pending for a proposed change in the approved uses for the
INTEGRA(R) Dermal Regeneration Template.
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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 Regulations. 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 also are 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 requires 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 that we
develop and manufacture quality medical devices. Each of our facilities is
audited on an annual basis by a recognized Notified Body (an organization
designated by the national governments of the European Union member states to
make independent judgments about whether or not a product complies with the
protection requirements established by each CE marking directive) to verify our
compliance with these standards. In 2001, 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 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.
13
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), CollaCote(R), CollaPlug(R), CollaStat(TM), CollaTape(R),
Dissectron(R), DuraGen(R), Helistat(R), Helitene(R), Heyer-Schulte(R),
INTEGRA(R) Dermal Regeneration Template, Integra LifeSciences(TM), Integra
NeuroSciences(TM), Integra NeuroSupplies(TM), LICOX(R), NeuraGen(TM),
NeuroNavigational(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 report 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, and the Valleylab and Radionics divisions of Tyco International Ltd. 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.
EMPLOYEES
At December 31, 2001, we had approximately 600 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.
Many of our employees, including those holding senior positions in our
regulatory, operations, research and development, and sales and marketing
departments, were recruited from large pharmaceutical or medical technology
companies. Our neurospecialists and regional sales managers attend in-depth
product training meetings throughout the year, and our clinical development team
consists of medical professionals who specialize in specific therapeutic areas
that our Integra NeuroSciences products serve. We believe that our clinical
development team differentiates us from our competition, as their knowledge and
experience as medical professionals allows them to more effectively educate and
train both our neurospecialists and the customers who use our products. This
team is especially valuable in communicating the clinical benefits of new
products.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this report, including statements under "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 and acquisitions;
o our ability to complete acquisitions and integrate operations
post-acquisition; and
o other risk factors described in the section entitled "Risk Factors" in this
report.
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 report.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this report may not occur and actual results could
differ materially from those anticipated or implied in the forward-looking
statements.
15
RISK FACTORS
We believe that the following important factors, among others, have affected,
and in the future could affect, our business, financial condition, and results
of operations and could cause the our future results to differ materially from
our historical results and those expressed in any forward-looking statements
made by us. Such factors are not meant to represent an exhaustive list of the
risks and uncertainties associated with our business. These and other factors
may affect our future results and our stock price, particularly on a quarterly
basis.
WE HAVE A HISTORY OF INCURRING 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 December 31, 2001, we had an
accumulated deficit of $79.6 million. The year 2001 was the first full year that
we experienced profitability. Profitability in the future 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.
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.
WE MAY BE UNABLE TO RAISE ADDITIONAL FINANCING NECESSARY TO CONDUCT OUR
BUSINESS, MAKE PAYMENTS WHEN DUE OR REFINANCE OUR DEBT.
As of December 31, 2001, we had cash, cash equivalents and investments of
approximately $131.0 million and short-term debt of approximately $3.6 million.
However, we may need to raise additional funds in the future in order to
implement our business plan, to conduct research and development, to fund
marketing programs or to acquire complementary businesses, technologies or
services. 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.
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
16
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 cannot 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, and the Valleylab and Radionics divisions of Tyco International Ltd. 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 five different
businesses for a total of $29.3 million.
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
17
other than those for which the product was initially approved or cleared or for
significant changes to 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 post-approval reporting and
may require post-approval 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 may 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
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
Japan and 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.
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.
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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, the use of
autograft tissue is a well-established means for repairing the dermis, 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 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. 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, our future
prospects could be adversely affected.
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, to manufacture products in
sufficient quantities and at an acceptable cost, and to supply and service
sufficient quantities of our products directly or through our strategic
alliances. 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 Wyeth 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 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 successful. Even if we enter
into collaborative or alliance agreements, our collaborators could terminate
these agreements, or those agreements 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.
19
Some collaborators may not perform their obligations as we expect. Some of the
companies we currently have alliances with or are targeting as potential allies
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, our sales and other revenues could
significantly be reduced.
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 many of our 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.
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.
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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. While we are not dependent on
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 so 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 ceases production of important components or
materials.
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. Although we maintain property damage and
business interruption insurance coverage on these facilities, we may not be able
to renew or obtain such insurance in the future on acceptable terms with
adequate coverage or at reasonable costs.
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.
WE ARE EXPOSED TO A VARIETY OF RISKS RELATING TO OUR INTERNATIONAL SALES AND
OPERATIONS, INCLUDING FLUCTUATIONS IN EXCHANGE RATES, LOCAL ECONOMIC CONDITIONS,
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 approximately 8% of our total product sales for the year ended
December 31, 2001, 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
21
acquisitions of European companies and our decision to sell directly, rather
than through distributors, in major European countries.
Our sales to foreign markets may be affected by local economic conditions.
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;
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.
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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, those losses 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 cannot assure
you that we will be able to attract additional personnel and retain existing
personnel.
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. See Market for
Registrant's Common Equity and Related Stockholder Matters. 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
23
o sales of our common stock.
Any of these factors could immediately, significantly and adversely affect the
trading price of our common stock.
OUR MAJOR STOCKHOLDERS COULD MAKE DECISIONS ADVERSE TO YOUR INTERESTS.
Our directors and executive officers and affiliates of certain directors own or
control more than one-third of our outstanding voting securities and would
generally have significant influence over the election of all directors, the
outcome of corporate actions requiring stockholder approval, and otherwise
influence 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 significant influence
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.
ITEM 2. PROPERTIES
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. Our primary distribution centers are located in Cranbury, New Jersey
and Andover, England. In addition, we lease several smaller facilities to
support additional administrative, assembly, and distribution operations. Our
total office manufacturing and research space approximates 190,000 square feet
with lease payments of approximately $130,000 per month. All of our
manufacturing facilities make at least one of our Integra NeuroSciences
products, and our Integra LifeSciences products are manufactured in the
Plainsboro, Anasco and Andover facilities. All of our facilities are leased. The
lease agreement for our manufacturing facility in San Diego expires in June
2003. We believe that we will be able to renew this lease on acceptable terms.
All of our manufacturing and distribution facilities are registered with the
FDA. Our facilities are subject to FDA inspection to assure compliance with
Quality System Regulations. We believe that our manufacturing facilities are in
substantial compliance with Quality System Regulations, 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.
ITEM 3. LEGAL PROCEEDINGS
In July 1996, we filed a patent infringement lawsuit in the United States
District Court for the Southern District of California (the "Court") 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. 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 ("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 in March 2000, a jury returned a
unanimous verdict for Integra, finding that Merck KGaA had willfully infringed
and induced the infringement of our patents, and awarded us $15,000,000 in
damages. The Court dismissed Scripps and Dr. Cheresh from the case.
In October, 2000, the Court entered judgment in Integra's 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. Merck KGaA filed various
post-trial motions requesting a
24
judgment as a matter of law notwithstanding the verdict or a new trial, in each
case regarding infringement, invalidity and damages. In September 2001, the
Court entered orders in favor of Integra and against Merck KGaA on the final
post-judgment motions in the case, and denied Merck KGaA's motions for judgment
as a matter of law and for a new trial.
Merck KGaA and Integra have each appealed various decisions of the Court. We
expect the court of appeals to hear arguments in the appeal during 2002 and to
issue its opinion during 2003. Post-judgment interest continues to accrue at the
rate of approximately $20,000 per week. Integra has not recorded any gain in
connection with this favorable judgment.
We are 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 our opinion, these 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 our results of operations, financial position and cash flows in a
particular period could be materially affected by these contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ADDITIONAL INFORMATION:
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K.
EXECUTIVE OFFICERS
The executive officers of Integra are elected annually and serve at the
discretion of the Board of Directors. The only family relationship between any
of the executive officers and our Board of Directors is that Mr. Holtz is the
nephew of Richard E. Caruso, Ph.D., who is Chairman of the Board of Directors.
The following information indicates the position and age of our executive
officers as of the date of this report and their previous business experience.
NAME AGE POSITION
Stuart M. Essig ................. 40 President, Chief Executive Officer
and Director
John B. Henneman, III............ 40 Senior Vice President, Chief
Administrative Officer and Secretary
David B. Holtz................... 35 Senior Vice President, Finance
and Treasurer
Donald R. Nociolo ............... 39 Senior Vice President, Operations
Judith E. O'Grady................ 51 Senior Vice President, Regulatory,
Quality Assurance and Clinical Affairs
Michael D. Pierschbacher, Ph.D... 50 Senior Vice President Research and
Development, Director of the Corporate
Research Center
Deborah A. Leonetti.............. 46 Vice President, Marketing
Robert D. Paltridge ............. 44 Vice President, Sales
25
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 MBA 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.
JOHN B. HENNEMAN, III is Integra's Senior Vice President, Chief Administrative
Officer and Secretary, and is responsible for the law department, regulatory
affairs, business development, human resources and investor relations. Mr.
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 and his J.D.
from the University of Michigan Law School.
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 financial reporting, 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 BS degree in Business Administration from Susquehanna
University and has been certified as a public accountant.
DONALD R. NOCIOLO joined Integra as Director of Manufacturing in 1994 and has
served as Vice President, Operations since March 1997 and was promoted to Senior
Vice President of Operations in May 2000. His responsibilities include managing
all manufacturing and distribution operations in the United States. Mr. Nociolo
has over fifteen years experience working in engineering and manufacturing
management in the medical device industry. Six of those years were spent working
at Ethicon, Inc., a division of Johnson & Johnson. Mr. Nociolo received a BS
degree in Industrial Engineering from Rutgers University and an MBA in
Industrial Management from Fairleigh Dickinson University.
JUDITH E. O'GRADY Senior Vice President of Regulatory Affairs, Quality Assurance
and Clinical Affairs, has served Integra since 1985. 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 500 FDA and
international submissions. She received her BS degree from Marquette University
and MSN 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 the Corporate Research Center. From June 1987 to
September 1995, Dr. Pierschbacher served as Senior Vice President and Scientific
Director of Telios Pharmaceuticals, Inc. ("Telios") which was acquired by us in
1995. 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.
26
DEBORAH A. LEONETTI joined Integra in May of 1997 as Director of Marketing and
was promoted to Vice President of Marketing in April 1999. Her responsibilities
include worldwide strategic marketing for all Integra products. From September
1989 through May 1997, Ms. Leonetti worked for Cabot Medical, which was later
acquired by Circon Corporation, and held positions in sales, sales training, and
marketing. Prior to her experience at Cabot-Circon, Ms. Leonetti completed
fifteen years of clinical practice as a registered nurse at St. Christopher's
Hospital for Children in Philadelphia. She received her Nursing degree from St.
Joseph's Hospital School of Nursing and La Salle University.
ROBERT D. PALTRIDGE joined Integra as National Sales Director in February 1995
and has served as Vice President, North American Sales since September 1997. He
was promoted to Vice President, Direct Sales in October 2001. His
responsibilities include managing the direct sales activities of Integra
NeuroSciences products in the United States, the United Kingdom, France, and
Germany and managing distributor sales in Canada. Mr. Paltridge has 19 years of
sales and sales management experience in the medical device industry. Before
joining Integra, he was National Sales Manager at Strato Medical, a division of
Pfizer, Inc. He received a BS degree in Business Administration from Rutgers
University.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Integra's Common Stock trades on The Nasdaq National Market under the symbol
IART. The following table represents the high and low sales prices for our
Common Stock for each quarter for the last two years:
HIGH LOW
2001
Fourth Quarter $ 31.030 $ 22.770
Third Quarter $ 32.150 $ 18.800
Second Quarter $ 22.450 $ 11.400
First Quarter $ 18.313 $ 9.875
2000
Fourth Quarter $ 16.125 $ 9.688
Third Quarter $ 15.000 $ 9.438
Second Quarter $ 12.625 $ 6.688
First Quarter $ 19.875 $ 5.875
The closing price for the Common Stock on March 15, 2002 was $28.80. For
purposes of calculating the aggregate market value of the shares of voting stock
of Integra held by non-affiliates, as shown on the cover page of this report, it
has been assumed that all the outstanding shares were held by non-affiliates
except for the shares held by our directors and executive officers and
stockholders owning 10% or more of outstanding shares. However, this should not
be deemed to constitute an admission that all such persons are, in fact,
affiliates of Integra. Further information concerning ownership of the Integra's
voting stock by executive officers, directors and principal stockholders will be
included in the our definitive proxy statement to be filed with the Securities
and Exchange Commission.
We do not currently pay any cash dividends on our Common Stock and do not
anticipate paying as such dividends in the foreseeable future.
The number of stockholders of record as of March 15, 2002 was approximately 375,
which includes stockholders whose shares were held in nominee name. The number
of beneficial stockholders at that date was over 5,000.
RECENT SALES OF UNREGISTERED SECURITIES
In March and December 2001, respectively, we sold 240,000 and 300,000 shares of
Common Stock to affiliates of Soros Private Equity Partners LLC through Soros'
exercise of stock purchase warrants in a transaction exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (the "Securities Act"). Proceeds from these
sales of Common Stock were $916,800 and $2,700,000, respectively.
In June 2001, we issued 2,617,800 shares of Common Stock to affiliates of Soros
Private Equity Partners LLC upon their conversion of all 100,000 shares of
Series B Preferred Stock owned by them in a transaction exempt from registration
under Section 4(2) of the Securities Act. The holders of this Common Stock have
registration rights.
In December 2001, we issued 10,000 shares of Common Stock to the seller of
NeuroSupplies, Inc. as partial consideration for our acquisition of
NeuroSupplies, Inc. in a transaction exempt from registration under Section 4(2)
of the Securities Act.
28
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and our
consolidated financial statements and related notes included elsewhere in this
report. We have acquired numerous businesses and product lines during the
previous four years. As a result of these acquisitions, the consolidated
financial results and balance sheet data for certain of the periods presented
above may not be directly comparable.
Years Ended December 31,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating Results:
Total revenue ......................................... 93,442 71,649 42,876 17,561 14,848
Total operating costs and expenses (1) ................ 79,156 83,370 55,256 31,741 33,759
-------- -------- -------- -------- --------
Operating income (loss) ............................... 14,286 (11,721) (12,380) (14,180) (18,911)
Interest income (expense), net ........................ 1,393 (473) 294 1,250 1,771
Gain on disposition of product line ................... -- 1,146 4,161 -- --
Other income (expense), net ........................... (136) 201 141 588 176
-------- -------- -------- -------- --------
Income (loss) before income taxes ..................... 15,543 (10,847) (7,784) (12,342) (16,964)
Income tax expense (benefit)(2) ....................... (10,863) 108 (1,818) -- --
-------- -------- -------- -------- --------
Net income (loss) before extraordinary item and
cumulative effect of accounting change ............. 26,406 (10,955) (5,966) (12,342) (16,964)
Extraordinary loss on the early retirement of debt,
net of income tax benefit(3) ....................... (243) -- -- -- --
Cumulative effect of accounting change(4) ............. -- (470) -- -- --
-------- -------- -------- -------- --------
Net income (loss) ..................................... $ 26,163 $(11,425) $ (5,966) $(12,342) $(16,964)
======== ======== ======== ======== ========
Diluted net income (loss) per share ................... $ 0.94 $ (0.97) $ (0.40) $ (0.77) $ (1.15)
Weighted average shares outstanding ................... 27,796 17,553 16,802 16,139 14,810
Pro Forma Data (4):
Total revenue .......................................... $ 42,974 $ 16,993
Net loss ............................................... (5,868) (12,910)
Basic and diluted net loss per share ................... $ (0.40) $ (0.80)
December 31,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
Financial Position(3):
Cash, cash equivalents, and non-current investments ... $131,036 $ 15,138 $ 23,612 $ 20,187 $ 26,272
Working capital ....................................... 89,086 25,177 28,014 23,898 29,407
Total assets .......................................... 227,588 86,514 66,253 34,707 38,356
Long-term debt ........................................ -- 4,758 7,625 -- --
Accumulated deficit ................................... (79,600) (105,729) (94,304) (88,287) (75,945)
Stockholders' equity .................................. 204,056 53,781 37,989 31,366 35,755
(1) Total operating costs and expenses include the following significant
special items: a $13.5 million stock-based compensation charge from the
extension of the employment of our President and Chief Executive Officer in
2000; $2.5 million in fair value inventory charges and $1.0 million in
severance costs related to acquisitions in 1999; and a $1.0 million asset
impairment charge and a $5.9 million stock-based signing bonus for our
President and Chief Executive Officer in 1997.
(2) In 2001, Integra recognized an $11.5 million deferred income tax benefit
related to the reduction of a portion of the valuation allowance recorded
against its deferred tax assets. In 1999, Integra recognized a $1.8 million
deferred income tax benefit from the reduction of the deferred tax
liability recorded in the NeuroCare acquisition to the extent that
consolidated deferred tax assets were generated subsequent to the
acquisition.
(3) In August 2001, we issued 4,747,500 shares of common stock at $25.50 per
share in a follow-on public offering. The net proceeds generated by the
offering, after expenses, was $113.4 million. We subsequently used a
portion of these proceeds to repay outstanding indebtedness totaling $9.3
million, for which we recorded a $243,000 extraordinary loss, net of tax,
on the early retirement of debt.
(4) As the result of the adoption of SEC Staff Accounting Bulletin No. 101
"Revenue Recognition" (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 2001 and 2000 includes $112,000 of
amortization of the amount deferred as of January 1, 2000. Pro forma data
reflects the amounts that would have been reported if SAB 101 had been
retroactively applied.
29
ITEM 7. 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
report. 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".
GENERAL
Integra is a global, diversified medical device company that develops,
manufactures, and markets medical devices, implants and biomaterials primarily
for use in neurosurgery, orthopedics and soft tissue repair. Our business is
divided into two divisions: Integra NeuroSciences(TM) and Integra
LifeSciences(TM).
INTEGRA NEUROSCIENCES DIVISION
Our Integra NeuroSciences division is a leading provider of implants, devices,
and systems used in neurosurgery, neurotrauma, and related critical care and a
distributor of disposables and supplies used in the diagnosis and monitoring of
neurological disorders. Integra NeuroSciences sells primarily through a direct
sales force of more than 80 people in the United States, the United Kingdom,
Germany and France.
INTEGRA LIFESCIENCES DIVISION
Our Integra LifeSciences division develops and manufactures a variety of medical
products and devices, including products based on our proprietary tissue
regeneration technology that are used to treat soft tissue and orthopedic
conditions. For the majority of the products manufactured by the Integra
LifeSciences division, we have partnered with market leaders for the development
and marketing efforts related to these products. These non-neurosurgical
products address large, diverse markets, and we believe that they can be
promoted more cost-effectively through leveraging marketing partners than
through developing a sales infrastructure ourselves. We have strategic alliances
with Ethicon, a division of Johnson & Johnson, the Genetics Institute division
of Wyeth, Medtronic Sofamor Danek, and Sulzer Dental.
ACQUISITIONS
The recent growth in products sales has been generated through new product
launches and six acquisitions. Reported product sales for 2001 and 2000 included
the following amounts in sales of acquired product lines:
2001 Sales 2000 Sales
---------- ----------
(IN THOUSANDS)
Integra NeuroSciences
Products acquired in 2001(1) ................ $ 2,044 $ --
Products acquired in 2000 ................... 15,290 9,587
------- -------
Subtotal .................................... 17,334 9,587
All other product sales ..................... 50,998 39,615
------- -------
Total Integra NeuroSciences product sales ... 68,332 49,202
Integra LifeSciences
Products acquired in 2001 ................... $ -- $ --
Products acquired in 2000 ................... 2,222 1,622
------- -------
Subtotal .................................... 2,222 1,622
All other product sales ..................... 17,133 14,163
------- -------
Total Integra LifeSciences product sales .... 19,355 15,785
Consolidated product sales .................... $87,687 $64,987
(1) Excludes sales of the LICOX(R) product in those territories where Integra
NeuroSciences had exclusive distribution rights to the product prior to our
acquisition of GMSmbH.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Recent business and product line acquisitions include the following:
On December 6, 2001, we acquired NeuroSupplies, Inc., a specialty distributor of
disposables and supplies for neurologists, pulmonologists and other physicians,
for $4.3 million. The purchase price consisted of $0.4 million in cash paid at
closing, a $3.6 million note payable in January 2002, and 10,000 shares of
Integra Common Stock. Integra NeuroSupplies markets a wide variety of supplies
that are sold to neurologists, hospitals, sleep clinics, and other physicians in
the United States as well as to original equipment manufacturers and
distributors. Revenues of the acquired business were approximately $4.0 million
in 2000.
On April 27, 2001, we acquired Satelec Medical, a subsidiary of the
Satelec-Pierre Rolland group, for $3.7 million in cash. Satelec Medical, based
in France, manufactures and markets the Dissectron(R) ultrasonic surgical
aspirator console and a line of related handpieces. Revenues of the acquired
business were approximately $1.5 million in 2000.
On April 4, 2001, we acquired GMSmbH, the German manufacturer of the LICOX(R)
product, for $2.9 million. The purchase price consisted of $2.3 million in cash
paid at closing, the forgiveness of $0.2 million in notes receivable from
GMSmbH, and $0.4 million of future minimum royalty payments to the seller. Prior
to the acquisition, the Integra NeuroSciences division had exclusive marketing
rights to the LICOX(R) products in the United States and certain other markets.
Revenues of the acquired 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 approximately $0.4 million to Integra.
On April 6, 2000, we 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. Sales of the cryosurgery product line are reported in
the Integra LifeSciences division.
On January 17, 2000, we purchased the business, including certain assets and
liabilities, of Clinical Neuro Systems, Inc. (CNS) for $6.8 million. The
purchase price consisted of $4.0 million in cash and a 5% $2.8 million
promissory note issued to the seller, which was repaid in full in 2001. CNS
designs and manufactures neurosurgical external ventricular drainage systems,
including catheters and drainage bags, as well as cranial access kits.
On March 29, 1999 we acquired the business, including certain assets and
liabilities, of the NeuroCare group of companies (NeuroCare), a leading provider
of neurosurgical products for $25.2 million. The purchase price consisted of
$14.2 million in cash and $11.0 million of assumed indebtedness under a term
loan from Fleet Capital, which was repaid in full in 2001. The cash portion of
the purchase price was financed in part by affiliates of Soros Private Equity
Partners LLC, through the sale of $10.0 million of Series B Convertible
Preferred Stock.
These acquisitions have been accounted for using the purchase method of
accounting, and the results of operations of the acquired businesses have been
included in our consolidated financial statements since their respective dates
of acquisition. The following table provides a comparison of pro forma product
sales for the years 2001 and 2000 as if all acquisitions completed after January
1, 2000 had occurred as of the beginning of that year. This pro forma product
sales data is based upon estimates of product sales generated by the acquired
businesses during the period prior to which Integra acquired them and does not
necessarily represent results that would have occurred if the acquisitions had
taken place on the basis assumed above.
2001 2000 Growth Over Prior Year
Reported Pro Forma Reported Pro Forma Reported Pro Forma
-------- --------- -------- --------- ----------- ----------
($ IN THOUSANDS)
Integra NeuroSciences product sales .... $ 68,332 $ 73,539 $ 49,202 $ 57,904 38.9% 27.0%
Integra LifeSciences product sales ..... 19,355 19,355 15,785 16,467 22.6% 17.5%
-------- --------- -------- --------- -------- ---------
Consolidated product sales ............. 87,687 92,894 64,987 74,371 34.9% 24.9%
Other revenue .......................... 5,755 5,755 6,662 6,662 (13.6%) (13.6%)
-------- --------- -------- --------- -------- ---------
Total revenue .......................... $ 93,442 $ 98,649 $ 71,649 $ 81,033 30.4% 21.7%
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
We have acquired numerous businesses and product lines since 1999. As a result
of these acquisitions, the following financial results may not be directly
comparable.
Years Ended December 31,
2001 2000 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Product sales ............................ $ 87,687 $ 64,987 $ 40,047
Total revenue ............................ 93,442 71,649 42,876
Cost of product sales .................... 36,014 29,511 22,678
GROSS MARGIN ON PRODUCT SALES ............ 51,673 35,476 17,369
GROSS MARGIN AS A PERCENTAGE
OF PRODUCT SALES ....................... 59% 55% 43%
Total other operating costs
and expenses ........................... 43,142 53,859 32,578
-------- -------- --------
Operating income (loss) .................. 14,286 (11,721) (12,380)
Interest income (expense), net ........... 1,393 (473) 294
Gain on disposition of product line ...... -- 1,146 4,161
Other income (expense), net .............. (136) 201 141
-------- -------- --------
Income (loss) before income taxes ........ 15,543 (10,847) (7,784)
Income tax expense (benefit) ............. (10,863) 108 (1,818)
-------- -------- --------
Net income (loss) before extraordinary
item and accounting change ............. 26,406 (10,955) (5,966)
Extraordinary loss / accounting change ... (243) (470) --
-------- -------- --------
Net income (loss) ........................ $ 26,163 $(11,425) $ (5,966)
======== ======== ========
Diluted net income (loss) per share ...... $ 0.94 $ (0.97) $ (0.40)
Weighted average shares outstanding ...... 27,796 17,553 16,802
In 2001, total revenues increased 30% over 2000 to $93.4 million, led by a 35%
increase in product sales to $87.7 million. Domestic product sales increased
$17.0 million in 2001 to $68.4 million, or 78% of total sales, as compared to
79% of product sales in 2000 and 77% of product sales in 1999. Growth in total
revenues and product sales in 2001 was led by the Integra NeuroSciences
division, which reported an $18.9 million increase in total revenues to $69.4
million, a 37% increase over 2000. The Integra LifeSciences division reported a
$2.9 million increase in total revenues to $24.0 million, a 14% increase over
2000.
In 2000, total revenues increased 67% over 1999 to $71.6 million, led by a 62%
increase in product sales to $65.0 million. The increase in product sales was
primarily the result of the $11.2 million in sales of products acquired in 2000,
increased sales of the DuraGen(R) product, which was launched in the third
quarter of 1999, and a full year of sales of the NeuroCare products, which were
acquired in March 1999. Growth in total revenues and product sales in 2000 was
led by the Integra NeuroSciences division, which reported an $24.6 million
increase in total revenues to $50.5 million, a 95% increase over 1999. The
Integra LifeSciences division reported a $4.2 million increase in total revenues
to $21.1 million, a 24% increase over 1999.
Cost of product sales included $203,000, $429,000, and $2.5 million in fair
value inventory purchase accounting adjustments recorded in connection with
acquisitions in 2001, 2000, and 1999, respectively. Excluding these adjustments,
gross margin as a percentage of product sales in 1999 would have been 50%. The
continued improvement in gross margins is primarily the result of an improved
sales mix of higher margin products and increased capacity utilization in our
manufacturing facilities.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net income in 2001 was $26.2 million, or $0.94 per diluted share, as compared to
a net loss of $11.4 million in 2000, or $(0.97) per diluted share, and a net
loss of $6.0 million in 1999, or $(0.40) per diluted share. Included in these
amounts are the following significant special items:
RECORDED IN 2001
- - an $11.5 million deferred income tax benefit from the reduction of a portion
of the valuation allowance recorded against our deferred tax assets; and
- - an extraordinary loss of $243,000, net of tax, from the early retirement of
debt;
RECORDED IN 2000
- - a $13.5 million non-cash, stock-based compensation charge related to the
extension of the Chief Executive Officer's employment agreement recorded in
operating expenses;
- - a $1.1 million gain on the sale of product lines;
- - a $470,000 charge recorded as the cumulative effect of an accounting change
associated with the adoption of a new accounting policy for revenue
recognition; and
- - a $4.2 million non-recurring, non-cash dividend related to the beneficial
conversion feature of our Series C Convertible Preferred Stock when it was
issued in March 2000 that did not affect the reported net loss for 2000 but
was reflected in the calculation of net loss per share for 2000;
RECORDED IN 1999
- - a $2.5 million fair value purchasing accounting inventory charge and $1.0
million of severance costs related to acquisitions recorded in operating
expenses;
- - a $3.7 million gain, net of tax, on the sale of a product line; and
- - a $1.8 million deferred income tax benefit from the reduction of the deferred
tax liability recorded in the NeuroCare acquisition to the extent that
consolidated deferred tax assets were generated subsequent to the
acquisition.
As adjusted for the above special items, we would have reported net income of
$14.9 million in 2001, as compared to net income of $1.4 million in 2000 and a
net loss of $7.9 million in 1999.
The following discussion of divisional financial results excludes corporate
general and administrative expenses and amortization of intangible assets, which
are not included in the measurement of divisional operating results.
INTEGRA NEUROSCIENCES DIVISION
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Product sales:
- Neuro intensive care unit .................. $ 27,830 $ 23,521 $ 14,398
- Neuro operating room ....................... 36,213 21,820 8,458
- Other NeuroSciences products ............... 4,289 3,861 2,588
-------- -------- --------
Total product sales ............................. 68,332 49,202 25,444
Other revenue ................................... 1,061 1,312 450
-------- -------- --------
Total revenue ................................... 69,393 50,514 25,894
Cost of product sales ........................... 25,973 20,485 14,185
GROSS MARGIN ON PRODUCT SALES ................... 42,359 28,717 11,259
GROSS MARGIN AS A PERCENTAGE OF PRODUCT SALES ... 62% 58% 44%
Research and development expenses ............... 3,027 2,470 2,080
Sales and marketing expenses .................... 18,750 13,165 6,442
General and administrative expenses ............. 3,682 4,358 4,726
-------- -------- --------
Operating income (loss) ......................... $ 17,961 $ 10,036 $ (1,539)
Product sales in the Integra NeuroSciences division increased $19.1 million in
2001 to $68.3 million, a 39% increase over 2000. Product sales increased $23.8
million in 2000 to $49.2 million, a 93% increase over 1999. This growth has been
generated through acquisitions, new product launches, and increased direct sales
and marketing efforts, both domestically and in Europe.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Sales of the DuraGen(R) Dural Graft Matrix, the Selector(R) Integra Ultrasonic
Aspirator for the ablation of cranial tumors, and our line of intracranial
monitoring and drainage products for the neuro intensive care unit have grown
particularly well.
In 2001, we launched three innovative new products in the United States. For the
neuro intensive care unit, we launched the LICOX(R) Brain Tissue Oxygen
Monitoring System for continuous monitoring of intracranial oxygen levels and
the Ventrix(R) TrueTech Catheter, the only advanced intracranial pressure
monitoring and drainage catheter designed to tunnel away from the brain, a
proven clinical technique used previously only in fluid-filled ICP monitoring
systems. Both of these products were launched in April 2001. For the neuro
operating room, we launched the NeuraGen(TM) Nerve Guide for the repair of
severed peripheral nerves in October 2001. These products generated
approximately $700,000 in domestic sales in 2001.
In April 2001, we acquired the LICOX(R) product (for which we previously had
distribution rights in the United States and certain other markets) and the
Dissectron(R) Ultrasonic Aspirator for tumor removal. In December 2001, we
acquired the neurological disposables and supplies business of NeuroSupplies,
Inc. Sales of these products (excluding sales of the LICOX(R) product in those
markets where we previously had distribution rights) totaled $2.0 million in
2001.
Future sales growth is expected to be driven by our planned increase in the
domestic sales force, the continued implementation of our direct sales strategy
in Europe and from the recently launched and acquired products.
Cost of product sales included $203,000, $339,000, and $2.5 million in fair
value inventory purchase accounting adjustments recorded in connection with
acquisitions in 2001, 2000, and 1999, respectively. Excluding these adjustments,
gross margin as a percentage of product sales would have been 62%, 59% and 54%,
respectively. The continued improvement in gross margins is primarily the result
of an improved sales mix of higher margin products. While gross margins on the
products that we manufacture are expected to continue to improve in the near
term, the lower gross margins from sales of the recently acquired Integra
NeuroSupplies business will limit the effect of such expected improvements on
overall divisional gross margins.
Other revenue consisted primarily of royalties on a product technology obtained
in the NeuroCare acquisition. Other revenue increased $862,000 in 2000 primarily
as the result of a full year of royalty revenues recognized in 2000 related to
the product technology acquired in 1999. Other revenue is expected to decrease
by $950,000 in 2002 from the expiration of the related royalty agreement.
Research and development expenses increased in 2001 primarily related to the
development of a new collagen hemostatic device for use in neurosurgical
procedures and continued development costs for the NeuraGen(TM) Nerve Guide
product. Research and development expenses increased in 2000 primarily from the
inclusion of the full year of research and development activities from the
NeuroCare acquisition. Research and development expenses represented 4%, 5%, and
8% of total product sales in 2001, 2000, and 1999, respectively.
Sales and marketing expenses have increased significantly since 1999, consistent
with the expansion of our domestic and international sales and marketing
infrastructure, increased trade show activities and the opening of a national
distribution center in 2000. Sales and marketing expenses represented 27%, 27%,
and 25% of total product sales in 2001, 2000, and 1999, respectively.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Since the end of 1999, the domestic sales organization has more than doubled to
64 professionals that include neurospecialists, regional managers and clinical
educators. With the acquisitions of GMSmbH and Satelec Medical in April 2001, we
have a direct sales and marketing presence in the key European markets of
Germany, France and the United Kingdom. Sales and marketing expenses are
expected to continue to increase in 2002 as a result of the planned increase in
the domestic direct sales organization to more than 80 professionals and because
we will incur the first full year of direct selling expenses in Germany and
France. We believe the smaller territories that result from the expansion of the
sales force in the United States will allow each neurospecialist to focus more
closely on each hospital account.
General and administrative expenses decreased $676,000 in 2001. Bad debt expense
was $400,000 lower in 2001, primarily as the result of a writeoff of a large
distributor account recorded in 2000 and improved accounts receivable
collections in 2001. Additionally, general and administrative expenses in 2000
included $200,000 of consulting fees paid to the seller of the CNS business.
General and administrative expenses in 1999 included $1.0 million in severance
costs related to the NeuroCare acquisition.
INTEGRA LIFESCIENCES DIVISION
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Product sales:
- Tissue repair products ...................... $ 8,698 $ 6,168 $ 5,781
- Other medical devices ....................... 10,657 9,617 8,822
------- ------- -------
Total product sales .............................. 19,355 15,785 14,603
Other revenue .................................... 4,694 5,350 2,379
------- ------- -------
Total revenue .................................... 24,049 21,135 16,982
Cost of product sales ............................ 10,041 9,026 8,493
GROSS MARGIN ON PRODUCT SALES .................... 9,314 6,759 6,110
GROSS MARGIN AS A PERCENTAGE OF PRODUCT SALES .... 48% 43% 42%
Research and development expenses ................ 4,965 5,054 6,813
Sales and marketing expenses ..................... 1,572 2,206 3,045
General and administrative expenses .............. 1,423 1,470 2,433
------- ------- -------
Operating income (loss) .......................... $ 6,048 $ 3,379 $(3,802)
Product sales in the Integra LifeSciences division increased $3.6 million in
2001 to $19.4 million, a 23% increase over 2000. This growth was generated
primarily by a $2.5 million increase in sales of tissue repair products and a
$600,000 increase in sales of the cryosurgery product line acquired in the
second quarter of 2000. The increase in sales of tissue repair products was
primarily generated by higher sales of the INTEGRA(R) Dermal Regeneration
Template and our Absorbable Collagen Sponge for use in orthopedic applications.
Product sales in 2000 increased $1.2 million to $15.8 million, an 8% increase
over 1999, primarily from sales of the acquired cryosurgery product line and
increased sales of orthopedic products. Partially offsetting this were decreased
sales of the INTEGRA(R) product, for which direct sales and marketing activities
were transferred to Ethicon in June 1999, and decreased sales of a product line
disposed of in the first quarter of 1999.
Gross margins have continued to improve primarily as the result of increased
capacity utilization and increasing sales of higher margin orthopedic products.
Other revenue consists of i) research and development funding from strategic
partners and government grants, ii) license, distribution, and other
event-related revenues from strategic partners and other third parties, and iii)
product royalty income. The decline in other revenue in 2001 was primarily the
result of $1.5 million of event-related revenues received in 2000, as compared
to none in 2001, which was partially offset by higher research and development
funding received in 2001. Other revenue in 2001 and 2000 includes $2.0 million
per year in research and development funding related to the Company's strategic
alliance with Ethicon. The Ethicon Agreement provides us with research funding
of $2.0 million per year through the year 2004. After 2004, funding amounts are
based on a percentage of net sales of the INTEGRA(R) Dermal Regeneration
Template.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Although the research, development and distribution agreements with our
strategic partners provide us with funding when certain events occur, such as
advances in research programs, critical publications or product approvals, the
timing of these event payments is uncertain and difficult to predict. In the
first quarter of 2002, we expect to receive an additional $500,000 event payment
from Ethicon for the achievement of a contract goal.
The decrease in research and development expenses in 2001 was the result of a
decline in costs associated with a program to develop a product to regenerate
articular cartilage, partially offset by increased spending on programs with our
other development partners. Research and development activities decreased in
2000 primarily because of the elimination of several non-core research programs
throughout 1999 and reductions in headcount in our New Jersey-based research
group. Offsetting these decreases were additional research and development
activities related to the INTEGRA(R) Dermal Regeneration Template programs.
Sales and marketing activities in the Integra LifeSciences division are
primarily the responsibility of our strategic marketing partners and
distributors. Sales and marketing costs have decreased since 1999 as a result of
the transition of INTEGRA(R) Dermal Regeneration Template selling and marketing
activities to Ethicon in June 1999 and lower distributor selling costs in 2001.
The $1.0 million decrease in general and administrative expenses in 2000 was
primarily the result of reduced headcount and the assumption of more
administrative responsibilities by the corporate staff.
CORPORATE EXPENSES AND AMORTIZATION
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Total divisional operating costs and expenses ... $ 69,433 $ 58,234 $ 48,217
Corporate general and administrative expenses ... 6,939 22,655 6,165
Amortization .................................... 2,784 2,481 874
-------- -------- --------
Consolidated total operating expenses ........... 79,156 83,370 55,256
Corporate general and administrative expenses in 2000 included the $13.5 million
non-cash, stock-based compensation charge related to the extension of the Chief
Executive Officer's employment agreement. Excluding this amount, the $2.2
million decrease in corporate general and administrative expenses in 2001
resulted primarily from a decrease in legal expenses related to the conclusion
of the jury trial in the patent infringement lawsuit against Merck KGaA in the
first quarter of 2000 as well as a reduction in other litigation matters
outstanding in 2001, and reduced spending in other corporate functions.
Excluding the $13.5 million stock-based charge recorded in 2000, corporate
general and administrative expenses increased $3.0 million in 2000 as compared
to 1999 primarily because of increased headcount.
The allocation of the purchase price of business acquisitions has resulted in
(i) acquired intangible assets, consisting primarily of technology, customer
lists and relationships, and trademarks, of approximately $22.2 million, which
are amortized on a straight-line basis over lives ranging from 2 to 15 years,
and (ii) residual goodwill of approximately $16.3 million, which has been
amortized on a straight-line basis over 15 years. In connection with the
implementation in 2002 of the recently issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (Statement 142), this
residual goodwill will no longer be amortized, but will be reviewed at least
annually for impairment. The implementation of Statement 142 is expected to
reduce amortization expense by approximately $1.0 million per year.
Additionally, a further $500,000 reduction in amortization expense is expected
in 2002 related to an intangible asset that was fully amortized at the end of
2001, which will be partially offset by an increase of approximately $100,000
from a full year of amortization of intangible assets related to businesses
acquired in 2001.
We reported operating earnings before interest, taxes, depreciation and
amortization (EBITDA) of $20.2 million in 2001, as compared to an adjusted $7.2
million in 2000 and an adjusted $(5.7) million in 1999. Operating EBITDA
represents operating income or loss before depreciation and amortization.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
NON-OPERATING INCOME AND EXPENSES
In August 2001, we raised $113.4 million from a follow-on public offering of 4.7
million shares of common stock, of which $9.3 million was subsequently used to
repay all outstanding indebtedness. Accordingly, net interest income in 2001
increased to $1.4 million, as compared to net interest expense of $473,000 in
2000 and net interest income of $294,000 in 1999.
We recorded a $1.1 million pre-tax gain on the disposition of two product lines
in 2000 and a $4.2 million pre-tax gain on the disposition of a product line in
1999.
INCOME TAXES
Based upon our recent trend of generating continued taxable earnings, current
projections for future taxable earnings, and the expected timing of the reversal
of deductible temporary differences, we concluded in the fourth quarter of 2001
that a portion of the valuation allowance recorded against federal and state net
operating loss carryforwards and certain other temporary differences was no
longer necessary. The valuation allowance was reduced by $12.0 million in 2001
because we believe that it is more likely than not that we will realize the
benefit of that portion of the deferred tax assets recorded at December 31,
2001. The $12.0 million reduction in the valuation allowance consisted of an
$11.5 million deferred income tax benefit and a $450,000 credit to additional
paid-in capital related to net operating loss carryforwards generated through
the exercise of stock options. A valuation allowance of $34.4 million is
recorded against the $44.6 million of net deferred tax assets recorded at
December 31, 2001. However, we may recognize additional deferred income tax
benefit in future periods if we determine that all or a portion of the remaining
deferred tax assets can be realized. At December 31, 2001, the Company had net
operating loss carryforwards of approximately $90.4 million and $19.8 million
for federal and state income tax purposes, respectively, to offset future
taxable income. The federal and state net operating loss carryforwards expire
through 2018 and 2008, respectively.
This partial reduction of the valuation allowance is expected to result in an
effective tax rate for Integra of approximately 34% in 2002, assuming no further
changes in our judgment regarding the realizability of our net deferred tax
assets. However, the utilization of our net operating loss carryforwards to
offset future taxable income is expected to substantially reduce the amount of
income taxes actually paid. Accordingly, our actual cash tax rate is expected to
be in the 8-12% range through the year 2003.
The $10.9 million net tax benefit recorded in 2001 is net of $1.2 million in
current income tax expense.
The income tax provision of $108,000 recorded in 2000 includes $600,000 of
income tax expense, partially offset by a $500,000 benefit from the sale of New
Jersey state net operating loss carryforwards under a state sponsored program.
The income tax benefit of $1.8 million recorded in 1999 consists of a $1.8
million deferred tax benefit from the reduction of the deferred tax liability
recorded in the NeuroCare acquisition to the extent that consolidated deferred
tax assets were generated subsequent to the acquisition. A tax benefit of
$600,000 associated with the sale of New Jersey state net operating loss
carryforwards in 1999 was offset by $600,000 of current income tax expense.
INTERNATIONAL PRODUCT SALES AND OPERATIONS
Product sales by major geographic area are summarized below:
United Asia Other
States Europe Pacific Foreign Consolidated
------ -------- --------- --------- ------------
(IN THOUSANDS)
Product sales:
2001 ........... $ 68,391 $ 10,577 $ 4,838 $ 3,881 $ 87,687
2000 ........... 51,379 6,759 4,628 2,221 64,987
1999 ........... 30,982 4,664 3,299 1,102 40,047
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
In 2001, sales to customers outside the United States totaled $19.3 million, or
22% of consolidated product sales, of which approximately 55% were to European
customers. Of this amount, $7.2 million of these sales were generated in foreign
currencies from our foreign-based subsidiaries in the United Kingdom, Germany
and France. 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. Sales to
customers outside the United States and sales denominated in foreign currencies
are expected to increase in 2002 because of our establishment of a direct sales
and marketing infrastructure in the United Kingdom, Germany and France in 2001
and the transfer of certain distributor accounts to our operations in the United
Kingdom.
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 European
customers. Of this amount, $3.2 million of these sales were generated in foreign
currencies from our subsidiary based in the United Kingdom, which was acquired
in April 2000.
In 1999 sales outside the United States totaled $9.1 million, or 23% of
consolidated product sales. 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
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. Since 1999, we have
substantially reduced our net use of cash from operations and, in 2001, we
generated positive operating cash flows of $15.7 million. This positive
operating cash flow was reduced by a $7.0 million use of cash to increase
inventory. Inventory levels increased during 2001 as part of a planned build-up
of certain product lines in connection with new product launches and specific
sales promotion programs. We also increased inventories in advance of changes in
the manufacturing of certain product lines to ensure that there were no sales
disruptions during the transition.
Our principal uses of funds in 2001 were $13.7 million for debt repayments, $6.3
million for business acquisitions, and $2.9 million for purchases of property
and equipment. Principal sources of funds were approximately $123.1 million from
the issuance of common stock and $15.7 million of positive operating cash flow.
On August 13, 2001, we issued 4.7 million shares of common stock in a public
offering at $25.50 per share. The net proceeds generated by the offering, after
expenses, were $113.4 million. With the proceeds from the public offering of
common stock, we repaid all outstanding debt, including $7.9 million of bank
loans and $1.4 million payable under the terms of a promissory note, in the
third quarter of 2001. Additionally, the related term loan and revolving credit
facility with Fleet Capital was terminated in August 2001. At December 31, 2001,
we had $3.6 million in debt outstanding relating to a short-term note issued in
connection with the Integra NeuroSupplies acquisition in December 2001. This
note was repaid in full in January 2002.
At December 31, 2001, we had cash, cash equivalents and current and non-current
investments totaling approximately $131.0 million. Investments consist almost
entirely of highly-liquid, interest bearing debt securities. Given the
significant level of liquid assets and our objective to grow by acquisition and
alliances, our financial position and future financial results could change
significantly if we were to complete a business acquisition by utilizing a
significant portion of our liquid assets.
In February, 2002, our Board of Directors reauthorized our share repurchase
program. Under the program, we may repurchase up to 500,000 shares of our common
stock for an aggregate purchase price not to exceed $15 million. Shares may be
repurchased under this program through December 31, 2002 either in the open
market or in privately negotiated transactions. We did not repurchase any shares
of our common stock under this program in 2001.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities, and the reported amounts
of revenues and expenses. Significant estimates affecting amounts reported or
disclosed in the consolidated financial statements include allowances for
doubtful accounts receivable and sales returns, net realizable value of
inventories, estimates of future cash flows associated with long-lived asset
valuations, depreciation and amortization periods for long-lived assets,
valuation allowances recorded against deferred tax assets, loss contingencies,
and estimates of costs to complete performance obligations associated with
research, licensing, and distribution arrangements for which revenue is
accounted for using percentage of completion accounting. These estimates are
based on historical experience and on various other assumptions that are
believed to be reasonable under the current circumstances. Actual results could
differ from these estimates.
We believe the following accounting policies, which form the basis for
developing these estimates, are those that are most critical to the presentation
of our financial statements and require the most difficult, subjective and
complex judgments:
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS. We evaluate the
collectibility of accounts receivable based on a combination of factors. In
circumstances where a specific customer is unable to meet its financial
obligations to us, we record an allowance against amounts due to reduce the net
recognized receivable to the amount that we reasonably expect to collect. For
all other customers, we record allowances for doubtful accounts based on the
length of time the receivables are past due, the current business environment
and our historical experience. If the financial condition of customers or the
length of time that receivables are past due were to change, we may change the
recorded amount of allowances for doubtful accounts in the future.
We record a provision for estimated sales returns and allowances on product
sales in the same period as the related revenues are recorded. We base these
estimates on historical sales returns and other known factors. Actual returns
could be different from our estimates and the related provisions for sales
returns and allowances, resulting in future changes to the sales returns and
allowances provision.
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. At each balance sheet date, we evaluate
ending inventories for excess quantities, obsolescence or shelf-life expiration.
Our evaluation includes an analysis of historical sales levels by product and
projections of future demand. To the extent that we determine there are excess,
obsolete or expired inventory quantities, we record valuation reserves against
all or a portion of the value of the related products. If future demand or
market conditions are different than our projections, a change in recorded
inventory valuation reserves may be required and would be reflected in cost of
sales in the period the revision is made.
LONG-LIVED ASSETS. We review long-lived assets to be held and used, including
property, plant, and equipment and goodwill and other intangible assets, 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, we perform a
recoverability test using projected undiscounted net cash flows applicable to
the long-lived assets. If an impairment exists, we calculate the amount of such
impairment based on the estimated fair value of the asset. Upon the adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" in January 2002, our assessment of the recoverability of
goodwill will change to a method based upon a comparison of the carrying value
of the reporting units to which goodwill is assigned with its respective fair
value. We record impairments to long-lived assets to be disposed of based upon
the fair value of the applicable assets. If future events that would trigger an
impairment review occur or we change our estimates of projected future
undiscounted net cash flows related to long-lived assets to be held and used, we
may need to record an impairment charge.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
DEPRECIATION AND AMORTIZATION PERIODS. We provide for depreciation and
amortization using the straight-line method over the estimated useful lives of
property, plant and equipment and goodwill and other intangible assets. We base
the determination of these useful lives on the period over which we expect the
related assets to contribute to our cash flows. If our assessment of the useful
lives of these long-lived assets changes, we may change future depreciation and
amortization expense.
INCOME TAXES. We recognize deferred tax assets and liabilities 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. We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. We have
considered our projections for future taxable earnings and the expected timing
of the reversal of deductible temporary differences in determining the need for
a valuation allowance. In 2001, this analysis resulted in our reducing the
recorded valuation allowance by $12.0 million. In the event that we determine
that we would be able to realize more or less than the recorded amount of net
deferred tax assets, we would record an adjustment to the deferred tax asset
valuation allowance in the period we make such a determination. We would record
the adjustment in the earnings of such period or, to the extent the valuation
allowance relates to tax benefits from the exercise of stock options, as a
credit to additional paid-in capital.
REVENUE RECOGNITION. We recognize product sales 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. We recognize
research grant revenue when the related expenses are incurred. Under the terms
of existing research grants, we are reimbursed for allowable direct and indirect
research expenses. We recognize royalty revenue over the period our customers
sell the royalty products. We recognize non-refundable fees received under
research, licensing and distribution arrangements as revenue when received if we
have no continuing obligations to the other party. For those arrangements where
we have continuing performance obligations, we recognize revenue using the
lesser of the amount of non-refundable cash received or the result achieved
using percentage of completion accounting based upon our estimated cost to
complete these obligations. If our estimates of the costs to complete these
obligations change, we may change the amount of revenue we recognized for fees
received under research, licensing and distribution arrangements where we have
continuing performance obligations.
LOSS CONTINGENCIES. We are subject to claims and lawsuits in the ordinary course
of our business, including claims by employees or former employees and with
respect to our products. Our financial statements do not reflect any material
amounts related to possible unfavorable outcomes of claims and lawsuits to which
we are currently a party because we currently believe that such claims and
lawsuits 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. However, it is possible that our
results of operations, financial position and cash flows in a particular period
could be materially affected by these contingencies if we change our assessment
of the likely outcome of these matters.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and the financial statement schedules specified by this
Item, together with the reports thereon of PricewaterhouseCoopers LLP, are
presented following Item 14 of this report.
Information on quarterly results of operations is set forth in our financial
statements under Notes to Consolidated Financial Statements, Note 14 - Selected
Quarterly Information - Unaudited.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
41
PART III
INCORPORATED BY REFERENCE
The information called for by Item 10 Directors and Executive Officers of the
Registrant (other than the information concerning executive officers set forth
after Item 4 herein), Item 11 Executive Compensation, Item 12 Security Ownership
of Certain Beneficial Owners and Management and Item 13 Certain Relationships
and Related Transactions is incorporated herein by reference to the Company's
definitive proxy statement for its Annual Meeting of Stockholders scheduled to
be held on May 21, 2002, which definitive proxy statement is expected to be
filed with the Commission not later than 120 days after the end of the fiscal
year to which this report relates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report.
1. Financial Statements. The following financial statements and financial
statement schedule are filed as a part of this report.
Report of Independent Accountants ......................................... F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000 .............. F-2
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000, and 1999 ........................................ F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999 ........................................ F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001, 2000, and 1999 .................... F-5
Notes to Consolidated Financial Statements ................................ F-7
Report of Independent Accountants on Financial Statement Schedule ......... F-28
Financial Statement Schedule .............................................. F-29
All other schedules not listed above have been omitted, because they are not
applicable or are not required, or because the required information is included
in the consolidated financial statements or notes thereto.
2. Exhibits and Reports on Form 8-K.
Location of
Exhibits
Incorporated
Number Description by Reference
- ------- ------------------------------------------------------ ------------
2.1 Purchase Agreement dated January 5, 1999 among
Integra LifeSciences Corporation, Rystan Company,
Inc. and Healthpoint, Ltd.** (11) (Exh. 2)
2.2 Asset Purchase Agreement dated March 29, 1999 among
Heyer-Shulte NeuroCare, L.P., Neuro Navigational,
L.L.C., Integra NeuroCare LLC and Redmond NeuroCare
LLC.** (12) (Exh. 2)
2.3 Asset Purchase Agreement, dated as of January 14,
2000, among Clinical Neuro Systems Holdings LLC,
Clinical Neuro Systems, Inc., Surgical Sales
Corporation (trading as Connell Neurosurgical) and
George J. Connell. (14)** (Exh. 2)
2.4 Asset Purchase Agreement dated March 20, 2000 by and
among Integra Selector Corporation, NMT Neurosciences
(US), Inc. and NMT Medical, Inc. (15)** (Exh. 2.1)
42
2.5 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. (15)** (Exh. 2.2)
3.1(a) Amended and Restated Certificate of Incorporation of
the Company (2) (Exh. 3.1)
3.1(b) Certificate of Amendment to Amended and Restated
Certificate of Incorporation dated May 23, 1998 (3) (Exh. 3.1(b))
3.2 Amended and Restated By-laws of the Company (8) (Exh. 3)
4.1 Stock Option Grant and Agreement dated December 27,
1997 between the Company and Stuart M. Essig*(8) (Exh. 10.2)
4.2 Restricted Units Agreement dated December 27, 1997
between the Company and Stuart M. Essig* (8) (Exh. 10.3)
4.3 Certificate of Designation, Preferences and Rights of
Series A Convertible Preferred Stock as filed with
the Delaware Secretary of State on April 14, 1998. (6) (Exh. 3)
4.4(a) Certificate of Designation, Preferences and Rights of
Series B Convertible Preferred Stock as filed with the
Delaware Secretary of State on March 12, 1999 (3) (Exh. 4.2)
4.4(b) 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. (16) (Exh. 4.2)
4.5 Certificate of Designation, Rights and Preferences of
Series C Convertible Preferred Stock of Integra
LifeSciences Holdings Corporation dated March 21,
2000. (16) (Exh. 4.1)
4.6 Warrant to Purchase 270,550 Shares of Common Stock of
Integra LifeSciences Holdings Corporation issued to
Quantum Industrial Partners LDC. (16) (Exh. 4.3)
4.7 Warrant to Purchase 29,450 Shares of Common Stock of
Integra LifeSciences Holdings Corporation issued to
SFM Domestic Investments LLC. (16) (Exh. 4.4)
4.8 Stock Option Grant and Agreement dated December 22,
2000 between Integra LifeSciences Holdings
Corporation and Stuart M. Essig* (21) (Exh. 4.1)
4.9 Stock Option Grant and Agreement dated December 22,
2000 between Integra LifeSciences Holdings
Corporation and Stuart M. Essig* (21) (Exh. 4.2)
4.10 Restricted Units Agreement dated December 22, 2000
between Integra LifeSciences Holdings Corporation and
Stuart M. Essig* (21) (Exh. 4.3)
4.11 Second Amendment to Certificate of Rights, Designations
and Preferences of Series B Convertible Preferred
Stock. (24) (Exh. 3i.1)
4.12 First Amendment to Certificate of Rights, Designations
and Preferences of Series C Convertible Preferred
Stock. (24) (Exh. 3i.2)
10.1 License Agreement between MIT and the Company dated
as of December 29, 1993 (2) (Exh. 10.1)
10.2 Exclusive License Agreement between the Company and
Rutgers University dated as of December 31, 1994 (2) (Exh. 10.5)
10.3 License Agreement for Adhesion Peptides Technology
between La Jolla Cancer Research Foundation and
Telios dated as of June 24, 1987 (2) (Exh. 10.6)
10.4 Supply Agreement between Genetics Institute, Inc. and
the Company Dated as of April 1, 1994 (2) (Exh. 10.12)
43
10.5 Lease between Plainsboro Associates and American
Biomaterials Corporation dated as of April 16, 1985,
as assigned to Colla-Tec, Inc. on October 24, 1989
and as amended through November 1, 1992 (2) (Exh. 10.30)
10.6 Equipment Lease Agreement between Medicus Corporation
and the Company, dated as of June 1, 2000. (19) (Exh. 10.1)
10.7 Form of Indemnification Agreement between the Company
and [ ] dated August 16, 1995, including a schedule
identifying the individuals that are a party to such
Indemnification Agreements(4) (Exh. 10.37)
10.8 1993 Incentive Stock Option and Non-Qualified Stock
Option Plan* (2) (Exh. 10.32)
10.9(a) 1996 Incentive Stock Option and Non-Qualified Stock
Option Plan* (5) (Exh. 4.3)
10.9(b) Amendment to 1996 Incentive Stock Option and
Non-Qualified Stock Option Plan* (8) (Exh. 10.4)
10.10 1998 Stock Option Plan* (7) (Exh. 10.2)
10.11 1999 Stock Option Plan* (17) (Exh. 10.13)
10.12 Employee Stock Purchase Plan* (7) (Exh. 10.1)
10.13 Deferred Compensation Plan* (17) (Exh. 10.15)
10.14 2000 Equity Incentive Plan* (22) (Exh. 10.17)
10.15 2001 Equity Incentive Plan (23) (Exh. 4)
10.16 Series B Convertible Preferred Stock and Warrant
Purchase Agreement dated March 29, 1999 among Integra
LifeSciences Corporation, Quantum Industrial Partners
LDC and SFM Domestic Investments LLC (12) (Exh. 10.1)
10.17 Registration Rights Agreement dated March 29, 1999
among Integra LifeSciences Corporation, Quantum
Industrial Partners LDC and SFM Domestic Investments
LLC (12) (Exh. 10.2)
10.18 Series C Convertible Preferred Stock and Warrant
Purchase Agreement dated February 16, 2000 among
Integra LifeSciences Holdings Corporation, Quantum
Industrial Partners LDC and SFM Domestic Investments
LLC. (16) (Exh. 10.1)
10.19 Amended and Restated Registration Rights Agreement
dated March 29, 2000 among Integra LifeSciences
Holdings Corporation, Quantum Industrial Partners LDC
and SFM Domestic Investments LLC. (16) (Exh. 10.2)
10.20 Stock Purchase Agreement dated September 28, 2000
among Integra LifeSciences Holdings Corporation and
ArthroCare Corporation (20) (Exh. 10.1)
10.21(a) Employment Agreement dated December 27, 1997 between
the Company and Stuart M. Essig* (8) (Exh. 10.1)
10.21(b) Amended and Restated Employment Agreement dated
December 22, 2000 between Integra LifeSciences
Holdings Corporation and Stuart M. Essig* (21) (Exh. 10.1)
10.22 Indemnity letter agreement dated December 27, 1997
from the Company to Stuart M. Essig* (8) (Exh. 10.5)
10.23 Registration Rights Provisions* (21) (Exh. 10.2)
10.24 Employment Agreement between John B. Henneman, III
and the Company dated September 11, 1998* (10) (Exh. 10)
10.25(a) Employment Agreement between George W. McKinney, III
and the Company dated December 31, 1998* (3) (Exh. 10.36)
10.25(b) Amended Employment Agreement between George W. McKinney,
III and the Company dated February 22, 2001* (25) (Exh. 10.1)
44
10.25(c) Amended Employment Agreement between George W. McKinney,
III and the Company dated December 20, 2001* (1)
10.26 Employment Agreement between Judith O'Grady and the
Company dated December 31, 1998* (3) (Exh. 10.37)
10.27 Employment Agreement between David B. Holtz and the
Company dated December 31, 1998* (3) (Exh. 10.38)
10.28 Employment Agreement between Michael D. Pierschbacher
and the Company dated December 31, 1998* (18) (Exh. 10.8)
10.29 Employment Agreement between Donald R. Nociolo and
the Company dated December 31, 1998* (18) (Exh. 10.9)
10.30 Supply, Distribution and Collaboration Agreement
between Integra LifeSciences Corporation and Johnson
& Johnson Medical, a Division of Ethicon, Inc. dated
as of June 3, 1999, certain portions of which are
subject to a request for confidential treatment under
Rule 24b-2 of the Securities Exchange Act of 1934. (13) (Exh. 10.1)
10.31 Lease Contract dated June 30, 1994 between the Puerto
Rico Industrial Development Company and Heyer-Schulte
NeuroCare, Inc. (17) (Exh. 10.32)
10.32 Industrial Real Estate Triple Net Sublease dated
April 1, 1993 between GAP Portfolio Partners and
Camino Laboratories. (17) (Exh. 10.33)
10.33 Industrial Real Estate Triple Net Sublease dated
January 15, 1997 between Sorrento Montana, L.P. and
Camino NeuroCare, Inc. (17) (Exh. 10.34)
21 Subsidiaries of the Company (1)
23 Consent of PricewaterhouseCoopers LLP (1)
* Indicates a management contract or compensatory plan or arrangement.
** Schedules and other attachments to the indicated exhibit were omitted. The
Company agrees to furnish supplementally to the Commission upon request a
copy of any omitted schedules or attachments.
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form 10/A (File No. 0-26224) which became
effective on August 8, 1995.
(3) Incorporated by reference to the indicated exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
(4) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-98698) which became
effective on January 24, 1996.
(5) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-8 (File No. 333-06577) which became
effective on June 22, 1996.
(6) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended March 31, 1998.
(7) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-8 (File No. 333-58235) which became
effective on June 30, 1998.
(8) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on February 3, 1998.
(9) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on October 13, 1998.
(10) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended September 30, 1998.
(11) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on January 20, 1999.
(12) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on April 13, 1999.
(13) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter
45
ended June 30, 1999.
(14) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on January 27, 2000.
(15) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on March 28, 2000.
(16) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on April 10, 2000.
(17) Incorporated by reference to the indicated exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
(18) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended March 31, 2000.
(19) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended June 30, 2000.
(20) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on October 12, 2000.
(21) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on January 8, 2001.
(22) Incorporated by reference to the indicated exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000 as filed on April
2, 2001.
(23) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-8 (File No. 333-73512) which became
effective on November 16, 2001.
(24) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on May 25, 2001.
(25) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended March 31, 2001.
Reports on Form 8-K: None
46
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, as of the 23rd day of March, 2002.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
BY: /s/ STUART M. ESSIG
-----------------------------
STUART M. ESSIG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, on behalf of the registrant in
the capacities indicated, on the 23rd day of March, 2002.
SIGNATURE TITLE
/S/ STUART M. ESSIG PRESIDENT, CHIEF EXECUTIVE OFFICER
- -------------------------------- AND DIRECTOR
STUART M. ESSIG (PRINCIPAL EXECUTIVE OFFICER)
/S/ DAVID B. HOLTZ SENIOR VICE PRESIDENT, FINANCE AND TREASURER
- -------------------------------- (PRINCIPAL FINANCIAL AND ACCOUNTING
DAVID B. HOLTZ OFFICER)
/S/ RICHARD E. CARUSO CHAIRMAN OF THE BOARD
- --------------------------------
RICHARD E. CARUSO, PH.D.
/S/ KEITH BRADLEY DIRECTOR
- --------------------------------
KEITH BRADLEY, PH.D.
/S/ GEORGE W. MCKINNEY, III DIRECTOR
- --------------------------------
GEORGE W. MCKINNEY, III, PH.D.
/S/ NEAL MOSZKOWSKI DIRECTOR
- --------------------------------
NEAL MOSZKOWSKI
/S/ JAMES M. SULLIVAN DIRECTOR
- --------------------------------
JAMES M. SULLIVAN
47
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,
2001 and 2000 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, 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.
As discussed more fully in Note 2 to the consolidated financial statements, in
2000 the Company changed its method of accounting for nonrefundable fees
received under its various research, license and distribution agreements.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Florham Park, New Jersey
February 22, 2002
F-1
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
December 31,
--------------------
ASSETS ................................................ 2001 2000
-------- --------
Current Assets:
Cash and cash equivalents ............................ $ 44,518 $ 14,086
Short-term investments ............................... 22,183 1,052
Trade accounts receivable, net of allowances
for doubtful accounts of $964 and $1,003 ........... 14,024 13,087
Inventories .......................................... 24,609 16,508
Prepaid expenses and other current assets ............ 2,898 1,484
-------- --------
Total current assets ............................. 108,232 46,217
Noncurrent investments ................................ 64,335 --
Property, plant, and equipment, net ................... 11,662 11,599
Deferred income taxes, net ............................ 10,243 --
Goodwill and other intangible assets, net ............. 31,525 25,299
Other assets .......................................... 1,591 3,399
-------- --------
Total assets ........................................... $227,588 $ 86,514
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt ...................................... $ 3,576 $ 8,872
Accounts payable, trade .............................. 2,924 3,363
Income taxes payable ................................. 1,481 1,200
Customer advances and deposits ....................... 4,843 823
Deferred revenue ..................................... 772 1,675
Accrued expenses and other current liabilities ....... 5,550 5,107
-------- --------
Total current liabilities ........................ 19,146 21,040
Long-term debt ........................................ -- 4,758
Deferred revenue ...................................... 3,949 4,728
Deferred income taxes ................................. -- 1,788
Other liabilities ..................................... 437 419
-------- --------
Total liabilities ...................................... 23,532 32,733
Commitments and contingencies
Stockholders' Equity:
Preferred stock; $0.01 par value;
15,000 authorized shares; 0 and 100 Series B
Convertible shares issued and outstanding
at December 31, 2001 and 2000, respectively;
54 Series C Convertible shares issued and
outstanding at December 31, 2001 and 2000,
$6,345 including a 10% annual cumulative
dividend liquidation preference .................... 1 2
Common stock; $.01 par value; 60,000 authorized
shares; 26,129 and 17,334 issued and
outstanding at December 31, 2001 and 2000 .......... 261 173
Additional paid-in capital ........................... 284,021 160,134
Treasury stock, at cost; 6 and 20 shares at
December 31, 2001 and 2000, respectively ........... (51) (180)
Other ................................................ (37) (66)
Accumulated other comprehensive loss ................. (539) (553)
Accumulated deficit .................................. (79,600) (105,729)
-------- --------
Total stockholders' equity ......................... 204,056 53,781
-------- --------
Total liabilities and stockholders' equity ............ $227,588 $ 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
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS Years Ended December 31,
------------------------------
2001 2000 1999
-------- -------- --------
REVENUES
Product sales ................................. $ 87,687 $ 64,987 $ 40,047
Other revenue ................................. 5,755 6,662 2,829
-------- -------- --------
Total revenue ............................. 93,442 71,649 42,876
COSTS AND EXPENSES
Cost of product sales ......................... 36,014 29,511 22,678
Research and development ...................... 7,992 7,524 8,893
Selling and marketing ......................... 20,322 15,371 9,487
General and administrative .................... 12,044 28,483 13,324
Amortization .................................. 2,784 2,481 874
-------- -------- --------
Total costs and expenses .................. 79,156 83,370 55,256
Operating income (loss) ....................... 14,286 (11,721) (12,380)
Interest income (expense), net ................ 1,393 (473) 294
Gain on dispositions of product lines ......... -- 1,146 4,161
Other income (expense), net ................... (136) 201 141
-------- -------- --------
Income (loss) before income taxes ............. 15,543 (10,847) (7,784)
Income tax expense (benefit) .................. (10,863) 108 (1,818)
-------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of accounting change ...... 26,406 (10,955) (5,966)
Extraordinary loss, net of income
tax benefit ................................. (243) -- --
Cumulative effect of accounting change ........ -- (470) --
-------- -------- --------
Net income (loss) ............................. $ 26,163 $(11,425) $ (5,966)
======== ======== ========
Earnings (loss) per share:
Basic net income (loss) per share before
extraordinary item and cumulative effect
of accounting change ...................... $ 1.09 $ (0.95) $ (0.40)
Basic net income (loss) per share ........... $ 1.08 $ (0.97) $ (0.40)
Diluted net income (loss) per share before
extraordinary item and cumulative effect
of accounting change ...................... $ 0.95 $ (0.95) $ (0.40)
Diluted net income (loss) per share ......... $ 0.94 $ (0.97) $ (0.40)
Weighted average common shares outstanding:
Basic ....................................... 23,353 17,553 16,802
Diluted ..................................... 27,796 17,553 16,802
Pro forma amounts assuming retroactive
application of accounting change:
Total revenues .............................. 42,974
Net loss .................................... (5,868)
Basic and diluted net loss per share ........ (0.40)
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
IN THOUSANDS Years Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
OPERATING ACTIVITIES:
Net income (loss) ..................................................... $ 26,163 $(11,425) $ (5,966)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization ........................................ 5,959 5,357 3,104
Loss (gain) on sale of product line and other assets ................. -- (1,316) (3,998)
Loss on early retirement of debt ..................................... 256 -- --
Deferred tax benefit ................................................. (12,085) -- (1,807)
Amortization of discount and premium on investments .................. 298 (181) (291)
Stock based compensation ............................................. 29 13,587 370
Other, net ........................................................... 158 43 --
Changes in assets and liabilities, net of business
acquisitions:
Accounts receivable ................................................ 98 (3,475) (510)
Inventories ........................................................ (6,987) (3,061) 2,829
Prepaid expenses and other current assets .......................... (1,443) (571) 217
Non-current assets ................................................. 1,858 (3,565) (80)
Accounts payable, accrued expenses and other
current liabilities ............................................. (941) 2,831 (677)
Customer advances and deposits ..................................... 4,020 (3,078) 3,652
Deferred revenue ................................................... (1,682) (106) 5,659
-------- -------- --------
Net cash provided by (used in) operating activities .................. 15,701 (4,960) 2,502
-------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sale of product line and other assets ................... -- 1,600 6,354
Proceeds from the sales/maturities of investments ..................... 3,000 16,981 26,000
Purchases of available for sale investments ........................... (88,533) (13,391) (14,737)
Purchases of property and equipment ................................... (2,860) (3,268) (2,309)
Cash used in business acquisitions, net of cash acquired .............. (6,348) (16,187) (14,944)
Loans made ............................................................ -- (238) --
-------- -------- --------
Net cash (used in) provided by investing activities .................. (94,741) (14,503) 364
-------- -------- --------
FINANCING ACTIVITIES:
Net proceeds (repayments) from revolving credit facility .............. (3,147) 3,143 4
Repayments of term loan ............................................... (7,705) (2,250) (1,125)
Repayment of note payable ............................................. (2,800) -- --
Proceeds from sales of preferred stock and warrants ................... -- 5,375 9,942
Proceeds from the issuance of common stock ............................ 113,433 5,000 --
Proceeds from exercise of common stock purchase warrants .............. 3,616 50 1,950
Proceeds from stock issued under employee benefit plans ............... 6,060 3,156 467
Purchases of treasury stock ........................................... -- (170) --
Collection of related party note receivable ........................... -- 35 --
Preferred stock dividends paid ........................................ -- (67) (80)
-------- -------- --------
Net cash provided by financing activities ............................ 109,457 14,272 11,158
Effect of exchange rate changes on cash and cash equivalents .............. 15 (24) --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ...................... 30,432 (5,215) 14,024
Cash and cash equivalents at beginning of period .......................... 14,086 19,301 5,277
-------- -------- --------
Cash and cash equivalents at end of period ................................ $ 44,518 $ 14,086 $ 19,301
======== ======== ========
Cash paid during the year for interest .................................... $ 778 $ 922 $ 654
Cash paid during the year for income taxes ................................ 928 508 124
Supplemental disclosure of non-cash investing and financing activities:
Note issued / loan assumed in business acquisitions .................. $ 3,576 $ 2,598 $ 11,000
Issuance of Restricted Units ......................................... -- 13,515 --
Common stock and warrants issued in settlement
of obligations .................................................... -- 641 15
Common stock issued in a business acquisition ........................ 276 -- --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS
F-4
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
In thousands
Preferred Accumulated Compre-
Stock Common Stock Additional Other hensive
-------------- -------------- Treasury Paid-In Comprehensive Income Accumulated Total
Shares Amount Shares Amount Stock Capital Other Loss (Loss) Deficit Equity
------ ------ ------ ------ ------- ---------- ------ ------------- -------- ----------- ---------
Balance,
December 31, 1998 .... 500 $ 5 15,783 $ 158 $ (286) $ 119,999 $(183) $ (40) $ (88,287) $ 31,366
------ ------ ------ ------ ------- --------- ------ ------ --------- --------
Net loss ............... (5,966) (5,966) (5,966)
Unrealized losses on
investments .......... (24) (24) (24)
------
Total comprehensive
loss ................. $ (5,990)
========
Issuance of Series B
Preferred Stock
and warrants ......... 100 1 9,941 9,942
Issuance of common
stock through
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 for stock
options granted to
employees ............ 89 89
Dividends paid on
Series A Preferred ... (80) (80)
Balance,
December 31, 1999 .... 600 6 16,131 161 (7) 132,340 (143) (64) (94,304) 37,989
====== ====== ====== ====== ======= ========= ====== ====== ========= ========
Net loss ............... (11,425) (11,425) (11,425)
Unrealized losses on
investments .......... (32) (32) (32)
Foreign currency
translation .......... (457) (457) (457)
Total comprehensive
loss ................. $(11,914)
========
Issuance of Series C
Preferred Stock
and warrants ......... 54 1 5,374 5,375
Conversion of Series A
Preferred Stock ...... (500) (5) 250 3 2
Private placement of
common stock.......... 333 3 4,997 5,000
Issuance of common
stock through
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 ... (67) (67)
Purchases of treasury
stock ................ (173) (173)
Collection of related
party note ........... 35 35
Balance,
December 31, 2000 .... 154 2 17,334 173 (180) 160,134 (66) (553) (105,729) 53,781
====== ====== ====== ====== ======= ========= ===== ======= ========= ========
The accompanying notes are an integral part
of these consolidated financial statements
F-5
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
In thousands
Preferred Accumulated Compre-
Stock Common Stock Additional Other hensive
-------------- -------------- Treasury Paid-In Comprehensive Income Accumulated Total
Shares Amount Shares Amount Stock Capital Other Loss (Loss) Deficit Equity
------ ------ ------ ------ ------- ---------- ------ ------------- -------- ----------- ---------
Balance,
December 31, 2000 .... 154 2 17,334 173 (180) 160,134 (66) (553) (105,729) 53,781
====== ====== ====== ====== ======= ========= ====== ====== ========= ========
Net income ............. 26,163 26,163 26,163
Unrealized gains on
investments ........ 238 238 238
Other than temporary
impairment of
available for sale
securities ........... 95 95
Foreign currency
translation .......... (319) (319) (319)
--------
Total comprehensive
income ............... $ 26,082
========
Conversion of Series B
Preferred ............ (100) (1) 2,618 26 (25)
Public offering of
common stock ......... 4,748 48 113,385 113,433
Issuance of common
stock through
employee benefit
plans ................ 879 9 129 5,998 (34) 6,102
Warrants exercised
for cash ............. 540 5 3,611 3,616
Common stock issued
in acquisition ....... 10 276 276
Amortization of
unearned
compensation ......... 29 29
Tax benefit related to
stock options ........ 642 642
Balance,
December 31, 2001 .... 54 $ 1 26,129 $ 261 $ (51) $ 284,021 $ (37) $ (539) $ (79,600) $204,056
====== ====== ====== ====== ======= ========= ====== ====== ========= ========
The accompanying notes are an integral part
of these consolidated financial statements
F-6
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Integra LifeSciences Holdings Corporation (the "Company") is a global,
diversified medical device company that develops, manufactures, and markets
medical devices, implants and biomaterials primarily for use in neurosurgery,
orthopedics and soft tissue repair. Our business is divided into two divisions:
Integra NeuroSciences(TM) and Integra LifeSciences(TM).
The Integra NeuroSciences division is a leading provider of implants, devices,
and systems used in neurosurgery, neurotrauma, and related critical care and a
distributor of disposables and supplies used in the diagnosis and monitoring of
neurological disorders. The Integra LifeSciences division develops and
manufactures a variety of medical products and devices, including products based
on the Company's proprietary tissue regeneration technology that 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.
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.
FINANCIAL INSTRUMENTS
Investments in marketable debt and equity securities are classified and
accounted for as available-for-sale securities and are carried at fair value,
which was based on quoted market prices. Unrealized gains and losses are
reported as a component of accumulated other comprehensive loss. Realized gains
and losses are determined on the specific identification cost basis and reported
in other income (expense), net. Investment balances as of December 31, 2001 and
2000 were as follows:
Unrealized Fair
Cost Gains Losses Value Maturity
------- ------- ------- ------- ----------
(in thousands)
2001:
- -----
Marketable debt securities, current....... $22,092 $ 53 $ (35) $22,110 less than 1 year
Marketable equity securities ............. 78 3 (8) 73
Marketable debt securities, non-current... 64,116 352 (133) 64,335 less than 30 months
------- ------ ------- -------
$86,286 $ 408 $ (176) $86,518
2000:
- -----
Marketable debt securities, current....... $ 977 $ -- $ -- $ 977 less than 1 year
Marketable equity securities ............. 173 10 (108) 75
------- ------ ------- -------
$ 1,150 $ 10 $ (108) $ 1,052
The carrying values of all other financial instruments were not materially
different from their estimated fair values.
F-7
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE AND SALES RETURNS
The Company evaluates the collectibility of accounts receivable based on a
combination of factors. In circumstances where a specific customer is unable to
meet its financial obligations to us, an allowance is recorded against amounts
due to reduce the net recognized receivable to the amount that is reasonably
expected to be collected. For all other customers, allowances for doubtful
accounts are recorded based on the length of time the receivables are past due,
the current business environment and our historical experience.
The Company records a provision for estimated sales returns and allowances on
product sales in the same period as the related revenues are recorded. These
estimates are based on historical sales returns and other known factors.
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. Inventories consisted of the following:
December 31,
2001 2000
---------- ----------
(IN THOUSANDS)
Finished goods .......................... $ 13,557 $ 6,878
Work in process ......................... 3,493 3,825
Raw materials ........................... 7,559 5,805
---------- ----------
$ 24,609 $ 16,508
At each balance sheet date, the Company evaluates ending inventories for excess
quantities, obsolescence or shelf-life expiration. This evaluation includes an
analyses of historical sales levels by product and projections of future demand.
To the extent that management determines there are excess, obsolete or expired
inventory quantities, valuation reserves are recorded against all or a portion
of the value of the related products.
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. The cost of major additions and improvements is capitalized, while
maintenance and repair costs that do not improve or extend the lives of the
respective assets are charged to operations as incurred. Property, plant and
equipment balances and corresponding lives were as follows:
December 31,
2001 2000 Lives
---------- ---------- --------------
(IN THOUSANDS)
Buildings and leasehold improvements ....... $ 10,095 $ 9,632 up to 40 years
Machinery and equipment .................... 13,320 11,371 3 - 15 years
Furniture and fixtures ..................... 1,657 810 5 - 7 years
Construction in progress ................... 310 470
--------- ---------
25,382 22,283
Less: Accumulated depreciation
and amortization.......................... (13,720) (10,684)
--------- ---------
$ 11,662 $ 11,599
Depreciation and amortization expense associated with property, plant and
equipment for the years ended December 31, 2001, 2000 and 1999 was $3,176,000,
$2,876,000, and $2,229,000, respectively.
F-8
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess of the cost over the fair value of net assets of acquired businesses
is recorded as goodwill. Goodwill acquired prior to July 1, 2001 was amortized
on a straight line basis over a period of 15 years. Goodwill acquired after July
1, 2001 is not subject to amortization. Beginning in 2002, all goodwill,
including balances outstanding at December 31, 2001, will cease being amortized
and will instead be subject to annual impairment reviews. The cost of other
acquired intangible assets is amortized on a straight line basis over their
estimated useful lives, ranging from 2 to 15 years. Goodwill and other
intangible assets, net, consisted of the following:
December 31,
2001 2000
-------- --------
(IN THOUSANDS)
Technology ...................................... $ 11,255 $ 10,761
Customer base ................................... 3,576 3,227
Trademarks ...................................... 1,715 1,770
Other ........................................... 3,405 3,899
Goodwill ........................................ 16,334 9,050
-------- --------
36,285 28,707
Less: Accumulated amortization .................. (4,760) (3,408)
-------- --------
$ 31,525 $ 25,299
LONG-LIVED ASSETS
Long-lived assets held and used by the Company, including property, plant and
equipment and goodwill and other intangible assets, 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. Upon the adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
in January 2002, our assessment of the recoverability of goodwill will change to
a method based upon a comparison of the carrying value of the reporting units to
which goodwill is assigned with its respective fair value. Impairments to
long-lived assets to be disposed of are recorded based upon the fair value of
the applicable assets.
FOREIGN CURRENCY
All assets and liabilities of foreign subsidiaries are translated at the rate of
exchange at year-end, while elements of the income statement 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. Foreign currency transaction gains and losses are reported
in other income (expense), net.
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.
F-9
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 these obligations. Royalty revenue is recognized over the period the
royalty products are sold by our customers.
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" (SAB 101). As the result of the adoption of SAB 101, the
Company recorded a $470,000 cumulative effect of an accounting change in 2000 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 for
each of the years ended December 31, 2001 and 2000 includes $112,000 of
amortization of the amount deferred as of January 1, 2000.
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.
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
income (loss) and pro forma earnings per share are presented as if the fair
value method had been applied.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents, which are held
at major financial institutions, investment-grade marketable debt securities 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.
F-10
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent liabilities, and the reported amounts of revenues and
expenses. Significant estimates affecting amounts reported or disclosed in the
consolidated financial statements include allowances for doubtful accounts
receivable and sales returns, net realizable value of inventories, estimates of
future cash flows associated with long-lived asset valuations, depreciation and
amortization periods for long-lived assets, valuation allowances recorded
against deferred tax assets, loss contingencies, and estimates of costs to
complete performance obligations associated with research, licensing, and
distribution arrangements for which revenue is accounted for using percentage of
completion accounting. These estimates are based on historical experience and on
various other assumptions that are believed to be reasonable under the current
circumstances. Actual results could differ from these estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (Statement 144). Statement 144
supercedes Statement of Financial Accounting Standards No 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". Statement 144 applies to all long-lived assets, including discontinued
operations, and consequently amends Accounting Principles Board Opinion No. 30,
"Reporting Results of Operations Reporting the Effects of Disposal of a Segment
of a Business". Statement 144 will be effective for the Company on January 1,
2002. Statement 144 is not expected to have a material impact on the Company's
financial statements.
In July 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations" (Statement 141), and No. 142, "Goodwill and Other
Intangible Assets" (Statement 142). Statement 141 requires that all business
combinations initiated after June 30, 2001, be accounted for using the purchase
method of accounting and further clarifies the criteria to recognize intangible
assets separately from goodwill. Under Statement 142, goodwill and indefinite
lived intangible assets will no be longer amortized, but will be reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. Goodwill and intangible assets
acquired prior to July 1, 2001 were amortized through December 31, 2001.
Starting in 2002, all goodwill and indefinite lived intangible assets will cease
being amortized. The implementation of Statement 142 is expected to reduce
amortization expense by approximately $1.0 million per year.
3. BUSINESS ACQUISITIONS
On December 6, 2001, the Company acquired NeuroSupplies, Inc., a specialty
distributor of disposables and supplies for neurologists, pulmonologists and
other physicians, for $4.3 million. The purchase price consisted of $0.4 million
in cash paid at closing, a $3.6 million note payable in January 2002, and 10,000
shares of Integra common stock. Integra NeuroSupplies markets a wide variety of
supplies that are sold to neurologists, hospitals, sleep clinics, and other
physicians in the United States as well as to original equipment manufacturers
and distributors. Revenues of the acquired business were approximately $4.0
million in 2000.
On April 27, 2001, the Company acquired Satelec Medical, a subsidiary of the
Satelec-Pierre Rolland group, for $3.7 million in cash. Satelec Medical, based
in France, manufactures and markets the Dissectron(R) ultrasonic surgical
aspirator console and a line of related handpieces. Revenues of the acquired
business were approximately $1.5 million in 2000.
F-11
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS ACQUISITIONS (CONTINUED)
On April 4, 2001, the Company acquired GMSmbH, the German manufacturer of the
LICOX(R) Brain Tissue Oxygen Monitoring System, for $2.9 million. The purchase
price consisted of $2.3 million in cash paid at closing, the forgiveness of $0.2
million in notes receivable from GMSmbH, and $0.4 million of future minimum
royalty payments to the seller. 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
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 approximately $0.4 million to Integra.
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.
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, which was repaid in full
in 2001. CNS designs and manufactures neurosurgical external ventricular
drainage systems, including catheters and drainage bags, as well as cranial
access kits.
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. 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.
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 respective dates
of acquisition. The allocation of the purchase price of these acquisitions
resulted in acquired intangible assets, consisting primarily of technology,
customer lists and relationships, and trademarks, of approximately $22.2
million, which are amortized on a straight-line basis over lives ranging from 2
to 15 years, and residual goodwill of approximately $16.3 million, which has
been amortized on a straight-line basis over 15 years.
The following unaudited pro forma financial information summarizes the results
of operations for the periods indicated as if the acquisitions consummated in
2001 and 2000 had been completed as of the beginning of each period presented:
2001 2000
-------- --------
(IN THOUSANDS)
Product sales .......................................... $ 92,894 $ 74,371
Total revenue .......................................... 98,649 81,033
Cost of product sales .................................. 39,484 34,893
Income (loss) before extraordinary loss ................ 26,589 (11,469)
Diluted income (loss) per share before
extraordinary loss .................................. $ 0.96 $ (0.98)
Net income (loss) ...................................... 26,346 (11,469)
Diluted net income (loss) per share .................... $ 0.95 $ (0.98)
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.
F-12
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SPECIAL CHARGES (CREDITS)
The following special charges (credits) are reflected in the Company's
statements of operations:
2001 2000 1999
-------- -------- -------
(IN THOUSANDS)
Inventory fair value purchase accounting
adjustments (Cost of product sales) .......... $ 203 $ 429 $ 2,508
Severance costs (General and administrative) ... -- -- 1,024
Stock-based compensation charge for issuance
of Restricted Units (General and
administrative -- see Note 7) ................ $ -- $ 13,515 $ --
Gain on sale of product lines .................. -- (1,146) (4,161)
Deferred tax benefits (Income tax benefit --
see Note 9) .................................... (11,512) -- (1,807)
5. DEBT
The Company's borrowings consisted of the following:
December 31,
2001 2000
------ ------
(IN THOUSANDS)
Short term debt:
Current portion of note payable ................... $3,576 $1,654
Bank loans
Current portion of term loan .................... -- 4,071
Revolving credit facility ....................... -- 3,147
------ ------
$3,576 $8,872
Long term debt:
Bank loans
Term loan ....................................... $ -- $3,554
Note payable ...................................... -- 1,204
------ ------
$ -- $4,758
In connection with the acquisition of NeuroSupplies in December 2001, the
Company issued a one month, interest-free $3.6 million promissory note to the
seller that was repaid in January 2002.
In connection with the CNS acquisition in January 2000, the Company issued a 5%
$2.8 million promissory note to the seller that was payable in two equal annual
principal payments. For valuation purposes, the note was discounted using a rate
of 10.5%, which was more comparable to market borrowing rates available to the
Company at that time. The Company made the first scheduled principal payment of
$1.4 million, plus accrued interest, in January 2001. Subsequently, in September
2001, the Company prepaid in full the remaining $1.4 million balance, plus
accrued interest, and recorded an extraordinary loss on the early retirement of
debt of $28,000, net of $2,000 of taxes.
The acquisition of NeuroCare in March 1999 was partially funded through an $11.0
million term loan provided by Fleet Capital. Fleet Capital also provided a $4.0
million revolving credit facility to fund working capital requirements. In
August 2001, the Company repaid in full all outstanding loans to Fleet Capital
and terminated the revolving credit facility. In connection with the $7.9
million prepayment of the Fleet Capital loans and the termination of the credit
facility, the Company recorded an extraordinary loss on the early retirement of
debt of $215,000, net of $11,000 of taxes. At December 31, 2000, the weighted
average interest rate on outstanding loan balances to Fleet Capital was 9.8%.
F-13
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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 $6.3 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 in 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 were exercised in December 2001 for proceeds of $2.7
million.
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. On June 26, 2001, Soros converted the Series B
Preferred into 2,617,800 shares of the Company's common stock. The Series B
Preferred ranked on a parity with the Series C Preferred, and was senior to the
Company's common stock and all other preferred stock of the Company. The
warrants issued with the Series B Preferred were exercised in March 2001 for
proceeds of $916,800.
Soros is entitled to certain registration rights for shares of common stock
obtained through conversion of the Series B Preferred or Series C Preferred or
the exercise of the related warrants.
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 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 August 2001, the Company issued 4,747,500 shares of common stock at $25.50
per share in a follow-on public offering. The net proceeds generated by the
offering, after expenses, were $113.4 million.
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 a business
acquisition. Both of these warrants were exercised in October 1999 for proceeds
of $1,950,000.
F-14
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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, 2001, approximately 297,000 shares remain
available for purchase under the ESPP.
STOCK OPTION PLANS
As of December 31, 2001, the Company had stock options outstanding under six
plans, 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), the 2000 Equity Incentive Plan (the 2000 Plan), and
the 2001 Equity Incentive Plan (the 2001 Plan and collectively, the Plans).
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, the 2000 Plan and the 2001 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 Plan and 2001 Plan permit 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, 2001, option activity for all the Plans
was as follows:
Options Outstanding Options Exercisable
----------------------- ----------------------
Wtd. Avg. Wtd. Avg.
Exercise Exercise
Price Shares Price Shares
---------- ---------- ---------- ---------
(SHARES IN THOUSANDS)
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 $ 6.76 1,422
Granted ..................... $11.62 1,548
Exercised ................... $ 5.68 (493)
Cancelled ................... $ 6.90 (327)
December 31, 2000 ........... $ 7.74 4,519 $ 6.27 1,759
Granted ..................... $24.61 748
Exercised ................... $ 6.49 (836)
Cancelled ................... $11.88 (170)
December 31, 2001 ........... $10.79 4,261 $ 6.89 1,986
Share available for grant,
December 31, 2001 ......... 1,729
F-15
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK PURCHASE AND AWARD PLANS (CONTINUED)
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 2001, 2000 and 1999 were as follows:
Less Than Equal to In Excess of
Market Price Market Price Market Price
-------------------- ---------------------- ----------------------
Exercise Fair Exercise Fair Exercise Fair
Price Value Price Value Price Value
--------- --------- ---------- ---------- ---------- ----------
2001 ..... $ -- $ -- $ 24.61 $ 16.14 $ -- $ --
2000 ..... $ -- $ -- $ 11.62 $ 8.20 $ -- $ --
1999 ..... $ 3.46 $ 3.46 $ 5.11 $ 3.77 $ 7.61 $ 0.06
The following table summarizes information about stock options outstanding as of
December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------ -------------------
Wtd. Avg Wtd. Avg. Wtd. Avg.
Range Of As Of Exercise Remaining As Of Exercise
Exercise Prices 12/31/01 Price Contractual Life 12/31/01 Price
- ----------------- -------- -------- ---------------- -------- ---------
(SHARES IN THOUSANDS)
$ 3.375 - $ 4.375 748 $ 3.69 3.0 years 512 $ 3.73
$ 4.438 - $ 5.875 1,141 $ 5.81 4.7 years 827 $ 5.82
$ 5.906 - $11.000 939 $ 9.55 6.2 years 408 $ 8.85
$11.125 - $16.070 792 $13.62 4.9 years 239 $14.02
$16.190 - $30.500 641 $26.23 5.9 years -- --
------- ------- ----------- ------- --------
4,261 $10.79 5.0 years 1,986 $ 6.89
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 income (loss) and basic and diluted net income
(loss) per share would have been as follows:
2001 2000 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss):
As reported .......................... $ 26,163 $(11,425) $ (5,966)
Pro forma ............................ 20,252 (14,861) (9,161)
Net income (loss) per share:
BASIC
As reported .......................... $ 1.08 $ (0.97) $ (0.40)
Pro forma ............................ $ 0.82 $ (1.17) $ (0.59)
DILUTED
As reported .......................... $ 0.94 $ (0.97) $ (0.40)
Pro forma ............................ $ 0.75 $ (1.17) $ (0.59)
F-16
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK PURCHASE AND AWARD PLANS (CONTINUED)
As options vest over a varying number of years and awards are generally made
each year, the pro forma impacts shown above 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:
2001 2000 1999
--------- --------- ---------
Dividend yield ...................... 0% 0% 0%
Expected volatility ................. 80% 90% 90%
Risk free interest rate ............. 4.50% 6.50% 5.40%
Expected option lives ............... 4.5 years 4.5 years 4.0 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 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. The Executive has demand
registration rights under the Restricted Units issued in December 1997 and
December 2000.
No other stock-based awards are outstanding under any of the Plans.
8. 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 agreement to lease 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 agreement, the Company paid $90,000 and $45,000 to
the related party lessor in 2001 and 2000, respectively.
F-17
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LEASES (CONTINUED)
Future minimum lease payments under operating leases at December 31, 2001 were
as follows:
Related Third
Parties Parties Total
--------- --------- ---------
(IN THOUSANDS)
2002 ............................ $ 303 $ 1,345 $ 1,648
2003 ............................ 321 1,150 1,471
2004 ............................ 321 822 1,143
2005 ............................ 321 340 661
2006 ............................ 321 14 335
Thereafter ...................... 1,754 571 2,325
--------- --------- ---------
Total minimum lease payments..... $ 3,341 $ 4,242 $ 7,583
========= ========= =========
Total rental expense for the years ended December 31, 2001, 2000, and 1999 was
$1,886,000, $1,422,000, and $958,000, respectively, and included $306,000,
$255,000, and $219,000 in related party expense, respectively.
9. INCOME TAXES
The income tax expense (benefit) consisted of the following:
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Current:
Federal .............................. $ 221 $ 100 $ 100
State ................................ 446 (131) (111)
Foreign .............................. 555 139 --
-------- -------- --------
Total current .......................... 1,222 108 (11)
Deferred:
Federal .............................. $(10,774) $ -- $ (1,671)
State ................................ (739) -- (136)
Foreign .............................. (572) -- --
-------- -------- --------
Total deferred ......................... (12,085) -- (1,807)
Income tax expense (benefit) ........... $(10,863) $ 108 $ (1,818)
======== ======== ========
The extraordinary loss on the early retirement of debt is reported net of a
$13,000 income tax benefit.
The temporary differences which give rise to deferred tax assets and
(liabilities) are presented below:
December 31
2001 2000
-------- --------
(IN THOUSANDS)
Net operating loss and tax credit carryforwards .......... $ 32,765 $ 33,676
Inventory reserves and capitalization .................... 2,616 1,740
Other .................................................... 9,159 8,594
Deferred revenue ......................................... 2,403 2,380
-------- --------
Total deferred tax assets before valuation allowance ... 46,943 46,390
Valuation allowance ...................................... (34,356) (44,776)
Depreciation and amortization ............................ (1,952) (3,010)
Other .................................................... (392) (392)
-------- --------
Net deferred tax assets (liabilities) .................... $ 10,243 $ (1,788)
======== ========
F-18
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (CONTINUED)
Since 1999, the Company has generated positive taxable income on a cumulative
basis. In light of this recent trend, current projections for future taxable
earnings, and the expected timing of the reversal of deductible temporary
differences, management concluded in the fourth quarter of 2001 that a portion
of the valuation allowance recorded against federal and state net operating loss
carryforwards and certain other temporary differences was no longer necessary.
The valuation allowance was reduced by $12.0 million in 2001 because management
believes that it is more likely than not that the Company will realize the
benefit of that portion of the deferred tax assets recorded at December 31,
2001. The $12.0 million reduction in the valuation allowance consisted of an
$11.5 million deferred income tax benefit and a $450,000 credit to additional
paid-in capital related to net operating loss carryforwards generated through
the exercise of stock options. A valuation allowance of $34.4 million is
recorded against the $44.6 million of net deferred tax assets recorded at
December 31, 2001. In the event that the Company determines that it would be
able to realize more or less than the recorded amount of net deferred tax
assets, an adjustment to the deferred tax asset valuation allowance would be
recorded in the period such a determination is made. Approximately $5.9 million
of this valuation allowance is recorded against deferred tax assets arising from
net operating loss carryforwards that were generated through the exercise of
stock options. Any subsequent reduction in the valuation allowance to recognize
these stock option-related deferred tax assets will be recorded as a credit to
additional paid-in capital.
The net change in the Company's valuation allowance was $(10,420,000),
$3,342,000, and $18,000 in 2001, 2000, and 1999, respectively. The 1999 change
in valuation allowance includes a non-cash benefit of $1,807,000 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, 2001, 2000, and 1999 is as
follows:
2001 2000 1999
------ ------ ------
Federal statutory rate ........................... 34.0% (34.0%) (34.0%)
Increase (reduction) in income taxes
resulting from:
State income taxes - before deferred benefit ... 1.9% 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 ........ (1.3%) (0.5%) --
Alternative minimum tax, net of state benefit .. 1.4% 0.9% 1.3%
Nondeductible items ............................ 1.1% 2.1% 8.2%
Other .......................................... 1.9 2.9% --
Change in valuation allowance .................. (108.9%) 30.8% (0.2%)
------ ------ ------
Effective tax rate ............................... (69.9%) 1.0% (23.3%)
====== ====== ======
At December 31, 2001, the Company had net operating loss carryforwards of
approximately $90.4 million and $19.8 million for federal and state income tax
purposes, respectively, to offset future taxable income. The federal and state
net operating loss carryforwards expire through 2018 and 2008, 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.
At December 31, 2001, several of the Company's subsidiaries had unused net
operating loss carryforwards and tax credit carryforwards arising from periods
prior to the Company's ownership which expire between 2002 and 2010. The timing
and manner in which any acquired net operating losses or tax credits may be
utilized in any year by the Company are limited by the Internal Revenue Code of
1986, as amended, Section 382 and other provisions of the Internal Revenue Code
and its applicable regulations.
F-19
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. NET INCOME (LOSS) PER SHARE
Amounts used in the calculation of basic and diluted net income (loss) per share
were as follows:
2001 2000 1999
------- -------- -------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item and
cumulative effect of accounting change .......... $26,406 $(10,955) $(5,966)
Dividends on preferred stock ....................... (1,026) (1,472) (830)
Beneficial conversion feature on preferred stock ... -- (4,170) --
------- -------- -------
Income (loss) before extraordinary item and
cumulative effect of accounting change
applicable to common stock ...................... $25,380 $(16,597) $(6,796)
Basic income (loss) per share before
extraordinary item and cumulative effect
of accounting change ............................. $ 1.09 $ (0.95) $ (0.40)
======= ======== =======
Net income (loss) .................................. $26,163 $(11,425) $(5,966)
Dividends on preferred stock ....................... (1,026) (1,472) (830)
Beneficial conversion feature on preferred stock ... -- (4,170) --
------- -------- -------
Net income (loss) applicable to common stock ....... $25,137 $(17,067) $(6,796)
Basic net income (loss) per share .................. $ 1.08 $ (0.97) $ (0.40)
======= ======== =======
Weighted average common shares outstanding for
basic earnings per share ........................ 23,353 17,553 16,802
======= ======== =======
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item and
cumulative effect of accounting change .......... $26,406 $(10,955) $(5,966)
Dividends on preferred stock ....................... -- (1,472) (830)
Beneficial conversion feature on preferred stock ... -- (4,170) --
------- -------- -------
Income (loss) before extraordinary item and
cumulative effect of accounting change
applicable to common stock ...................... $26,406 $(16,597) $(6,796)
Diluted income (loss) per share before
extraordinary item and cumulative effect of
accounting change ............................... $ 0.95 $ (0.95) $ (0.40)
======= ======== =======
Net income (loss) .................................. $26,163 $(11,425) $(5,966)
Dividends on preferred stock ....................... -- (1,472) (830)
Beneficial conversion feature on preferred stock ... -- (4,170) --
------- -------- -------
Net income (loss) applicable to common stock ....... $26,163 $(17,067) $(6,796)
Diluted net income (loss) per share ................ $ 0.94 $ (0.97) $ (0.40)
======= ======== =======
Weighted average common shares outstanding for
basic earnings per share ........................ 23,353 17,553 16,802
Effect of dilutive securities:
Assumed conversion of Series B Preferred Stock .. 1,273 -- --
Assumed conversion of Series C Preferred Stock .. 600 -- --
Stock options ................................... 2,364 -- --
Stock purchase warrants ......................... 206 -- --
------- -------- -------
Weighted average common shares outstanding
for diluted earnings per share .................. 27,796 17,553 16,802
======= ======== =======
F-20
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. NET INCOME (LOSS) PER SHARE (CONTINUED)
The $243,000 extraordinary loss on the early retirement of debt reduced basic
and diluted earnings per share by $0.01 in 2001. The $470,000 cumulative effect
of the accounting change for SAB 101 reduced basic and diluted earnings per
share by $0.02 in 2000.
Shares of common stock issuable through exercise or conversion of the following
dilutive securities were not included in the computation of diluted net income
(loss) per share for each period because their effect would have been
antidilutive:
2001 2000 1999
---- ----- -----
(IN THOUSANDS)
Convertible Preferred Stock ............... -- 3,218 2,868
Stock options and warrants ................ 65 5,068 4,401
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 in 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.
Restricted Units issued by the Company (see Note 7) that entitle the holder to
2,250,000 shares of common stock are included in the weighted average shares
outstanding calculation from their date of issuance because no further
consideration is due related to the issuance of the underlying common shares.
11. 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 $5,280,000 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 $3,960,000 at December 31, 2001 is
recorded in deferred revenue, of which $528,000 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
$2,000,000 through 2004, after which such funding amounts will be
determined based on a percentage of net sales of the INTEGRA(R) product, as
defined. 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.
F-21
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DEVELOPMENT, DISTRIBUTION, AND LICENSE AGREEMENTS AND GOVERNMENT GRANTS
(CONTINUED)
- - The Company has an agreement with the Genetics Institute division of Wyeth
(formerly American Home Products Corporation) and Medtronic Sofamor Danek
for the development of collagen and other absorbable matrices to be used in
conjunction with Genetics Institute's recombinant human bone morphogenetic
protein-2 (rhBMP-2) in a variety of bone regeneration applications. The
agreement with Genetics Institute requires Integra to supply Absorbable
Collagen Sponges to Genetics Institute (including those that Genetics
Institute sells to Medtronic Sofamor Danek with rhBMP-2 for use in
Medtronic Sofamor Danek's InFUSE(TM) product) at specified prices. In
addition, the Company will receive a royalty equal to a percentage of
Genetics Institute's sales of surgical kits combining rhBMP-2 and the
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 the Company to assist with
regulatory affairs and research. The Company received $1,100,000, $310,000
and $300,000 of research and development revenues under the agreement in
2001, 2000, and 1999, respectively.
- - 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.
- - 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.
12. 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.
F-22
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In July 1996, the Company filed a patent infringement lawsuit in the United
States District Court for the Southern District of California (the "Court")
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. 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 ("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 in March, 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.
In October, 2000, the Court 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. Merck KGaA
filed various post-trial motions requesting a judgment as a matter of law
notwithstanding the verdict or a new trial, in each case regarding infringement,
invalidity and damages. In September 2001, the Court entered orders in favor of
the Company and against Merck KGaA on the final post-judgment motions in the
case, and denied Merck KGaA's motions for judgment as a matter of law and for a
new trial.
Merck KGaA and Integra have each appealed various decisions of the Court. We
expect the court of appeals to hear arguments in the appeal during 2002 and to
issue its opinion during 2003. Post-judgment interest continues to accrue at the
rate of approximately $20,000 per week. Integra has not recorded any gain in
connection with this favorable judgment.
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 a
wholly-owned subsidiary of the Company (Subsidiary), dated as of December 18,
1996, alleged that Subsidiary breached the terms of the Letter Agreement prior
to the Company's acquisition of the NeuroCare Group (Subsidiary'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 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.
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.
F-23
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DIVISION AND GEOGRAPHIC INFORMATION
Integra's business is divided into two divisions: Integra NeuroSciences and
Integra LifeSciences.
The Integra NeuroSciences division is a leading provider of implants, devices,
and systems used in neurosurgery, neurotrauma, and related critical care and a
distributor of disposables and supplies used in the diagnosis and monitoring of
neurological disorders. The Integra LifeSciences division develops and
manufactures a variety of medical products and devices, including products based
on the Company's proprietary tissue regeneration technology that are used to
treat soft tissue and orthopedic conditions.
Integra NeuroSciences sells primarily through a direct sales force in the United
States and Europe and through a network of distributors elsewhere throughout the
world. For the majority of the products manufactured by the Integra LifeSciences
division, the Company has partnered with market leaders for the development and
marketing efforts related to these products.
In the fourth quarter of 2001, the Company changed the classification of certain
products between the Integra LifeSciences and Integra NeuroSciences divisions.
Sales of the Helitene(R) fibrillar hemostat product and the carotid shunts
product line are now classified in the Integra NeuroSciences division's product
sales. These products, both of which are now sold by the Integra NeuroSciences
direct salesforce, were previously classified in the Integra LifeSciences
division's product sales. All prior period divisional financial results provided
below have been revised to reflect the retroactive application of this division
reporting change. Additionally, the Company has reclassified certain general and
administrative expenses from 2000 and 1999 within the divisions and corporate
general and administrative expenses to conform to the current methodology for
determining divisional profitability. These reclassifications were not material
and did not change the basic nature of the business divisions.
Selected financial information on the Company's business divisions is reported
below:
Total
Integra Integra Reportable
NeuroSciences LifeSciences Divisions
------------- ------------ ----------
(IN THOUSANDS)
2001
- ------
Product sales ...................... $ 68,332 $ 19,355 $ 87,687
Total revenue ...................... 69,393 24,049 93,442
Operating expenses ................. 51,432 18,001 69,433
Operating income ................... 17,961 6,048 24,009
Depreciation included in segment
operating expenses ............... 2,030 1,064 3,094
2000
- ------
Product sales ...................... $ 49,202 $ 15,785 $ 64,987
Total revenue ...................... 50,514 21,135 71,649
Operating expenses ................. 40,478 17,756 58,234
Operating income ................... 10,036 3,379 13,415
Depreciation included in segment
operating expenses ............... 1,457 1,158 2,615
1999
- ------
Product sales ...................... $ 25,444 $ 14,603 $ 40,047
Total revenue ...................... 25,894 16,982 42,876
Operating expenses ................. 27,433 20,784 48,217
Operating loss ..................... (1,539) (3,802) (5,341)
Depreciation included in segment
operating expenses ............... 1,062 870 1,932
F-24
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DIVISION AND GEOGRAPHIC INFORMATION (CONTINUED)
Product sales and the related cost of product sales between divisions are
eliminated in computing divisional operating results. The Company does not
disaggregate nonoperating revenues and expenses nor identifiable assets on a
divisional basis.
A reconciliation of the amounts reported for total reportable divisions to the
consolidated financial statements is as follows:
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Operating expenses:
Total reportable divisions ............................... $ 69,433 $ 58,234 $ 48,217
Plus: Corporate general and administrative expenses ...... 6,939 22,655 6,165
Amortization ....................................... 2,784 2,481 874
-------- -------- --------
Consolidated total operating expenses .................... 79,156 83,370 55,256
Operating income (loss):
Total reportable divisions ............................... $ 24,009 $ 13,415 $ (5,341)
Less: Corporate general and administrative expenses ...... 6,939 22,655 6,165
Amortization ....................................... 2,784 2,481 874
-------- -------- --------
Consolidated operating income (loss) ..................... $ 14,286 $(11,721) $(12,380)
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 consisted of the following:
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Integra NeuroSciences:
Neuro intensive care unit ............................. $ 27,830 $ 23,521 $ 14,398
Neuro operating room .................................. 36,213 21,820 8,458
Other NeuroSciences products .......................... 4,289 3,861 2,588
-------- -------- --------
Total product sales ................................... 68,332 49,202 25,444
Integra LifeSciences:
Tissue repair products ................................ $ 8,698 $ 6,168 $ 5,781
Other medical devices ................................. 10,657 9,617 8,822
-------- -------- --------
Total product sales ................................... 19,355 15,785 14,603
Consolidated product sales ............................ $ 87,687 $ 64,987 $ 40,047
Product sales and long-lived assets (excluding financial instruments and
deferred tax assets) by major geographic area are summarized below:
United Asia Other
States Europe Pacific Foreign Consolidated
-------- -------- -------- -------- ------------
(IN THOUSANDS)
Product sales:
2001 ............... $ 68,391 $ 10,577 $ 4,838 $ 3,881 $ 87,687
2000 ............... 51,379 6,759 4,628 2,221 64,987
1999 ............... 30,982 4,664 3,299 1,102 40,047
Long-lived assets:
2001 ............... $ 33,001 $ 11,777 $ -- $ -- $ 44,778
2000 ............... 33,428 6,869 -- -- 40,297
1999 ............... 23,447 -- -- -- 23,447
F-25
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SELECTED QUARTERLY INFORMATION -- UNAUDITED
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001:
- -----
Total revenue ........................... $25,088 $23,750 $22,920 $21,684
Cost of product sales ................... 9,957 9,153 8,310 8,594
Total other operating expenses .......... 10,419 10,861 11,154 10,708
Operating income ........................ 4,712 3,736 3,456 2,382
Interest income (expense), net .......... 1,029 556 (114) (78)
Other income (expense), net ............. (19) 96 (151) (62)
Income before income taxes .............. 5,722 4,388 3,191 2,242
Income tax expense (benefit) ............ (11,903) 365 429 246
Income before extraordinary loss ........ 17,625 4,023 2,762 1,996
Extraordinary loss on early
retirement of debt, net of
income tax benefit ................... -- (243) -- --
Net income .............................. $17,625 $ 3,780 $ 2,762 $ 1,996
Basic income per share before
extraordinary loss ................... $ 0.63 $ 0.15 $ 0.12 $ 0.08
Basic net income per share .............. 0.63 0.14 0.12 0.08
Diluted income per share before
extraordinary loss .................... $ 0.56 $ 0.14 $ 0.10 $ 0.07
Diluted net income per share ............ 0.56 0.13 0.10 0.07
2000:
- -----
Total revenue ........................... $20,251 $19,781 $17,086 $14,531
Cost of product sales ................... 8,108 7,504 7,212 6,687
Total other operating expenses .......... 24,037 10,294 10,462 9,066
Operating income (loss) ................. (11,894) 1,983 (588) (1,222)
Interest income (expense), net .......... (101) (204) (179) 11
Gain on sale of product line ............ -- -- 1,031 115
Other income (expense), net ............. 24 45 9 123
Income (loss) before income taxes ....... (11,971) 1,824 273 (973)
Income tax expense (benefit) ............ (195) 80 161 62
Income (loss) before cumulative
effect of accounting change .......... (11,776) 1,744 112 (1,035)
Cumulative effect of accounting change .. -- -- -- (470)
Net income (loss) ....................... $(11,776) $ 1,744 $ 112 $(1,505)
Basic income (loss) per share before
cumulative effect of accounting change $ (0.67) $ 0.08 $ (0.02) $ (0.32)
Basic net income (loss) per share ....... (0.67) 0.08 (0.02) (0.35)
Diluted income (loss) per share before
cumulative effect of accounting change $ (0.67) $ 0.07 $ (0.02) $ (0.32)
Diluted net income (loss) per share ..... (0.67) 0.07 (0.02) (0.35)
F-26
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SELECTED QUARTERLY INFORMATION -- UNAUDITED (CONTINUED)
The following special charges (credits) are reflected in the selected quarterly
information:
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(IN THOUSANDS)
2001:
- -----
Inventory fair value purchase accounting
adjustments (Cost of product sales) .... $ 51 $ -- $ 152 $ --
Deferred tax benefit from the reduction
of the valuation allowance recorded
against deferred tax assets
(Income tax benefit) ................... (11,512) -- -- --
2000:
- -----
Inventory fair value purchase accounting
Adjustments (Cost of product sales) .... $ -- $ -- $ 334 $ 95
Stock-based compensation charge for
issuance of Restricted Units
(Total other operating expenses) ....... 13,515 -- -- --
F-27
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of Integra LifeSciences
Holdings Corporation and Subsidiaries:
Our audits of the consolidated financial statements referred to in our report
dated February 22, 2002, appearing in the 2001 Annual Report on Form 10-K of
Integra LifeSciences Holdings Corporation and Subsidiaries also included an
audit of the financial statement schedule listed in the index in Item 14 of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Florham Park, New Jersey
February 22, 2002
F-28
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description Of Period Expenses Accounts(1) Deductions(2) Period
- --------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2001
Allowance for doubtful accounts .......... $ 1,003 $ 54 $ 4 $ (97) $ 964
Inventory reserves ....................... 3,420 3,734 -- (1,342) 5,812
Deferred tax asset valuation allowance ... 44,776 1,544 -- (11,964) 34,356
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts .......... $ 944 $ 489 $ 30 $ (460) $ 1,003
Inventory reserves ....................... 3,137 892 903 (1,512) 3,420
Deferred tax asset valuation allowance ... 41,434 3,342 -- -- 44,776
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts .......... $ 354 $ 406 $ 216 $ (32) $ 944
Inventory reserves ....................... 525 2,159 1,614 (1,161) 3,137
Deferred tax asset valuation allowance ... 41,844 -- (392) (18) 41,434
(1) All amounts shown were recorded to goodwill in connection with
acquisitions.
(2) The $12.0 million deduction to the deferred tax asset valuation allowance
in 2001 includes a $450,000 credit to additional paid-in capital.
F-29
EXHIBIT 10.25(c)
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is entered into this 20th day of
December 2001 and effective as of the 31st day of December 2001 ("Effective
Date") by and between Integra LifeSciences Holdings Corporation ("Integra") and
George McKinney, Ph.D. ("McKinney"), with reference to the following
BACKGROUND.
WHEREAS, McKinney and Integra entered into an Employment Agreement dated
February 22, 2001 and effective as of February 28, 2001 (the "Employment
Agreement");
WHEREAS, the Employment Agreement provides, among other things, for
McKinney's retiring from his position as Executive Vice President and Chief
Operating Officer effective December 31, 2001 and remaining as an employee with
the title "Consultant to the President and CEO" until June 30, 2002;
WHEREAS, the Employment Agreement provides for the payment to McKinney of
certain compensation through June 30, 2002;
WHEREAS, McKinney has facilitated a smooth and effective transition of his
matters to other colleagues at Integra and its subsidiaries; and
WHEREAS, because of McKinney's efforts in facilitating the transition,
Integra has determined to accelerate payments owing to McKinney under the
Employment Agreement.
NOW THEREFORE, in consideration of the premises and the mutual agreements
contained herein and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Paragraph 2 of the Employment Agreement shall be deleted in its
entirety and replaced with the following:
2. POSITION AND PAYMENTS. McKinney hereby resigns from his position as
Executive Vice President and Chief Operating Officer of Integra effective
December 31, 2001. McKinney shall remain as an employee on Integra's payroll
until June 30, 2002 with the title "Consultant to the President and CEO" and
shall receive $67,500 as compensation for such six-month period, payable in
semi-monthly installments, net of withholding taxes, and McKinney shall receive
the benefits that are described on Exhibit B of the Employment Agreement. In
addition, on December 31, 2001 Integra shall make a payment of $202,500, net of
withholding taxes, to McKinney. At all times after December 31, 2001, McKinney
shall not be required to maintain a residence in the State of New Jersey or be
present at Integra's principal executive offices located in Plainsboro, New
Jersey, and, after such date, McKinney shall have the right, at his expense, to
perform his work for Integra in the Boston metropolitan area or such other
location as he may select, provided, however that McKinney, in his role as
Consultant to the President and CEO, shall until June 30, 2002 make himself
available to the President and CEO of Integra at all reasonable times and agrees
to travel to Integra's sites on an as-needed basis in order to perform his
consulting duties for Integra, and, provided further, however, that except for
reasonable travel expenses and for expenses relating to McKinney's use of a
cellular telephone on business for Integra and telephone expenses relating to
McKinney's remote connections to the Integra computer system based in
Plainsboro, New Jersey, Integra shall not be responsible to pay or reimburse
McKinney during any period in which he is serving as Consultant to the President
and CEO for any costs or expenses that McKinney incurs in maintaining his office
outside Integra's principal executive offices located in Plainsboro, New Jersey.
In order to receive reimbursement for the expenses set forth in this Section 2,
McKinney shall submit appropriate documentation that substantiates such
expenses.
2. Except as amended hereby, the Employment Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Employment Agreement as of the date first above written.
/s/ George McKinney
- ------------------------------
Witness:
Integra LifeSciences Holdings Corporation
By: /s/ Stuart M. Essig
------------------------------
Stuart M. Essig
President and CEO
EXHIBIT 21
Subsidiaries of Integra LifeSciences Holdings Corporation
State or Country of
Name of Subsidiary Incorporation or Organization
- ------------------ -----------------------------
Caveangle Ltd. United Kingdom
GMS mbH Germany
Integra LifeSciences Corporation Delaware
Integra LifeSciences Investment Corporation Delaware
Integra NeuroSciences CA Corporation Delaware
Integra NeuroSciences PR, Inc. Delaware
Integra NeuroSciences Holdings (UK) Ltd. United Kingdom
Integra NeuroSciences (UK) Ltd. United Kingdom
Integra NeuroSupplies, Inc. Connecticut
Integra Selector Corporation Delaware
Satelec Medical France
Spembly Cryosurgery Ltd. United Kingdom
Spembly Medical Ltd. United Kingdom
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-46024, 333-82233, 333-58235, 333-06577,
and 333-73512) of Integra LifeSciences Holdings Corporation and Subsidiaries of
our report dated February 22, 2002 relating to the consolidated financial
statements which appears in this Annual Report on Form 10-K. We also consent to
the incorporation by reference of our report dated February 22, 2002 related to
the financial statement schedule which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 27, 2002