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, 2002
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
As of June 28, 2002, the aggregate market value of the registrant's common stock
held by non-affiliates was approximately $356,962,914, based upon the closing
sales price of the registrant's common stock on NASDAQ on such date. For
purposes of this calculation only, all directors, executive officers and holders
of more than 10% of the registrant's outstanding common stock as of such date
were deemed to be "affiliates" of the registrant.
The number of shares of the registrant's Common Stock outstanding as of March
14, 2003 was 27,325,902.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating to its
scheduled May 21, 2003 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 develops, manufactures, and markets medical devices, implants and
biomaterials primarily for use in neurosurgery, orthopedics and soft tissue
repair. Our business operates globally and is divided into two segments, which
we sometimes refer to as divisions: Integra NeuroSciences(TM) and Integra
LifeSciences(TM).
Integra was founded in 1989 and over the next decade developed technologies and
a product portfolio directed toward tissue regeneration. In 1999, we entered the
neurosurgery market through an acquisition and the launch of our DuraGen(R)
Dural Graft Matrix product for the repair of the dura mater. Since 1999, Integra
NeuroSciences has grown to comprise more than 77% of our total revenues. During
that period, we have increased our revenues from $40.0 million to $117.8
million, for an average annual growth rate of 41%, and we have broadened our
product offerings to include more than 10,000 products. We have achieved this
growth in our overall business through eleven acquisitions, the development and
introduction of new products, and the expansion of Integra NeuroSciences' direct
sales force.
Integra is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, which we refer to as the "Exchange Act". In accordance
with the Exchange Act, we file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may view our financial information, including the information contained in
this report, and other reports we file with the Securities and Exchange
Commission, on the Internet in the "SEC Filings" page of the Investor Relations
section of our website at www.Integra-LS.com. You may also obtain a copy of any
of these reports, without charge, from our investor relations department, 311
Enterprise Drive, Plainsboro, NJ 08536. Alternatively, you may view or obtain
reports filed with the Securities and Exchange Commission at the SEC Public
Reference Room at 450 Fifth Street, N.W. in Washington, D.C. 20549, or at the
SEC's Internet site at www.sec.gov. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference facilities.
Integra NeuroSciences Segment
Our Integra NeuroSciences segment comprises our businesses that primarily sell
directly to healthcare providers. Through our Integra NeuroSciences segment we
are a leading provider of implants, devices, and systems used in neurosurgery,
neurotrauma, and related critical care, a marketer of surgical instruments and
devices, and 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. We believe that we are able to access this focused group of
hospital-based practitioners cost effectively through our direct sales and
marketing infrastructure in the United States and Europe and our distribution
network elsewhere. Integra NeuroSciences' direct selling effort in the United
States and Europe currently involves more than 100 professionals, including
direct salespeople (called neurospecialists in the United States), sales
management, and clinical educators who educate and train both our salespeople
and customers in the use of our products. A national sales manager and seven
regional managers lead the United States sales force. We increased the number
of our domestic sales territories from 44 to 63 in 2002. We believe our
expanded sales force allows for smaller, more focused territories, better
coverage of our customers, greater participation in trade shows and more
extensive marketing efforts.
We market surgical instruments and other devices directly to plastic and
reconstructive surgeons, burn surgeons, hand surgeons, ear, nose and throat
(ENT) surgeons and other physicians through a separate eight-person sales force
in the United States and a network of distributors outside the United States. We
also market a broad range of disposables and supplies used in the diagnosis and
monitoring of neurological, ENT and pulmonary disorders directly to
neurologists, hospitals and sleep clinics through our Integra NeuroSupplies
catalog business.
Integra LifeSciences Segment
Our Integra LifeSciences segment comprises our businesses that primarily sell
through intermediaries, such as strategic partners and original equipment
manufacturer customers. Through our Integra LifeSciences segment we develop and
manufacture a variety of medical products and devices, including products based
on our proprietary tissue regeneration technology. We partner with market
leaders for the development and marketing of most of our Integra LifeSciences
products. We believe that because these products address large, diverse markets,
we can promote them more cost-effectively through leveraging the sales
capabilities of our marketing partners than through developing our own sales
infrastructure. This strategy allows us to achieve our growth objectives cost-
effectively while enabling us to focus our management efforts on developing new
products. Our strategic partners include Ethicon, Inc. (a division of Johnson &
Johnson), Wyeth Biopharma, Medtronic Sofamor Danek, and Centerpulse.
Financial information about our segments and geographical areas, is set forth in
our financial statements under Notes to Consolidated Financial Statements, Note
13 - Segment and Geographic Information. We do not disaggregate nonoperating
revenues and expenses nor identifiable assets on a segment basis.
Recent Development
On March 17, 2003, we acquired JARIT(R) Surgical Instruments, Inc. (JARIT)
for $44.5 million in cash, subject to a working capital adjustment and other
adjustments with respect to certain income tax elections. For more than 30
years, JARIT has marketed a wide variety of high quality, reusable surgical
instruments to virtually all surgical disciplines. JARIT sells its products to
more than 5,200 hospitals and surgery centers worldwide. In the United
States, JARIT sells through a 20 person sales management force that works
with over 100 distributor sales representatives.
With more than 5,000 instrument patterns and a 98% order fill rate, JARIT has
developed a strong reputation as a leading provider of high-quality surgical
instruments. JARIT manages its vendor relationships and purchases, packages
and labels its products directly from instrument manufacturers through its
facility in Tuttlingen, Germany.
The acquisition of JARIT broadens Integra's existing customer base and
surgical instrument product offering and provides an opportunity to achieve
operating costs savings, including the procurement of Integra's Redmond(TM)-
Ruggles(TM) and Padgett Instruments Inc.(R) products directly from the
instrument manufacturers.
The acquired business generated approximately $30.9 million in revenues and
$7.8 million in income before income taxes for the year ended December 31, 2002.
We expect to report the results of JARIT in the Integra NeuroSciences segment.
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. 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 segment exists through
* expanding our product portfolio and market reach through additional
acquisitions;
* increasing the penetration of our existing products into closely related
markets, such as the ENT, neurology, and spine markets;
* 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
* expanding our sales force and product offerings focused on plastic
and reconstructive surgeons.
Additional Strategic Acquisitions. Since 1999 we have completed twelve
acquisitions focused primarily in the Integra NeuroSciences division. We
regularly evaluate potential acquisition candidates 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. Significant ongoing strategic
alliances include those with Ethicon to market our INTEGRA(R) Dermal
Regeneration Template and Wyeth BioPharma 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, biomaterials for the
orthopedic implant market, Biomend(R) and Biomend(R) Extend Absorbable Collagen
Membrane, 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 and
are seeking expanded applications for our existing products.
BUSINESS SEGMENTS
[INTEGRA NEUROSCIENCES LOGO]
OVERVIEW
The Integra NeuroSciences segment sells 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, used in 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 outpatient
settings. We also sell products that vascular surgeons use to divert blood to
vital organs, such as the brain, during surgical procedures involving blood
vessels. Additionally, our Padgett Instruments, Inc. subsidiary sells
instruments and other devices through a separate direct sales force to plastic
and reconstructive surgeons, burn surgeons, ENT surgeons and other physicians.
According to industry sources and our estimates, our Integra NeuroSciences
products address markets that exceed $400 million in the aggregate and are
expected to grow at an annual rate of 6-8%.
Integra NeuroSciences 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,surgical instrumentation, carotid shunting, peripheral
nerve repair and central nervous system diagnostic and monitoring supplies.
Integra NeuroSciences' products can be divided 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 of intracranial pressure,
Monitoring systems, LICOX(R) oxygen and temperature following
oxygen monitoring Systems, injury or neurosurgical procedures
Integra Systems of CSF 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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PRODUCT LINES APPLICATION
NeuraGen(TM) Nerve Guide Repair of peripheral nerves
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Selector(R) Integra Ultrasonic Use of ultrasonic energy to
Aspirator; Dissectron(R) ablate tissue
Ultrasonic Aspirator
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Neurosurgical shunts, including the Specifically designed for the
Orbis-Sigma II(R), and the H-V Lumbar, management of hydrocephalus, a chronic
Novus and Equi-Flow(R) Valves condition involving excess
cerebrospinal fluid in the brain
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Redmond(TM)-Ruggles(TM) neurosurgical Specialized surgical instruments for
and spinal instruments use in brain or spinal surgery
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Integra epilepsy monitoring electrodes Electrodes for the intraoperative
monitoring of epileptic seizures
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ALL OTHER
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JARIT(R) Surgical Instruments Instruments for general, plastic, neuro
ENT cardiovascular, ob-gyn, and
ophthalmic surgery
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Padgett Instruments Devices and instruments used in burn,
reconstructive and plastic surgery
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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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MARKETS AND PRODUCTS
Neuro Intensive Care Unit
The Monitoring Of Brain Parameters. Neurosurgeons use intracranial monitors to
diagnose and treat cases of severe head trauma and other diseases. There are
approximately 400,000 cases of head trauma each year in the United States, and
the market for monitoring and intervention is estimated to be 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. Neurosurgeons use external drainage
systems and cranial access kits 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 names.
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 may 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 $80 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 DuraGen(R) Dural Graft Matrix addresses the shortcomings from which other
methods for repairing the dura mater suffer. Clinical trials have shown our
DuraGen(R) product 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 human body ultimately absorbs the
DuraGen(R) product and replaces it with new natural tissues, 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 to be $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. In addition to targeting the neurosurgical operating room, we
are also marketing the NeuraGen(TM) product to Integra NeuroSupplies' customer
base of non-hospital and private practice-based neurologists and to Padgett
Instruments' customer base of hand and reconstructive surgeons.
Neurosurgical Systems For Tissue 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. In September 2002, we received FDA
510(k) clearance to market the Selector(R) product for use in general,
gynecological, urological, plastic and reconstructive, orthopedic, thoracic and
thorascopic surgery procedures. We offer the Dissectron(R) product only outside
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 the body absorbs cerebrospinal fluid. 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. Hydrocephalus is most commonly treated by inserting a shunt into the
ventricular system of the brain to divert the flow of cerebrospinal fluid out of
the brain and using a pressure valve to maintain a normal level of cerebrospinal
fluid 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, and the remaining 20% address 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.
In 2002 we strengthened our offering of hydrocephalus management products
through our acquisition of the neurosciences division of NMT Medical, Inc. and
certain assets of the Radionics business, a division of Tyco Healthcare Group.
Those acquisitions added a range of leading pressure valves, including the
Orbis-Sigma(R), Integra Hakim(R) horizontal-vertical ("H-V"), Equiflow(R) and
Contour Flex(R) valves to our existing line of hydrocephalus management shunting
products. We have sold the Heyer-Schulte(R), 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 since our acquisition of
the NeuroCare group of companies in 1999.
In recent years, neurosurgeons have increased their use of programmable valves,
which allow the neurosurgeon to adjust the pressure settings of the 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. We do not
market hydrocephalus management shunts with programmable valves and believe that
the increasing use of programmable valves may negatively affect the future sales
of our shunt products.
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 our
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.
Epilepsy Electrodes. We sell a line of electrodes for the intraoperative
monitoring of epileptic seizures through our NeuroSciences sales force. We
acquired these products and other assets in December 2002 from Radionics, a
division of the Tyco Healthcare Group, and are transferring the manufacture of
these products to our facility in Biot, France.
All Other
Neurological Supplies. Through our Integra NeuroSupplies business, 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.
We sell these products under the Integra NeuroSupplies(TM) name primarily
through a catalog to more than 6,000 neurologists, hospitals, sleep clinics, and
other physicians. Neurologists are the referring physicians for Integra's
existing neurosurgeon customers and participate in the decision to use our line
of epilepsy monitoring electrodes.
Padgett Instruments. Padgett Instruments , Inc.(R) markets a wide variety of
high quality, reusable surgical instruments to plastic and reconstructive
surgeons, burn surgeons, ENT surgeons, hospitals, surgery centers, and other
physicians. We sell these products in the United States through an eight-person
direct sales force and through certain distributors and original equipment
manufacturer accounts. We sell these products internationally through
distributors. Padgett's customer base represents an attractive potential market
for certain of our other products, such as the NeuraGen(TM) Nerve Guide.
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. The Integra NeuroSciences sales force sells these products
directly in the United States for use by vascular surgeons and neurosurgeons.
[INTEGRA LIFESCIENCES LOGO]
OVERVIEW
The Integra LifeSciences segment develops and manufactures implants and other
medical devices 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 segment comprises our businesses that sell primarily
through intermediaries, such as strategic partners and original equipment
manufacturer customers. Because its products generally address large, diverse
markets, we have constructed Integra LifeSciences segment's marketing, research
and development programs around strategic alliances with leading medical device
companies. We believe that we can promote these products more cost-effectively
through leveraging our marketing partners' sales capabilities than through
developing our own sales force. According to industry sources and our estimates,
the aggregate size of the markets addressed by Integra LifeSciences' products
exceeds $1 billion.
We have established a reputation as a value-added and dependable development and
manufacturing partner. In addition, we have expertise in the development,
manufacture and supply of a variety of absorbable materials and can provide
experienced personnel to support product quality and regulatory review efforts.
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 Ethicon, Inc., a division of
Regeneration Template and repair skin Johnson & Johnson, and Century
defects Medical, Inc. in Japan
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BioMend(R) and Used in guided tissue Centerpulse
BioMend(R) Extend regeneration in
Absorbable Collagen periodontal surgery
Membrane
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Absorbable Collagen Fracture management/ Wyeth BioPharma; Medtronic
Sponge and other matrices enabling spinal Sofamor Danek
for use with bone fusion
morphogenetic protein
(rhBMP-2)
______________________________________________________________________________
OTHER MEDICAL DEVICES
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VitaCuff(R) catheter Provides protection Arrow International, Inc.,
access infection against infection Bard Access Systems, Inc.,
control device arising from Tyco HealthCare,
long-term catheters
BioPatch(R)(1) Antimicrobial wound Ethicon, Inc.
Antimicrobial Wound dressing
Dressing
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PRODUCT LINES APPLICATION MARKETING/DEVELOPMENT PARTNER
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CollaCote(R), Used to control Centerpulse
CollaTape(R) and bleeding in dental
CollaPlug(R) absorbable surgery
wound dressings
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Instat(R)(1),Helistat(R) Control of bleeding Ethicon, Inc. and various
and Helitene(R) distributors
Absorbable Collagen
Hemostats
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Spembly Medical Allows surgeon to Various distributors
cryosurgery products use low temperature
moreto easily extract
diseased tissue
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Cranial fixation Allows neurosurgeon Medtronic
fixation devices; to repair injuries
custom cranial plates to the cranium
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(1) BioPatch and Instat are registered trademarks of Johnson & Johnson.
MARKETS AND PRODUCTS
Tissue Repair Products
Skin Replacement. Integra LifeSciences' skin replacement products address the
market need created by severe burns, reconstructive surgery, and chronic wounds.
INTEGRA(R) Dermal Regeneration Template is designed to enable the human body to
regenerate functional dermal tissue. The FDA initially approved the product
under a Premarket Approval application ("PMA") for the post-excisional treatment
of life-threatening deep or full-thickness dermal injury where sufficient
autograft is not available at the time of excision or not desirable due to the
physiological condition of the patient. In 2002, the FDA approved a PMA
supplement to permit the marketing of the INTEGRA(R) Dermal Regeneration
Template for the repair of scar contractures in patients who have already
recovered from their initial wound. In 2002, we also received FDA 510(k)
clearance to sell a related product, Integra(TM) Bilayer Matrix Wound Dressing
and Integra(TM) Matrix Wound Dressing, for the dressing of wounds, including
chronic wounds.
The Ethicon division of Johnson & Johnson is the exclusive seller of the
INTEGRA(R) Dermal Regeneration Template and the Integra(TM) BiLayer Wound Matrix
worldwide, except in Japan where Century Medical, Inc. has rights to distribute
the INTEGRA(R) Dermal Regeneration Template.
In 2002, we sold $4.2 million of INTEGRA(r) Dermal Regeneration Template to
Ethicon and received $2.0 million in research payments and $1.0 million in
clinical and regulatory event payments that were recorded in other revenue.
Ethicon has not been successful in selling the minimum amounts of INTEGRA(R)
Dermal Regeneration Template specified in its agreement with us. In addition,
we have notified Ethicon that certain clinical and regulatory events have
been achieved under the agreement and that payments for the achievement of
those events is due to us. Ethicon has informed us that it disagrees that the
clinical and regulatory events in question have been achieved, and that it
does not intend to make the payments we have demanded. In addition, Ethicon
has informed us that if we do not agree to substantial amendments to its
agreement with us, it will consider alternatives that may include exercising
its right to terminate the agreement.
The agreement requires Ethicon to give us notice one year in advance of a
termination of the agreement, during which time Ethicon is required to continue
to comply with the terms of the contract. At the end of that period, Ethicon
may be required to pay additional amounts based on the termination provisions
of the agreement and is required to cooperate in the transfer of the business
back to Integra. Additionally, Ethicon may apply the value of any minimum
payments in excess of actual product purchases against future purchases of
products for sale on a non-exclusive basis for a specified period of time.
If Ethicon does terminate the agreement or if we determine that Ethicon is in
breach of the agreement and we terminate the agreement, there is no assurance
that we will be able to recover the money that we believe Ethicon is obligated
to pay us under the agreement. If Ethicon does give us notice that it will
terminate the agreement, it is possible that Ethicon will diminish its
sales and marketing efforts for the product during the one-year notice period
and that its sales will decline as a result. In addition, we may not be
successful in sustaining or restoring the sales of the INTEGRA(R) Dermal
Regeneration Template at current levels after the termination date. Finally,
if Ethicon terminates the agreement it is possible that we may become
involved in litigation with Ethicon, which could also impair our ability to
sell products under our other agreements with Ethicon, including the
BioPatch(R) and Instat(R) products.
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 body absorbs the BioMend(R) product after approximately four to seven weeks,
avoiding the requirement for additional surgical procedures to remove a
non-absorbable membrane. The BioMend(R) Extend product has the same indication
for use as the BioMend(R) product, except that it absorbs in approximately 16
weeks. The BioMend(R) and BioMend(R) Extend Absorbable Collagen Membranes are
sold through Centerpulse.
Orthopedic Biomaterials. Integra LifeSciences supplies Wyeth BioPharma with
Absorbable Collagen Sponges for use in developing bone regeneration implants.
Since 1994, we have supplied Absorbable Collagen Sponges for use with Wyeth
BioPharma's recombinant human bone morphogenetic protein-2 (rhBMP-2), a
manufactured version of human protein naturally present in very small quantities
in the body. Wyeth BioPharma is developing rhBMP-2 for clinical evaluation in
several areas of bone repair and augmentation, including orthopedic, oral and
maxillofacial surgery applications.
We are selling Absorbable Collagen Sponges for spinal applications through a
related collaboration with Medtronic Sofamor Danek in North America. In July
2002, the FDA approved 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(TM) Bone Graft uses rhBMP-2 applied to our Absorbable
Collagen Sponge 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(TM) Bone Graft is indicated to
treat certain types of spinal degenerative disc disease, a common cause of low
back pain.
Wyeth BioPharma has filed a PMA application with the FDA seeking approval for
the use of InductOs(TM), rhBMP-2 used in conjunction with our Absorbable
Collagen Sponge, for use in the treatment of acute long-bone fractures requiring
open surgical management. In November 2002, the Orthopedic and Rehabilitation
Panel of the FDA Medical Devices Advisory Committee recommended that the FDA
approve, with conditions, Wyeth BioPharma's PMA application.
We receive development funding and other payments from Medtronic Sofamor Danek
and Wyeth BioPharma related to the development of additional matrices for
various applications. Although the agreement provides for no milestone or other
contingent payments, Wyeth BioPharma pays us to assist with regulatory affairs
and research.
In addition, we are continuing to develop additional biomaterial technologies,
such as a new class of absorbable polycarbonates created through the
polymerization of tyrosine, that enhance the rate and quality of healing and
tissue regeneration with synthetic biodegradable scaffolds that support cell
attachment and growth. No medical device containing these materials has yet been
approved for sale.
Other Medical Devices
Other current products of Integra LifeSciences include the VitaCuff(R) catheter
access infection control device, the BioPatch(R) anti-microbial wound dressing,
a wide range of absorbable collagen products for hemostasis for use in dental
surgery sold under the names CollaCote(R), CollaTape(R) and CollaPlug(R), the
Helistat(R) Absorbable Collagen Hemostatic Agent, the Instat(R) Absorbable
Collagen Hemostat and cranial fixation devices for use in craniomaxillofacial
surgery. 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.
RESEARCH AND DEVELOPMENT STRATEGY
Our research and development programs focus on developing new products based on
our materials and collagen engineering technologies and our expertise in
fiber optics. Contract development revenues from strategic alliance partners and
governmen grants fund a portion of our research and development activities. We
spent approximately $10.6 million, $8.0 million, and $7.5 million in 2002, 2001,
and 2000, respectively, on research and development activities. The 2002 amount
includes $2.3 million of acquired in-process research and development charges
recorded in connection with acquisitions. Research and development activities
funded by contract development and government grant revenues amounted to $3.5
million, $3.9 million, and $2.8 million in 2002, 2001, and 2000, respectively.
We have either acquired or secured the proprietary rights to several important
technological and scientific platforms, including collagen matrix, peptide,
biomaterials, and intracranial monitoring technologies. 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 neuroscience 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.
We regularly review our research and development programs to ensure that they
remain consistent with and supportive of our growth strategies. To that end, in
2002 we expanded our product development staff to increase the focus on our
Integra NeuroSciences product development efforts and to seek additional
strategic alliances and applications for our Integra LifeSciences products and
technologies.
GOVERNMENT REGULATION
As a manufacturer of medical devices, we are subject to extensive regulation by
the Food and Drug Administration (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. 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 material direct expense to
us or a long-term disruption of an important customer or supplier relationship.
However, a future voluntary or involuntary recall of one of our major products,
particularly if it involved a potential or actual risk to patients, could have
an adverse financial impact on us, as a result both of direct expenses and
disrupted customer relationships.
The FDA requires, as a condition of marketing a medical device in the United
States, that we secure a Premarket Notification clearance pursuant to Section
510(k) of the Federal Food, Drug and Cosmetic Act, an approved PMA application
or a supplemental PMA 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 PMA
application or supplemental PMA application, can take up to several years and
can involve preclinical studies and clinical testing. 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 PMA 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. The FDA Medical
Device User Fee and Modernization Act of 2002 (MDUFMA) imposes user fees
payable to FDA for submission of Premarket Notifications, PMA applications,
Product Development Protocols, and certain supplemental PMA applications. The
regulatory process of obtaining product approvals/clearances can be onerous and
costly.
We may not receive the necessary regulatory approvals, including approval
for product improvements and new products, on a timely basis, if at all.
Delays in receipt of, or failure to receive, regulatory 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. However, the changes could have a material impact on
our business.
We have received or acquired more than 190 Premarket Notification 510(k)
clearances, five approved PMA applications and 54 supplemental PMA applications.
We expect to file new applications during the next year to cover new products
and variations on existing products.
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. Under FDA regulations, we are required to submit reports of certain
voluntary recalls and corrections to FDA. 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 Regulations 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 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, and ISO 9000; 2000, ISO 13485 and EN46001 are
recognized international quality standards that are designed to ensure that
we develop and manufacture quality medical devices. 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) audits each of our facilities annually to verify our compliance with
these standards. In 2002, each of our certified 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; the maintenance
of personal health information; sales and marketing practices, including product
discounting 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 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 could incur significant costs to comply with
environmental laws and regulations in the future, and our operations, business
or assets could be materially adversely affected by current or future
environmental laws or regulations.
PATENTS AND INTELLECTUAL PROPERTY
We pursue a policy of seeking patent protection of our technology, products and
product improvements both in the United States and in selected foreign
countries. When determined appropriate, we have enforced and plan to continue to
enforce and defend our patent rights. In general, however, we do not rely on our
patent estate to provide us with any significant competitive advantages as it
relates to our existing product lines. 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), EquiFlow(R), Helistat(R), Helitene(R),
Heyer-Schulte(R), INTEGRA(R) Dermal Regeneration Template, Integra Life-
Sciences(TM), Integra NeuroSciences(TM), Integra NeuroSupplies(TM), JARIT(R),
LICOX(R), NeuraGen(TM), NeuroNavigational(R), Novus(R), LPV(R), Ommaya(R),
Orbis-Sigma(R), Padgett Instruments, Inc(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 Medtronic Neurotechnologies division of Medtronic, Inc., the Codman division
of Johnson & Johnson, the Aesculap division of B. Braun and the Valleylab
division 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. 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, 2002, we had approximately 760 regular 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, administration
and finance. Except for certain employees at our Biot, France facility, 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 sales representatives 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 sales force and the customers who use our products. This team is
especially valuable in communicating the clinical benefits of new products.
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:
* general economic and business conditions, both nationally and in our
international markets;
* our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
* anticipated trends in our business;
* existing and future regulations affecting our business;
* our ability to obtain additional debt and equity financing to fund capital
expenditures and working capital requirements and acquisitions;
* our ability to complete acquisitions and integrate operations
post-acquisition; and
* 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.
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 our future results to differ materially from our
historical results and those anticipated 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.
Our Operating Results May Fluctuate.
Our operating results may fluctuate from time to time, which could affect our
stock price. 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:
* the impact of acquisitions;
* the timing of significant customer orders;
* market acceptance of our existing products, as well as products in
development;
* the timing of regulatory approvals;
* the timing of payments received and the recognition of those payments as
revenue under collaborative arrangements and strategic alliances;
* expenses incurred and business lost in connection with product field
corrections or recalls;
* our ability to manufacture our products efficiently; and
* the timing of our research and development expenditures.
The Industry And Market Segments In Which We Operate Are Highly Competitive, And
We May Be Unable To Compete Effectively With Other Companies.
In general, the medical technology industry is characterized by intense
competition. We compete with established medical technology and pharmaceutical
companies. Competition also comes from early stage companies that have
alternative technological solutions for our primary clinical targets, as well as
universities, research institutions and other non-profit entities. Many of our
competitors have access to greater financial, technical, research and
development, marketing, manufacturing, sales, distribution services and other
resources than we do. Further, our competitors may be more effective at
implementing their technologies to develop commercial products.
Our competitive position will depend on our ability to achieve market acceptance
for our products, implement production and marketing plans, secure regulatory
approval for products under development, obtain patent protection and secure
adequate capital resources. We may need to develop new applications for our
products to remain competitive. Technological advances by one or more of our
current or future competitors could render our present or future products
obsolete or uneconomical. Our future success will depend upon our ability to
compete effectively against current technology as well as to respond effectively
to technological advances. Competitive pressures could adversely affect our
profitability.
The largest competitors of Integra NeuroSciences in the neurosurgery markets are
the Medtronic Neurotechnologies division of Medtronic, Inc., the Codman division
of Johnson & Johnson, the Aesculap division of B. Braun, and the Valleylab
division 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. 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 1999, we have acquired twelve businesses or product lines at
a total cost of approximately $107 million.
We may be unable to continue to implement our growth strategy, and this strategy
may be ultimately unsuccessful. 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 material 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 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 develop further our
resources to adapt to these 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 could 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
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. Further studies, including clinical trials and FDA
approvals, may be required to gain approval for the use of a product for
clinical indications other than those for which the product was initially
approved or cleared or for significant changes to the product. In addition, for
products with an approved PMA application, the FDA requires annual reports and
may require post-approval surveillance programs to monitor the products' 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 PMA 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 approval might not be granted.
Approved products are subject to continuing FDA requirements relating to quality
control and quality assurance, maintenance of records, reporting of adverse
events, and product recalls, 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 a third-party manufacturer or we 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. See "Business -- Government
Regulation".
Certain Of Our Products Contain Materials Derived From Animal Sources And May
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 bovine
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. Regulatory 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.
Lack Of Market Acceptance For Our Products Or Market Preference For Technologies
That Compete With Our Products Could Reduce Our Revenues And Profitability.
We cannot be certain that our current products or any other products that we may
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 medical
community will accept the NeuraGen(TM) Nerve Guide 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. For
example, our sales of shunt products could decline if neurosurgeons increase
their use of programmable valves and we fail to introduce a competitive product.
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 acceptable costs, 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 acceptance of our products.
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 Be Unable 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 Wyeth BioPharma division of Wyeth for the
development of collagen matrices to be used in conjunction with Wyeth
BioPharma's recombinant bone protein, a protein that stimulates the growth of
bone in humans. Termination of these alliances would require us to develop other
means to distribute the affected products and could adversely affect our
expectations for the growth of our Integra LifeSciences segment.
Ethicon has informed us that if we do not agree to substantial amendments to its
agreement with us, it will consider alternatives that may include exercising its
right to terminate the agreement.
Our ability to enter into agreements with collaborators depends in part on
convincing them that our technology can help them achieve their goals and
execute their 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 these 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. 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 fail to market our products effectively or to 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 depends 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 that 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 Depends, In Part, Upon Unpatented Trade Secrets Which
We May Be Unable 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 our 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, except in specified
circumstances, all confidential information developed or made known to the
individual during the course of their relationship with us must be kept
confidential. 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 their 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 be unavailable to us on acceptable terms, or at all. In addition,
some licenses may be nonexclusive, and allow our competitors to access the same
technology we license. If we fail to obtain a required license or are unable to
design our product so as not to infringe on the proprietary rights of others, we
may be unable to sell some of our products, which could have a material adverse
effect on our revenues and profitability.
It May Be Difficult To Replace Some Of Our Suppliers.
Outside vendors, some of whom are sole-source suppliers, provide key components
and raw materials used in the manufacture of our products. Although we believe
that alternative sources for many of 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 intracranial pressure monitors and catheters, which we
assemble 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 could need time a
significant period of 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 revenues 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 in value
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
experience currency exchange risk with respect to those foreign currency
denominated revenues or expenses.
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:
* 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;
* Medicare, Medicaid and private health care insurer cutbacks could create
downward price pressure on our products;
* 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;
* 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;
* there is economic pressure to contain health care costs in international
markets;
* there are proposed and existing laws and regulations in domestic and
international markets regulating the sales and marketing practices and the
pricing and profitability of companies in the health care industry; and
* there have been initiatives by third-party payors to challenge the prices
charged for medical products that could affect our ability to sell products on
a competitive basis.
Both the pressures 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 market their products to health care
professionals and may compete by discounting the prices of their products.
Although we exercise care in structuring our sales and marketing practices and
customer discount arrangements to comply with those laws and regulations, we
cannot assure you that:
* government officials charged with responsibility for enforcing those laws will
not assert that our sales and marketing practices or customer discount
arrangements are in violation of those laws or regulations, or
* government regulators or courts will interpret those laws or regulations in a
manner consistent with our interpretation.
We May Have Significant Product Liability Exposure And Our Insurance May Not
Cover All Potential Claims.
We are exposed 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
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.
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 company.
The market price of our common stock has fluctuated widely in the past and is
likely to continue to fluctuate in the future. Factors that may have a
significant impact on the market price of our common stock include:
* our actual financial results differing from guidance provided by management;
* our actual financial results differing from that expected by securities
analysts;
* future announcements concerning us or our competitors, including the
announcement of acquisitions;
* changes in the prospects of our business partners or suppliers;
* developments regarding our patents or other proprietary rights or those of
our competitors;
* quality deficiencies in our products;
* competitive developments, including technological innovations by us or our
competitors;
* government regulation, including the FDA's review of our products
and developments;
* changes in recommendations of securities analysts and rumors that may be
circulated about us or our competitors;
* public perception of risks associated with our operations;
* conditions or trends in the medical device and biotechnology industries;
* additions or departures of key personnel; and
* 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 generally
have significant influence over the election of all directors, the outcome of
any corporate action requiring stockholder approval, and other aspects of 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,
Biot, France, San Diego, California, Anasco, Puerto Rico, Andover, England and
Mielkendorf, Germany. Our primary distribution centers are located in Cranbury,
New Jersey, Hawthorne, New York, Andover, England and Biot, France. In addition,
we lease several smaller facilities to support additional administrative,
assembly, and distribution operations. We lease all of our facilities other than
our facilities in Biot, France, and Tuttlingen, Germany, which we own.
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 willfully and deliberately to 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.
In March 2000, a jury returned a unanimous verdict in our favor and awarded us
$15,000,000 in damages, finding that Merck KGaA had willfully infringed and
induced the infringement of our patents. The Court dismissed Scripps and Dr.
Cheresh from the case.
In October 2000, the Court entered judgment in our favor and against Merck KGaA
in the case. In entering the judgment, the Court also granted to us pre-judgment
interest of approximately $1,350,000, bringing the total award 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 us 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 we have each appealed various decisions of the Court. The court
of appeals heard arguments in the appeal in November 2002, and we expect the
court to issue its opinion in 2003. We have not recorded any gain in connection
with this matter.
In addition to the Merck KGaA matter, we are subject to various claims, lawsuits
and proceedings in the ordinary course of our business, including claims by
current or former employees and distributors and with respect to our products.
In the opinion of management, such claims are either adequately covered by
insurance or otherwise indemnified, or 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.
In September, 2001, three subsidiaries of the recently acquired neurosciences
division of NMT Medical, Inc. received a tax reassessment notice from the French
tax authorities seeking in excess $1.5 million in back taxes, interest and
penalties. NMT Medical, Inc., the former owner of these entities, has agreed to
specifically indemnify Integra against any liability in connection with these
tax claims. In addition, NMT Medical, Inc. has agreed to provide the French tax
authorities with payment of the tax liabilities on behalf of each of these
subsidiaries.
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.
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. In August 2002, Mr. Holtz was given responsibility for managing Integra's European operations. His responsibilities include managing all financial reporting and accounting functions as well as the management of our European operations. 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 has served as Senior Vice President of Regulatory Affairs, Quality Assurance and Clinical Affairs, 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. Robert D. Paltridge joined Integra as National Sales Director in February 1995 and was appointed Vice President, North American Sales in September 1997. He was promoted to Vice President, Global Sales in October 2002 and Senior Vice President, Global Sales in January 2003. His responsibilities include managing both the direct sales force and distributor network for Integra NeuroSciences products. Mr. Paltridge has 20 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. 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 we acquired in 1995. He co-founded 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. Deborah A. Leonetti joined Integra in May of 1997 as Director of Marketing and was promoted to Vice President of Global 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. 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 lists the high and low sales prices for our Common Stock for each quarter for the last two years: HIGH LOW 2002 Fourth Quarter $ 18.99 $ 12.06 Third Quarter $ 21.80 $ 14.30 Second Quarter $ 29.00 $ 17.35 First Quarter $ 33.50 $ 24.61 2001 Fourth Quarter $ 31.03 $ 22.77 Third Quarter $ 32.15 $ 18.80 Second Quarter $ 22.45 $ 11.40 First Quarter $ 18.31 $ 9.87 The closing price for the Common Stock on March 14, 2003 was $20.26. 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, we have assumed that all outstanding shares not held by our directors and executive officers and stockholders owning 10% or more of outstanding shares were held by non-affiliates. However, this should not be deemed to constitute an admission that any 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 our definitive proxy statement to be filed with the Securities and Exchange Commission. We have not paid any cash dividends on our common stock since our formation. Any future determinations to pay cash dividends on the common stock will be at the discretion of our Board of Directors and will depend upon our results of operations and financial condition and other factors deemed relevant by the Board of Directors. The number of stockholders of record as of March 15, 2003 was approximately 600, which includes stockholders whose shares were held in nominee name. The number of beneficial stockholders at that date was over 5,000.
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 below may not be directly comparable.
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. Our 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 develops, manufactures, and markets medical devices, implants and biomaterials primarily for use in neurosurgery, orthopedics and soft tissue repair. Our business operates globally and is divided into two segments: Integra NeuroSciences(TM) and Integra LifeSciences(TM). Integra NeuroSciences Segment Our Integra NeuroSciences segment comprises our businesses that primarily sell directly to healthcare providers. Through our Integra NeuroSciences segment we are a leading provider of implants, devices, and systems used in neurosurgery, neurotrauma, and related critical care, a marketer of surgical instruments and devices, and a distributor of disposables and supplies used in the diagnosis and monitoring of neurological disorders. We sell our neurosurgery, neurotrauma, and related critical care products through a direct sales force of more than 80 people in the United States and western Europe. We market surgical instruments and other devices to plastic and reconstructive surgeons, burn surgeons, hand surgeons, ENT surgeons and other physicians through a direct sales force of eight people in the United States. Integra NeuroSupplies provides neurologists, hospitals, sleep clinics and other physicians with products used in the diagnosis and monitoring of neurological conditions and sleep disorders. Integra LifeSciences Segment Our Integra LifeSciences segment includes our businesses that primarily sell through strategic partners or to original equipment manufacturer customers. These businesses develop and manufacture 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. We have partnered with market leaders for the development and marketing efforts related to the majority of the products manufactured by the Integra LifeSciences segment. These products address large, diverse markets, and we believe that we can promote them more cost-effectively through leveraging marketing partners than through developing our own sales infrastructure. We have strategic alliances with Ethicon, Inc. (a division of Johnson & Johnson), Wyeth BioPharma, Medtronic Sofamor Danek, and Centerpulse.
Acquisitions Our recent growth in product revenues reflect increased sales of existing products, sales of newly launched products and sales of acquired businesses and product lines. We have acquired ten businesses and product lines since January 1, 2000, and those acquisitions have contributed significantly to our growth. Reported product revenues for 2002 and 2001 included the following amounts in sales of acquired product lines:
In August 2002, we acquired the neurosciences division of NMT Medical, Inc. for $5.7 million in cash. Through this acquisition, we added a range of leading differential pressure valves, including the Orbis-Sigma(R), Integra Hakim(R) and horizontal-vertical lumbar valves, and external ventricular drainage products to our neurosurgical product line. The acquired operations include a facility located in Biot, France that manufactures, packages and distributes shunting, catheter and drainage products, and a distribution facility located in Atlanta, Georgia. We completed the consolidation of the Atlanta operations into our Cranbury, New Jersey distribution center as of September 30, 2002. In July 2002, we acquired the assets of Signature Technologies, Inc., a specialty manufacturer of titanium and stainless steel implants for the neurosurgical and spinal markets, and certain other intellectual property assets. The purchase price consisted of $2.9 million in cash, $0.5 million of deferred consideration, and royalties on future sales of products to be developed. Our acquisition of Signature Technologies gave us the capability of developing and manufacturing metal implants for our strategic partners and for our direct sale. Signature Technologies currently manufactures cranial fixation systems for sale primarily under a single contract manufacturing agreement that expires in June 2004. In connection with this acquisition, we recorded a $1.2 million in-process research and development charge for the value associated with a project for the development of an enhanced cranial fixation system using patented technology for improved identification and delivery of certain components of the system. Signature Technologies has manufactured prototypes of this enhanced cranial fixation system and we do not expect to incur significant costs to complete development and obtain regulatory clearance to market the product. We estimated the value of the in-process research and development charge with the assistance of a third party appraiser using probability weighted cash flow projections with factors for successful development ranging from 10% to 35% and a 15% discount rate. In December 2001, we acquired NeuroSupplies, Inc., a specialty distributor of disposables and supplies for neurologists, pulmonologists and other physicians, for $4.1 million. The purchase price consisted of $0.2 million in cash, a $3.6 million note paid in January 2002, and 10,000 shares of Integra Common Stock. Integra NeuroSupplies markets a wide variety of supplies to neurologists, hospitals, sleep clinics, and other physicians in the United States as well as to original equipment manufacturers and distributors. In April 2001, we acquired Satelec Medical, a subsidiary of the Satelec-Pierre Rolland group, for $3.9 million in cash. Satelec Medical, based in France, manufactures and markets the Dissectron(R) ultrasonic surgical aspirator console and a line of related handpieces. We completed the consolidation of the Satelec manufacturing operations into our Andover, England and Biot, France facilities in 2002. In April 2001, we acquired GMSmbH, the German manufacturer of the LICOX(R) product, for $3.2 million. The purchase price consisted of $2.6 million in cash, 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 segment had exclusive marketing rights to the LICOX(R) products in the United States and certain other markets. In April 2000, we purchased the Selector(R) Ultrasonic Aspirator, Ruggles(TM) hand-held neurosurgical instruments and Spembly Medical cryosurgery product lines from NMT Medical, Inc. for $11.6 million in cash. We report revenues of the cryosurgery product line in our Integra LifeSciences segment. In January 2000, we purchased the business of Clinical Neuro Systems, Inc. for $6.8 million. The purchase price consisted of $4.0 million in cash and a $2.8 million promissory note issued to the seller, which we repaid in full in 2001. The acquired business designed and manufactured neurosurgical external ventricular drainage systems, catheters, drainage bags, and cranial access kits.
We have accounted for these acquisitions using the purchase method of accounting and have included the results of operations of each of the acquired businesses in our consolidated financial statements since its date of acquisition. The following table provides a comparison of pro forma product revenues for the years 2002 and 2001 as if all acquisitions completed after January 1, 2001 had occurred as of the beginning of that year. This pro forma product revenues data is based upon estimates of product revenues 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.
Results of Operations As a result of our recent acquisitions, the following financial results may not be directly comparable.
Net income in 2002 was $35.3 million, or $1.14 per diluted share, as compared to net income of $26.2 million in 2001, or $0.94 per diluted share, and a net loss of $11.4 million in 2000, or $(0.97) per diluted share. Included in these amounts are certain charges or gains resulting from facts and circumstances that, based on our recent history and future expectations, may not recur with similar materiality or impact on continuing operations. We believe that the identification of all charges and gains that meet this criteria promotes comparability of reported financial results. The following special charges and gains were included in net income (loss) and net income (loss) per share: Recorded in 2002 - - A $20.4 million deferred income tax benefit primarily from the reduction of the valuation allowance recorded against our deferred tax assets associated with net operating loss carryforwards; and - - acquired in-process research and development charges of $2.3 million recorded in connection with acquisitions. Recorded in 2001 - - A $11.5 million deferred income tax benefit from the reduction of a portion of the valuation allowance recorded against our deferred tax assets associated with net operating loss carryforwards; 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; The following discussion of segment financial results excludes corporate general and administrative expenses and amortization of intangible assets, which are not included in the measurement of segment operating results.
Increased sales of our DuraGen(R) Dural Graft Matrix accounted for most of our growth in neurosurgical operating room product revenue in 2002. Revenue from sales of neurosurgical shunt product lines acquired in 2002, offset in part by a decline in sales from our existing shunt lines, and increased sales of our NeuraGen(TM) Nerve Guide and ultrasonic aspirators also contributed to the growth in our 2002 neurosurgical operating room product revenue. Revenue from sales of drainage product lines acquired in 2002 and increased sales of our intracranial monitoring systems and existing drainage systems all contributed significantly to the growth in our neurosurgical intensive care unit product revenues in 2002. Substantially all of the growth in other neurosciences products revenue in 2002 was attributable to product lines acquired in 2002 and in December 2001. We expect that our future growth will derive from our expanded domestic sales force, the continued implementation of our direct sales strategy in Europe and from internally developed and acquired products. We also intend to acquire businesses that complement our existing businesses and products. Cost of product revenues included $447,000, $203,000, and $339,000 in fair value inventory purchase accounting adjustments recorded in connection with acquisitions in 2002, 2001, and 2000, respectively. Excluding these adjustments, gross margin as a percentage of product revenues would have been 63%, 62% and 59%, in 2002, 2001 and 2000, respectively. The continued improvement in gross margins is primarily the result of an improved sales mix of higher margin products and increased direct sales to hospitals in Europe. Effective January 2003, we began to sell our neurosurgical products to certain hospitals through a group purchasing organization. Group purchasing organizations use the leverage of large, organized buying groups to obtain better prices for medical products for the participating hospitals and other health care providers than might otherwise be available to these institutions individually. We expect that our participation in group purchasing organizations will improve our ability to sell our products to those participating hospitals that have not historically purchased from us. In 2000 and 2001, other revenue consisted primarily of technology related royalties. Other revenue decreased by $950,000 in 2002 from the expiration of a technology related royalty agreement. In 2002, we recorded $2.3 million of in-process research and development charges in connection with our acquisitions of Signature Technologies, Inc. and certain assets of Novus Monitoring Limited. Other research and development expenses increased in 2002 as a result of increased headcount and spending on product development. We expect to continue to increase our efforts and focus on product development in the future. Research and development expenses increased in 2001 primarily due to the development of a collagen hemostatic device for use in neurosurgical procedures and development costs for the NeuraGen(TM) Nerve Guide product. Excluding the in-process research and development charges recorded on the Signature and Novus acquisitions, research and development expenses represented 5%, 4%, and 5% of total product revenues in 2002, 2001, and 2000, respectively. Sales and marketing expenses have increased significantly since 2000, consistent with the expansion of our domestic and international sales and marketing infrastructure and increased trade show activities. Sales and marketing expenses represented 27% of total product revenues in each of the years 2000 through 2002. Since the end of 1999, we have more than doubled the size of our domestic neurosurgical sales organization to more than 80 professionals, including neurospecialists, regional managers and clinical educators. With the acquisitions of GMSmbH and Satelec Medical in April 2001 and the neurosciences division of NMT Medical in July 2002, we have a direct neurosurgical sales and marketing presence in the key markets of western Europe. Through the acquisition of Padgett Instruments in 2002 we have an eight person direct sales force in the United States that sells to plastic and reconstructive surgeons, burn surgeons, hand surgeons, ENT surgeons and other physicians. Through the acquisition of JARIT Surgical Instruments in March 2003, we have a 20 person sales management force in the United States that works with over 100 distributor sales representatives selling to virtually all surgical disciplines.
General and administrative expenses increased $2.6 million in 2002, $1.8 million of which were operating costs associated with recently acquired businesses that were not reflected in our results for the full year in 2001. General and administrative expenses decreased $509,000 in 2001, primarily as a result of the recording in 2000 of a write-off of a large distributor account and improved accounts receivable collections in 2001.
Research and development expense declined $1.2 million in 2002 from reduced spending on INTEGRA(R) Dermal Regeneration Template and a $0.5 million decrease in government grants for research. The decrease in research and development expenses in 2001 was the result of the termination of a program with a partner to develop a product to regenerate articular cartilage, partially offset by increased spending on programs with our other development partners. Our strategic marketing partners and distributors are primarily responsible for sales and marketing activities in the Integra LifeSciences segment. Sales and marketing costs have decreased since 2000 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 2002, we sold $4.2 million of INTEGRA(r) Dermal Regeneration Template to Ethicon and received $2.0 million in research payments and $1.0 million in clinical and regulatory event payments that were recorded in other revenue. Ethicon has not been successful in selling the minimum amounts of INTEGRA(R) Dermal Regeneration Template specified in its agreement with us. In addition, we have notified Ethicon that certain clinical and regulatory events have been achieved under the agreement and that payments for the achievement of those events is due to us. Ethicon has informed us that it disagrees that the clinical and regulatory events in question have been achieved, and that it does not intend to make the payments we have demanded. In addition, Ethicon has informed us that if we do not agree to substantial amendments to its agreement with us, it will consider alternatives that may include exercising its right to terminate the agreement. The agreement requires Ethicon to give us notice one year in advance of a termination of the agreement, during which time Ethicon is required to continue to comply with the terms of the contract. At the end of that period, Ethicon may be required to pay additional amounts based on the termination provisions of the agreement and is required to cooperate in the transfer of the business back to Integra. Additionally, Ethicon may apply the value of any minimum payments in excess of actual product purchases against future purchases of products for sale on a non-exclusive basis for a specified period of time. If Ethicon does terminate the agreement or if we determine that Ethicon is in breach of the agreement and we terminate the agreement, there is no assurance that we will be able to recover the money that we believe Ethicon is obligated to pay us under the agreement. If Ethicon does give us notice that it will terminate the agreement, it is possible that Ethicon will diminish its sales and marketing efforts for the product during the one-year notice period and that its sales will decline as a result. In addition, we may not be successful in sustaining or restoring the sales of the INTEGRA(R) Dermal Regeneration Template at current levels after the termination date. Finally, if Ethicon terminates the agreement it is possible that we may become involved in litigation with Ethicon, which could also impair our ability to sell products under our other agreements with Ethicon, including the BioPatch(R) and Instat(R) products.
Amortization expense decreased in 2002 because of the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets", which requires that goodwill no longer be amortized. Excluding the effect of the recently acquired Jarit Instruments business, annual amortization expense is expected to approximate $2.1 million in both 2003 and 2004, $1.8 million in both 2005 and 2006, and $1.6 million in 2007. 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 2002 increased to $3.5 million, as compared to net interest income of $1.4 million in 2001 and net interest expense of $473,000 in 2000. We recorded a $1.1 million pre-tax gain on the disposition of two product lines in 2000. INCOME TAXES Since 1999, we have generated positive taxable income on a cumulative basis. In light of this trend, our 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 we no longer needed to maintain a portion of the valuation allowance recorded against federal and state net operating loss carryforwards and certain other temporary differences. We reduced the valuation allowance by $12.0 million in 2001 because we believed that it was more likely than not that we would 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. In the fourth quarter of 2002, we reduced the remaining valuation allowance recorded against net operating loss carryforwards by $23.4 million, which reflected our estimate of additional tax benefits that we expect to realize in the future. The $23.4 million reduction in the valuation allowance consisted of a $20.4 million deferred income tax benefit and a $3.0 million credit to additional paid-in capital related to net operating loss carryforwards generated through the exercise of stock options. A valuation allowance of $7.7 million is recorded against the remaining $32.9 million of net deferred tax assets recorded at December 31, 2002. This valuation allowance relates to deferred tax assets for certain expenses which will be deductible for tax purposes in very limited circumstances and for which we believe it is unlikely that we will recognize the associated tax benefit. We do not anticipate additional income tax benefits through future reductions in the valuation allowance. However, 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 will record an adjustment to the deferred tax asset valuation allowance in the period such a determination is made. The net change in the Company's valuation allowance was $(26.7) million, $(10.4) million, and $3.3 million, in 2002, 2001, and 2000, respectively. Included in the 2002 reduction was the write off of the valuation allowance associated with $3.3 million of deferred tax assets which the Company wrote off because they are no longer expected to be utilizable. At December 31, 2002, we had net operating loss carryforwards of approximately $74.4 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 2013 and 2010, respectively. New Jersey has imposed a moratorium on the ability of corporations to use their net operating loss carryforwards to reduce their New Jersey state tax obligations. In 2000, we recognized a tax benefit of $467,000 from the sale of certain state net operating loss carryforwards through a special program offered by the State of New Jersey. At December 31, 2002, several of our subsidiaries had unused net operating loss carryforwards and tax credit carryforwards arising from periods prior to our ownership which expire through 2010. The Internal Revenue Code limits the timing and manner in which we may use any acquired net operating losses or tax credits. International Product Revenues and Operations Because we have operations 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.
Currently, we do not use derivative financial instruments to manage foreign currency risk. As the volume of our business transacted in foreign currencies increases, we will continue to assess the potential effects that changes in foreign currency exchange rates could have on our business. If this potential impact is believed to present a significant risk to our business, we may enter into derivative financial instruments, including forward contracts to purchase or sell foreign currencies, to mitigate this risk. Additionally, we generate significant revenues 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. 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. Product revenues by major geographic area are summarized below:
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, a related term loan and revolving credit facility was terminated in August 2001. We had no debt outstanding at December 31, 2002. At December 31, 2002, we had cash, cash equivalents and marketable securities totaling $132.3 million. Investments consist almost entirely of highly liquid, interest bearing debt securities. We believe that our cash and marketable securities are sufficient to finance our operations in the short term. However, 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. On March 17, 2003, we used $44.5 million to acquire the business of JARIT Instruments. Excluding the effect of the acquisition of JARIT Surgical Instruments in March 2003, we are obligated to pay approximately $2.5 million and $2.2 million in 2003 and 2004 respectively, under the terms of operating lease agreements for our facilities. Thereafter, through 2012, we are contractually obligated to pay an aggregate of $6.1 million in total lease costs. We may be obligated to pay Novus an additional $1.5 million upon Novus' achievement of a development milestone and up to an additional $2.5 million based upon revenues from Novus' products. Additionally, we are obligated to pay royalties based on sales of certain of our products, including $0.3 million in future guaranteed minimum royalty payments to the seller of the GMSmbH business. We have no other significant future contractual obligations. In February 2003, our Board of Directors authorized us to repurchase up to one million shares of our common stock for an aggregate cost not to exceed $15.0 million. We may repurchase shares under this program through February 2004 either in the open market or in privately negotiated transactions. During 2002, we repurchased 100,000 shares of our stock for an aggregate purchase price of $1.8 million under a previously authorized share repurchase program. 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 and acquired in-process research and development charges, 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 revenues 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 revenues 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 intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate the recoverability of long-lived assets to be held and used by comparing its carrying value with the 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. 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. Goodwill. 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 changed 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 completed our initial impairment review for goodwill as of June 30, 2002 and determined that our reporting unit goodwill was not impaired. If future events that would trigger an impairment review occur or we change our estimates of the fair value of our reporting units, we may need to record an impairment charge. Acquired In-Process Research and Development Charges. In-process research and development charges are recorded in connection with acquisitions and represent the value assigned to acquired assets which have not yet reached technological feasibility and for which there is no alternative use. Fair value is generally assigned to these assets based on the net present value of the projected cash flows expected to be generated by those assets. Significant assumptions underlying these cash flows include our assessment of the timing and our ability to successfully complete the in-process research and development project, projected cash flows associated with the successful completion of the project, and interest rates used to discount these cash flows to their present value. 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 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 2002, this analysis resulted in our reducing the recorded valuation allowance by $23.4 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 and the amount earned by Integra is fixed and determinable. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have exposure to financial risk from changes in foreign exchange rates and interest rates. Foreign Currency Exchange A discussion of foreign currency exchange risks is provided under the caption "International Product Revenues and Operations" under "Management's Discussion and Analysis of Financial Condition and Results of Operations". Interest Rate and Credit Risk We are exposed to the risk of interest rate fluctuations on the fair value and interest income earned on our cash and cash equivalents and investments in available-for-sale marketable debt securities. A hypothetical 100 basis point movement in interest rates applicable to our cash and cash equivalents and investments in marketable debt securities outstanding at December 31, 2002 would increase or decrease interest income by approximately $1.3 million on an annual basis. We are not subject to material foreign currency exchange risk with respect to these investments. 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 15 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. 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, 2003, 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. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this report, our Chief Executive Officer and Senior Vice President, Finance, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rule 13a-14(c). Based on that evaluation, the Chief Executive Officer and Senior Vice President, Finance concluded that our disclosure controls and procedures were effective as of the date of that evaluation. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Senior Vice President, Finance completed their evaluation.
ITEM 15. 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.
3. Exhibits required to be filed by Item 601 of Regulation S-K.
(b) Reports on Form 8-K. On December 6, 2002, we filed with the Securities and Exchange Commission a Report on Form 8-K with respect to the amendment of a previously executed sales plans pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, by the Chief Executive Officer of the Company. On December 13, 2002, we filed with the Securities and Exchange Commission a Report on Form 8-K with respect to the execution of a sales plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, by an Executive Officer of the Company.
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 20th day of March, 2003. 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 20th day of March, 2003. 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/ David Auth Director - -------------------------------- David Auth /s/ Neal Moszkowski Director - -------------------------------- Neal Moszkowski /s/ James M. Sullivan Director - -------------------------------- James M. Sullivan
CERTIFICATIONS I, Stuart M. Essig, certify that: 1. I have reviewed this annual report on Form 10-K of Integra LifeSciences Holdings Corporation.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the 'Evaluation Date'); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 20, 2003 By: /s/ Stuart M. Essig ----------------------- Stuart M. Essig Chief Executive Officer
I, David B. Holtz, certify that: 1. I have reviewed this annual report on Form 10-K of Integra LifeSciences Holdings Corporation.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the 'Evaluation Date'); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 20, 2003 By: /s/ David B. Holtz -------------------- David B. Holtz Sr. Vice President, Finance and Treasurer
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, 2002 and 2001 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, 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. As discussed in Note 2 to the consolidated financial statements, the Company has adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", effective January 1, 2002. /s/ PricewaterhouseCoopers LLP Florham Park, New Jersey February 21, 2003, except Note 15 for which the date is March 17, 2003 F1
INTEGRA LIFESCIENCES HOLDINGS CORPORATION 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 segments: Integra NeuroSciences(TM) and Integra LifeSciences(TM). The Integra NeuroSciences segment includes our businesses that primarily sell directly to healthcare providers. It 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. The segment also includes our Padgett Instruments business, which sells instruments and other devices to plastic and reconstructive surgeons, burn surgeons, ENT surgeons and other physicians. Our Integra LifeSciences segment includes our businesses that primarily sell through intermediaries such as strategic partners or OEM customers. Integra LifeSciences 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 segment, we have partnered with market leaders for the development and marketing efforts related to these products. 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 income (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, 2002 and 2001 were as follows:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION 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 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, 2002 2001 ---------- ---------- (in thousands) Finished goods .......................... $ 19,198 $ 13,277 Work in process ......................... 3,019 3,493 Raw materials ........................... 6,285 7,559 ---------- ---------- $ 28,502 $ 24,329 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 are stated at cost. The Company provides for depreciation using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the useful life. 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:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION 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 through December 31, 2001. Goodwill acquired after July 1, 2001 was not subject to amortization. Effective January 1, 2002, goodwill was no longer amortized but is instead subject to annual impairment reviews. 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 has changed 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. The Company completed its initial impairment review for goodwill as of June 30, 2002 and determined that its reporting unit goodwill was not impaired. Changes in the carrying amount of reporting unit goodwill in 2002 were as follows:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LONG-LIVED ASSETS Long-lived assets held and used by the Company, including property, plant and equipment and 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. 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 income (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. REVENUE RECOGNITION Product revenues include both product sales and royalties earned on sales by strategic alliance partners of the Company's products or of products incorporating one or more of the Company's products. Product sales are recognized when delivery has occurred and title has passed to the customer, there is a fixed or determinable sales price, and collectability of that sales price is reasonably assured. Product royalties are recognized as the royalty products are sold by our customers and the amount earned by Integra is fixed and determinable. Other revenues include research grants, fees received under research, licensing, and distribution arrangements, and technology-related royalties. 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 or for the licensing of technology 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. 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, 2002, 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 revenues. The related shipping and handling fees and costs incurred by the Company are included in cost of product revenues. F9
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRODUCT WARRANTIES Certain of the Company's medical devices, including monitoring systems and ablation systems, are reusable and are designed to operate over long periods of time. These products are sold with warranties extending for up to two years from date of purchase. The Company accrues estimated product warranty costs at the time of sale based on historical experience. Any additional amounts are recorded when such costs are probable and can be reasonably estimated. Accrued warranty expense consisted of the following: December 31, 2002 2001 -------- -------- (in thousands) Beginning balance .................. $ 226 $ 124 Charged to expense ................. 257 347 Deductions ......................... (267) (245) -------- -------- Ending balance ..................... $ 216 $ 226 RESEARCH AND DEVELOPMENT Research and development costs, including salaries, depreciation, consultant and other external fees, and facility costs directly attributable to research and development activities, are expensed in the period in which they are incurred. In-process research and development charges recorded in connection with acquisitions represent the value assigned to acquired assets to be used in research and development activities and for which there is no alternative use. Value is generally assigned to these assets based on the net present value of the projected cash flows expected to be generated by those assets. 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". Had the compensation cost for the Company's stock option plans been determined based on the fair value at the grant consistent with the provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation", the Company's net income (loss) and basic and diluted net income (loss) per share would have been as follows:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. The Company determined that its assembled workforce intangible asset does not meet the criteria for recognition as a separate identifiable intangible asset and thus, effective January 1, 2002, reclassified the net book value of its assembled workforce intangible asset into goodwill. Under Statement 142, goodwill and indefinite-lived intangible assets are no longer amortized, but are reviewed for impairment at the reporting unit level annually, or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. Upon adoption of Statement 142, the Company reassessed the useful lives of its existing identifiable intangible assets and determined that they continue to be appropriate. As required by Statement 142, the Company amortized through December 31, 2001 all goodwill acquired prior to July 1, 2001. Effective January 1, 2002, the Company stopped amortizing all goodwill. If the Company had applied the non-amortization provisions of Statement 142 for all of 2001 and 2000, net income (loss) would have been as follows:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. ACQUISITIONS (CONTINUED) In August 2002, the Company acquired all of the capital stock of the neurosciences division of NMT Medical, Inc. for $5.7 million in cash, including expenses associated with the acquisition. Through this acquisition, the Company added a range of leading differential pressure valves and external ventricular drainage products to its neurosurgical product line. The acquired operations included a facility located in Biot, France that manufactures, packages and distributes shunting, catheter and drainage products, and a distribution facility located in Atlanta, Georgia that was consolidated into Integra's Cranbury, New Jersey distribution center in September 2002. The $4.2 million fair value assigned to the land, building and equipment in Biot was determined based on a third party appraisal. This acquisition broadened Integra's neurosurgical product line offering and provided a more technologically advanced neurosurgical shunting product line than was previously sold by the Company. Additionally, the acquired Biot facility and European-based direct sales organization are expected to become an important part of Integra's continental European operating activities. In connection with this acquisition, the Company terminated all of NMT's independent neurosciences sales agents based in the United States and exited the Atlanta, Georgia distribution facility. The estimated costs to terminate the independent sales agents, all rent payments made after the shutdown of the facility, and the costs paid to terminate the Atlanta facility lease were accrued as part of the purchase price because they provided no future benefit to the Company's operations. The amounts recorded are summarized below:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. ACQUISITIONS (CONTINUED) In April 2001, the Company acquired all of the outstanding capital stock of Satelec Medical, a subsidiary of the Satelec-Pierre Rolland group, for $3.9 million in cash, including expenses associated with the acquisition. Satelec Medical, based in France, manufactures and markets the Dissectron(R) ultrasonic surgical aspirator console and a line of related handpieces. The Company completed the consolidation of the Satelec manufacturing operations into its Andover, England and Biot, France facilities in 2002. This acquisition broadened Integra's neurosurgical product line offering and its direct sales and marketing presence in Europe. In April 2001, the Company acquired all of the outstanding capital stock of GMSmbH, the German manufacturer of the LICOX(R) Brain Tissue Oxygen Monitoring System, for $3.2 million. The purchase price consisted of $2.6 million in cash (including expenses associated with the acquisition), 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 segment had exclusive marketing rights to the LICOX(R) products in the United States and certain other markets. This acquisition provided Integra with full rights to the LICOX(R) product technology. In April 2000, the Company purchased the Selector(R) Ultrasonic Aspirator, Ruggles(TM) hand-held neurosurgical instruments and Spembly Medical cryosurgery product lines from NMT Medical, Inc. for $11.6 million in cash. This acquisition broadened Integra's neurosurgical product line offering and provided Integra with its first direct sales and marketing presence in Europe. In January 2000, the Company purchased the business of Clinical Neuro Systems, Inc. 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 2001. The acquired business designed and manufactured neurosurgical external ventricular drainage systems, including catheters and drainage bags, as well as cranial access kits. All of 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 following table summarizes the fair value of the assets acquired and liabilities assumed as a result of these acquisitions: (All amounts in thousands)
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. ACQUISITIONS (CONTINUED) All of the goodwill acquired in 2002 and 2001 was assigned to the Integra NeuroSciences segment. The goodwill acquired in the Radionics acquisition is expected to be deductible for tax purposes. The acquired intangible assets are being amortized on a straight-line basis over lives ranging from 2 to 40 years. The following unaudited pro forma financial information summarizes the results of operations for the periods indicated as if the acquisitions consummated in 2002 and 2001 had been completed as of January 1, 2001. The pro forma results are based upon certain assumptions and estimates and they give effect to actual operating results prior to the acquisitions and adjustments to reflect decreased depreciation expense, increased intangible asset amortization, and increased income taxes at a rate consistent with Integra's effective rate in each year. No effect has been given to cost reductions or operating synergies. As a result, these 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.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. DEBT 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 prepayment of all outstanding bank loans and a $2.8 million note payable issued in connection with an acquisition, the Company recorded in 2001 an extraordinary loss on the early retirement of debt of $243,000, net of a $13,000 tax benefit. 5. 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 (SPEP) for $5.4 million, net of issuance costs. The Series C Preferred ranked on a parity with the Company's Series B Convertible Preferred Stock, was senior to the Company's common stock and all other preferred stock of the Company, and had a 10% cumulative annual dividend yield payable only upon liquidation. The Series C Preferred was converted into 600,000 shares of common stock in April 2002. 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 was 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 SPEP for $9.9 million, net of issuance costs. In June 2001, SPEP converted the Series B Preferred into 2,617,800 shares of common stock. The Series B Preferred had a 10% cumulative annual dividend yield payable only upon liquidation. The warrants issued with the Series B Preferred were exercised in March 2001 for proceeds of $916,800. SPEP 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 common stock in October 2000. The Series A Preferred paid an annual dividend of $0.16 per share. 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. In 2002 and 2000, respectively, the Company repurchased 100,000 and 19,000 shares of its common stock for $1.8 million and $173,000. In February 2003, the Company received authorization from its Board of Directors to repurchase up to one million shares of its common stock for an aggregate cost not to exceed $15.0 million. F16
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. 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, 2002, approximately 248,000 shares remain available for purchase under the ESPP. STOCK OPTION PLANS As of December 31, 2002, 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. Option activity for all the Plans was as follows:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. STOCK PURCHASE AND AWARD PLANS (CONTINUED) The following table summarizes information about stock options outstanding as of December 31, 2002:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. RETIREMENT BENEFIT PLANS (CONTINUED) The following sets forth the change in benefit obligations and change in plan assets at December 31, 2002 and 2001 and the prepaid (accrued) benefit cost:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LEASES (CONTINUED) Future minimum lease payments under operating leases at December 31, 2002 were as follows:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION 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 believed that it was 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. In the fourth quarter of 2002, the Company reduced the remaining valuation allowance recorded against net operating loss carryforwards by $23.4 million, which reflected the Company's estimate of additional tax benefits that it expects to realize in the future. The $23.4 million reduction in the valuation allowance consisted of a $20.4 million deferred income tax benefit and a $3.0 million credit to additional paid-in capital related to net operating loss carryforwards generated through the exercise of stock options. A valuation allowance of $7.7 million is recorded against the remaining $32.9 million of net deferred tax assets recorded at December 31, 2002. This valuation allowance relates to deferred tax assets for certain expenses which will be deductible for tax purposes in very limited circumstances and for which the Company believes it is unlikely that it will recognize the associated tax benefit. The Company does not anticipate additional income tax benefits through future reductions in the valuation allowance. However, 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. The net change in the Company's valuation allowance was $(26.7) million, $(10.4) million, and $3.3 million, in 2002, 2001, and 2000, respectively. Included in the 2002 reduction was the write off of the valuation allowance associated with $3.3 million of deferred tax assets which the Company wrote off because they are no longer expected to be utilizable. A reconciliation of the United States Federal statutory rate to the Company's effective tax rate for the years ended December 31, 2002, 2001, and 2000 is as follows:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION 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:
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. DEVELOPMENT, DISTRIBUTION, AND LICENSE AGREEMENTS AND GOVERNMENT GRANTS The Company has various development, distribution, and license agreements under which it receives payments. Significant agreements and grant awards include the following: In 1999, the Company and Ethicon, Inc., a division of Johnson & Johnson, signed an agreement (the Ethicon Agreement) providing Ethicon with exclusive marketing and distribution rights to INTEGRA(R) Dermal Regeneration Template worldwide, excluding Japan. Under the Ethicon Agreement, the Company will continue to manufacture INTEGRA(R) Dermal Regeneration Template and will collaborate with Ethicon to conduct research and development and clinical research aimed at expanding indications and developing future products in the field of skin repair and regeneration. Upon signing the Ethicon Agreement, the Company received a nonrefundable payment from Ethicon of $5.3 million for the exclusive use of the Company's trademarks and regulatory filings related to INTEGRA(R) Dermal Regeneration Template and certain other rights. This amount was initially recorded as deferred revenue and is being recognized as revenue in accordance with the Company's revenue recognition policy for nonrefundable, up-front fees received. The unamortized balance of $3.3 million at December 31, 2002 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 $2.0 million 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 2002 and 2000, the Company received $1.0 million and $750,000, respectively, of event-related payments from Ethicon which were recorded in other revenue in accordance with the Company's revenue recognition policy. Ethicon has not been successful in selling the minimum amounts of INTEGRA(R) Dermal Regeneration Template specified in the Ethicon Agreement. In addition, Integra has notified Ethicon that certain clinical and regulatory events have been achieved under the Ethicon Agreement and that payments for the achievement of those events is due to the Company. Ethicon has informed Integra that it disagrees that the clinical and regulatory events in question have been achieved, and that it does not intend to make the payments the Company has demanded. In addition, Ethicon has informed Integra that if the Company does not agree to substantial amendments to the Ethicon Agreement, it will consider alternatives that may include exercising its right to terminate the agreement. The Ethicon Agreement requires Ethicon to give the Company notice one year in advance of a termination of the agreement, during which time Ethicon is required to continue to comply with the terms of the contract. At the end of that period, Ethicon may be required to pay additional amounts based on the termination provisions of the contract and is required to cooperate in the transfer of the business back to Integra. Additionally, Ethicon may apply the value of any minimum payments in excess of actual product purchases against future purchases of products for sale on a non-exclusive basis for a specified period of time. The Company has an agreement with Wyeth and Medtronic Sofamor Danek for the development of collagen and other absorbable matrices to be used in conjunction with Wyeth's recombinant human bone morphogenetic protein-2 (rhBMP-2) in a variety of bone regeneration applications. The agreement with Wyeth requires Integra to supply Absorbable Collagen Sponges to Wyeth (including those that Wyeth 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 receives a royalty equal to a percentage of Wyeth'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 Wyeth. The agreement does not provide for milestones or other contingent payments, but Wyeth pays the Company to assist with regulatory affairs and research. The Company received $1.2 million, $1.1 million, and $0.3 million of research and development revenues under the agreement in 2002, 2001, and 2000, respectively. F23
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. The court of appeals heard arguments in the appeal in November 2002, and we expect the court to issue its opinion in 2003. Integra has not recorded any gain in connection with this matter. 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 various claims, lawsuits and proceedings in the ordinary course of our business, including claims by current or former employees and distributors and with respect to our products. In the opinion of management, such claims are either adequately covered by insurance or otherwise indemnified, or 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. In September, 2001, three subsidiaries of the recently acquired neurosciences division of NMT Medical, Inc. received a tax reassessment notice from the French tax authorities seeking in excess $1.5 million in back taxes, interest and penalties. NMT Medical, Inc., the former owner of these entities, has agreed to specifically indemnify Integra against any liability in connection with these tax claims. In addition, NMT Medical, Inc. has agreed to provide the French tax authorities with payment of the tax liabilities on behalf of each of these subsidiaries. F24
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. SEGMENT AND GEOGRAPHIC INFORMATION 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. The Company's operating segments are organized based on marketing and distribution strategies. The Integra NeuroSciences segment includes our businesses that primarily sell directly to healthcare providers. The Integra LifeSciences segment includes our businesses that primarily sell through intermediaries such as strategic partners or OEM customers.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
INTEGRA LIFESCIENCES HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SELECTED QUARTERLY INFORMATION - UNAUDITED (CONTINUED)
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 21, 2003, except Note 15 for which the date is March 17, 2003, appearing in the 2002 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 15 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 21, 2003 F28
INTEGRA LIFESCIENCES HOLDINGS CORPORATION VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II
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 Ltd. United Kingdom Integra NeuroSciences Ltd. United Kingdom Integra NeuroSupplies, Inc. Connecticut Integra Selector Corporation Delaware Satelec Medical France Spembly Cryosurgery Ltd. United Kingdom Spembly Medical Ltd. United Kingdom Integra Signature Technologies Inc. Delaware NMT NeuroSciences(IP), Inc. Delaware NMT NeuroSciences,(International), Inc. Delaware NMT NeuroSciences Holdings BV Netherlands NMT NeuroSciences (Belgium) SA Belgium NMT NeuroSciences Instruments BV Netherlands NMT NeuroSciences (Hong Kong) Limited Hong Kong NMT NeuroSciences GmbH Germany NMT NeuroSciences (Spain) SA Spain Integra NeuroSciences Implants (France) SA France Integra NeuroSciences Instruments (France)SARL France Integra NeuroSciences Holdings (France) SA France J. Jamner Surgical Instruments, Inc. Delaware Padgett Instruments, Inc. Missouri Swedemed AB Sweden
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 21, 2003, except Note 15 for which the date is March 17, 2003, relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Florham Park, New Jersey March 18, 2003
Exhibit 99 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes -Oxley Act of 2002 I, Stuart M. Essig, Chief Executive Officer and Director of Integra LifeSciences Holdings Corporation (the "Company"), hereby certify that, to my knowledge: 1. The Annual Report on Form 10-K of the Company for the year ended December 31, 2002 (the "Report") fully complies with the requirement of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 20, 2003 By: /s/ Stuart M. Essig ------------------- Stuart M. Essig Chief Executive Officer Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes -Oxley Act of 2002 I, David B. Holtz, Senior Vice President, Finance and Treasurer of Integra LifeSciences Holdings Corporation (the "Company"), hereby certify that, to my knowledge: 1. The Annual Report on Form 10-K of the Company for the year ended December 31, 2002 (the "Report") fully complies with the requirement of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 20, 2003 By: /s/ David B. Holtz ------------------- David B. Holtz Sr. Vice President, Finance and Treasurer