SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
COMMISSION FILE NUMBER 0-26224
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0317849
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
311 ENTERPRISE DRIVE
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(609) 275-0500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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.
/X/ - YES / / - NO
AS OF MAY 10, 2002 THE REGISTRANT HAD OUTSTANDING 26,930,670
SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 (Unaudited) 3
Consolidated Statements of Operations for the three months ended
March 31, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 (Unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousands, except per share amounts
March 31, December 31,
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 46,764 $ 44,518
Short-term investments .................................. 42,952 22,183
Accounts receivable, net of allowances of
$665 and $964 ....................................... 14,828 14,024
Inventories ............................................. 24,013 24,177
Prepaid expenses and other current assets ............... 2,690 2,898
--------- ---------
Total current assets ................................ 131,247 107,800
Noncurrent investments ................................... 42,657 64,335
Property, plant, and equipment, net ...................... 11,436 11,662
Deferred income taxes, net ............................... 8,457 10,243
Identifiable intangible assets, net ...................... 15,181 16,898
Goodwill ................................................. 15,835 14,627
Other assets ............................................. 1,954 2,023
--------- ---------
Total assets .............................................. $ 226,767 $ 227,588
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt ......................................... $ -- $ 3,576
Accounts payable, trade ................................. 2,995 2,924
Income taxes payable .................................... 1,567 1,481
Customer advances and deposits .......................... 3,736 4,843
Deferred revenue ........................................ 868 772
Accrued expenses and other current liabilities .......... 4,920 5,550
--------- ---------
Total current liabilities ........................... 14,086 19,146
Deferred revenue ......................................... 3,776 3,949
Other liabilities ........................................ 442 437
--------- ---------
Total liabilities ......................................... 18,304 23,532
Commitments and contingencies
Stockholders' Equity:
Preferred stock; $0.01 par value; 15,000 authorized shares;
54 Series C Convertible shares issued and outstanding
at March 31, 2002 and December 31, 2001, $6,480
including a 10% annual cumulative dividend liquidation
preference ............................................ 1 1
Common stock; $0.01 par value; 60,000 authorized shares;
26,277 and 26,129 issued and outstanding at March 31,
2002 and December 31, 2001, respectively .............. 263 261
Additional paid-in capital .............................. 285,006 284,021
Treasury stock, at cost; 6 shares at March 31, 2002 and
December 31, 2001, respectively ....................... (51) (51)
Other ................................................... (31) (37)
Accumulated other comprehensive loss .................... (1,216) (539)
Accumulated deficit ..................................... (75,509) (79,600)
--------- ---------
Total stockholders' equity ............................ 208,463 204,056
--------- ---------
Total liabilities and stockholders' equity ............... $ 226,767 $ 227,588
========= =========
The accompanying notes are an integral part of the consolidated financial statements
3
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended March 31,
2002 2001
---- ----
REVENUES
Product sales ........................................... $ 24,430 $ 20,284
Other revenue ........................................... 1,486 1,400
-------- --------
Total revenue ........................................ 25,916 21,684
COSTS AND EXPENSES
Cost of product sales ................................... 9,528 8,594
Research and development ................................ 1,822 2,073
Selling and marketing ................................... 5,672 4,751
General and administrative .............................. 3,219 3,204
Amortization ............................................ 350 680
-------- --------
Total costs and expenses ............................. 20,591 19,302
Operating income ........................................ 5,325 2,382
Interest income (expense), net .......................... 993 (78)
Other income (expense), net ............................. (23) (62)
-------- --------
Income before income taxes .............................. 6,295 2,242
Income tax expense ...................................... 2,204 246
-------- --------
Net income .............................................. 4,091 1,996
======== ========
Basic net income per share .............................. $ 0.14 $ 0.08
Diluted net income per share ............................ $ 0.13 $ 0.07
Weighted average common shares outstanding
Basic ................................................ 28,460 19,618
Diluted .............................................. 30,717 21,849
The accompanying notes are an integral part of these consolidated financial statements
4
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income ...................................................... $ 4,091 $ 1,996
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................... 1,166 1,431
Deferred tax provision .......................................... 1,858 --
Amortization of discount and premium on investments ............. 413 --
Other, net ...................................................... 30 (11)
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable .......................................... (834) 393
Inventories .................................................. 125 (2,212)
Prepaid expenses and other current assets .................... 202 (99)
Non-current assets ........................................... 52 301
Accounts payable, accrued expenses and other liabilities ..... (377) 342
Customer advances and deposits ............................... (1,107) 2,390
Deferred revenue ............................................. (77) 19
-------- --------
Net cash provided by operating activities ....................... 5,542 4,550
-------- --------
INVESTING ACTIVITIES:
Proceeds from sale/maturity of investments ...................... 4,564 --
Purchases of available-for-sale investments ..................... (4,523) (2,891)
Cash used in business acquisition, net of cash acquired ......... (69) --
Purchases of property and equipment ............................. (630) (396)
-------- --------
Net cash used in investing activities ........................... (658) (3,287)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from revolving credit facility ..................... -- 770
Repayment of term loan .......................................... -- (625)
Repayment of note payable ....................................... (3,576) (1,540)
Proceeds from exercised stock options and warrants .............. 951 1,434
-------- --------
Net cash (used in) provided by financing activities ............. (2,625) 39
-------- --------
Effect of exchange rate changes on cash ......................... (13) 4
Net increase in cash and cash equivalents ....................... 2,246 1,306
Cash and cash equivalents at beginning of period ................ 44,518 14,086
-------- --------
Cash and cash equivalents at end of period ...................... $ 46,764 $ 15,392
======== ========
The accompanying notes are an integral part of these consolidated financial statements
5
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
GENERAL
In the opinion of management, the March 31 unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) which the Company considers necessary for a fair presentation of the
financial position, results of operations and cash flows of the Company. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These unaudited consolidated financial statements should
be read in conjunction with the Company's consolidated financial statements for
the year ended December 31, 2001 included in the Company's Annual Report on Form
10-K. Operating results for the three-month period ended March 31, 2002 are not
necessarily indicative of the results to be expected for the entire year.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent liabilities, and the reported amounts of revenues and
expenses. Significant estimates affecting amounts reported or disclosed in the
consolidated financial statements include allowances for doubtful accounts
receivable and sales returns, net realizable value of inventories, estimates of
future cash flows associated with long-lived asset valuations, depreciation and
amortization periods for long-lived assets, valuation allowances recorded
against deferred tax assets, loss contingencies, and estimates of costs to
complete performance obligations associated with research, licensing, and
distribution arrangements for which revenue is accounted for using percentage of
completion accounting. These estimates are based on historical experience and on
various other assumptions that are believed to be reasonable under the current
circumstances. Actual results could differ from these estimates.
The Company has reclassified certain prior year amounts to conform with the
current year's presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (Statement 144). Statement 144
supercedes Statement of Financial Accounting Standards No 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". Statement 144 applies to all long-lived assets, including discontinued
operations, and consequently amends Accounting Principles Board Opinion No. 30,
"Reporting Results of Operations Reporting the Effects of Disposal of a Segment
of a Business". The Company adopted Statement 144 on January 1, 2002. The
adoption of Statement 144 had no impact on the Company's financial statements.
6
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
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. The Company reassessed the useful lives
of its 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 ceased amortization of all goodwill. The implementation of
Statement 142 is expected to reduce amortization expense by approximately $1.0
million in 2002.
If the non-amortization provisions of Statement 142 had been applied for all of
2001, net income for the three months ended March 31, 2001 would have been as
follows:
2001
-------
(in thousands)
Net income, as reported ................... $ 1,996
Add: Goodwill amortization ................ 147
Assembled workforce amortization ..... 29
-------
Net income, as adjusted ................... $ 2,172
Net income per share, as adjusted
Basic .................................. $ 0.09
Diluted ................................ $ 0.08
The Company is currently conducting its initial impairment review for goodwill
and will complete this analysis by June 30, 2002. Although management does not
expect that this analysis will indicate an impairment of goodwill, any such
impairment would be reflected as a cumulative effect of accounting change.
7
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. INVENTORIES
Inventories consisted of the following:
March 31, December 31,
2002 2001
---- ----
(in thousands)
Raw materials.......................... $ 6,633 $ 7,559
Work-in process........................ 3,956 3,493
Finished goods......................... 13,424 13,125
------- -------
$24,013 $24,177
======= =======
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of reporting unit goodwill for the three months
ended March 31, 2002, were as follows:
Integra Integra
NeuroSciences LifeSciences Total
------------- ------------ -----
(in thousands)
Goodwill, net of accumulated amortization
at December 31, 2001 .................... $ 13,815 $ 812 $ 14,627
Reclassification of assembled workforce
intangible, net of accumulated
amortization ............................ 1,245 30 1,275
Foreign currency translation ............... (1) (66) (67)
-------- -------- --------
Goodwill at March 31, 2002 ................. $ 15,059 $ 776 $ 15,835
======== ======== ========
The components of the Company's identifiable intangible assets are as follows:
March 31, 2002 December 31, 2001
---------------------- ----------------------
(in thousands)
Accumulated Accumulated
Cost Amortization Cost Amortization
-------- ------------ -------- ------------
Technology ................................ $ 11,179 $ (1,704) $ 11,255 $ (1,516)
Customer base ............................. 3,567 (768) 3,575 (674)
Trademarks ................................ 1,715 (334) 1,715 (305)
Assembled work force ...................... -- -- 1,581 (306)
Other ..................................... 1,822 (296) 1,824 (251)
-------- ------------ -------- ------------
$ 18,283 $ (3,102) $ 19,950 $ (3,052)
Accumulated amortization .................. (3,102) (3,052)
-------- --------
$ 15,181 $ 16,898
======== ========
Amortization expense is expected to approximate $1.4 million annually in each of
the next five years.
4. INCOME TAXES
Income tax expense was approximately 35% and 11% of pre-tax income for the three
months ended March 31, 2002 and 2001, respectively. Income tax expense for the
three months ended March 31, 2002 included a deferred income tax provision of
$1.9 million, or 29.5% of pre-tax income, of which $77,000 was recorded as a
credit to additional paid-in capital for the tax benefit generated through the
exercise of stock options. The effective rate for the quarter ended March 31,
2001 reflects the utilization of our net operating loss carryforwards during the
period. In the quarter ended December 31, 2001, we reversed a portion of the
valuation allowance recorded against the deferred tax assets related to these
net operating loss carryforwards.
8
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31 was as follows:
2002 2001
---- ----
(in thousands)
Net income ................................ $ 4,091 $ 1,996
Unrealized losses on investments .......... (449) (14)
Foreign currency translation adjustment.... (228) (331)
------- -------
Comprehensive income ...................... $ 3,414 $ 1,651
======= =======
6. NET INCOME PER SHARE
Basic and diluted net income per share for the three months ended March 31 were
as follows:
2002 2001
---- ----
(In thousands, except
per share amounts)
Basic net income per share:
- ---------------------------
Net income .................................................... $ 4,091 $ 1,996
Dividends on Preferred Stock .................................. (135) (385)
-------- --------
Net income available to common stock .......................... $ 3,956 $ 1,611
Weighted average common shares outstanding .................... 28,460 19,618
Basic net income per share .................................... $ 0.14 $ 0.08
Diluted net income per share:
- ---------------------------
Net income .................................................... $ 4,091 $ 1,996
Dividends on Preferred Stock .................................. (135) (385)
-------- --------
Net income available to common stock .......................... $ 3,956 $ 1,611
Weighted average common shares outstanding .................... 28,460 19,618
Effect of dilutive securities - stock options and warrants .... 2,257 2,231
-------- --------
Weighted average common shares outstanding for diluted earnings
per share ................................................... 30,717 21,849
Diluted net income per share .................................. $ 0.13 $ 0.07
Options to purchase 10,222 shares of common stock and preferred stock
convertible into 600,000 shares of common stock at March 31, 2002 were excluded
from the computation of diluted net income per share for the three months ended
March 31, 2002 because their exercise or conversion would have been
antidilutive. Options to purchase 146,000 shares of common stock and preferred
stock convertible into 3,218,000 shares of common stock at March 31, 2001 were
excluded from the computation of diluted net income per share for the three
months ended March 31, 2001 because their exercise or conversion would have been
antidilutive. The exercise price of the options excluded from the computation of
diluted net income per share for each of the periods ended March 31 exceeded the
average market price of the common stock for the applicable period.
9
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. DIVISION AND GEOGRAPHIC INFORMATION
Integra's business is divided into two divisions: Integra NeuroSciences and
Integra LifeSciences.
The Integra NeuroSciences division is a leading provider of implants, devices,
and systems used in neurosurgery, neurotrauma, and related critical care and a
distributor of disposables and supplies used in the diagnosis and monitoring of
neurological disorders. The Integra LifeSciences division develops and
manufactures a variety of medical products and devices, including products based
on the Company's proprietary tissue regeneration technology that are used to
treat soft tissue and orthopedic conditions.
Integra NeuroSciences sells primarily through a direct sales force in the United
States and Europe and through a network of distributors elsewhere throughout the
world. For the majority of the products manufactured by the Integra LifeSciences
division, the Company has partnered with market leaders for the development and
marketing efforts related to these products.
As a result of the acquisitions of NeuroSupplies, Inc. (renamed Integra
NeuroSupplies, Inc.) in December 2001, and GMSmbH and Satelec Medical in April
2001, the Company's division financial results for quarters ended March 31, 2002
and 2001 may not be directly comparable. Reported product sales in the Integra
NeuroSciences division for the quarter ended March 31, 2002 included $2.0
million in sales of product lines acquired since March 31, 2001.
Selected financial information on the Company's business divisions is reported
below:
Total
Integra Integra Reportable
NeuroSciences LifeSciences Segments
------------- ------------ ----------
(in thousands)
First quarter ended March 31, 2002
----------------------------------
Product sales .................... $ 19,795 $ 4,635 $ 24,430
Total revenue .................... 19,823 6,093 25,916
Operating expenses ............... 14,606 3,658 18,264
Operating income ................. 5,217 2,435 7,652
Depreciation included in segment
operating expenses ............ 554 247 801
First quarter ended March 31, 2001
----------------------------------
Product sales .................... $ 15,786 $ 4,498 $ 20,284
Total revenue .................... 16,064 5,620 21,684
Operating expenses ............... 11,858 4,697 16,555
Operating income ................. 4,206 923 5,129
Depreciation included in segment
operating expenses ............ 417 298 715
10
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. DIVISION AND GEOGRAPHIC INFORMATION (CONTINUED)
A reconciliation of the amounts reported for total reportable segments to the
consolidated financial statements is as follows:
Three Months Ended March 31,
2002 2001
-------- --------
(in thousands)
Operating expenses:
Total reportable segments ............ $ 18,264 $ 16,555
Plus: Corporate general and
administrative expenses ..... 1,977 2,067
Amortization ................... 350 680
-------- --------
Consolidated total operating expenses. $ 20,591 $ 19,302
Operating income:
Total reportable segments ............ $ 7,652 $ 5,129
Less: Corporate general and
administrative expenses ..... 1,977 2,067
Amortization ................... 350 680
-------- --------
Consolidated operating income ........ $ 5,325 $ 2,382
Product sales consisted of the following:
Three Months Ended March 31,
2002 2001
-------- --------
(in thousands)
Integra NeuroSciences:
Neuro intensive care unit ............................. $ 7,241 $ 6,578
Neuro operating room .................................. 10,092 8,238
Other NeuroSciences products .......................... 2,462 970
-------- --------
Total product sales ................................... 19,795 15,786
Integra LifeSciences:
Tissue repair products ................................ $ 2,121 $ 1,790
Other medical devices ................................. 2,514 2,708
-------- --------
Total product sales ................................... 4,635 4,498
Consolidated product sales ............................ $ 24,430 $ 20,284
Product sales by major geographic area are summarized below:
United Asia Other
States Europe Pacific Foreign Total
-------- -------- -------- -------- --------
(in thousands)
Three months ended March 31,
2002 ............................. $ 19,283 $ 3,023 $ 1,240 $ 884 $ 24,430
2001 ............................. 15,554 2,513 1,135 1,082 20,284
11
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. LEGAL MATTERS
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. In March, 2000, a jury returned a
unanimous verdict for the Company and awarded $15,000,000 in damages, finding
that Merck KGaA had willfully infringed and induced the infringement of the
Company's patents. 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
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
the Company and against Merck KGaA on the final post-judgment motions in the
case, and denied Merck KGaA's motions for judgment as a matter of law and for a
new trial.
Merck KGaA and Integra have each appealed various decisions of the Court. We
expect the court of appeals to hear arguments in the appeal during 2002 and to
issue its opinion during 2003. Post-judgment interest continues to accrue at the
rate of approximately $20,000 per week. Integra has not recorded any gain in
connection with this favorable judgment.
The Company is also subject to other claims and lawsuits in the ordinary course
of our business, including claims by employees or former employees and with
respect to our products. In the opinion of management, such other claims are
either adequately covered by insurance or otherwise indemnified, and are not
expected, individually or in the aggregate, to result in a material adverse
effect on the Company's financial condition. The Company's financial statements
do not reflect any material amounts related to possible unfavorable outcomes of
the matters above or others. However, it is possible that the Company's results
of operations, financial position and cash flows in a particular period could be
materially affected by these contingencies.
9. SUBSEQUENT EVENT
On April 15, 2002, the Company notified the holders of the 54,000 shares of
Series C Preferred Stock of its intention to redeem these shares on May 31, 2002
for $6.6 million. On April 16, 2002, all of the holders of the Series C
Preferred Stock exercised their right to convert their shares into 600,000
shares of common stock prior to the redemption.
12
ITEM 2. 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 in conjunction with our consolidated financial
statements and the related notes thereto appearing elsewhere in this report and
in our 2001 Annual Report on Form 10-K filed with the Securities and Exchange
Commission. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including but not limited to those under the heading
"Risk Factors" contained in our 2001 Annual Report on Form 10-K.
GENERAL
Integra is a global, diversified medical device company that develops,
manufactures, and markets medical devices, implants and biomaterials primarily
for use in neurosurgery, orthopedics and soft tissue repair. Our business is
divided into two divisions: Integra NeuroSciences(TM) and Integra
LifeSciences(TM).
Our Integra NeuroSciences division is a leading provider of implants, devices,
and systems used in neurosurgery, neurotrauma, and related critical care and a
distributor of disposables and supplies used in the diagnosis and monitoring of
neurological disorders. Integra NeuroSciences sells primarily through a direct
sales force of more than 80 people in the United States, the United Kingdom,
Germany and France.
Our Integra LifeSciences division develops and manufactures a variety of medical
products and devices, including products based on our proprietary tissue
regeneration technology that are used to treat soft tissue and orthopedic
conditions. For the majority of the products manufactured by the Integra
LifeSciences division, we have partnered with market leaders for the development
and marketing efforts related to these products. These non-neurosurgical
products address large, diverse markets, and we believe that they can be
promoted more cost-effectively through leveraging marketing partners than
through developing a sales infrastructure ourselves. We have strategic alliances
with Ethicon, a division of Johnson & Johnson, the Genetics Institute division
of Wyeth, Medtronic Sofamor Danek, and Sulzer Dental.
ACQUISITIONS
As a result of the acquisitions of NeuroSupplies, Inc. (renamed Integra
NeuroSupplies, Inc.) in December 2001, and GMSmbH and Satelec Medical in April
2001, our division financial results for quarters ended March 31, 2002 and 2001
may not be directly comparable. Reported product sales in the Integra
NeuroSciences division for the quarter ended March 31, 2002 included $2.0
million in sales of product lines acquired in 2001.
Quarter Ended March 31,
2002 2001
---------- ----------
(IN THOUSANDS)
Integra NeuroSciences
Products acquired in 2001(1) ................. $ 2,002 $ --
All other product sales ...................... 17,793 15,786
---------- ----------
Total Integra NeuroSciences product sales .... 19,795 15,786
Integra LifeSciences
Products acquired in 2001 .................... $ -- $ --
All other product sales ...................... 4,635 4,498
---------- ----------
Total Integra LifeSciences product sales ..... 4,635 4,498
Consolidated product sales ...................... $ 24,430 $ 20,284
(1) Excludes sales of the LICOX(R) product in those territories where Integra
NeuroSciences had exclusive distribution rights to the product prior to our
acquisition of GMSmbH.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
For the quarter ended March 31, 2002, total revenues increased 20% over the
quarter ended March 31, 2001 to $25.9 million, led by a 20% increase in product
sales to $24.4 million. Domestic product sales increased $3.7 million in the
quarter ended March 31, 2002 to $19.3 million, or 79% of product sales, as
compared to 77% of product sales in the prior year quarter. Growth in total
revenues and product sales for the quarter ended March 31, 2002 was led by the
Integra NeuroSciences division, which reported a $3.8 million increase in total
revenues to $19.8 million, a 23% increase over the prior year quarter. The
Integra LifeSciences division reported a $0.5 million increase in total revenues
to $6.1 million, an 8% increase over the quarter ended March 31, 2001.
Consolidated gross margin on product sales improved by three percentage points
to 61% for the quarter ended March 31, 2002, which is ahead of our stated target
of 60% for the full year 2002. This improvement in gross margins reflects an
improved sales mix of higher margin products and an increase in capacity
utilization as compared to the quarter ended March 31, 2001.
Net income for the quarter ended March 31, 2002 was $4.1 million, or $0.13 per
share, as compared to net income of $2.0 million, or $0.07 per share, reported
in the prior year quarter. Net income improved primarily as a result of the
increase in revenues and the improved gross margin. Offsetting this was an
increase in our effective tax rate from 11% in the quarter ended March 31, 2001
to a 35% rate recorded in 2002. The effective rate for the quarter ended March
31, 2001 reflects the utilization of our net operating loss carryforwards during
the period. In the quarter ended December 31, 2001, we reversed a portion of the
valuation allowance recorded against the deferred tax assets related to these
net operating loss carryforwards, which is expected to result in an ongoing
effective tax rate of 35%. Our actual cash tax rate is expected to be in the 6%
to 8% range in 2002. Had our effective tax rate been 35% in 2001, reported
earnings would have been $0.05 per share in the quarter ended March 31, 2001.
The following discussion of divisional financial results excludes corporate
general and administrative expenses and amortization of intangible assets, which
are not included in the measurement of divisional operating results.
INTEGRA NEUROSCIENCES DIVISION
Quarter Ended March 31,
2002 2001
-------- --------
(in thousands)
Product sales:
- Neuro intensive care unit .................. $ 7,241 $ 6,578
- Neuro operating room ....................... 10,092 8,238
- Other NeuroSciences products ............... 2,462 970
-------- --------
Total product sales ............................. 19,795 15,786
Other revenue ................................... 28 278
-------- --------
Total revenue ................................... 19,823 16,064
Cost of product sales ........................... 7,228 6,048
Gross margin as a percentage of product sales ... 63% 62%
Research and development expenses ............... 883 688
Sales and marketing expenses .................... 5,483 4,310
General and administrative expenses ............. 1,012 812
-------- --------
Operating income ................................ $ 5,217 $ 4,206
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Product sales in the Integra NeuroSciences division increased $4.0 million in
the quarter ended March 31, 2002 to $19.8 million, a 25% increase over the prior
year quarter. This increase included $2.0 million in sales of products acquired
in 2001. This growth has been generated through acquisitions, new product
launches, and increased direct sales and marketing efforts, both domestically
and in Europe.
The increase in sales of neuro intensive care unit products included $0.3
million in sales of products acquired in 2001. Neuro operating room product
sales increased $1.9 million to $10.1 million, and included $0.4 million in
sales of acquired products. The sales growth in neuro operating room products
was led by increased sales of the DuraGen(R) Dural Graft Matrix, offset by a
decline in sales of hydrocephalus management shunt products. The weak comparison
to the prior year quarter in our hydrocephalus line is due primarily to a large
international tender that occurred in the quarter ended March 31, 2001. The
increase in sales of other neuro products included $1.3 million in sales of
acquired products. The decrease in other revenues was the result of decreased
royalty revenues from an agreement that expired at the end of September 2001.
Gross margin on product sales increased one percentage point to 63% in the
quarter ended March 31, 2002 primarily as a result of a continued improvement in
sales mix.
Future sales growth is expected to be driven by our planned increase in the
domestic sales force, the continued implementation of our direct sales strategy
in Europe and from recently launched and acquired products.
The increase in research and development expenses in the quarter ended March 31,
2002 was primarily related to the development of a new collagen hemostatic
device for use in neurosurgical procedures. Sales and marketing spending in the
quarter ended March 31, 2002 increased as a result of the continued expansion in
the domestic and international sales force. Sales and marketing expenses
approximated 28% and 27% of product sales in the quarters ended March 31, 2002
and 2001, respectively. The increase in general and administrative expenses was
primarily related to the businesses acquired in 2001.
INTEGRA LIFESCIENCES DIVISION
Quarter Ended March 31,
2002 2001
-------- --------
(in thousands)
Product sales:
- Tissue repair products ..................... $ 2,121 $ 1,790
- Other medical devices ...................... 2,514 2,708
-------- --------
Total product sales ............................. 4,635 4,498
Other revenue ................................... 1,458 1,122
-------- --------
Total revenue ................................... 6,093 5,620
Cost of product sales ........................... 2,300 2,546
Gross margin as a percentage of product sales ... 50% 43%
Research and development expenses ............... 939 1,385
Sales and marketing expenses .................... 189 441
General and administrative expenses ............. 230 325
-------- --------
Operating income ................................ $ 2,435 $ 923
Product sales in the Integra LifeSciences division increased $0.1 million in the
quarter ended March 31, 2002 to $4.6 million, a 3% increase over the prior year
quarter. This growth was generated primarily by
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
a $0.3 million increase in sales of tissue repair products, or 18% growth over
the prior year quarter, offset by a $0.2 million decline in sales of other
medical devices. Product sales for the quarter ended March 31, 2002 were
negatively affected by reduced orders for the VitaCuff(R) infection control
product from one of our OEM customers. This customer's orders were approximately
$0.4 million less in the quarter ended March 31, 2002, as compared to their
average quarterly orders over the previous two years. While we expect this
shortfall will also affect the quarter ended June 30, 2002, we expect that sales
of the VitaCuff(R) product will improve in the second half of this year.
Gross margin on product sales increased seven percentage points to 50% in the
quarter ended March 31, 2002 primarily as a result of a significant increase in
capacity utilization and increased sales of higher margin orthopedic products.
Other revenue consists of i) research and development funding from strategic
partners and government grants, ii) license, distribution, and other
event-related revenues from strategic partners and other third parties, and iii)
product royalty income. The $0.3 million increase in other revenue in the
quarter ended March 31, 2002 was primarily related to a $0.5 million event
payment from the Ethicon division of Johnson & Johnson for the achievement of a
clinical and regulatory objective for the INTEGRA(R) Dermal Regeneration
Template in the quarter ended March 31, 2002, offset by a decrease in grant
revenue.
The decrease in research and development expenses in the quarter ended March 31,
2002 was primarily related to the completion of a grant program in the quarter
ended March 31, 2001, and is consistent with the decrease in grant revenue in
the quarter ended March 31, 2002 as compared to the prior year quarter. Sales
and marketing activities decreased in the quarter ended March 31, 2002 primarily
due to the elimination of distributor commissions. Sales and marketing
activities in the Integra LifeSciences division are primarily the responsibility
of our strategic marketing partners and distributors.
CORPORATE EXPENSES AND AMORTIZATION
Quarter Ended March 31,
2002 2001
-------- --------
(in thousands)
Total divisional operating costs and expenses ....... $ 18,264 $ 16,555
Corporate general and administrative expenses ....... 1,977 2,067
Amortization ........................................ 350 680
-------- --------
Consolidated total operating expenses ............... $ 20,591 $ 19,302
Amortization expense decreased $0.3 million in the quarter ended March 31, 2002
to $0.3 million as a result of the implementation of Statement of Financial
Accounting Standard No 142 (Statement 142) in January 2002. The implementation
of Statement 142 had a favorable impact on earnings of $0.2 million, or
approximately $0.01 per share, in the quarter ended March 31, 2002.
We reported operating earnings before interest, taxes, depreciation and
amortization (EBITDA) of $6.5 million in the quarter ended March 31, 2002, as
compared to $3.8 million in the prior year quarter. Operating EBITDA represents
operating income before depreciation and amortization.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NON-OPERATING INCOME AND EXPENSES
We raised $113.4 million in a follow-on public offering of 4.7 million shares of
common stock in August 2001 and subsequently used $9.3 million to repay all
outstanding indebtedness. Accordingly, net interest income increased $1.1
million in the quarter ended March 31, 2002 to $1.0 million.
INCOME TAXES
Income tax expense was approximately 35% and 11% of pre-tax income for the
quarters ended March 31, 2002 and 2001, respectively. Income tax expense for the
quarter ended March 31, 2002 included a deferred income tax provision of $1.9
million, or 29.5% of pre-tax income, of which $77,000 was recorded as a credit
to additional paid-in capital for the tax benefit generated through the exercise
of stock options.
INTERNATIONAL PRODUCT SALES AND OPERATIONS
Product sales by major geographic area are summarized below:
United Asia Other
States Europe Pacific Foreign Total
-------- -------- -------- -------- --------
(in thousands)
Quarter ended March 31,
2002 ............................. $ 19,283 $ 3,023 $ 1,240 $ 884 $ 24,430
2001 ............................. 15,554 2,513 1,135 1,082 20,284
In the quarter ended March 31, 2002, sales to customers outside the United
States totaled $5.1 million, or 21% of consolidated product sales, of which
approximately 59% were to European customers. Of this amount, $2.1 million of
these sales were generated in foreign currencies from our foreign-based
subsidiaries in the United Kingdom, Germany and France. In the quarter ended
March 31, 2001, sales to customers outside the United States totaled $4.7
million, or 23% of consolidated product sales, of which approximately 53% were
to European customers. Of this amount, $1.3 million of these sales were
generated in foreign currencies from our subsidiary based in the United Kingdom.
Our international sales and operations are subject to the risk of foreign
currency fluctuations, both in terms of exchange risk related to transactions
conducted in foreign currencies and the price of our products in those markets
for which sales are denominated in the U.S. dollar. We expect that our
establishment of a direct sales and marketing infrastructure in the United
Kingdom, Germany and France in 2001 and our recent transfer of certain
distributor accounts to our operations in the United Kingdom will cause our
sales denominated in foreign currencies to continue to increase in the future.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operations primarily through private and public
offerings of equity securities, product revenues, research and collaboration
funding, borrowings under a revolving credit line and cash acquired in
connection with business acquisitions and dispositions. Since 1999, we have
substantially reduced our net use of cash from operations and, in 2001, we
generated positive operating cash flows on an annual basis for the first time.
For the quarter ended March 31, 2002, we generated $5.5 million in cash flows
from operations.
Our principal uses of funds in the quarter ended March 31, 2002 were $3.6
million for repayment of debt and $0.6 million for purchases of property and
equipment. Principal sources of funds were approximately $5.5 million in
operating cash flows and $1.0 million from the issuance of common stock through
the exercise of stock options.
At March 31, 2002, we had cash, cash equivalents and current and non-current
investments totaling approximately $132.4 million and no outstanding debt.
Investments consist almost entirely of highly-liquid, interest bearing debt
securities. Given the significant level of liquid assets and our objective to
grow by acquisition and alliances, our financial position and future financial
results could change significantly if we were to complete a business acquisition
by utilizing a significant portion of our liquid assets.
In February 2002, our Board of Directors reauthorized our share repurchase
program. Under the program, we may repurchase up to 500,000 shares of our common
stock for an aggregate purchase price not to exceed $15 million. Shares may be
repurchased under this program through December 31, 2002 either in the open
market or in privately negotiated transactions. We did not repurchase any shares
of our common stock under this program in 2001 or in the quarter ended March 31,
2002.
OTHER MATTERS
A valuation allowance of $34.4 million is recorded against net deferred tax
assets. However, we may recognize a deferred income tax benefit in future
periods if we determine that all or a portion of the remaining deferred tax
assets can be realized.
On April 15, 2002, we notified the holders of the 54,000 shares of Series C
Preferred Stock of our intention to redeem these shares on May 31, 2002 for $6.6
million. On April 16, 2002, all of the holders of the Series C Preferred Stock
exercised their right to convert their shares into 600,000 shares of common
stock prior to the redemption.
18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
A Report on Form 8-K was filed on March 13, 2002, which reported under the
caption "Item 5. Other Events" that the Company's Board of Directors had
reauthorized the Company's share repurchase program.
SIGNATURES
Pursuant to the requirements 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.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
Date: May 15, 2002 /S/ STUART M. ESSIG
-------------------
Stuart M. Essig
President and Chief Executive Officer
Date: May 15, 2002 /S/ DAVID B. HOLTZ
-------------------
David B. Holtz
Senior Vice President, Finance and Treasurer
19