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, 2003
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 30, 2003, the aggregate market value of the registrant's common stock
held by non-affiliates was approximately $703,166,000, 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 2, 2004 was 28,463,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating to its
scheduled May 17, 2004 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 for use in
neuro-trauma, neurosurgery, plastic and reconstructive surgery and general
surgery. Integra was founded in 1989 and over the next decade developed
technologies and products 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, we have increased our revenues from $42.9 million to $185.6 million, an
average annual growth rate of 44%, and we have broadened our product offerings
to include more than 10,000 products. We have achieved this growth in our
overall business through the development and introduction of new products, the
development of our distribution channels and acquisitions.
Our product lines include innovative tissue repair products that incorporate our
proprietary absorbable implant technology, such as the DuraGen(R) Dural Graft
Matrix, the DuraGen Plus(TM) Dural Graft Matrix, the NeuraGen(TM) Nerve Guide,
the INTEGRA(R) Dermal Regeneration Template, and the INTEGRA(TM) Bi-Layer Matrix
Wound Dressing, as well as more traditional medical devices, such as monitoring
and drainage systems, surgical instruments and fixation systems.
Financial information about our geographical areas is set forth in our financial
statements under Notes to Consolidated Financial Statements, Note 14 - Segment
and Geographic Information.
STRATEGY
Our goal is to become a global leader in the development, manufacturing and
marketing of medical devices, implants and biomaterials in the neurosurgery,
plastic and reconstructive surgery and general surgery markets. Key elements of
our strategy include the following:
Expand our presence in hospitals and other health care facilities. Through
acquisitions and internal growth, we have rapidly become a leading provider of
products used in the diagnosis, monitoring and treatment of chronic diseases and
acute injuries. We focus on injuries involving the brain, the cranium, the spine
and the central nervous system, and the repair and reconstruction of soft
tissue, such as dermis. We believe that additional growth potential 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 ear, nose, throat (ENT),dental, maxillofacial
and spine markets;
* continuing the development and promotion of innovative new products, such as
the NeuraGen(TM) Nerve Guide, the Novus NeuroSensor(R) Cerebral Blood Flow
Monitoring System 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 more than
fifteen acquisitions focused primarily on our neurosurgical product lines,
plastic and reconstructive surgery and surgical instrumentation. 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 Develop New And Innovative Medical Products. We have built a leading
proprietary absorbable implant franchise through our development of the
INTEGRA(R) Dermal Regeneration Template and INTEGRA(TM) Bi-Layer Matrix Wound
Dressing, the DuraGen(R) Dural Graft Matrix, DuraGen Plus(TM) Dural Graft Mat
and NeuraGen(TM) Nerve Guide, Biomend(R) and Biomend(R) Extend Absorbable
Collagen Membrane and biomaterials for the orthopedic implant market. We
currently are developing a variety of innovative neurosurgical and other medical
products and are seeking expanded applications for our existing products.
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PRODUCT GROUPS, MARKETING AND SALES
Our business is organized into product groups and distribution channels. Our
product groups include Monitoring Products, Operating Room Products, Surgical
Instrumentation, and Private Label Products. Our distribution channels include
two direct sales organizations (Integra NeuroSciences and Integra Plastic and
Reconstructive Surgery), one distributor network managed by a direct sales
organization (JARIT), and strategic alliances. We sell the products from our
four product groups through our various distribution channels, as follows:
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PRODUCT GROUPS
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Monitoring Operating Room Instruments Private Label
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C
H
A
N
N
E Integra X X X
L NeuroSciences
S
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Plastic and X X
Reconstructive
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JARIT X
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Alliances X
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The following table summarizes the most important products in each of our
product groups, which we discuss in more detail in the text following the table:
PRRODUCT LINES APPLICATIONS
MONITORING PRODUCTS
Camino(R)and Ventrix(R)Fiber Optic-Based Intracranial Continuous monitoring of intracranial pressure and
Monitoring Systems temperature following injury or neurosurgical procedures
LICOX(R)Oxygen Monitoring Systems Continuous monitoring of intracranial oxygen following
injury or neurosurgical procedures
Integra Systems of Cranial Access and CSF Drainage Access to the cranial cavity and drainage of excess cerebrospinal
fluid from the brain
Integra Epilepsy Monitoring Electrodes Specialty electrodes for the intraoperative monitoring of epileptic
seizures
EEG, EP, and EMG electrodes, disposables and other The diagnosis and monitoring of neurological, ENT and
supplies pulmonary disorders
OPERATING ROOM PRODUCTS
DuraGen(R)and DuraGen Plus(TM)Dural Graft Products Onlay collagen matrix to repair dura mater
EnDura(TM)No-React(R)(1) Dural Substitute Bovine pericardium suturable product for repair of dura
mater
NeuraGen(TM) Nerve Guide Repair of peripheral nerves
Hydrocephalus shunts, including the Orbis-Sigma II(R) Specifically designed for the management of hydrocephalus, a chronic
valves condition involving excess cerebrospinal fluid in the brain
INTEGRA(R)Dermal Regeneration Template and INTEGRA(TM) Regenerate dermis, repair skin defects, and wound
Bi-Layer Matrix Wound Dressing dressings
Sundt(TM)and other carotid shunts For shunting blood during surgical procedures involving
blood vessels
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INSTRUMENTS
Selector(R)Integra Ultrasonic Aspirator; Dissectron(R) Powered surgical systems that use ultrasonic energy to ablate tissue
Ultrasonic Aspirator
JARIT Surgical Instruments General and specialty instruments for open and endoscopic surgery
Ruggles(TM)Neurosurgical and Spinal Instruments Specialized surgical instruments for use in brain or spinal surgery
Padgett Instruments Instruments used in reconstructive and plastic surgery
Padgett Dermatomes and Meshers Devices for harvesting and conditioning skin grafts
Spinal Specialties Custom spinal, epidural, discogram and nerve block kits and products for
chronic pain management
PRIVATE LABEL PRODUCTS
Absorbable Collagen Sponge and other matrices for use Fracture management/enabling spinal fusion
with bone morphogenetic protein (rhBMP-2) (manufactured for Wyeth BioPharma; Medtronic Sofamor Danek)
BioMend(R) and BioMend(R) Extend Absorbable Collagen Used in guided tissue regeneration in periodontal
Membrane, CollaCote(R), CollaTape(R) and CollaPlug(R) surgery and to control bleeding in dental surgery
Absorbable Wound Dressings (manufactured for Zimmer)
VitaCuff(R) Percutaneous Infection Control Device and Provide protection against infection arising from long-term catheters and
BioPatch(R)(2) Antimicrobial Wound Dressing in wounds (manufactured for various medical device companies)
(1) No-React is a registered trademark of Shelhigh, Inc.
(2) BioPatch is a registered trademark of Johnson & Johnson
Monitoring Products
The Monitoring Of Brain Parameters. Neurosurgeons use intracranial monitors to
diagnose and treat cases of severe head trauma and other diseases. There are
approximately 500,000 cases of head trauma each year in the United States, and
the market for monitoring and intervention is estimated to approximate $110
million.
We sell the Camino(R) and Ventrix(R) lines of intracranial pressure and
temperature monitoring systems and the LICOX(R) Brain Tissue Oxygen Monitoring
System. Currently more than 3,000 of our intracranial monitors are installed and
in use 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.
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We expect to introduce the Novus NeuroSensor(R) Cerebral Blood Flow Monitoring
System in the second half of 2004. The Novus monitoring system measures both
intracranial pressure and cerebral blood flow using a single combined probe and
an electronic monitor for data display. Cerebral blood flow is considered to be
an important parameter for monitoring cerebral auto-regulation and, when
combined with the measurement of intracranial pressure, is expected to
facilitate improved patient care and clinical management with applications in
neuro-trauma, cerebrovascular disease, and post-operative neurosurgical
treatment.
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.
Cranial Access And External Drainage. Neurosurgeons use cranial access kits and
external drainage systems to gain access to the cranial cavity and to drain
excess cerebrospinal fluid from the ventricles of the brain into an external
container. We manufacture and market 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.
Epilepsy Electrodes. Neurosurgeons use electrodes for the intraoperative
monitoring of epileptic seizures to determine if surgical options can be used in
the treatment of epilepsy. Seizures vary from a momentary disruption of the
senses, to short periods of unconsciousness or convulsions. Seizures signals to
each other. The neurosurgeon uses the electrodes in conjunction with an EEG
video monitor to determine if a patient is a viable candidate surgery, which
involves the removal of the damaged portion of brain tissue. The worldwide
market for intraoperative epilepsy electrodes is estimated to be $10 million. We
have recently begun to market these products in the United States through our
Integra NeuroSciences sales force.
Neurological Supplies. 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 evaluate
sleep disorders.
We sell these products under the Integra Supplies(TM) name primarily through
catalogs and telemarketing 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.
Operating Room Products
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
collagen, synthetic materials, processed human cadaver, or bovine pericardium.
The worldwide market for dural repair, including cranial and spinal
applications, is estimated to be $110 million.
The DuraGen(R) and DuraGen Plus(TM) Dural Graft Matrices are absorbable collagen
products indicated for the repair of the dura mater surrounding the brain and
spine. We believe that the DuraGen(R) and DuraGen Plus(TM) Dural Graft products
address the shortcomings of other methods for repairing the dura mater. Clinical
trials have shown our DuraGen(R) products 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.
EnDura(TM) No-React(R) Dural Substitute is a bovine pericardium suturable
product for the repair of the dura mater. It is treated with the proprietary
No-React process, which reduces the body's inflammatory response to the implant,
prolongs the product's durability and eliminates the need for rinsing prior to
implantation. Through the EnDura product, we address the approximately 15% of
dural repair procedures that, due to pressure existing at the dural breach
location, require a suturable graft.
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Skin Replacement and Engineered Wound Dressings. Our skin replacement products
address the market need created by severe burns, reconstructive surgery, and
chronic wounds.
The INTEGRA(R) Dermal Regeneration Template is designed to enable the human body
to regenerate functional dermal tissue. The Food and Drug Administration (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 we received FDA approval to market our skin replacement products for use
in certain procedures in which cadaver skin or an autograft would typically be
used. 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. The FDA also
granted 510(k) clearance for the sale of a related product, INTEGRA(TM) Bi-Layer
Matrix Wound Dressing, for the dressing of wounds, including chronic wounds. We
estimate that the worldwide market now addressable by our skin replacement
products exceeds $1.0 billion.
Between 1999 and 2003, the ETHICON division of Johnson & Johnson was the
exclusive seller of the INTEGRA(R) Dermal Regeneration Template and the
INTEGRA(TM) Bi-Layer Matrix Wound Dressing worldwide, except in Japan where
Century Medical, Inc. has rights to distribute the INTEGRA(R) Dermal
Regeneration Template. Effective December 31, 2003, we terminated our agreement
with ETHICON and again assumed the sales and marketing responsibility for both
products. We now distribute the INTEGRA(R) Dermal Regeneration Template and the
INTEGRA(TM) Bi-Layer Matrix Wound Dressing through our plastic and
reconstructive surgery sales organization in the United States and parts of
Western Europe and through a network of distributors elsewhere.
Repair Of Peripheral Nerves. Peripheral nerves may become severed or damaged
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.
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 nside 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 and adult onset normal pressure
hydrocephalus. Based on industry sources, we believe that the total United
States market for hydrocephalus management, including monitoring, shunting and
drainage, is approximately $140 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 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 has, and may continue to, negatively
affect the sales of our shunt products.
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Later this year, we plan to introduce a low-flow hydrocephalus shunt that will
regulate the flow of cerebrospinal fluid out of the brain, rather than the
pressure created by cerebrospinal fluid inside the head. This shunt regulates
the flow of cerebrospinal fluid to a range of 8-15 milliliters per hour, which,
according to studies, is the preferred range of flow for patients with normal
pressure hydrocephalus. Normal pressure hydrocephalus is a syndrome that occurs
in both adults who have previously experienced birth-related hydrocephalus, and
those who have not. It is characterized by dementia, gait disturbance and
urinary incontinence in patients that are typically over 65 years of age.
Certain reports estimate that approximately 20% of total cerebrospinal fluid
shunt sales address normal pressure hydrocephalus.
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.
Instruments
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 fragmentation 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. Later this year, we plan to introduce a next generation
Selector(R) Integra Ultrasonic Aspirator, which will be more efficient and offer
a broader selection of handpieces and tips than is currently available in
ultrasonic technology.
JARIT(R) Surgical Instruments. For more than 30 years, JARIT has marketed a wide
variety of high quality, reusable surgical instruments to virtually all surgical
disciplines. With more than 5,000 instrument patterns and a 98% order fill rate,
the JARIT brand has a strong reputation for high-quality surgical instruments.
Neurosurgical And Spinal Instrumentation. We provide neurosurgeons and spine
surgeons with a full line of specialty hand-held spinal and neurosurgical
instruments. We sell instruments under the Redmond/R&B name primarily for spinal
procedures (including neuro-spine), and instruments under the Ruggles(TM) brand
name primarily for cranial surgery.
Plastic and Reconstructive Instruments. We market a wide variety of high
quality, reusable surgical instruments to plastic and reconstructive surgeons,
burn surgeons, ENT surgeons, hospitals, surgery centers, and other physicians.
Dermatomes and Meshers. We sell a range of manual, air- and electric-powered
dermatomes and related disposables for harvesting skin grafts. In 2003 we
launched our new Dermatome-S, which is lighter, more ergonomic and more powerful
than the other dermatomes in our line. Our variable skin mesher is designed to
expand skin grafts prior to implantation to provide for greater coverage.
Spinal Specialties. Spinal Specialties' products include the OsteoJect(TM) Bone
Cement Delivery System and the ACCU-DISC(TM) Pressure Monitoring System.
Physicians use these products in a variety of spinal, orthopedic and pain
management procedures. The OsteoJect product allows precise delivery of bone
cement to a surgical site under active fluoroscopy by a surgeon whose hands
remain outside the fluoroscopy field. The ACCU-DISC, which is used to interpret
discography results, offers the accurate delivery of fluids to the body and the
ability to monitor the fluids in discography interpretation.
Private Label Products
Orthopedic Biomaterials. Since 1994, we have supplied Wyeth BioPharma with
Absorbable Collagen Sponges for use in developing bone regeneration implants,
including use with Wyeth BioPharma's recombinant human bone morphogenetic
protein-2 (rhBMP-2), which Wyeth BioPharma is developing for clinical evaluation
in several areas of bone repair and augmentation, including orthopedic, oral and
maxillofacial surgery applications. We sell Absorbable Collagen Sponges for
spinal applications through a related collaboration with Medtronic Sofamor Danek
in North America. The FDA has approved Medtronic Sofamor Danek's InFUSE(TM)
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Bone Graft used with the LT-CAGE(TM) Lumbar Tapered Fusion Device and
the INTER FIX and INTER FIX Threaded Fusion Devices, for use in spinal fusion
procedures. The InFUSE 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, and the INTER FIX and INTER FIX Threaded
Fusion Devices, the InFUSE Bone Graft is indicated to treat certain types of
spinal degenerative disc disease, a common cause of low back pain.
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 Zimmer.
Other Private Label Products. Our current private label products also 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 Instat(R) Absorbable Collagen Hemostat, and
cranial fixation devices for use in craniomaxillofacial surgery.
Distribution Channels
We sell our products directly through various sales forces and through a variety
of other distribution channels. Our direct sales forces include the following:
Integra NeuroSciences(TM). Integra NeuroSciences' direct marketing effort in the
United States and Europe currently involves more than 130 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. Our Integra
NeuroSciences(TM) sales force sells our monitoring products (including Camino,
LICOX and Ventrix monitoring lines, cranial access kits, external ventricular
and lumbar monitoring and drainage products and epilepsy electrodes), our
neurosurgical operating room products (including the DuraGen, EnDura and
NeuraGen products and the Selector Ultrasonic Aspirator) and the Ruggles line of
neurosurgical instruments. These salespeople call primarily on neurosurgeons and
intensive care units that are capable of managing neuro-trauma cases. We believe
that we effectively address this focused group of hospital-based practitioners
through our direct Integra NeuroSciences sales and marketing infrastructure in
the United States and Europe and our distribution network elsewhere.
Plastic and Reconstructive Surgery. Our plastic and reconstructive surgery sales
and marketing organization consists of 18 professionals, including direct
salespeople, sales management, clinical educators, marketing management and
product managers, as well as distributors outside of the United States. This
sales and marketing organization sells INTEGRA Dermal Regeneration Template,
INTEGRA Bi-Layer Matrix Wound Dressing, the NeuraGen Nerve Guide, Padgett
dermatomes and meshers, and a wide variety of high quality surgical instruments
and implants to plastic and reconstructive surgeons, burn surgeons, hospitals,
surgery centers, and other physicians.
JARIT Surgical Instruments. Our JARIT organization sells its products to more
than 5,200 hospitals and surgery centers worldwide. In the United States, JARIT
employs an 18-person sales management force that works with over 100 distributor
sales representatives. The JARIT organization sells the JARIT line of general
and specialty instruments for open and endoscopic surgery, and a line of
specialty instruments for spinal and neurosurgery.
Private Label. We market our private label products through strategic partners
or original equipment manufacturer customers. Our private label products address
large, diverse markets, and we believe that we can develop and promote these
products more cost-effectively through leveraging the product development and
distribution systems of our strategic partners than through developing the
products ourselves or selling them through our own direct sales infrastructure.
We have partnered with market leaders, such as Johnson & Johnson, Medtronic,
Wyeth, and Zimmer, for the development and marketing efforts related to many of
these products.
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We have established a reputation as a value-added and dependable development and
manufacturing partner. Many of our current private label products are built on
our expertise in absorbable collagen products. 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.
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, ultrasonic technology and surgical fixation. We spent $12.8 million,
$11.5 million and $8.9 million in 2003, 2002, and 2001, respectively, on
research and development activities. The 2003 and 2002 amounts include $400,000
and $2.3 million of acquired in-process research and development charges,
respectively, recorded in connection with acquisitions. In addition to internal
research and development activities, we may continue to use our capital
resources to acquire businesses that include research and development programs,
which could result in additional in-process research and development charges in
the future. We also receive contract development revenues and government grant
funding which support a portion of our research and development activities.
Research and development activities funded by contract development and
government grant revenues amounted to $4.5 million, $3.5 million and $3.9
million in 2003, 2002, and 2001, respectively.
We have either acquired or secured the proprietary rights to several important
technological and scientific platforms, including collagen matrix, intracranial
monitoring, ultrasonic tissue ablation, and implantable fixation technologies.
These technologies provide support for our critical applications in neurosurgery
and tissue regeneration with 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 neurosurgical 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
2003 we expanded our product development staff to increase the focus on our
neurosurgical product development efforts and consolidated our San Diego
research facility with our other facilities.
GOVERNMENT REGULATION
As a manufacturer of medical devices, we are subject to extensive regulation by
the FDA and, in some jurisdictions, by state and foreign governmental
authorities. These regulations govern the introduction of new medical devices,
the observance of certain standards with respect to the design, manufacture,
testing, labeling and promotion of the devices, the maintenance of certain
records, the ability to track devices, the reporting of potential product
defects, the export of devices and other matters. We believe that we are in
substantial compliance with these governmental regulations.
From time to time, we have recalled certain of our products. 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.
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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. These
changes, however, could have a material impact on our business.
We have received or acquired more than 200 Premarket Notification 510(k)
clearances, five approved PMA applications and 56 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, ISO 9000 series, 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.
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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 seek patent protection of our key 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.
ACCU-DISC(TM), BioMend(R), Camino(R), CollaCote(R), CollaPlug(R), CollaStat(TM),
CollaTape(R), Dissectron(R), DuraGen(R), DuraGen Plus(TM), EquiFlow(R),
Helistat(R), Helitene(R), Heyer-Schulte(R), INTEGRA(R) Dermal Regeneration
Template, INTEGRA(TM) Bi-Layer Matrix Wound Dressing, Integra NeuroSciences(TM),
Integra NeuroSupplies(TM), Integra Supplies(TM), JARIT(R), LICOX(R),
NeuraGen(TM), Novus(R), LPV(R), Orbis-Sigma(R), Osteoject(R), NeuroSensor(R),
Padgett Instruments, Inc(R), Pudenz(TM), Redmond(TM), Ruggles(TM), Selector(R),
Spetzler(R), Spinal Specialties(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
Our largest competitors 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, many of our neurosurgery product lines compete
with smaller specialized companies or larger companies that do not otherwise
focus on neurosurgery.
Our largest competitors in plastic and reconstructive surgery are LifeCell
Corporation, Inamed Corporation, Mentor Corporation, Zimmer Holdings, Inc. and
Brennen Medical, Inc.
We believe that we are the third largest surgical instrument company in the
United States. The two larger companies are the Codman division of Johnson &
Johnson, and the V. Mueller division of Cardinal Healthcare. In addition, there
are many smaller instrument companies that compete with many of our specialty
instruments. We rely on the depth and breadth of our sales and marketing
organization to maintain our competitive position in surgical instruments.
Our private label products 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 the INTEGRA(R)
Dermal Regeneration Template, our duraplasty products, and the NeuraGen(TM)
Nerve Guide). Depending on the product line, we compete on the basis of our
products' features, strength of our sales force or marketing partner,
sophistication of our technology, and cost effectiveness of our solution to the
customer's medical requirements.
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EMPLOYEES
At December 31, 2003, we had approximately 880 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 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.
AVAILABLE INFORMATION
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, without charge as soon as reasonably practicable
after we file them with the Securities and Exchange Commission, 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.
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," that 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 "Factors That May
Affect Our Future Performance" 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.
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FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE
Our Operating Results May Fluctuate.
Our operating results, including components of operating results, such as gross
margin on product sales, 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 other alliances;
* changes in the rate of exchange between the U.S. dollar, the euro and
the British pound;
* 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, develop new products, implement production and
marketing plans, secure regulatory approval for products under development, and
obtain patent protection. 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. For example, the introduction of a competitively
priced onlay dural graft matrix could reduce the sales, or growth in sales, of
our DuraGen(R) Dural Graft products. We expect that one or more other companies
will introduce such a product within the next two years.
Our largest competitors 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, many of our product lines compete with smaller
specialized companies or larger companies that do not otherwise focus on
neurosurgery. Our plastic and reconstructive surgery business is small compared
to its principal competitors, which include major medical device and wound care
companies such as the ETHICON division of Johnson & Johnson, Smith and Nephew,
Inamed, Mentor, and Zimmer. Our private label products 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 an alternative for the INTEGRA(R) Dermal
Regeneration Template, our duraplasty products, and the NeuraGen(TM) Nerve
Guide.
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 17 businesses or product lines at a
total cost of approximately $118 million.
We may be unable to continue to implement our growth strategy, and our 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
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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 Food and Drug Administration (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, 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.
Another risk of application to the FDA relates to the regulatory classification
of 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--Regulation--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 products, the
NeuraGen(TM) Nerve Guide, and the INTEGRA(R) Dermal Regeneration Template,
contain material derived from bovine tissue. Products that contain materials
derived from animal sources, including food as well as pharmaceuticals and
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medical devices, 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. Recent cases of BSE discovered in Canada and the United States have
increased awareness of the issue in North America.
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 deep flexor tendon of cattle from the United
States that are less than 24 months old. The World Health Organization
classifies different types of cattle tissue for relative risk of BSE
transmission. Deep flexor tendon, the sole source of our collagen, is in the
lowest risk category for BSE transmission (the same category as milk, for
example), and is therefore considered to have a negligible risk of containing
the agent that causes BSE (an improperly folded protein known as a prion).
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. Significant new regulation, or a ban of our
products, could have a material effect on our current business or our ability to
expand our business.
The European Union has recently announced that new medical devices containing
tissues of animal origin will have to conform to new requirements, and existing
medical devices containing animal tissue must be re-assessed between April 1,
2004 and September 30, 2004. If the required documentation is not submitted,
received and approved, by September 30, 2004, existing EC Certificates will
become invalid. We plan to submit all documents required for a re-assessment of
our products within the schedule required by the European Union.
In addition, we have been notified that Japan has issued new regulations
regarding medical devices that contain tissue of animal origin. Among other
regulations, Japan may require that the tendon used in the manufacture of
medical devices sold in Japan originate in a country that has never had a case
of BSE. Currently, all of our tendon is sourced from the United States. If we
cannot secure and qualify a source of tendon from a country that has never had a
case of BSE, we may not be permitted to sell our collagen hemostatic agents and
products for oral surgery in Japan after September 2004. We do not currently
sell our dural or skin repair products in Japan.
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
competes for acceptance in the market with the 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,
or our sales of certain catheters may be adversely affected by the recent
introduction by other companies of catheters that contain anti-microbial agents
intended to reduce the incidence of infection after implantation. 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 distribution
alliances. In addition, limited funding available for product and technology
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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 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
-16-
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 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,
wildfire 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 in euros, British
pounds and in U.S. dollar-denominated transactions conducted with customers who
generate revenue in currencies other than the U.S. dollar. For those foreign
customers who purchase our products in U.S. dollars, 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.
Because we have operations based in Europe and we generate revenues and incur
operating expenses in euros and British pounds, we experience currency exchange
risk with respect to those foreign currency-denominated revenues and expenses.
In 2003, the cost of products we manufactured in our European facilities or
purchased in foreign currencies exceeded our foreign currency-denominated
revenues. We expect this imbalance to continue into 2004. We currently do not
hedge our exposure to foreign currency risk. Accordingly, a further weakening of
the dollar against the euro and British pound could negatively affect future
gross margins and operating margins.
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 we believe that
this potential impact presents a significant risk to our business, we may enter
into derivative financial instruments to mitigate this risk.
In general, we cannot predict the consolidated 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.
Our sales to foreign markets may be affected by local economic conditions,
regulatory or political considerations, the effectiveness of our sales
representatives and distributors, local competition, and changes in local
medical practice. Relationships with customers and effective terms of sale
frequently vary by country, often with longer-term receivables than are typical
in the United States.
-17-
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, 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;
* we are party to contracts with group purchasing organizations that
require us to discount our prices for certain of our products and limit
our ability to raise prices for certain of our products, particularly
surgical instruments;
* there is economic pressure to contain health care costs in international
markets;
* there are proposed and existing laws, regulations and industry policies
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.
Regulatory Oversight of the Medical Device Industry Might Affect The Manner in
Which We May Sell Medical Devices
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.
In October 2003 ADVAMED, the principal U.S. trade association for the medical
device industry, promulgated a model "code of conduct" that sets forth standards
by which its members should abide in the promotion of their products. The
ADVAMED Code became effective as of January 1, 2004. In addition, we have in
place policies and procedures for compliance that we believe are as stringent
as, or more stringent than, those set forth in the ADVAMED Code, and we provide
routine training to our sales and marketing personnel on our policies regarding
sales and marketing practices. Nevertheless, we believe that the sales and
marketing practices of our industry will be subject to increased scrutiny from
government agencies.
Our Private Label Business Depends Significantly On Key Relationships With Third
Parties, Which We May Be Unable To Establish And Maintain.
-18-
Our private label business depends 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
alliance is 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 any of our alliances would require us to develop
other means to distribute the affected products affected and could adversely
affect our expectations for the growth of private label products.
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 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 when and as we
expect. Thus revenues to be derived from collaborations may vary significantly
over time and be difficult to forecast. 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.
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.
-19-
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, Pembroke, Massachusetts, San Diego, California, Anasco, Puerto
Rico, Andover, England and Mielkendorf, Germany. Our primary distribution
centers are located in Cranbury, New Jersey, Hawthorne, New York, San Antonio,
Texas, 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 "Trial 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 Trial Court dismissed Scripps and
Dr. Cheresh from the case.
In October 2000, the Trial Court entered judgment in our favor and against Merck
KGaA in the case. In entering the judgment, the Trial 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 Trial 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 each appealed various decisions of the Trial Court to the
United States Court of Appeals for the Federal Circuit (the "Circuit Court").
The Circuit Court affirmed the Trial Court's finding that Merck KGaA had
infringed our patents. The Circuit Court also held that the basis of the jury's
calculation of damages was not clear from the trial record, and remanded the
case to the Trial Court for further factual development and a new calculation of
damages consistent with the Circuit Court's decision. We expect the Trial Court
to begin new hearings on damages in the summer of 2004. 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.
Three of the Company's French subsidiaries that were acquired from the
neurosciences division of NMT Medical, Inc. received a tax reassessment notice
from the French tax authorities seeking in excess of 1.7 million euros 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.
-20-
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 of the Company
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., the Chairman of the Board of Directors. The
following information indicates the position and age of our executive officers
as of the date of this report and their previous business experience.
NAME AGE POSITION
Stuart M. Essig ................... 42 President, Chief Executive Officer and Director
Gerard S. Carlozzi................. 47 Executive Vice President, Chief Operating
Officer
John B. Henneman, III.............. 42 Executive Vice President, Chief Administrative
Officer and Secretary
David B. Holtz..................... 37 Senior Vice President, Finance and Treasurer
Donald R. Nociolo ................. 41 Senior Vice President, Operations
Judith E. O'Grady.................. 53 Senior Vice President, Regulatory, Quality
Assurance and Clinical Affairs
Robert D. Paltridge ............... 45 Senior Vice President, Global Sales
Deborah A. Leonetti ............... 48 Vice President, Global Marketing
Stuart M. Essig has served as President and Chief Executive Officer and a
director of Integra since December 1997. Before joining Integra, Mr. Essig
supervised the medical technology practice at Goldman, Sachs & Co. as a
managing director. Mr. Essig had ten years of broad health care experience
at Goldman Sachs serving as a senior merger and acquisitions advisor to a
broad range of domestic and international medical technology, pharmaceutical
and biotechnology clients. Mr. Essig received an A.B. degree from the
Woodrow Wilson School of Public and International Affairs at Princeton
University and an MBA and a Ph.D. degree in Financial Economics from the
University of Chicago, Graduate School of Business. Mr. Essig also serves on
the Board of Directors of St. Jude Medical Corporation.
Gerard S. Carlozzi is Integra's Executive Vice President and Chief Operating
Officer, and is responsible for the company's marketing, sales, manufacturing,
distribution and research and development functions. Mr. Carlozzi joined Integra
in September 2003, after serving as a consultant to the Company from March 2003
to September 2003. Prior to joining Integra, Mr. Carlozzi had spent 20 years in
the medical device industry. From 1999 to 2003, he was President, Chief
Executive Officer and a director of Bionx Implants, a company focused on the
development of novel biomaterial devices for various surgical specialties. Prior
to 1999, he held various management positions with Synthes USA, Acufex
microsurgical and Infusaid Corporation. He received a BS degree in engineering
and an MBA from Northeastern University. Mr. Carlozzi also serves on the Board
of Directors of Cascade Medical Corporation.
John B. Henneman, III is Integra's Executive Vice President, Chief
Administrative Officer and Secretary, and is responsible for the law department,
regulatory affairs, corporate quality systems, clinical affairs, business
development, human resources, information management and investor relations. Mr.
Henneman was our General Counsel from September 1998 until September 2000 and
our Senior Vice President, Chief Administrative Officer and Secretary from
September 2000 until February 2003. Prior to joining Integra in August 1998, Mr.
Henneman served Neuromedical Systems, Inc., a public company developer and
manufacturer of in vitro diagnostic equipment, in various capacities for more
than four years. From 1994 until June 1997, Mr. Henneman was Vice President of
Corporate Development, General Counsel and Secretary. From June 1997 through
November 1997, he served in the additional capacity of interim Co-Chief
Executive Officer and from December 1997 to August 1998 Mr. Henneman was
Executive Vice President, US Operations, and Chief Legal Officer. Mr. Henneman
received his A.B. from Princeton University and his J.D. from the University of
Michigan Law School.
-21-
David B. Holtz joined Integra as Controller in 1993, served as Vice President,
Finance and Treasurer from March 1997 to January 2001, and was promoted to
Senior Vice President, Finance and Treasurer in February 2001. From August 2002
through October 2003, Mr. Holtz was given responsibility for managing Integra's
European operations to support the transition of our acquisitions in Europe. His
current responsibilities include managing all financial reporting and accounting
functions. Before joining Integra, Mr. Holtz was an associate with Coopers &
Lybrand, L.L.P. in Philadelphia and Cono Leasing Corporation, a private leasing
company. He received a BS degree in Business Administration from Susquehanna
University and has been certified as a public accountant.
Donald R. Nociolo joined Integra as Director of Manufacturing in 1994, served as
Vice President, Operations since March 1997, and was promoted to Senior Vice
President of Operations in May 2000. He is responsible for managing Integra's
worldwide manufacturing and distribution operations. Mr. Nociolo has over
sixteen 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
the worldwide sales activities of Integra's three sales organizations and
third-party distributors. Mr. Paltridge has 21 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.
Deborah A. Leonetti joined Integra in May of 1997 as Director of Marketing and
was promoted to Vice President, 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
2003
Fourth Quarter $ 34.99 $ 27.23
Third Quarter $ 30.65 $ 23.39
Second Quarter $ 29.94 $ 22.49
First Quarter $ 23.72 $ 15.66
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
-22-
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 2, 2004 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 five 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.
Years Ended December 31,
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(in thousands, except per share data)
Operating Results:
Total revenue (1) ...................................... $185,599 $117,822 $ 93,442 $ 71,649 $ 42,876
Total operating costs and expenses (2) ................. 145,952 98,635 79,156 83,370 55,256
------- ------ ------ ------ ------
Operating income (loss) ................................ 39,647 19,187 14,286 (11,721) (12,380)
Interest income (expense), net ......................... 471 3,535 1,393 (473) 294
Gain on disposition of product line .................... -- -- -- 1,146 4,161
Other income (expense), net (1) ........................ 3,071 3 (392) 201 141
------ ------ ------ ------ ------
Income (loss) before income taxes ...................... 43,189 22,725 15,287 (10,847) (7,784)
Income tax expense (benefit) (3) ....................... 16,328 (12,552) (10,876) 108 (1,818)
------ ------ ------ ------ ------
Net income (loss) before cumulative
effect of accounting change ......................... 26,861 35,277 26,163 (10,955) (5,966)
Cumulative effect of accounting change(5) .............. -- -- -- (470) --
------ ------ ------ ------ ------
Net income (loss) ...................................... $26,861 $35,277 $26,163 $(11,425) $(5,966)
====== ====== ====== ====== ======
Diluted net income (loss) per share .................... $ 0.88 $ 1.14 $ 0.94 $(0.97) $(0.40)
Weighted average shares outstanding .................... 30,468 30,895 27,796 17,553 16,802
Pro Forma Data (5):
Total revenue .......................................... $ 42,974
Net loss ............................................... (5,868)
Basic and diluted net loss per share ................... $ (0.40)
December 31,
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(in thousands)
Financial Position:
Cash, cash equivalents, and marketable securities(4,6).. $206,743 $132,311 $131,036 $ 15,138 $ 23,612
Total assets ........................................... 412,526 274,668 227,588 86,514 66,253
Long-term debt (6) ..................................... 119,257 -- -- 4,758 7,625
Accumulated deficit .................................... (17,462) (44,323) (79,600) (105,729) (94,304)
Stockholders' equity ................................... 268,530 247,597 204,056 53,781 37,989
-23-
(1) In 2003, we recorded $11.0 million of other revenue related to the
acceleration of the recognition of unused minimum purchase payments and
unamortized license fee revenue from ETHICON following the termination of
the supply distribution and collaboration agreement in December 2003. We
also recorded a $2.0 million gain in other income associated with a related
termination payment received from ETHICON.
(2) We recorded the following significant special items in operating expenses:
$1.1 million of expenses related to the closure of our San Diego research
center, $0.4 million of acquired in-process research and development and a
$2.0 million donation to the Integra Foundation in 2003; $2.3 million of
acquired in-process research and development charges recorded in connection
with acquisitions in 2002; a $13.5 million stock-based compensation charge
incurred in connection with the extension of the employment of our
President and Chief Executive Officer in 2000; and $2.5 million in fair
value inventory charges and $1.0 million in severance costs related to
acquisitions in 1999.
(3) In 2002 and 2001, respectively, Integra recognized a $20.4 million and
$11.5 million deferred income tax benefit primarily related to the
reduction of a portion of the valuation allowance recorded against its
deferred tax assets. In 1999, Integra recognized a $1.8 million deferred
income tax benefit from the reduction of the deferred tax liability
recorded in the NeuroCare acquisition to the extent that consolidated
deferred tax assets were generated subsequent to the acquisition.
(4) In August 2001, we issued 4,747,500 shares of common stock at $25.50 per
share in a follow-on public offering. The net proceeds generated by the
offering, after expenses, were $113.4 million. We subsequently used a
portion of these proceeds to repay outstanding indebtedness totaling $9.3
million, for which we recorded a $256,000 loss on the early retirement of
debt.
(5) As the result of the adoption of SEC Staff Accounting Bulletin No. 101
"Revenue Recognition" (SAB 101), we recorded a $470,000 cumulative effect
of an accounting change to defer a portion of a nonrefundable, up-front fee
received and recorded in other revenue in 1998. The cumulative effect of
this accounting change was measured as of January 1, 2000. As a result of
this accounting change, other revenue in 2003, 2002, 2001 and 2000 includes
$112,000 of amortization of the amount deferred as of January 1, 2000. Pro
forma data reflects the amounts that would have been reported if SAB 101
had been retroactively applied.
(6) In 2003, we issued $120.0 million of 2.5% contingent convertible
subordinated notes due 2008. The net proceeds generated by the notes, after
expenses, were $115.9 million. The notes are convertible into approximately
3.5 million shares.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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
"Factors That May Affect Our Future Performance".
Regulation G, "Conditions for Use of Non-GAAP Financial Measures," and other
provisions of the Securities Exchange Act of 1934, as amended, define and
prescribe the conditions for the use of certain non-GAAP financial information.
In Management's Discussion and Analysis of Financial Condition and Results of
Operations, we provide information regarding growth in product revenues
excluding recently acquired product lines, which is a non-GAAP financial
measure. A reconciliation of this non-GAAP financial measure to the most
comparable GAAP measure is provided in this annual report.
This non-GAAP financial measure should not be relied upon to the exclusion of
GAAP financial measures. Management believes that this non-GAAP financial
measure constitutes important supplemental information to investors which
reflects an additional way of viewing aspects of our operations that, when
viewed with our GAAP results and the accompanying reconciliations, provides a
more complete understanding of factors and trends affecting our ongoing business
and operations. Management strongly encourages investors to review our financial
statements and publicly-filed reports in their entirely and to not rely on any
single financial measure. Because non-GAAP financial measures are not
standardized, it may not be possible to compare these financial measures with
other companies' non-GAAP financial measures having the same or similar names.
GENERAL
Integra develops, manufactures, and markets medical devices for use in
neuro-trauma, neurosurgery, plastic and reconstructive surgery, and general
surgery. Our business is organized into product groups and distribution
channels. Our product groups include implants and other devices for use in the
operating room, monitoring systems for the measurement of various parameters in
tissue (such as pressure, temperature, and oxygen), hand-held and ultrasonic
surgical instruments, and private label products that we manufacture for other
medical device companies.
-24-
Our distribution channels include a sales organization that we employ to call on
neurosurgeons, another employed sales force to call on plastic and
reconstructive surgeons, and networks of third-party distributors that we
manage. We invest substantial resources and management effort to develop our
sales organizations, and we believe that we compete very effectively in this
aspect of our business.
We manufacture most of the operating room, monitoring and private label products
that we sell in various plants located in the United States, Puerto Rico,
France, the United Kingdom and Germany. We also manufacture the ultrasonic
surgical instruments that we sell, but we source most of our hand-held surgical
instruments through specialized third-party vendors.
We believe that we have a particular advantage in the development, manufacture
and sale of specialty tissue repair products derived from bovine collagen. We
develop and build these products in our manufacturing facility in Plainsboro,
New Jersey. Taken together, these products accounted for approximately 27%, 32%
and 32% of product revenues in the years ended December 31, 2003, 2002 and 2001,
respectively.
We manage these multiple product groups and distribution channels on a
centralized basis. Accordingly, we report our financial results under a single
operating segment - the development, manufacturing, and distribution of medical
devices.
Our objective is to build a customer-focused and profitable medical device
company by developing or acquiring innovative medical devices and other products
to sell through our sales channels. Our strategy therefore entails substantial
growth in product revenues both through internal means - through launching new
and innovative products and selling existing products more intensively - and by
acquiring existing businesses or already successful product lines.
We aim to achieve this growth in revenues while maintaining strong financial
results. While we pay attention to any meaningful trend in our financial
results, we pay particular attention to measurements that tend to support the
view that our profitability can grow for a period of years. These measurements
include revenue growth from products developed internally or acquired more than
a year before the reporting period in question, gross margins on products
revenues, which we hope to increase to more than 65% over a period of several
years, operating margins for the entire company, which we hope to increase
substantially from the level we reported in 2003, and earnings per fully diluted
share of common stock.
ACQUISITIONS
Our strategy for growing our business includes the acquisition of complementary
product lines and companies. Our recent acquisitions of businesses, assets and
product lines may make our financial results for the year ended December 31,
2003 not directly comparable to those of the corresponding prior year periods.
Since the beginning of 2001, we have acquired the following businesses, assets
and product lines:
In December 2003, we acquired the assets of Reconstructive Technologies, Inc.
for $400,000 in cash and an agreement to make future payments based on product
sales. Reconstructive Technologies is the developer of the Automated Cyclic
Expansion System (ACE System(TM)), a tissue expansion device. As the ACE system
is not yet approved, we recorded an in-process research and development charge
in connection with this acquisition. Once approved, we plan to market the system
through our plastic and reconstructive sales force.
In November 2003, we acquired all of the outstanding capital stock of Spinal
Specialties, Inc. from I-Flow Corporation for approximately $6.0 million in
cash, subject to a working capital adjustment. Spinal Specialties assembles and
sells custom kits and products for chronic pain management, including the
OsteoJect(TM) Bone Cement Delivery System and the ACCU-DISC(TM) Pressure
Monitoring System. Spinal Specialties markets its products to anesthesiologists
and interventional radiologists through an in-house telemarketing team and a
network of distributors. We report sales of Spinal Specialties products as
instrument revenues.
In August 2003, we acquired the assets of Tissue Technologies, Inc., the
manufacturer and distributor of the UltraSoft(TM) line of facial implants for
soft tissue augmentation of the facial area. We market the UltraSoft products
directly to cosmetic and reconstructive surgeons through our plastic and
reconstructive surgery sales force.
In March 2003, we acquired all of the outstanding capital stock of J. Jamner
Surgical Instruments, Inc. (doing business as JARIT(R) Surgical Instruments) for
$45.6 million in cash. JARIT sells its products to more than 5,200 hospitals and
surgery centers worldwide. JARIT generates its domestic product sales primarily
through sales to hospitals that are members of group purchasing organizations.
Group purchasing organizations use the combined leverage of their member
hospitals 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. The acquisition of JARIT broadened Integra's
customer base and surgical instrument product offering and facilitated the
procurement of Integra's Ruggles(TM) and Padgett instrument products directly
from the instrument manufacturers.
-25-
In December 2002, we acquired the epilepsy monitoring and neurosurgical shunt
business of the Radionics division of Tyco Healthcare Group for $3.7 million in
cash. We moved the manufacturing of the acquired lines to our facility in Biot,
France and are selling the acquired products through our Integra NeuroSciences
sales force.
In October 2002, we acquired Padgett Instruments, Inc.(R), a marketer of
instruments used in reconstructive and plastic surgery, for $9.6 million in
cash. Our acquisition of Padgett Instruments broadened our existing surgical
customer base and allowed us to expand into new market segments. We consolidated
Padgett's operations into our distribution center located in Cranbury, New
Jersey in March 2003.
In August 2002, we acquired certain assets, including the NeuroSensor(R) monitor
and rights to certain intellectual property, from Novus Monitoring Limited of
the United Kingdom ("Novus") and entered into a related development agreement
pursuant to which Novus will, at its own cost, conduct certain clinical studies,
continue development of an additional monitoring product, and design and
transfer to us a validated manufacturing process for these products. We paid
Novus $3.5 million in cash at closing and agreed to pay 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. We expect the
Novus products to complement our existing line of brain parameter monitoring
products.
We expect to introduce the Novus NeuroSensor(R) Cerebral Blood Flow Monitoring
System in the second half of 2004. The Novus monitoring system measures both
intracranial pressure and cerebral blood flow using a single combined probe and
an electronic monitor for data display. Cerebral blood flow is considered to be
an important parameter for monitoring cerebral auto-regulation and, when
combined with the measurement of intracranial pressure, is expected to
facilitate improved patient care and clinical management with applications in
neuro-trauma, cerebrovascular disease, and post-operative neurosurgical
treatment.
In connection with the Novus acquisition, we recorded a $1.1 million in-process
research and development charge for the value associated with the development of
a next generation monitoring system. Novus remains responsible for the costs to
complete development and obtain regulatory clearance for this project, the value
of which we recorded as prepaid research and development. We estimated the value
of the in-process research and development with the assistance of a third party
appraiser using probability weighted cash flow projections with factors for
successful development ranging from 15% to 20% and a 15% discount rate.
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 included a facility
located in Biot, France that manufactures, packages and distributes shunting,
catheter and drainage products.
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 the Signature Technologies 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.
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 2003, we relocated the
NeuroSupplies operations to our facility in Pembroke, Massachusetts.
In April 2001, we acquired Satelec Medical, a manufacturer and marketer of the
Dissectron(R) ultrasonic surgical aspirator console and a line of related
handpieces, for $3.9 million in cash. We completed the consolidation of the
Satelec operations into our Andover, England and Biot, France facilities in
2002.
-26-
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, we had exclusive marketing rights to the LICOX(R) products in the
United States and certain other markets.
RESULTS OF OPERATIONS
Net income in 2003 was $26.9 million, or $0.88 per diluted share, as compared to
net income of $35.3 million or $1.14 per diluted share in 2002, and net income
of $26.2 million or $0.94 per diluted share in 2001. Included in these amounts
are certain revenues, 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 revenues, charges, and gains that meet these criteria
promotes comparability of reported financial results. The following revenues,
charges, and gains were included in net income and net income per diluted share:
Recorded in 2003
* We recorded $11.0 million of other revenue related to the acceleration of
the recognition of unused minimum purchase payments and unamortized
license fee revenue from ETHICON following the termination of the Supply,
Distribution and Collaboration agreement in December 2003.
* We incurred $1.1 million of expenses related to the closing of our San
Diego research center, consolidation of the research activities into our
other facilities and the discontinuation of certain research programs.
* We recorded an acquired in-process research and development charge of
$400,000 in connection with an acquisition.
* We made a $2.0 million donation to the Integra Foundation, which is included
in general and administrative expenses.
* We received a $2.0 million payment from ETHICON from the termination of our
agreement with them, which is included in other income.
Recorded in 2002
* We recorded 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.
* We recorded acquired in-process research and development charges of $2.3
million in connection with acquisitions.
Recorded in 2001
* We recorded an $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.
* We recorded a $256,000 loss from the early retirement of debt.
-27-
Total Revenues and Gross Margin on Product Revenues
(in thousands, except per share data) 2003 2002 2001
-------- -------- --------
Monitoring products ................................. $ 44,229 $ 37,184 $ 28,158
Operating room products ............................. 53,301 38,326 27,240
Instruments ......................................... 47,168 16,802 14,972
Private label products .............................. 21,997 20,313 17,538
-------- -------- --------
Total product revenues ................................. 166,695 112,625 87,908
Other revenue .......................................... 18,904 5,197 5,534
-------- -------- --------
Total revenues.......................................... 185,599 117,822 93,442
Cost of product revenues ............................... 70,597 45,772 36,014
Gross margin on product revenues ....................... 96,098 66,853 51,894
Gross margin as a percentage of product revenues ....... 58% 59% 59%
In 2003, total revenues increased 58% over 2002 to $185.6 million, led by a
$54.1 million or 48% increase in product revenues to $166.7 million. Domestic
product revenues increased $42.4 million in 2003 to $132.8 million, or 80% of
total product revenues, as compared to 80% of product revenues in 2002 and 78%
of product revenues in 2001. Sales of instruments and operating room products,
which reported a 181% and 39% increase, respectively, in sales over 2002, led
our growth in product revenues in 2003.
In 2002, total revenues increased 26% over 2001 to $117.8 million, led by a 28%
increase in product revenues to $112.6 million. Domestic product revenues
increased $21.8 million in 2002 to $90.4 million, or 80% of total product
revenues. Sales of monitoring and operating room products, which reported a 32%
and 41% increase, respectively, in sales over 2001, led our growth in product
revenues in 2002.
Reported product revenues for 2003 and 2002 included the following amounts in
revenues from acquired product lines:
2003 Revenues 2002 Revenues % change
--------------- --------------- ------------
(in thousands)
Monitoring
Products acquired during 2002 ........... $ 3,832 $ 1,626 136%
All other product revenues .............. 40,397 35,558 14%
-------- --------
Total Monitoring product revenues........ 44,229 37,184 19%
Operating Room
Products acquired during 2002 ........... $ 9,360 $ 3,325 182%
All other product revenues .............. 43,941 35,001 26%
-------- --------
Total Operating Room product revenues.... 53,301 38,326 39%
Instruments
Products acquired during 2003 ........... $ 24,476 $ -- N/A
Products acquired during 2002 ........... 4,775 1,238 286%
All other product revenues .............. 17,917 15,564 15%
-------- --------
Total Instruments product revenues....... 47,168 16,802 181%
Private Label
Products acquired during 2002 ........... $ 2,772 $ 1,418 95%
All other product revenues .............. 19,225 18,895 2%
-------- --------
Total Private Label product revenues..... 21,997 20,313 8%
Consolidated
Products acquired during 2003 ........... $ 24,476 $ -- N/A
Products acquired during 2002 ........... 20,739 7,607 173%
All other product revenues .............. 121,480 105,018 16%
--------- --------
Total product revenues .................. 166,695 112,625 48%
-28-
Product line revenues excluding 2003 and 2002 acquisitions grew at 16% for the
year ended December 31, 2003 as compared to 2002. Increased sales of our
DuraGen(R) Dural Graft Matrix, NeuraGen(TM) Nerve Guide, intracranial monitoring
and drainage systems, and neurosurgical systems accounted for most of this
growth in 2003.
Revenue from sales of drainage product lines acquired in 2002 and the Integra
NeuroSupplies(TM) products acquired in December 2001 and increased sales of our
intracranial monitoring systems and existing drainage systems all contributed
significantly to the growth in our monitoring product revenues in 2002. Revenue
from sales of the Padgett Instruments product line acquired in 2002 and a full
year of sales of the Dissectron(R) Ultrasonic Aspirator product line acquired in
April 2001 contributed to the growth in instruments product revenues in 2002.
Growth in private label product revenues in 2002 was generated primarily by
increased revenues from the Absorbable Collagen Sponge component of Medtronic's
recently approved InFUSE(TM) Bone Graft product and $1.4 million in sales of
product lines acquired in 2002.
In 2003, we expanded our dural repair product offering with the introduction
through our Integra NeuroSciences sales force of the DuraGen Plus(TM) Dural
Graft Matrix and EnDura(TM) No-React(R) Dural Substitute in the United States.
The DuraGen Plus product represents the second generation in Integra's line of
absorbable and sutureless onlay collagen matrix grafts for cranial and spinal
dural repair. The EnDura(TM) product is a new suturable product for the repair
of the dura mater.
In addition, through our plastic and reconstructive sales force we launched the
Dermatome Model S. Designed specifically for burn surgeons, it is lighter, more
ergonomic and more powerful than the other dermatomes in Integra's Padgett
instrument line.
Through ETHICON, we also launched the INTEGRA(TM) Bi-Layer Matrix Wound
Dressing. This product is used for the management of wounds, including partial
and full-thickness wounds, as well as chronic wounds and trauma wounds.
Following the termination of the ETHICON agreement in December 2003, we now
market these products through our plastic and reconstructive sales force.
We have generated our product revenue growth through acquisitions, new product
launches and increased direct sales and marketing efforts both domestically and
in Europe. 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
continue to acquire businesses that complement our existing businesses and
products.
Gross margin as a percentage of product revenues was 58% in 2003 and 59% in 2002
and 2001. Cost of product revenues included $1,261,000, $447,000 and $203,000 in
fair value inventory purchase accounting adjustments recorded in connection with
acquisitions in 2003, 2002 and 2001, respectively. During 2003, the gross margin
was negatively affected by acquisitions of lower margin products and the impact
of foreign exchange rates on the cost of products that we manufacture or
purchase in Europe. We expect our future gross margins to benefit as we resume
the direct sales of the INTEGRA(R) Dermal Regeneration Template and related
products and as sales of the higher margin products continue to grow faster than
other products.
We currently do not hedge our exposure to foreign currency risk. In 2003, the
cost of products we manufacture in or purchase in Europe exceeded our foreign
currency-denominated revenues. We expect this imbalance to continue into 2004. A
further weakening of the dollar against the euro and British pound could
negatively affect future gross margins.
Other revenue consists of research and development funding from strategic
partners and government grants, and license, distribution, and other
event-related revenues from strategic partners and other third parties. Other
revenue increased in 2003 by $13.7 million primarily due to the accelerated
recognition of $11.0 million of license and distribution fee revenue due to the
termination of the ETHICON agreement. The $337,000 decline in 2002 resulted from
a decline in government grant funding and the expiration of a technology royalty
agreement, although the receipt in 2002 of $1.0 million in event-related
payments partially offset those negative factors. Since our agreement with
ETHICON was the main source of our other revenue, we expect it to significantly
decrease in 2004.
Other Operating Expenses
The following is a summary of other operating expenses as a percent of product
revenues:
2003 2002 2001
-------- -------- --------
Research and development ............................... 7.7% 10.2% 10.1%
Selling and marketing .................................. 22.9% 22.3% 23.1%
General and administrative ............................. 12.8% 12.9% 12.7%
-29-
We recorded $400,000 and $2.3 million of in-process research and development
charges in connection with acquisitions in 2003 and 2002, respectively. Other
research and development expenses increased in both 2003 and 2002 as a result of
increased headcount and spending on product development focused on our neuro
products. We incurred additional expenses of $950,000 in 2003 related to the
consolidation of our San Diego research center with our other facilities. During
2003, we also increased spending on clinical research relationships with
research institutions related to markets in which we compete.
We expect our research and development expenses as a percentage of product
revenues to decline further in 2004 because of the significant increase in
hand-held instrument product revenues as a proportion of our total revenues. By
their nature, our hand-held instrument product lines require less research and
development and depend on sales and marketing efforts to support continued
growth.
Sales and marketing expenses increased significantly in both 2003 and 2002 with
the expansion of our domestic and international sales and marketing organization
and increased trade show activities. In 2003, the increase included sales
support for JARIT Instruments and the expansion of the plastic and
reconstructive sales force in anticipation of the termination of the ETHICON
agreement. We also hired more experienced marketing professionals and spent more
on advertising. In 2004, we expect to continue to expand our neuro and plastic
and reconstructive sales forces.
General and administrative expenses increased $6.8 million in 2003, $2.5 million
of which is related to operating costs associated with recently acquired
businesses that were not reflected in our results for the full year in 2002. In
addition, in 2003 we donated $2.0 million to the Integra Foundation and incurred
additional costs to consolidate several facilities.
General and administrative expenses increased $3.4 million in 2002, $1.9 million
of which was related to operating costs associated with acquired businesses that
were not reflected in our results for the full year in 2001. The remaining
increase in general and administrative expenses in 2002 consisted primarily of
increased rent at our expanded corporate headquarters and higher insurance and
legal costs.
We initiated and completed a number of activities in the fourth quarter of 2003,
including the expansion of our marketing capability, the doubling of our plastic
and reconstructive surgery sales organization, the consolidation of our San
Diego research and manufacturing facilities, and making a significant
contribution to the Integra Foundation. These activities resulted in higher
operating costs compared to our recent trend. We anticipate our 2004 operating
costs as a percentage of product revenues to decrease compared to the levels
incurred in the fourth quarter of 2003.
Amortization expense increased in 2003 primarily because of amortization on
additional intangible assets acquired through our business acquisitions. Annual
amortization expense is expected to be approximately $3.3 million in 2004, $3.1
million in 2005, $3.0 million in 2006, $2.8 million in 2007, and $2.5 million in
2008.
Non-Operating Income and Expenses
In 2003, we received approximately $115.9 million of net proceeds from the sale
of $120.0 million of our 2 1/2% contingent convertible subordinated notes due in
March 2008. We have recorded $2.7 million for the interest expense associated
with the notes, which was offset by $3.2 million of interest income on our
invested cash and marketable debt securities.
We will pay additional interest ("Contingent Interest") on our convertible notes
if, at thirty days prior to maturity, Integra's common stock price is greater
than $37.56 per share. The fair value of this Contingent Interest obligation is
marked to its fair value at each balance sheet date, with changes in the fair
value recorded to interest expense. We recorded a $365,000 liability related to
the estimated fair value of the Contingent Interest obligation at the time the
notes were issued. At December 31, 2003, the estimated fair value of the
Contingent Interest obligation was $458,000.
In August 2003, we entered into an interest rate swap agreement with a $50.0
million notional amount to hedge the risk of changes in fair value attributable
to interest rate risk with respect to a portion of our fixed rate convertible
notes. We receive a 2 1/2% fixed rate from the counterparty, payable on a
semi-annual basis, and pay to the counterparty a floating rate based on 3-month
LIBOR minus 35 basis points, payable on a quarterly basis. The interest rate
swap agreement terminates in March 2008, subject to early termination upon the
occurrence of certain events, including redemption or conversion of the
convertible notes.
-30-
The interest rate swap agreement qualifies as a fair value hedge under SFAS No.
133, as amended "Accounting for Derivative Instruments and Hedging Activities".
The net amount to be paid or received under the interest rate swap agreement is
recorded as a component of interest expense. Interest expense for the year ended
December 31, 2003 reflects a $330,000 reduction associated with the interest
rate swap.
The net fair value of the interest rate swap at inception was $767,000. At
December 31, 2003, the net fair value of the interest rate swap increased
$305,000 to $1.1 million, and this amount is included in other liabilities. In
connection with this fair value hedge transaction, we recorded a $433,000 net
decrease in the carrying value of our convertible notes. The net $128,000
difference between changes in the fair value of the interest rate swap and the
convertible notes represents the ineffective portion of the hedging
relationship, and this amount is recorded in other income.
Our net other income/expense increased by $3.1 million in 2003. This increase
consisted primarily of the $2.0 million termination payment received from
ETHICON and foreign currency transaction gains.
In August 2001, we raised $113.4 million from a follow-on public offering of 4.7
million shares of common stock. Accordingly, net interest income in 2002
increased to $3.5 million, as compared to net interest income of $1.4 million in
2001.
Income Taxes
Since 1999, we have generated positive taxable income on a cumulative basis. In
light of this trend, our 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.
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 expected to realize in
the future. A valuation allowance of $5.4 million is recorded against the
remaining $33.5 million of net deferred tax assets recorded at December 31,
2003. 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, if 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.
In 2003, our effective income tax rate was 37.8% of income before income taxes.
The increase as compared to 2002 and 2001 resulted from the income tax benefits
related to the reduction of deferred tax asset valuation allowances recorded in
2002 and 2001 and a larger proportion of our taxable income being generated in
higher tax jurisdictions in 2003.
The net change in the Company's valuation allowance was $(2.3) million, $(26.7)
million, and $(10.4) million, in 2003, 2002 and 2001, respectively.
At December 31, 2003, we had net operating loss carryforwards of approximately
$72.8 million and $10.5 million for federal and state income tax purposes,
respectively, to offset future taxable income. The federal and state net
operating loss carryforwards expire through 2018 and 2009, 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.
At December 31, 2003, 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.
-31-
INTERNATIONAL PRODUCT REVENUES AND OPERATIONS
Because we have operations based in Europe and we generate revenues and incur
operating expenses in euros and British pounds, we will experience currency
exchange risk with respect to those foreign currency denominated revenues or
expenses.
In 2003, the cost of products we manufactured in our European facilities or
purchased in foreign currencies exceeded our foreign currency-denominated
revenues. We expect this imbalance to continue into 2004. We currently do not
hedge our exposure to foreign currency risk. Accordingly, a further weakening of
the dollar against the euro and British pound could negatively affect future
gross margins and operating margins. We will continue to assess the potential
effects that changes in foreign currency exchange rates could have on our
business. If we believe this potential impact presents a significant risk to our
business, we may enter into derivative financial instruments to mitigate this
risk.
Additionally, we generate significant revenues outside the United States, a
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.
Our sales to foreign markets may be affected by local economic conditions,
regulatory or political considerations, the effectiveness of our sales
representatives and distributors, local competition, and changes in local
medical practice.
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:
United Asia Other
States Europe Pacific Foreign Consolidated
-------- -------- --------- --------- --------------
(in thousands)
2003 ..................... $132,805 $ 21,433 $ 5,828 $ 6,629 $166,695
2002 ..................... 90,422 14,737 4,062 3,404 112,625
2001 ..................... 68,612 10,577 4,838 3,881 87,908
In 2003, product revenues from customers outside the United States totaled $33.9
million, or 20% of consolidated product revenues, of which approximately 63%
were to European customers. Of this amount, $21.3 million of these revenues were
generated in foreign currencies.
In 2002, product revenues from customers outside the United States totaled $22.2
million, or 20% of consolidated product revenues, of which approximately 66%
were to European customers. Of this amount, $13.4 million of these revenues were
generated in foreign currencies.
In 2001, revenues from customers outside the United States totaled $19.3
million, or 22% of consolidated product revenues, of which approximately 55%
were to European customers. Of this amount, $7.2 million of these revenues were
generated in foreign currencies.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Marketable Securities
At December 31, 2003, we had cash, cash equivalents and marketable securities
totaling $206.7 million. Investments consist almost entirely of highly liquid,
interest bearing debt securities.
Cash Flows
We generated positive operating cash flows of $34.8 million, $32.0 million and
$15.7 million in 2003, 2002 and 2001, respectively. Operating cash flows
improved in 2003 and 2002 primarily as a result of higher pre-tax income and the
benefits from the continued utilization of our net operating loss carryforwards
and tax deductions generated by employee stock option exercises. Based on our
current unused net operating loss carryforward position and various other future
potential tax deductions, we expect our operating cash flows to continue to
benefit from actual cash tax payments being lower than our effective book income
tax rate for at least the next two years.
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In 2003, we also generated $14.2 million from the issuance of common stock under
employee benefit plans and $115.9 million of net proceeds from the sale of
$120.0 million of our contingent convertible subordinated notes.
Our principal uses of funds in 2003 were $50.4 million for acquisitions, $38.6
million for the net purchases of marketable debt securities, $35.4 million for
the repurchase of approximately 1.5 million shares our common stock and $3.8
million for capital expenditures. The significant repurchase of our common stock
in 2003 was made simultaneously with the issuance of our convertible notes.
In 2002, our principal sources of funds were $32.0 million of operating cash
flow and $3.3 million from the issuance of common stock. In 2002, our principal
uses of funds were $25.0 million for acquisitions, the repayment of a $3.6
million note and $2.3 million for capital expenditures.
In August 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 2001.
Additionally, a related term loan and revolving credit facility was terminated
in 2001.
Working Capital
At December 31, 2003 and 2002, working capital was $167.3 million and $130.3
million, respectively. The increase in working capital in 2003 was primarily due
to a decrease in the overall maturity of our marketable securities portfolio,
additional investments in inventory to support our growth in product revenues,
higher accounts receivable balances related to increased sales, and the
recognition of significant amounts of deferred revenue and customer advances as
revenue in 2003.
Convertible Debt and Related Hedging Activities
In 2003, we generated $115.9 million of net proceeds from the sale of $120.0
million of our contingent convertible subordinated notes due in March 2008. We
pay interest on the convertible notes at an annual rate of 2 1/2% each September
15th and March 15th. We will also pay contingent interest on the notes if, at
thirty days prior to maturity, Integra's common stock price is greater than
$37.56. The contingent interest will be payable for each of the last three years
the notes remain outstanding in an amount equal to the greater of i) 0.50% of
the face amount of the notes and ii) the amount of regular cash dividends paid
during each such year on the number of shares of common stock into which each
note is convertible. Holders of the notes may convert the notes into shares of
our common stock under certain circumstances, including when the market price of
our common stock on the previous trading day is more than $37.56 per share,
based on an initial conversion price of $34.15 per share.
The notes are general, unsecured obligations of Integra and will be subordinate
to any future senior indebtedness. We cannot redeem the notes prior to their
maturity, and the notes' holders may compel us to repurchase the notes upon a
change of control. There are no financial covenants associated with the
convertible notes.
In August 2003, we entered into an interest rate swap agreement with a $50
million notional amount to hedge the risk of changes in fair value attributable
to interest rate risk with respect to a portion of the notes. We receive a 2
1/2% fixed rate from the counterparty, payable on a semi-annual basis, and pay
to the counterparty a floating rate based on 3-month LIBOR minus 35 basis
points, payable on a quarterly basis. The interest rate swap agreement
terminates in March 2008, subject to early termination upon the occurrence of
certain events, including redemption or conversion of the contingent convertible
notes.
Share Repurchase Plans
In March 2004, our Board of Directors authorized us to repurchase up to an
additional 1.5 million shares of our common stock for an aggregate purchase
price not to exceed $40.0 million. We may repurchase shares under this program
through March 2005 either in the open market or in privately negotiated
transactions.
During 2003 and 2002, respectively, we repurchased approximately 1.5 million and
100,000 shares of our common stock under previously authorized share repurchase
programs.
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Dividend Policy
We have not paid any cash dividends on our common stock since our formation. Any
future determinations to pay cash dividends on our common stock will be at the
discretion of our Board of Directors and will depend upon our financial
condition, results of operations, cash flows, and other factors deemed relevant
by the Board of Directors.
Requirements and Capital Resources
We believe that our cash and marketable securities are sufficient to finance our
operations and capital expenditures in the near term. In 2004, we expect to
increase cash outlays for capital expenditures as compared to 2003, primarily
because of an estimated $4.3 million of expenditures associated with information
system upgrades.
Given the significant level of liquid assets and our objective to grow by
acquisition and alliances, our financial position could change significantly if
we were to complete a business acquisition by utilizing a significant portion of
our liquid assets.
Currently, we do not have any existing borrowing capacity or other credit
facilities in place to raise significant amounts of capital if such a need
arises.
Contractual Obligations and Commitments
We are obligated to pay the following amounts under various agreements:
Less than More than
Total 1 year 1-3 Years 3-5 Years 5 years
------- ----------- ----------- ----------- -----------
(in millions)
Long Term Debt............... $120.0 $ -- $ -- $120.0 $ --
Interest on Long Term Debt... 13.5 3.0 9.0 1.5 --
Operating Leases............. 9.1 2.2 2.9 1.9 2.1
Purchase Obligations......... 10.2 6.3 3.2 0.7 --
Pension Contribution(1)...... 0.2 0.2 -- -- --
Other Long Term Liabilities.. 0.4 -- 0.2 0.1 0.1
-------- ------- ------- -------- ------
Total........................ $153.4 $ 11.7 $ 15.3 $124.2 $ 2.2
(1) Pension contributions after 2004 cannot be reasonably estimated.
In addition, under other agreements we are required to make payments based on
sales levels of certain products or if specific development milestones are
achieved.
In January 2004, the Company acquired the R&B instrument business from R&B
Surgical Solutions, LLC for approximately $2.0 million in cash. The R&B
instrument line is a complete line of high-quality handheld surgical instruments
used in neuro- and spinal surgery. The acquired business generated approximately
$1.2 million in revenues for the twelve months ended December 31, 2003. The
Company plans to market these products through its JARIT sales force.
In January 2004, the Company acquired the Sparta disposable critical care
devices and surgical instruments business from Fleetwood Medical, Inc. for
approximately $1.5 million in cash. The Sparta product line includes products
used in plastic and reconstructive, ear, nose and throat (ENT), neuro,
ophthalmic and general surgery. Prior to the acquisition, Fleetwood Medical
marketed these product lines primarily to hospitals and physicians through a
catalogue and a network of distributors. The acquired business generated
approximately $1.0 million in revenues for the twelve months ended December 31,
2003.
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
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inventories, estimates of future cash flows associated with acquired in-process
research and development charges, derivatives, amortization periods for acquired
intangible assets, and loss contingencies. 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, the value determined by 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.
Derivatives
We report all derivatives at their estimated fair value and record changes in
fair value in current earnings or defer these changes until a related hedged
item is recognized in earnings, depending on the nature and effectiveness of the
hedging relationship. The designation of a derivative as a hedge is made on the
date the derivative contract is executed. On an ongoing basis, we assess whether
each derivative continues to be highly effective in offsetting changes in the
fair value or cash flows of hedged items. If and when a derivative is no longer
expected to be highly effective, we discontinue hedge accounting. All hedge
ineffectiveness is included in current period earnings in other income
(expense), net.
We document all relationships between hedged items and derivatives. Our overall
risk management strategy describes the circumstances under which we may
undertake hedge transactions and enter into derivatives. The objective of our
current risk management strategy is to hedge the risk of changes in fair value
attributable to interest rate risk with respect to a portion of our fixed rate
debt.
The determination of fair value of derivatives is based on valuation models that
use observable market quotes or projected cash flows and our view of the
creditworthiness of the derivative counterparty. If a derivative is no longer
deemed qualify as an effective hedge, changes in the fair value of that
derivative could significantly affect our non-operating income or expense.
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.
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Amortization Periods
We provide for amortization using the straight-line method over the estimated
useful lives of acquired 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 intangible assets
changes, we may change future amortization expense.
Loss Contingencies
We are subject to claims and lawsuits in the ordinary course of our business,
including claims by employees or former employees, with respect to our products
and involving commercial disputes. 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 are exposed to various market risks, including changes in foreign currency
exchange rates and interest rates that could adversely impact our results of
operations and financial condition. To manage the volatility relating to these
typical business exposures, we may enter into various derivative transactions
when appropriate. We do not hold or issue derivative instruments for trading or
other speculative purposes.
Foreign Currency Exchange Rate Risk
Because we have operations based in Europe and we generate revenues and incur
operating expenses in euros and British pounds, we will experience currency
exchange risk with respect to those foreign currency denominated revenues or
expenses. In 2003, the total cost of products we manufacture in or purchase in
foreign currencies and other operating expenses that we incur in foreign
currencies exceeded our total foreign currency-denominated revenues. We expect
this imbalance to continue into 2004. A further weakening of the dollar against
the euro and British pound could negatively affect future gross margins and
operating margins.
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 we believe this
potential impact presents a significant risk to our business, we may enter into
derivative financial instruments to mitigate this risk.
Interest Rate Risk - Marketable Debt Securities
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, 2003 would
increase or decrease interest income by approximately $2.1 million on an annual
basis. We are not subject to material foreign currency exchange risk with
respect to these investments.
Interest Rate Risk - Long Term Debt and Related Hedging Instruments
We are exposed to the risk of interest rate fluctuations on the net interest
received or paid under the terms of an interest rate swap. At December 31, 2003,
we had outstanding a $50.0 million notional amount interest rate swap used to
hedge the risk of changes in fair value attributable to interest rate risk with
respect to a portion of our $120.0 million principal amount fixed rate 2 1/2%
contingent convertible subordinated notes due March 2008.
Our interest rate swap agreement qualifies as a fair value hedge under SFAS No.
133, as amended, "Accounting for Derivative Instruments and Hedging Activities".
At December 31, 2003, the net fair value of the interest rate swap approximated
$1.1 million and is included in other liabilities. The net fair value of the
interest rate swap represents the estimated receipts or payments that would be
made to terminate the agreement. A hypothetical 100 basis point movement in
interest rates applicable to the interest rate swap would increase or decrease
interest expense by approximately $500,000 on an annual basis.
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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 15 - Selected
Quarterly Information - unaudited.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and Senior Vice President,
Finance, conducted an evaluation of the effectiveness of the Company's
disclosure controls and procedures as of December 31, 2003. Based on that
evaluation, our management, including our Chief Executive Officer and Senior
Vice President, Finance, has concluded that our disclosure controls and
procedures are effective. During the period covered by this report, there was no
change in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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 Related Stockholder Matters,
Item 13 Certain Relationships and Related Transactions, and Item 14 Principal
Accountant Fees and Services is incorporated herein by reference to the
Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on May 17, 2004, 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 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 schedules are filed
as a part of this report.
Report of Independent Auditors .......................................... F-1
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001 ...................................... F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002 ............ F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001 ...................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2003, 2002, and 2001 .................. F-5
Notes to Consolidated Financial Statements .............................. F-6
2. Financial Statement Schedules.
Report of Independent Auditors on Financial Statement Schedule .......... F-30
Financial Statement Schedule ............................................ F-31
All other schedules not listed above have been omitted, because they are not
applicable or are not required, or because the required information is included
in the consolidated financial statements or notes thereto.
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3. Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibit
in
Incorporated Filing
2.1 Stock Purchase Agreement, dated as of March 17,2003,
Integra LifeSciences Corporation and Howard Jamner and
other individual stockholders of J. Jamner Surgical
Instruments, Inc. (17) (Exh. 2.1)
3.1(a) Amended and Restated Certificate of Incorporation of
the Company (2) (Exh. 3.1)
3.1(b) Certificate of Amendment to Amended and Restated
Certificate of Incorporation dated May 23, 1998 (3) (Exh. 3.1(b))
3.2 Amended and Restated By-laws of the Company (7) (Exh. 3)
4.1 Indenture, dated as of March 31, 2003, between Integra
LifeSciences Holdings Corporation and Wells Fargo Bank
Minnesota, National Association (19) (Exh. 4.1)
4.2 Registration Rights Agreement, dated as of March 31, 2003,
between Integra LifeSciences Holdings Corporation and
Credit Suisse First Boston, LLC, Banc of America Securities
LLC and U.S. Bancorp Piper Jaffray Inc. (20) (Exh. 4.3)
4.3 Stock Option Grant and Agreement dated December 27,
1997 between the Company and Stuart M. Essig* (7) (Exh. 10.2)
4.4 Restricted Units Agreement dated December 27, 1997
between the Company and Stuart M. Essig* (7) (Exh. 10.3)
4.5 Stock Option Grant and Agreement dated December 22,
2000 between Integra LifeSciences Holdings
Corporation and Stuart M. Essig* (12) (Exh. 4.1)
4.6 Stock Option Grant and Agreement dated December 22,
2000 between Integra LifeSciences Holdings
Corporation and Stuart M. Essig* (12) (Exh. 4.2)
4.7 Restricted Units Agreement dated December 22, 2000
between Integra LifeSciences Holdings Corporation and
Stuart M. Essig* (12) (Exh. 4.3)
10.1 Lease between Plainsboro Associates and American
Biomaterials Corporation dated as of April 16, 1985,
as assigned to Colla-Tec, Inc. on October 24, 1989
and as amended through November 1, 1992 (2) (Exh. 10.30)
10.2 Equipment Lease Agreement between Medicus Corporation
and the Company, dated as of June 1, 2000. (11) (Exh. 10.1)
10.3 Form of Indemnification Agreement between the Company
and [ ] dated August 16, 1995, including a schedule
identifying the individuals that are a party to such
Indemnification Agreements (4) (Exh. 10.37)
10.4 1993 Incentive Stock Option and Non-Qualified Stock
Option Plan* (2) (Exh. 10.32)
10.5(a) 1996 Incentive Stock Option and Non-Qualified Stock
Option Plan* (5) (Exh. 4.3)
10.5(b) Amendment to 1996 Incentive Stock Option and
Non-Qualified Stock Option Plan* (7) (Exh. 10.4)
10.6 1998 Stock Option Plan* (6) (Exh. 10.2)
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10.7 1999 Stock Option Plan* (9) (Exh. 10.13)
10.8 Employee Stock Purchase Plan* (6) (Exh. 10.1)
10.9 Deferred Compensation Plan* (9) (Exh. 10.15)
10.10 2000 Equity Incentive Plan* (13) (Exh. 10.17)
10.11 2001 Equity Incentive Plan* (14) (Exh. 4)
10.12 2003 Equity Incentive Plan* (18) (App. A)
10.13 Amended and Restated Employment Agreement dated
December 22, 2000 between Integra LifeSciences
Holdings Corporation and Stuart M. Essig* (12) (Exh. 10.1)
10.14 Indemnity letter agreement dated December 27, 1997
from the Company to Stuart M. Essig* (7) (Exh. 10.5)
10.15 Registration Rights Provisions* (12) (Exh. 10.2)
10.16 Amended and Restated Employment Agreement between
John B. Henneman, III and the Company
dated October 31, 2003* (22) (Exh. 10.2)
10.17 Employment Agreement between Gerard Carlozzi and the
Company dated September 25, 2003* (22) (Exh. 10.1)
10.18 Employment Agreement between Judith O'Grady and the
Company dated February 20, 2003* (16) (Exh. 10.17)
10.19 Employment Agreement between David B. Holtz and the
Company dated September 10, 2002* (15) (Exh. 10.38)
10.20 Employment Agreement between Donald R. Nociolo and
the Company dated February 20, 2003* (1)
10.21 Retention Agreement between Robert Paltridge and the
Company dated February 20, 2003* (19) (Exh. 10.1)
10.22(a) Supply, Distribution and Collaboration Agreement between
Integra LifeSciences Corporation and Johnson & Johnson
Medical, a Division of Ethicon, Inc. dated as of June 3,
1999, certain portions of which are subject to a request
for confidential treatment under Rule 24b-2 of the
Securities Exchange Act of 1934. (8) (Exh. 10.1)
10.22(b) Amendment to Supply, Distribution and Collaboration
Agreement by and between Integra LifeSciences Corporation
and Ethicon, Inc., dated as of September 30, 2003) (21) (Exh. 10.1)
10.23 Lease Contract dated June 30, 1994 between the Puerto
Rico Industrial Development Company and Heyer-Schulte
NeuroCare, Inc. (9) (Exh. 10.32)
10.24 Industrial Real Estate Triple Net Sublease dated
April 1, 1993 between GAP Portfolio Partners and
Camino Laboratories. (9) (Exh. 10.33)
10.25 Industrial Real Estate Triple Net Sublease dated
January 15, 1997 between Sorrento Montana, L.P. and
Camino NeuroCare, Inc. (9) (Exh. 10.34)
21 Subsidiaries of the Company (1)
23 Consent of PricewaterhouseCoopers LLP (1)
31.1 Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (1)
31.2 Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (1)
32.1 Certification of Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (1)
32.2 Certification of Principal Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (1)
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* Indicates a management contract or compensatory plan or arrangement.
** Schedules and other attachments to the indicated exhibit were omitted. The
Company agrees to furnish supplementally to the Commission upon request a
copy of any omitted schedules or attachments.
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form 10/A (File No. 0-26224) which became
effective on August 8, 1995.
(3) Incorporated by reference to the indicated exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
(4) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-98698) which became
effective on January 24, 1996.
(5) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-8 (File No. 333-06577) which became
effective on June 22, 1996.
(6) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-8 (File No. 333-58235) which became
effective on June 30, 1998.
(7) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed on February 3, 1998.
(8) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended June 30, 1999.
(9) Incorporated by reference to the indicated exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
(10) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended March 31, 2000.
(11) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended June 30, 2000.
(12) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed on January 8, 2001.
(13) Incorporated by reference to the indicated exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000 as
filed on April 2, 2001.
(14) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-8 (File No. 333-73512) which became
effective on November 16, 2001.
(15) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended September 20, 2002.
(16) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 2002.
(17) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed on March 25, 2003.
(18) Incorporated by reference to the indicated exhibit to the Company's
Definitive Proxy Statement on Form 14A filed on April 17, 2003.
(19) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended March 31, 2003.
(20) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-3 (File No. 333-106625).
(21) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed on October 23, 2003.
(22) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended September 30, 2003.
(b) Reports on Form 8-K.
On October 6, 2003, we filed with the Securities and Exchange Commission a
Report on Form 8-K under items 5 and 7 reporting the amendment of the 1999
Supply, Distribution and Collaboration Agreement between Integra LifeSciences
Corporation and ETHICON, Inc.
On October 31, 2003, we furnished with the Securities and Exchange Commission a
Report on Form 8-K under items 7 and 12 regarding our earnings for the quarter
ended September 30, 2003.
On November 12, 2003, we filed with the Securities and Exchange Commission a
Report on Form 8-K under item 9 regarding the conversion of restricted units
held by an executive officer of the company into shares of common stock of the
company and the executive officer's subsequent sale of some of those shares.
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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.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
Date: March 12, 2004 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.
Signature Title Date
----------- ------- ------
/s/ Stuart M. Essig President, Chief March 12, 2004
- ------------------------------ Executive Officer and
Stuart M. Essig Director (Principal
Executive Officer)
/s/ David B. Holtz Senior Vice President, March 12, 2004
- ------------------------------ Finance and Treasurer
David B. Holtz (Principal Financial and
Accounting Officer)
/s/ Richard E. Caruso Chairman of the Board March 12, 2004
- ------------------------------
Richard E. Caruso, Ph.D.
/s/ Keith Bradley Director March 12, 2004
- ------------------------------
Keith Bradley, Ph.D.
/s/ David Auth Director March 12, 2004
- ------------------------------
David Auth
/s/ Neal Moszkowski Director March 12, 2004
- ------------------------------
Neal Moszkowski
/s/ James M. Sullivan Director March 12, 2004
- ------------------------------
James M. Sullivan
-41-
REPORT OF INDEPENDENT AUDITORS
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, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of Integra
LifeSciences Holdings Corporation and Subsidiaries (the Company) at December 31,
2003 and 2002 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003, 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 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 25, 2004
F-1
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts
Years Ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
REVENUES
Product revenue ................................. $166,695 $ 112,625 $ 87,908
Other revenue ................................... 18,904 5,197 5,534
-------- -------- --------
Total revenue ............................... 185,599 117,822 93,442
COSTS AND EXPENSES
Cost of product revenue ......................... 70,597 45,772 36,014
Research and development ........................ 12,814 11,517 8,884
Selling and marketing ........................... 38,097 25,118 20,322
General and administrative ...................... 21,364 14,584 11,152
Amortization .................................... 3,080 1,644 2,784
-------- -------- --------
Total costs and expenses .................... 145,952 98,635 79,156
Operating income ................................ 39,647 19,187 14,286
Interest income ................................. 3,195 3,575 2,039
Interest expense ................................ (2,724) (40) (646)
Other income (expense), net ..................... 3,071 3 (392)
-------- -------- --------
Income before income taxes ...................... 43,189 22,725 15,287
Income tax expense (benefit) .................... 16,328 (12,552) (10,876)
-------- -------- --------
Net income....................................... $ 26,861 $ 35,277 $ 26,163
======== ======== ========
Basic net income per share .................. $ 0.92 $ 1.21 $ 1.08
Diluted net income per share ................. $ 0.88 $ 1.14 $ 0.94
Weighted average common shares outstanding:
Basic ........................................ 29,071 29,021 23,353
Diluted ...................................... 30,468 30,895 27,796
The accompanying notes are an integral part of these consolidated financial
statements
F-2
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
In thousands, except per share amounts
December 31,
-----------------------
ASSETS 2003 2002
--------- ---------
Current Assets:
Cash and cash equivalents ...................................... $ 78,979 $ 43,583
Short-term investments ......................................... 29,567 55,278
Trade accounts receivable, net of allowances
of $2,025 and $1,387 ....................................... 28,936 19,412
Inventories .................................................... 41,046 28,502
Prepaid expenses and other current assets ...................... 9,365 5,498
--------- ---------
Total current assets ....................................... 187,893 152,273
Noncurrent investments .......................................... 98,197 33,450
Property, plant, and equipment, net ............................. 20,072 16,556
Deferred income taxes, net ...................................... 21,369 25,218
Goodwill ........................................................ 26,683 22,073
Intangible assets, net .......................................... 52,435 23,091
Other assets .................................................... 5,877 2,007
--------- ---------
Total assets ..................................................... $ 412,526 $ 274,668
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade ........................................ $ 7,947 $ 3,764
Customer advances and deposits ................................. 977 7,908
Accrued expenses and other current liabilities ................. 11,694 10,249
--------- ---------
Total current liabilities .................................. 20,618 21,921
Long term debt .................................................. 119,257 --
Deferred revenue ................................................ 418 3,263
Other liabilities ............................................... 3,703 1,887
--------- ---------
Total liabilities ................................................ 143,996 27,071
Commitments and contingencies
Stockholders' Equity:
Common stock; $.01 par value; 60,000 authorized shares; 28,611
and 27,204 issued ........................................... 286 272
Additional paid-in capital ..................................... 286,716 292,007
Treasury stock, at cost; 219 and 106 shares .................... (5,236) (1,812)
Other .......................................................... (5) (15)
Accumulated other comprehensive income (loss):
Unrealized gain on available-for-sale securities ............ 63 861
Foreign currency translation adjustment ..................... 5,400 1,618
Minimum pension liability adjustment ........................ (1,232) (1,011)
Accumulated deficit ............................................ (17,462) (44,323)
--------- ---------
Total stockholders' equity ................................... 268,530 247,597
--------- ---------
Total liabilities and stockholders' equity ...................... $ 412,526 $ 274,668
========= =========
The accompanying notes are an integral part of these consolidated financial
statements
F-3
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Years Ended December 31,
------------------------------
2003 2002 2001
-------- -------- --------
OPERATING ACTIVITIES:
Net income ............................................... $ 26,861 $ 35,277 $ 26,163
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................ 7,030 5,020 5,959
In process research and development charge ............... 400 2,328 --
Deferred tax provision (benefit).......................... 12,357 (13,401) (12,085)
Amortization of discount and premium on investments ...... 2,013 2,142 298
Other, net ............................................... 802 188 443
Changes in assets and liabilities, net of business
acquisitions:
Accounts receivable .................................... (4,819) (2,109) 98
Inventories ............................................ (1,829) 1,153 (6,987)
Prepaid expenses and other current assets .............. (505) (1,131) (1,443)
Non-current assets ..................................... 480 185 1,858
Accounts payable, accrued expenses and other
liabilities ......................................... 2,537 (90) (941)
Customer advances and deposits ......................... (6,431) 2,565 4,020
Deferred revenue ....................................... (4,070) (142) (1,682)
-------- -------- --------
Net cash provided by operating activities ................ $ 34,826 $ 31,985 $ 15,701
-------- -------- --------
INVESTING ACTIVITIES:
Proceeds from the sales/maturities of investments ......... 178,483 35,402 3,000
Purchases of available for sale investments ............... (217,070) (39,113) (88,533)
Purchases of property and equipment ....................... (3,843) (2,254) (2,860)
Payment of product license fee ............................ (1,500) -- --
Cash used in business acquisitions, net of cash acquired .. (50,405) (25,015) (6,348)
-------- -------- --------
Net cash used in investing activities .................... $(94,335) $(30,980) $(94,741)
-------- -------- --------
FINANCING ACTIVITIES:
Repayment of note payable and bank loans................... -- (3,600) (13,652)
Proceeds from the issuance of common stock, net ........... -- -- 113,433
Proceeds from exercised stock options and warrants ........ 14,152 3,323 9,676
Purchases of treasury stock ............................... (35,402) (1,761) --
Proceeds from issuance of convertible notes, net........... 115,923 -- --
-------- -------- --------
Net cash provided by (used in) financing activities ...... $ 94,673 $ (2,038) $ 109,457
Effect of exchange rate changes on cash and cash equivalents .. 232 98 15
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .......... $ 35,396 (935) 30,432
Cash and cash equivalents at beginning of period .............. 43,583 44,518 14,086
-------- -------- --------
Cash and cash equivalents at end of period .................... $ 78,979 $ 43,583 $ 44,518
======== ======== ========
Cash paid during the year for interest ........................ $ 1,476 $ 20 $ 778
Cash paid during the year for income taxes .................... 1,309 1,435 928
Supplemental non-cash disclosure:
Property and equipment purchases included in liabilities $ 2,000 -- --
The accompanying notes are an integral part of these consolidated financial
statements
F-4
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
In thousands Accumulated
Additional Other
Preferred Common Treasury Paid-In Comprehensive Accumulated Total
Stock Stock Stock Capital Other Income (Loss) Deficit Equity
--------- --------- --------- ---------- --------- ------------- ----------- ----------
Balance, December 31, 2000 ........... 2 173 (180) 160,134 (66) (553) (105,729) 53,781
========= ========= ========= ========== ========= ============= =========== ==========
Net income ........................... 26,163 26,163
Unrealized gains on investments ...... 333 333
Foreign currency translation ........ (319) (319)
---------
Total comprehensive income..... $ 26,177
=========
Conversion of 100 shares of Series B
Preferred Stock into 2,618 shares of
common stock ....................... (1) 26 (25) --
Public offering of 4,748 shares of
common stock ....................... 48 113,385 113,433
Issuance of 879 shares of common stock
through employee benefit plans ..... 9 129 5,998 (34) 6,102
Warrants exercised for cash .......... 5 3,611 3,616
Issuance of 10 shares of common stock in
acquisition ........................ 276 276
Amortization of unearned compensation 29 29
Tax benefit related to stock option
exercises ......................... 642 642
Balance, December 31, 2001 ........... 1 261 (51) 284,021 (37) (539) (79,600) $ 204,056
======== ========= ========= ========== ========= ============= =========== ==========
Net income ........................... 35,277 35,277
Unrealized losses on investments ..... 624 624
Foreign currency translation ......... 2,394 2,394
Minimum pension liability adjustment . (1,011) (1,011)
---------
Total comprehensive income ..... $ 37,284
=========
Conversion of 54 shares of Series C
Preferred Stock into 600 shares of
common stock .......................... (1) 6 (5) --
Issuance of 475 shares of common stock
through employee benefit plans ......... 5 3,288 3,293
Amortization of unearned compensation .... 9 22 31
Tax benefit related to stock option
exercises ............................. 4,694 4,694
Repurchase 100 shares of common stock .... (1,761) (1,761)
Balance, December 31, 2002 ............... -- $ 272 $ (1,812) $ 292,007 $ (15) $ 1,468 $ (44,323) $ 247,597
==== ========= ========= ========== ========= ============= =========== ==========
Net income................................ 26,861 26,861
Realized gains on investments............. (210) (210)
Unrealized losses on investments ......... (588) (588)
Foreign currency translation.............. 3,673 3,673
Minimum pension liability adjustment ..... (112) (112)
---------
Total comprehensive income......... $ 29,624
=========
Issuance of 1,788 shares of common stock
through employee benefit plans.......... 4 31,978 (17,880) 14,102
Warrants exercised for cash............... 50 50
Conversion of 1,000 Restricted Units into
1,000 shares of common stock .......... 10 (10) --
Amortization of unearned compensation..... 16 10 26
Tax benefit related to stock option
exercises.............................. 12,533 12,533
Repurchase 1,503 shares of common stock... 35,402) (35,402)
Balance, December 31, 2003 ........... $ -- $ 286 $ (5,236) $ 286,716 $ (5) $ 4,231 $ (17,462) $ 268,530
========= ========= ========= ========== ========= ============= =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
F-5
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Integra LifeSciences Holdings Corporation (the "Company") develops,
manufactures, and markets medical devices for use in neuro-trauma, neurosurgery,
plastic and reconstructive surgery, and general surgery. The Company's product
lines include innovative tissue repair products that incorporate the Company's
proprietary absorbable implant technology, such as the DuraGen(R) Dural Graft
Matrix, the NeuraGen(TM) Nerve Guide, and the INTEGRA(R) Dermal Regeneration
Template, as well as, more traditional medical devices, such as monitoring and
drainage systems, surgical instruments, and fixation systems.
The Company sells its products directly through various sales forces and through
a variety of other distribution channels.
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 to 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 is 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, 2003 and
2002 were as follows:
Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
2003 (in thousands)
- -----
Marketable Securities, current
Corporate Debt Securities.......... $ 23,761 $ 21 $ (1) $ 23,781
U.S. Government Debt Securities.... 5,550 1 -- 5,551
Other Securities................... 235 -- -- 235
------- ------- ------- -------
Total marketable securities, current $ 29,546 $ 22 $ (1) $ 29,567
Marketable Securities, non-current
Corporate Debt Securities.......... $ 56,811 $ 98 $ (105) $ 56,804
U.S. Government Debt Securities.... 41,341 58 (6) 41,393
------- ------- ------- -------
Total marketable securities, non-current $ 98,152 $ 156 $ (111) $ 98,197
2002:
- -----
Marketable securities, current..... $54,755 $ 525 $ (2) $ 55,278
Marketable securities, non-current. 33,112 347 (9) 33,450
------- ------- -------- --------
$87,867 $ 872 $ (11) $ 88,728
The maturity dates for marketable debt securities classified as current are less
than one year. The maturity dates for marketable debt securities classified as
non-current are less than 60 months and less than 40 months as of December 31,
2003 and 2002, respectively.
F-6
The fair value of the Company's $120.0 million principal amount 2 1/2%
contingent convertible subordinated notes outstanding at December 31, 2003 was
approximately $116.7 million.
The carrying values of all other financial instruments were not materially
different from their estimated fair values.
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, the value determined by the first-in,
first-out method, or market. Inventories consisted of the following:
December 31,
2003 2002
---------- ----------
(in thousands)
Finished goods .......................... $ 26,239 $ 17,497
Work in process ......................... 5,069 3,019
Raw materials ........................... 9,738 7,986
---------- ----------
$ 41,046 $ 28,502
At each balance sheet date, the Company evaluates ending inventories for excess
quantities, obsolescence or shelf-life expiration. This evaluation includes
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.
F-7
Property, plant and equipment balances and corresponding lives were as follows:
December 31,
2003 2002 Lives
---------- ---------- ---------------
(in thousands)
Land ............................................ $ 892 $ 511
Buildings and leasehold improvements ............ 12,082 11,877 2 - 40 years
Machinery and equipment ......................... 19,498 16,492 3 - 15 years
Furniture and fixtures .......................... 3,277 3,561 5 - 7 years
Construction in progress ........................ 2,316 500
---------- ----------
38,065 32,941
Less: Accumulated depreciation .................. (17,993) (16,385)
---------- ----------
$ 20,072 $ 16,556
Depreciation expense associated with property, plant and equipment was $3.9
million, $3.4 million, and $3.2 million, in 2003, 2002, and 2001 respectively.
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 is no longer amortized, but is reviewed for
impairment at the reporting unit level annually, or more frequently if
impairment indicators arise.
Upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets", the Company reassessed the useful lives of its
existing identifiable intangible assets and determined that they continue to be
appropriate. The Company does not have any indefinite life intangible assets.
If the Company had applied the non-amortization provisions of Statement 142 for
all of 2001, net income would have been as follows:
2001
--------
(in thousands)
Net income, as reported ................................... $ 26,163
Effect of goodwill and assembled workforce amortization ... 858
--------
Net income, as adjusted ................................... $ 27,021
Basic net income per share, as reported ................... $ 1.08
Effect of goodwill and assembled workforce amortization ... .03
--------
Basic net income per share, as adjusted ................... $ 1.11
Diluted net income per share, as reported ................. $ 0.94
Effect of goodwill and assembled workforce amortization ... .03
--------
Diluted net income per share, as adjusted ................. $ 0.97
The Company's assessment of the recoverability of goodwill is based upon a
comparison of the carrying value of goodwill with its estimated fair value. The
Company updated its impairment review for goodwill as of June 30, 2003 and
determined that its goodwill was not impaired.
F-8
Changes in the carrying amount of goodwill in 2003 and 2002 were as follows:
2003 2002
---------- ---------
(in thousands)
Goodwill, net of accumulated amortization beginning of year ....... $ 22,073 $ 14,627
Reclassification of net assembled workforce intangible ............ -- 1,275
Acquisitions ...................................................... 3,321 5,775
Adjustments to previously recorded pre-acquisition
income tax contingencies ....................................... -- (484)
Other, net ....................................................... (29) 64
Foreign currency translation ...................................... 1,318 816
---------- ---------
Goodwill, end of year ............................................. $ 26,683 $ 22,073
========== =========
The components of the Company's identifiable intangible assets were as follows:
December 31, 2003 December 31, 2002
Weighted ---------------------- ----------------------
Average Accumulated Accumulated
Life Cost Amortization Cost Amortization
-------- -------- ------------ -------- ------------
(in thousands)
Completed technology ........... 15 years $15,062 $ (3,337) $ 13,165 $ (2,380)
Customer relationships ......... 20 years 16,755 (2,053) 4,661 (1,085)
Trademarks / brand names ....... 38 years 25,235 (1,017) 7,151 (445)
All other ...................... 10 years 2,909 (1,119) 2,601 (577)
-------- ------------ -------- ------------
$59,961 $ (7,526) $ 27,578 $ (4,487)
Accumulated amortization .................... (7,526) (4,487)
-------- --------
$52,435 $ 23,091
======== ========
Annual amortization expense is expected to approximate $3.3 million in 2004,
$3.1 million in 2005, $3.0 million in 2006, $2.8 million in 2007, and $2.5
million in 2008. Identifiable intangible assets are initially recorded at fair
market value at the time of acquisition generally using an income or cost
approach.
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.
INTEGRA FOUNDATION
The Company may periodically, at the discretion of its Board of Directors, make
a contribution to the Integra Foundation, Inc. The Integra Foundation was
incorporated in 2002 exclusively for charitable, educational, and scientific
purposes and qualifies under IRC 501(c)(3) as an exempt private foundation.
Under its charter, the Integra Foundation engages in activities that promote
health, the diagnosis and treatment of disease, and the development of medical
science through grants, contributions and other appropriate means. The Integra
Foundation is a separate legal entity and is not a subsidiary of the Company.
Therefore, its results are not included in these consolidated financial
statements. During 2003, the Company contributed $2.0 million to the Integra
Foundation. This contribution is included in general and administrative
expenses.
F-9
DERIVATIVES
The Company reports all derivatives at their estimated fair value and records
changes in fair value in current earnings or defers these changes until a
related hedged item is recognized in earnings, depending on the nature and
effectiveness of the hedging relationship. The designation of a derivative as a
hedge is made on the date the derivative contract is executed. On an ongoing
basis, the Company assesses whether each derivative continues to be highly
effective in offsetting changes in the fair value or cash flows of hedged items.
If and when a derivative is no longer expected to be highly effective, the
Company discontinues hedge accounting. All hedge ineffectiveness is included in
current period earnings in other income (expense), net.
The Company documents all relationships between hedged items and derivatives.
The Company's overall risk management strategy describes the circumstances under
which it may undertake hedge transactions and enter into derivatives. The
objective of the Company's current risk management strategy is to hedge the risk
of changes in fair value attributable to interest rate risk with respect to a
portion of fixed rate debt.
The determination of fair value of derivatives is based on valuation models that
use observable market quotes or projected cash flows and the Company's view of
the creditworthiness of the derivative counterparty.
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). These currency translation adjustments are not
currently adjusted for income taxes as they relate to permanent investments in
non-U.S. subsidiaries. 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. 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.
F-10
SHIPPING AND HANDLING FEES AND COSTS
Amounts billed to customers for shipping and handling are included in product
revenues. The related shipping and freight charges incurred by the Company are
included in cost of product revenues. Distribution and handling costs of
approximately $2.6 million, $1.5 million, and $1.5 million are recorded in
selling and marketing expense during 2003, 2002, and 2001, respectively.
PRODUCT WARRANTIES
Certain of the Company's medical devices, including monitoring systems and
neurosurgical systems, are reusable and are designed to operate over long
periods of time. These products are sold with warranties generally 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,
2003 2002
-------- --------
(in thousands)
Beginning balance .................. $ 216 $ 226
Liability acquired through acquisition 95 --
Charged to expense ................. 209 257
Deductions ......................... (151) (267)
-------- --------
Ending balance ..................... $ 369 $ 216
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.
The Company recorded $400,000 and $2.3 million of in-process research and
development in connection with acquisitions during 2003 and 2002, respectively.
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".
F-11
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 and basic and diluted net income per
share would have been as follows:
2003 2002 2001
-------- -------- --------
(in thousands, except per share amounts)
Net income:
As reported ...................................... $ 26,861 $ 35,277 $ 26,163
Less: Total stock-based employee compensation
expense determined under the fair
value-based method for all awards, net
of related tax effects ..................... (5,537) (4,774) (5,911)
-------- -------- --------
Pro forma ........................................ $ 21,324 $ 30,503 $ 20,252
Net income per share:
Basic
As reported ...................................... $ 0.92 $ 1.21 $ 1.08
Pro forma ........................................ $ 0.73 $ 1.05 $ 0.82
Diluted
As reported ...................................... $ 0.88 $ 1.14 $ 0.94
Pro forma ........................................ $ 0.70 $ 1.03 $ 0.75
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.
The Company used the following weighted-average assumptions for the valuation
of stock option grants:
2003 2002 2001
---------- ---------- ----------
Dividend yield ....................... 0% 0% 0%
Expected volatility .................. 61% 65% 80%
Risk free interest rate .............. 2.92% 3.00% 4.50%
Expected life of option from
vesting date ....................... 4.5 years 4.5 years 4.5 years
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents, which are held
at major financial institutions, investment-grade marketable debt securities and
trade receivables. The Company's products are sold on an uncollateralized basis
and on credit terms based upon a credit risk assessment of each customer.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent liabilities, and the reported amounts of revenues and
expenses. Significant estimates affecting amounts reported or disclosed in the
consolidated financial statements include allowances for doubtful accounts
receivable and sales returns, net realizable value of inventories, estimates of
projected cash flows and discount rates used to value and test impairments of
long-lived assets, depreciation and amortization periods for long-lived assets,
valuation allowances recorded against deferred tax assets, loss contingencies,
and in-process research and development charges. 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.
F-12
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
FASB Statement No. 87, 88 and 106. This Statement revises employers' disclosures
about pension plans and other postretirement benefit plans. The Company will
adopt the disclosure requirements of SFAS 132 (revised 2003) in 2004, as the
Company's only pension plan is a non-U.S. plan.
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Instruments with Characteristics of both
Liabilities and Equity", which establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company's adoption of the initial recognition and initial measurement provisions
of SFAS 150 did not have a material impact on the Company's results of
operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of SFAS 149 did not have a material impact on the Company's
results of operations or financial position.
In November 2002, the Emerging Issues Task Force (EITF) issued EITF 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables". EITF 00-21
addresses when and how an arrangement involving multiple deliverables should be
divided into separate units of accounting. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company will continue to evaluate the impact of EITF 00-21 on revenue
arrangements it may enter into in the future.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Among other things, SFAS 145 eliminates the requirement that gains and losses
related to extinguishments of debt be classified as extraordinary items.
Accordingly, the Company reclassified the $256,000 loss on the early retirement
of debt incurred in 2001 to other income/(expense), net.
3. ACQUISITIONS
In November 2003, the Company acquired all of the outstanding capital stock of
Spinal Specialties, Inc. for $6.0 million in cash including expenditures
associated with the acquisition and subject to a working capital adjustment. At
December 31, 2003, we have accrued $380,000 for the estimated amount to be paid
for the working capital adjustment. In connection with this acquisition, the
Company recorded approximately $5.4 million of goodwill and intangible assets.
The acquired intangible assets consisted primarily of trade name, technology and
customer relationships and are being amortized on a straight-line basis over
lives ranging from 3 to 15 years.
Spinal Specialties markets its products primarily to anesthesiologists and
interventional radiologists through an in-house telemarketing team and a network
of distributors. Spinal Specialties' products include the OsteoJect(TM) Bone
Cement Delivery System and the ACCU-DISC(TM) Pressure Monitoring System.
Physicians use these products in a variety of spinal, orthopedic and pain
management procedures.
In August 2003, the Company acquired substantially all of the assets of Tissue
Technologies, Inc., the manufacturer and distributor of the UltraSoft(TM) line
of implants for soft tissue augmentation of the facial area. The Company paid
$0.6 million in cash and is obligated to pay the seller up to an additional $1.5
million in contingent consideration based upon a multiple of the Company's sales
of the UltraSoft product in the third year following the acquisition. The
Company markets the UltraSoft products directly to cosmetic and reconstructive
surgeons through its plastic and reconstructive surgery sales force and through
a network of distributors. The acquired assets consist primarily of technology,
which is being amortized on a straight-line basis over 10 years, and goodwill.
Any future contingent consideration paid to the seller is expected be recorded
as additional goodwill.
F-13
In March 2003, the Company acquired all of the outstanding capital stock of J.
Jamner Surgical Instruments, Inc. (doing business as JARIT(R) Surgical
Instruments) ("JARIT") for $43.5 million in cash, including expenditures
associated with the acquisition and net of $2.1 million of cash acquired.
JARIT markets 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. The acquisition of JARIT has broadened
Integra's existing customer base and surgical instrument product offering and
has provided an opportunity to achieve operating costs savings, including the
procurement of Integra's Ruggles(TM) and Padgett(TM) instruments products
directly from the instrument manufacturers.
In connection with this acquisition, the Company recorded approximately $29.1
million of intangible assets, consisting primarily of trade name and customer
relationships, which are being amortized on a straight-line basis over lives
ranging from 5 to 40 years.
In December 2002, the Company acquired the neurosurgical shunt and epilepsy
monitoring business of the Radionics division of Tyco Healthcare Group for $3.7
million in cash, including expenditures associated with the acquisition. The
manufacturing of the acquired product lines was transferred to Integra's
manufacturing facility located in Biot, France. This acquisition broadened
Integra's neurosurgical product line offering and customer base and increased
capacity utilization at the Company's Biot facility.
In October 2002, the Company acquired all of the outstanding capital stock of
Padgett Instruments, Inc., an established marketer of instruments used in
reconstructive and plastic surgery, for $9.6 million in cash, including
expenditures associated with the acquisition. For more than 40 years, Padgett
has been providing high quality instruments to meet the needs of the plastic and
reconstructive surgeon and, as a result, has become one of the most recognized
names in the plastic and reconstructive surgery market. Approximately $5.4
million of the purchase price was allocated to the trademarks and trade name of
the acquired business, which are being amortized on a straight-line basis over
40 years.
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
expenditures 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 manufacturing facility located in Biot, France. The $4.2
million fair value assigned to the land, building and equipment in Biot was
determined based on a third party appraisal.
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. These termination and closure costs were
accrued as part of the purchase price because they provided no future benefit to
the Company's operations.
In July 2002, the Company 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 Company acquired Signature Technologies to gain the capability of
developing and manufacturing metal implants for strategic partners and for
direct sale by Integra. The purchase price consisted of $2.9 million in cash
(including expenditures associated with the acquisition), $0.5 million of
deferred consideration that was paid in 2003, and royalties on future sales of
products to be developed. Signature Technologies currently manufactures cranial
fixation systems primarily for sale under a single contract manufacturing
agreement that expires in June 2004.
In connection with this acquisition, the Company recorded a $1.2 million
in-process research and development charge of 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
F-14
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. The value of the in-process research and development charge was
estimated 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, the Company acquired all of the capital stock of
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 (including expenditures
associated with the acquisition), a $3.6 million note that was repaid in 2002,
and 10,000 shares of Integra common stock. This acquisition extended Integra's
reach to the neurologist and allied fields and further into products used for
the diagnosis and monitoring of neurological disorders. In 2003, the Company
relocated the NeuroSupplies operations to its facility in Pembroke,
Massachusetts.
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 expenditures 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 expenditures 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 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.
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.
F-15
The following table summarizes the fair value of the assets acquired and
liabilities assumed as a result of 2003 and 2002 acquisitions:
(All amounts in thousands)
Spinal Jarit Tissue
2003 Acquisitions Specialties Instruments Technologies
- ----------------- ------------- ----------- -----------
Current assets ....................... $ 1,944 $ 17,498 $ 81
Property, plant and equipment ........ 307 1,285 88
Intangible assets .................... 2,300 29,091 281
Goodwill ............................. 3,070 -- 251
Other non-current assets ............. -- 104 --
------------- ----------- -----------
Total assets acquired ............. 7,621 47,978 701
Current liabilities .................. 358 2,357 76
Deferred tax liabilities ............. 836 -- --
------------- ----------- -----------
Total liabilities assumed ......... 1,194 2,357 76
Net assets acquired .................. $ 6,427 $ 45,621 $ 625
2002 Acquisitions Radionics Padgett NMT Neuro Signature
- ----------------- --------- --------- --------- ---------
Current assets ....................... $ 977 $ 1,895 $ 5,977 $ 490
Property, plant and equipment ........ 75 65 4,138 1,165
Intangible assets .................... 391 6,437 -- 626
Goodwill ............................. 2,028 3,658 -- --
In-process research and development .. -- -- -- 1,177
Other non-current assets ............. 18 281 -- --
--------- --------- --------- ---------
Total assets acquired ............. 3,489 12,336 $10,115 3,458
Current liabilities .................. 10 200 3,789 76
Deferred tax liabilities ............. -- 2,524 665 --
--------- --------- --------- ---------
Total liabilities assumed ......... 10 2,724 4,454 76
Net assets acquired .................. $ 3,479 $ 9,612 $ 5,661 $ 3,382
The 2003 purchase price allocations are preliminary.
The goodwill acquired in the Tissue Technologies and Radionics acquisitions 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
2003 and 2002 had been completed as of January 1, 2002. 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 increased
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.
2003 2002
-------- --------
(in thousands)
Total revenue ......................................... $195,327 $168,915
Net income ............................................ 27,469 41,987
Basic net income per share ............................ $ 0.94 $ 1.45
Diluted net income per share .......................... $ 0.90 $ 1.36
In December 2003, the Company acquired the assets of Reconstructive
Technologies, Inc.("RTI") for approximately $400,000 in cash and agreed to make
certain future performance-based payments for the RTI assets. Any future
contingent consideration paid to the seller is expected to be recorded as a
technology-based intangible asset. RTI is the developer of the Automated Cyclic
Expansion System (ACE System(TM)), a tissue expansion device. RTI's technology
encompasses a sophisticated and compact pump that produces a cyclic force when
attached to ballooning tissue expanders. RTI's ACE System technology rapidly
expands tissue by stimulating the body's natural response to physical stress on
the skin. Because the ACE System is not approved by the FDA for sale and the
Company did not acquire any assets other than technology and intellectual
F-16
property underlying the ACE System, the Company recorded the entire acquisition
price as an in-process research and development charge in the fourth quarter of
2003. This transaction was accounted for as an asset purchase because the
acquired assets did not constitute a business under Statement 141.
In September 2002, the Company acquired certain assets, including the
NeuroSensor(TM) monitoring system and rights to certain intellectual property,
from Novus Monitoring Limited of the United Kingdom for $3.7 million in cash
(including expenditures associated with the acquisition), an additional $1.5
million to be paid upon Novus' achievement of a product development milestone,
and up to an additional $2.5 million payable based upon revenues from Novus'
products. As part of the consideration paid, Novus has also agreed to conduct
certain clinical studies on the NeuroSensor(TM) system, continue development of
a next generation, advanced neuromonitoring product, and design and transfer to
Integra a validated manufacturing process for these products.
The assets acquired from Novus were accounted for as an asset purchase because
the acquired assets did not constitute a business under Statement 141. The
initial $3.7 million purchase price was allocated as follows (in thousands):
Prepaid research and development expense ......... $ 771
Other assets ..................................... 151
Intangible assets ................................ 1,663
In-process research and development .............. 1,151
The acquired intangibles assets consisted primarily of technology-related
intangible assets, which are being amortized on a straight-line basis over lives
ranging from 3 to 15 years. The prepaid research and development expense
represents the estimated fair value of future services to be provided by Novus
under the development agreement. The $1.2 million in-process research and
development charge represents the value associated with the development of a
next generation neuromonitoring system. The value of the in-process research and
development was estimated with the assistance of a third party appraiser using
probability weighted cash flow projections with factors for successful
development ranging from 15% to 20% and a 15% discount rate.
4. DEBT
In March and April 2003, the Company completed a $120.0 million private
placement of contingent convertible subordinated notes due 2008.
The notes bear interest at 2.5 percent per annum, payable semiannually. The
Company will pay additional interest ("Contingent Interest") if, at thirty days
prior to maturity, Integra's common stock price is greater than $37.56 per
share. The Contingent Interest will be payable for each of the last three years
the notes remain outstanding in an amount equal to the greater of i) 0.50% of
the face amount of the notes and ii) the amount of regular cash dividends paid
during each such year on the number of shares of common stock into which each
note is convertible. The Company recorded a $365,000 liability related to the
estimated fair value of the Contingent Interest obligation at the time the notes
were issued. The fair value of the Contingent Interest obligation is marked to
its fair value at each balance sheet date, with changes in the fair value
recorded to interest expense. At December 31, 2003, the estimated fair value of
the Contingent Interest obligation was $458,000.
Debt issuance costs totaled $4.1 million and are being amortized using the
straight-line method over the five-year term of the notes.
Holders may convert their notes into shares of Integra common stock at an
initial conversion price of $34.15 per share, upon the occurrence of certain
conditions, including when the market price of Integra's common stock on the
previous trading day is more than 110% of the conversion price.
The notes are general, unsecured obligations of the Company and will be
subordinate to any future senior indebtedness of the Company. The Company cannot
redeem the notes prior to their maturity. Holders of the notes may require the
Company to repurchase the notes upon a change in control.
F-17
Concurrent with the issuance of the notes, the Company used approximately $35.3
million of the proceeds to purchase 1.5 million shares of its common stock.
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 a loss on the early retirement of debt of $256,000, which is
included in other income/(expense), net.
5. INTEREST RATE SWAP AGREEMENT
In August 2003, the Company entered into an interest rate swap agreement with a
$50 million notional amount to hedge the risk of changes in fair value
attributable to interest rate risk with respect to a portion of its fixed rate
contingent convertible subordinated notes. The Company receives a 2 1/2% fixed
rate from the counterparty, payable on a semi-annual basis, and pays to the
counterparty a floating rate based on 3-month LIBOR minus 35 basis points,
payable on a quarterly basis. The floating rate resets each quarter. The
interest rate swap agreement terminates on March 15, 2008, subject to early
termination upon the occurrence of certain events, including redemption or
conversion of the contingent convertible notes.
The interest rate swap agreement qualifies as a fair value hedge under SFAS No.
133, as amended, "Accounting for Derivative Instruments and Hedging Activities".
Accordingly, the interest rate swap is recorded at fair value and changes in
fair value are recorded in other income (expense), net. The net amount to be
paid or received under the interest rate swap agreement is recorded as a
component of interest expense. Interest expense for the year ended December 31,
2003 reflects a $330,000 reduction in interest expense associated with the
interest rate swap. Our effective interest rate on the hedged portion of the
notes was 0.79% as of December 31, 2003.
The net fair value of the interest rate swap at inception was $767,000. At
December 31, 2003, the net fair value of the interest rate swap increased
$305,000 to $1.1 million and is included in other liabilities. In connection
with this fair value hedge transaction, the Company recorded a $433,000 net
decrease in the carrying value of its contingent convertible notes. The $128,000
net difference between changes in the fair value of the interest rate swap and
the contingent convertible notes represents the ineffective portion of the
hedging relationship, and this amount is recorded in other income.
6. COMMON AND PREFERRED STOCK
PREFERRED STOCK TRANSACTIONS
The Company is authorized to issue up to 15,000,000 shares of preferred stock in
one or more series, of which 2,000,000 shares have been designated as Series A,
120,000 shares have been designated as Series B, and 54,000 shares have been
designated as Series C.
On March 29, 2000, the Company issued 54,000 shares of Series C Convertible
Preferred Stock (Series C Preferred) and warrants to purchase 300,000 shares of
common stock at $9.00 per share to affiliates of Soros Private Equity Partners
LLC (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 warrants issued with the Series C Preferred were
exercised in December 2001 for proceeds of $2.7 million.
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.
F-18
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 2003 and 2002, respectively, the Company repurchased 1.5 million and 100,000
shares of its common stock for $35.4 million and $1.8 million.
7. STOCK PURCHASE AND AWARD PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Company received stockholder approval for its Employee Stock Purchase Plan
(ESPP) in May 1998. The purpose of the ESPP is to provide eligible employees of
the Company with the opportunity to acquire shares of common stock at periodic
intervals by means of accumulated payroll deductions. Under the ESPP, a total of
500,000 shares of common stock have been reserved for issuance. These shares
will be made available either from the Company's authorized but unissued shares
of common stock or from shares of common stock reacquired by the Company as
treasury shares. At December 31, 2003, approximately 196,000 shares remain
available for purchase under the ESPP.
STOCK OPTION PLANS
As of December 31, 2003 the Company had stock options outstanding under seven
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), the
2001 Equity Incentive Plan (the 2001 Plan), and the 2003 Equity Incentive Plan
(the 2003 Plan, and collectively, the Plans). No new options may be granted
under the 1993 Plan.
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, 2,000,000
shares under each of the 1999 Plan, the 2000 Plan and the 2001 Plan, and
2,500,000 shares under the 2003 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, 2001 Plan, and 2003 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.
F-19
Option activity for all the Plans was as follows:
2003 2002 2001
--------------------- --------------------- ---------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Options Ex. Price Options Ex. Price Options Ex. Price
--------------------- ---------------------- ---------------------
(shares in thousands)
Options outstanding at
January 1, ........... 4,295 $12.15 4,261 $10.79 4,519 $ 7.74
Granted ................. 430 $24.81 618 $17.73 748 $24.61
Exercised ............... (1,726) $ 7.70 (425) $ 6.15 (836) $ 6.49
Cancelled ............... (115) $17.40 (159) $13.39 (170) $11.88
Options outstanding at
December 31, ......... 2,884 $16.49 4,295 $12.15 4,261 $10.79
Options exercisable at
December 31, .......... 1,495 $13.65 2,380 $ 8.75 1,986 $ 6.89
At December 31, 2003, there were 3,436,000 shares available for grant under the
Plans.
The following table summarizes information about stock options outstanding as of
December 31, 2003:
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------
As of Wtd. Avg. Wtd. Avg. As of Wtd. Avg.
Range Of Dec. 31, Exercise Remaining Dec. 31 Exercise
Exercise Prices 2003 Price Contractual Life 2003 Price
----------------- ---------- ------------ -------------------- ---------- -----------
(shares in thousands
$ 3.38 - $ 6.00 478 $ 4.85 1.5 years 478 $ 4.85
$ 6.28 - $12.00 496 $ 10.00 4.9 years 226 $ 8.85
$12.19 - $17.00 490 $ 14.20 3.4 years 300 $ 14.13
$17.07 - $23.00 630 $ 18.91 4.9 years 156 $ 18.31
$23.58 - $32.42 790 $ 27.12 4.5 years 335 $ 26.87
------- -------- ----------- ------- --------
2,884 $ 16.49 4.0 years 1,495 $ 13.65
The weighted average fair market value of options granted in 2003, 2002 and 2001
was $13.01, $9.57, and $16.14 per share, respectively.
RESTRICTED UNITS
In December 2000, the Company issued 1,250,000 restricted units (Restricted
Units) under the 2000 Plan as a fully vested equity based bonus to the Company's
President and Chief Executive Officer (Executive) in connection with the
extension of his employment agreement. Each Restricted Unit represents the right
to receive one share of the Company's common stock. The Executive has demand
registration rights under the Restricted Units issued.
The Executive received 1,000,000 Restricted Units in December 1997, each of
which entitles him to receive one share of the Company's common stock. The
Restricted Units issued in December 1997 were not issued under any of the Plans.
In November 2003, the 1997 restricted units were converted into 1,000,000 shares
of the Company's common stock.
No other stock-based awards are outstanding under any of the Plans.
F-20
8. RETIREMENT BENEFIT PLANS
DEFINED BENEFIT PLAN
The Company maintains a defined benefit pension plan in the United Kingdom
covering certain current and former employees. This plan is no longer open to
new participants. Net periodic benefit costs for this defined benefit pension
plan included the following amounts:
2003 2002 2001
-------- -------- --------
(in thousands)
Service cost ..................................... $ 88 $ 122 $ 115
Interest cost .................................... 397 355 332
Expected return on plan assets ................... (330) (331) (356)
Recognized net actuarial loss .................... 116 85 7
-------- -------- --------
Net periodic benefit cost ..................... $ 271 $ 231 $ 98
The following weighted average assumptions were used to develop net periodic
benefit cost and the actuarial present value of projected benefit obligations:
2003 2002 2001
-------- -------- --------
Discount rate .................................... 5.4% 5.5% 5.9%
Expected return on plan assets ................... 6.2% 6.5% 6.5%
Rate of compensation increase .................... 3.3% 3.8% 4.1%
The following sets forth the change in benefit obligations and change in plan
assets at December 31, 2003 and 2002 and the accrued benefit cost:
December 31,
2003 2002
-------- --------
(in thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year .......................... $ 6,803 $ 5,733
Service cost ................................................... 88 123
Interest cost .................................................. 397 356
Participant contributions ...................................... 36 33
Actuarial (gain) loss .......................................... 857 30
Benefits paid .................................................. (151) (105)
Effect of foreign currency exchange rates ...................... 802 633
-------- --------
Benefit obligation, end of year ................................ $ 8,832 $ 6,803
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning of year ................... $ 5,068 $ 5,153
Actual return on plan assets ................................... 881 (669)
Employer contributions ......................................... 211 153
Benefits paid .................................................. (151) (105)
Participant contributions ...................................... 36 33
Effect of foreign currency exchange rates ...................... 601 503
-------- --------
Plan assets at fair value, end of year ......................... $ 6,646 $ 5,068
RECONCILIATION OF FUNDED STATUS
Funded status, Benefit obligation in excess of plan assets ........ $(2,186) $(1,735)
Unrecognized net actuarial loss ................................... 2,416 2,001
Adjustment to recognize minimum liability ......................... (1,804) (1,444)
-------- --------
Accrued benefit cost .............................................. $(1,574) $(1,178)
The accrued benefit liability recorded at December 31, 2003 and 2002 is included
in other liabilities.
DEFINED CONTRIBUTION PLAN
The Company also has various defined contribution savings plans that cover
substantially all employees in the United States, the United Kingdom, and Puerto
Rico. The Company matches a certain percentage of each employee's contributions
as per the provisions of the plans. Total contributions by the Company to the
plans were $483,000, $575,000 and $411,000 in 2003, 2002 and 2001, respectively.
F-21
9. LEASES
The Company leases administrative, manufacturing, research and distribution
facilities and various manufacturing, office and transportation equipment
through operating lease agreements.
In November 1992, a corporation whose shareholders are trusts, whose
beneficiaries include family members of the Company's Chairman, acquired from
independent third parties a 50% interest in the general partnership from which
the Company leases its manufacturing facility in Plainsboro, New Jersey. The
lease provides for a rent escalation of 8.5% in 2007 and expires in October
2012.
In June 2000, the Company signed a ten-year agreement to lease certain
production equipment from a corporation whose sole stockholder is a general
partnership, for which the Company's Chairman is a partner and the President.
Under the terms of the lease agreement, the Company paid $90,000 to the related
party lessor in 2003, 2002 and 2001.
Future minimum lease payments under operating leases at December 31, 2003 were
as follows:
Related Third
Parties Parties Total
--------- --------- ---------
(in thousands)
2004 ............................ 321 1,860 2,181
2005 ............................ 321 1,378 1,699
2006 ............................ 321 894 1,215
2007 ............................ 324 854 1,178
2008 ............................ 341 364 705
Thereafter ...................... 999 1,090 2,089
--------- --------- ---------
Total minimum lease payments..... 2,627 6,440 9,067
========= ========= =========
Total rental expense in 2003, 2002, and 2001 was $2.9 million, $2.0 million, and
$1.9 million, respectively, and included $321,000, $321,000, and $306,000, in
related party expense, respectively.
10. INCOME TAXES
The income tax expense (benefit) consisted of the following:
2003 2002 2001
-------- -------- --------
(in thousands)
Current:
Federal .............................. $ 972 $ -- $ 208
State ................................ 2,470 1,276 446
Foreign .............................. 529 (427) 555
--------- --------- ---------
Total current .......................... 3,971 849 1,209
Deferred:
Federal .............................. $12,800 $(13,671) $(10,774)
State ................................ 83 373 (739)
Foreign .............................. (526) (103) (572)
--------- --------- ---------
Total deferred ......................... 12,357 (13,401) (12,085)
Income tax expense (benefit) ........... $ 16,328 $(12,552) $(10,876)
========= ========= =========
F-22
The temporary differences that give rise to deferred tax assets are presented
below:
December 31
2003 2002
-------- --------
(in thousands)
Net operating loss and tax credit carryforwards ........... $ 22,695 $ 23,749
Inventory reserves and capitalization ..................... 2,294 2,722
Other ..................................................... 1,758 2,102
Deferred compensation ..................................... 5,361 7,692
Deferred income ........................................... 1,434 2,167
-------- --------
Total deferred tax assets before valuation allowance .... 33,542 38,432
Valuation allowance ....................................... (5,360) (7,692)
Depreciation and amortization ............................. (6,421) (5,130)
Other ..................................................... (392) (392)
-------- --------
Net deferred tax assets ................................... $ 21,369 $ 25,218
======== ========
Since 1999, the Company has generated positive taxable income on a cumulative
basis. In light of this 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 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, the Company reduced the remaining valuation
allowance recorded against net operating loss carryforwards by $23.4 million,
which reflects 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 $5.4
million is recorded against the remaining $33.3 million of deferred tax assets
recorded at December 31, 2003. This valuation allowance relates to deferred tax
assets for certain expenses that 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 $ (2.3) million, $(26.7)
million, and $(10.4) million, in 2003, 2002, and 2001, 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. Included in the 2003 reduction was the
write off of the valuation allowance associated with $2.3 million of deferred
tax assets which the Company wrote off because they are not expected to be
utilizable.
F-23
A reconciliation of the United States Federal statutory rate to the Company's
effective tax rate for the years ended December 31, 2003, 2002, and 2001 is as
follows:
2003 2002 2001
------ ------ ------
Federal statutory rate ..................................... 35.0% 35.0% 34.0%
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal tax benefit ........... 3.9% 3.7% 1.9%
Foreign taxes booked at different rates .................. (1.0%) (2.5%) (1.3%)
Alternative minimum tax, net of state benefit ............ -- -- 1.4%
Nondeductible items ...................................... (0.1%) (0.5%) 1.1%
Other .................................................... -- (1.0%) 0.7%
Change in valuation allowance ............................ -- (89.9%) (108.9%)
------ ------ ------
Effective tax rate ......................................... 37.8% (55.2%) (71.1%)
====== ====== ======
At December 31, 2003, the Company had net operating loss carryforwards of
approximately $72.8 million and $10.5 million for federal and state income tax
purposes, respectively, to offset future taxable income. The federal and state
net operating loss carryforwards expire through 2018 and 2009, respectively.
At December 31, 2003, several of the Company's subsidiaries had unused net
operating loss carryforwards and tax credit carryforwards arising from periods
prior to the Company's ownership which expire through 2010. The timing and
manner in which any acquired net operating losses or tax credits may be utilized
in any year by the Company are limited by the Internal Revenue Code of 1986, as
amended, Section 382 and other provisions of the Internal Revenue Code and its
applicable regulations.
Income taxes are not provided on undistributed earnings of non-U.S. subsidiaries
because such earnings are expected to be permanently reinvested. Undistributed
earnings of foreign subsidiaries totaled $11.8 million and $9.0 million at
December 31, 2003 and 2002, respectively.
11. NET INCOME PER SHARE
Amounts used in the calculation of basic and diluted net income per share were
as follows:
2003 2002 2001
-------- -------- --------
(in thousands, except per share amounts)
Basic:
- ------
Net income..................................................... $ 26,861 $ 35,277 $ 26,163
Dividends on preferred stock .................................. -- (159) (1,026)
--------- -------- --------
Net income applicable to common stock ......................... $ 26,861 $ 35,118 $ 25,137
Basic net income per share .................................... $ 0.92 $ 1.21 $ 1.08
======== ======== ========
Weighted average common shares outstanding - Basic ............ 29,071 29,021 23,353
======== ======== ========
Diluted:
- --------
Net income applicable to common stock ......................... $ 26,861 $ 35,277 $ 26,163
Diluted net income per share .................................. $ 0.88 $ 1.14 $ 0.94
======== ======== ========
Weighted average common shares outstanding - Basic ............ 29,071 29,021 23,353
Effect of dilutive securities:
Assumed conversion of Preferred Stock ...................... -- 175 1,873
Stock options and warrants ................................. 1,397 1,699 2,570
-------- -------- --------
Weighted average common shares outstanding .................... 30,468 30,895 27,796
======== ======== ========
F-24
Shares of common stock issuable through exercise or conversion of the following
dilutive securities were not included in the computation of diluted net income
per share for each period because their effect would have been antidilutive:
2003 2002 2001
-------- -------- --------
(in thousands)
Stock options and warrants ....................... 424 1,104 65
Notes payable outstanding at December 31, 2003 that are convertible into
3,514,166 shares of common stock were excluded from the computation of diluted
net income per share in 2003 because the conditions required to convert the
notes were not met.
Restricted Units issued by the Company (see Note 7) that entitle the holder to
1,250,000 shares of common stock are included in the weighted average shares
outstanding calculation from their date of issuance because no further
consideration is due related to the issuance of the underlying common shares.
12. DEVELOPMENT, DISTRIBUTION, AND LICENSE AGREEMENTS AND GOVERNMENT GRANTS
The Company has various development, distribution, and license agreements under
which it receives payments. Significant agreements 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 manufactured
INTEGRA(R) Dermal Regeneration Template and collaborated 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 for trademarks
and regulatory filings related to the INTEGRA(R) Dermal Regeneration Template
and certain other rights. This amount was initially recorded as deferred revenue
and was recognized as revenue in accordance with the Company's revenue
recognition policy for nonrefundable, up-front fees received. Additionally, the
ETHICON Agreement required ETHICON to make nonrefundable payments to the Company
each year based upon minimum purchases of INTEGRA(R) Dermal Regeneration
Template.
In 2003, and 2002, the Company received $2.8 million and $1.0 million,
respectively, of event-related payments from ETHICON. The ETHICON Agreement also
provided for annual research funding of $2.0 million. Both the event-related
payments and the research funding were recorded in other revenue in accordance
with the Company's revenue recognition policy.
In September 2003, the Company and ETHICON amended the ETHICON agreement. Under
the amended ETHICON agreement, ETHICON continued to market and sell INTEGRA
Dermal Regeneration Template through December 31, 2003 under the original terms,
and ETHICON paid Integra $2.0 million on December 31, 2003 in connection with
the termination of the agreement. The Company has recorded this termination fee
as other income.
Due to the termination of the ETHICON agreement, the Company recorded $11.0
million of other revenue in the fourth quarter of 2003 related to the
acceleration of the recognition of unused minimum purchase payments and
unamortized license fee revenue.
The Company has an agreement with Wyeth 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 2007, but may be
extended at the option of the parties. 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 $2.2 million, $1.2
million, and $1.1 million of research and development revenues under the
agreement in 2003, 2002, and 2001, respectively.
F-25
13. 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, we filed a patent infringement lawsuit in the United States
District Court for the Southern District of California (the "Trial 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 Trial Court dismissed Scripps and
Dr. Cheresh from the case.
In October 2000, the Trial Court entered judgment in our favor and against Merck
KGaA in the case. In entering the judgment, the Trial 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 Trial 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 each appealed various decisions of the Trial Court to the
United States Court of Appeals for the Federal Circuit (the "Circuit Court").
The Circuit Court affirmed the Trial Court's finding that Merck KGaA had
infringed our patents. The Circuit Court also held that the basis of the jury's
calculation of damages was not clear from the trial record, and remanded the
case to the Trial Court for further factual development and a new calculation of
damages consistent with the Circuit Court's decision. We expect the Trial Court
to begin new hearings on damages in the summer of 2004. We have not recorded any
gain in connection with this matter.
Three of the Company's French subsidiaries that were acquired from the
neurosciences division of NMT Medical, Inc. received a tax reassessment notice
from the French tax authorities seeking in excess of 1.7 million euros 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.
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.
F-26
In December 2003, the Company recorded a $1.1 million charge in connection with
closing of its San Diego research center, the termination of certain research
programs conducted there, and the consolidation of the remaining research
activities into its other facilities. The charge consisted of the following:
Facility lease termination fee .................. $ 379,000
Research program termination costs .............. 216,000
Property and equipment impairment ............... 183,000
Inventory write-off ............................. 157,000
Employee severance .............................. 120,000
Other ........................................... 52,000
----------
Total $1,107,000
The inventory write-off was recorded to cost of product revenues. All other
amounts were recorded to research and development expense. All amounts were paid
in 2003, except for the employee severance amounts, which were included in
accrued expenses and other current liabilities at December 31, 2003.
14. SEGMENT AND GEOGRAPHIC INFORMATION
In 2003, following the integration of several recently acquired, diverse
businesses, Integra began to manage the business and review financial results on
an aggregate basis, instead of through two operating segments. Accordingly, all
prior period financial results provided below have been revised to reflect the
retroactive application of this change to a single operating segment.
Product revenues consisted of the following:
2003 2002 2001
-------- -------- --------
(in thousands)
Neuromonitoring products .............................. $ 44,229 $ 37,184 $ 28,158
Operating room products ............................... 53,301 38,326 27,240
Instruments ........................................... 47,168 16,802 14,972
Private label products ................................ 21,997 20,313 17,538
-------- -------- --------
Consolidated product revenues ......................... $166,695 $112,625 $ 87,908
======== ======== ========
Certain of the Company's products, including the DuraGen(R) Dural Graft
products, NeuraGen(TM) Nerve Guide, INTEGRA(R) Dermal Regeneration Template,
INTEGRA(TM) Bi-Layer Matrix Wound Dressing, and BioMend(R) Absorbable Collagen
Membrane, contain material derived from bovine tissue. Products that contain
materials derived from animal sources, including food as well as pharmaceuticals
and medical devices, are increasingly subject to scrutiny from the press and
regulatory authorities. These products comprised approximately 27%, 32% and 32%
of product revenues in 2003, 2002 and 2001, respectively. Accordingly,
widespread public controversy concerning collagen products, new regulation, or a
ban of the Company's products containing material derived from bovine tissue,
could have a material adverse effect on the Company's current business or its
ability to expand its business.
F-27
Product revenue and long-lived assets (excluding financial instruments and
deferred tax assets) by major geographic area are summarized below:
United Asia Other
States Europe Pacific Foreign Consolidated
---------- ---------- ---------- ---------- ------------
(in thousands)
Product revenue:
2003 ................... $132,805 $ 21,433 $ 5,828 $ 6,629 $166,695
2002 ................... 90,422 14,737 4,062 3,404 112,625
2001 ................... 68,612 10,577 4,838 3,881 87,908
Long-lived assets:
December 31, 2003 ...... $ 81,182 $ 21,082 $ -- $ -- $102,264
December 31, 2002 ...... 45,319 18,408 -- -- $ 63,727
December 31, 2001 ...... 33,001 12,057 -- -- 45,058
15. SELECTED QUARTERLY INFORMATION -- UNAUDITED
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- --------- --------- ----------
(in thousands, except per share data)
2003:
- -----
Total revenue ................... $ 59,025 $ 47,058 $ 42,736 $ 36,780
Cost of product revenues ........ 20,935 18,869 17,090 13,703
Total other operating expenses .. 25,095 17,266 17,357 15,637
Operating income ................ 12,995 10,923 8,289 7,440
Interest income (expense), net .. 81 (188) (198) 776
Other income (expense), net ..... 1,962 309 451 349
Income before income taxes ...... 15,038 11,044 8,542 8,565
Income tax expense .............. 5,867 4,210 3,124 3,127
Net income ...................... $ 9,171 $ 6,834 $ 5,418 $ 5,438
Basic net income per share....... $ 0.31 $ 0.24 $ 0.19 $ 0.18
Diluted net income per share .... $ 0.30 $ 0.23 $ 0.18 $ 0.18
2002:
- -----
Total revenue ................... $ 35,261 $ 30,204 $ 26,441 $ 25,916
Cost of product revenues ........ 14,168 12,611 9,465 9,528
Total other operating expenses .. 14,313 16,001 11,486 11,063
Operating income ................ 6,780 1,592 5,490 5,325
Interest income, net ............ 727 822 993 993
Other income (expense), net ..... (18) (11) 55 (23)
Income before income taxes ...... 7,489 2,403 6,538 6,295
Income tax expense (benefit) .... (17,885) 840 2,289 2,204
Net income ...................... $ 25,374 $ 1,563 $ 4,249 $ 4,091
Basic net income per share ...... 0.87 0.05 0.15 0.14
Diluted net income per share .... 0.83 0.05 0.14 0.13
F-28
16. SUBSEQUENT EVENTS
In January 2004, the Company acquired the R&B instrument business from R&B
Surgical Solutions, LLC for approximately $2.0 million in cash. The R&B
instrument line is a complete line of high-quality handheld surgical instruments
used in neuro- and spinal surgery. The Company plans to market these products
through its JARIT sales force.
In January 2004, the Company acquired the Sparta disposable critical care
devices and surgical instruments business from Fleetwood Medical, Inc. for
approximately $1.5 million in cash. The Sparta product line includes products
used in plastic and reconstructive, ear, nose and throat (ENT), neuro,
ophthalmic and general surgery. Prior to the acquisition, Fleetwood Medical
marketed these product lines primarily to hospitals and physicians through a
catalogue and a network of distributors.
The determination of the fair value of the assets acquired and liabilities
assumed as a result of these acquisitions is in progress.
F-29
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Integra LifeSciences
Holdings Corporation and Subsidiaries:
Our audits of the consolidated financial statements referred to in our report
dated February 25, 2004, appearing in the 2003 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(a)(2)
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 25, 2004
F-30
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description Of Period Expenses Accounts(1) Deductions(2) Period
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
Year ended December 31, 2003
- ----------------------------
Allowance for doubtful accounts
and Sales Returns .......... $ 1,387 $ 541 $ 497 $ (400) $ 2,025
Inventory reserves ...................... 9,573 3,193 894 (7,456) 6,204
Deferred tax asset valuation allowance .. 7,692 -- (2,331) -- 5,361
Year ended December 31, 2002
- ----------------------------
Allowance for doubtful accounts
and Sales Returns .......... $ 1,403 1,961 559 (2,537) $ 1,387
Inventory reserves ...................... 5,812 4,152 787 (1,178) 9,573
Deferred tax asset valuation allowance .. 34,356 (20,389) (3,260) (3,015) 7,692
Year ended December 31, 2001
- ----------------------------
Allowance for doubtful accounts
and Sales Returns .......... $ 1,253 $ 2,142 $ 4 $ (1,996) $ 1,403
Inventory reserves ...................... 3,420 3,734 -- (1,342) 5,812
Deferred tax asset valuation allowance .. 44,776 (9,970) -- (450) 34,356
(1) All amounts shown were recorded to goodwill in connection with acquisitions
except for the $2.3 million and $3.3 million reduction in the deferred tax
asset valuation allowance in 2003 and 2002, respectively, which were
written off against the gross deferred tax asset.
(2) The $3.0 million and $450,000 reductions of the deferred tax asset
valuation allowance in 2002 and 2001, respectively, were recorded to
additional paid-in capital.
F-31
Ehhibit 10.20
EMPLOYMENT AGREEMENT
This employment agreement ("this "Agreement") is made as of the 20 day of
February, 2003 by and between Integra LifeSciences Holdings Corporation, a
Delaware Corporation, and Donald Nociolo ("Executive").
Background
Executive is currently the Senior Vice President of Manufacturing Operations of
Company. Company desires to continue to employ Executive, and Executive
desires to remain in the employ of Company, on the terms and conditions
contained in this Agreement. Executive will be substantially involved with
Company's operations and management and will learn trade secrets and other
confidential information relating to Company and its customers; accordingly,
the noncompetition covenant and other restrictive covenants contained in
Section 14 of this Agreement constitute essential elements hereof.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and intended to be legally bound hereby, the parties hereto
agree as follows:
Terms
1. Definitions. The following words and phrases shall have the meanings set
forth below for the purposes of this Agreement (unless the context clearly
indicates otherwise):
(a)"Base Salary" shall have the meaning set forth in Section 5.
(b)"Board" shall mean the Board of Directors of Company, or any successor
thereto.
(c)"Cause," as determined by the Board in good faith, shall mean Executive has-
(1)failed to perform his stated duties in all material respects, which failure
continues for 15 days after his receipt of written notice of the failure;
(2)intentionally and materially breached any provision of this Agreement and
not cured such breach (if curable) within 15 days of his receipt of written
notice of the breach;
(3)demonstrated his personal dishonesty in connection with his employment by
Company;
(4)engaged in willful misconduct in connection with his employment with the
Company;
(5)engaged in a breach of fiduciary duty in connection with his employment with
the Company; or
(6)willfully violated any law, rule or regulation, or final cease-and-desist
order (other than traffic violations or similar offenses) or engaged in other
serious misconduct of such a nature that his continued employment may
reasonably be expected to cause the Company substantial economic or
reputational injury.
(d) A "Change in Control" of Company shall be deemed to have occurred:
(1)if the"beneficial ownership" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) of securities representing more than fifty percent (50%)
of the combined voting power of Company Voting Securities (as herein defined)
is acquired by any individual, entity or group (a "Person"), other than
Company, any trustee or other fiduciary holding securities under any employee
benefit plan of Company or an affiliate thereof, or any corporation owned,
directly or indirectly, by the stockholders of Company in substantially the
same proportions as their ownership of stock of Company (for purposes of this
Agreement, "Company Voting Securities" shall mean the then outstanding voting
securities of Company entitled to vote generally in the election of directors);
provided, however, that any acquisition from Company or any acquisition
pursuant to a transaction which complies with clauses (i), (ii) and (iii) of
paragraph (3) of this definition shall not be a Change in Control under this
paragraph (1); or
(2) if individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at least
a majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by Company's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or
1
(3) upon consummation by Company of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets of
Company or the acquisition of assets or stock of any entity (a "Business
Combination"), in each case, unless immediately following such Business
Combination: (i) Company Voting Securities outstanding immediately prior to
such Business Combination (or if such Company Voting Securities were converted
pursuant to such Business Combination, the shares into which such Company
Voting Securities were converted) (x) represent, directly or indirectly, more
than 50% of the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors of the corporation
resulting from such Business Combination (the "Surviving Corporation"), or, if
applicable, a corporation which as a result of such transaction owns Company or
all or substantially all of Company's assets either directly or through one or
more subsidiaries (the "Parent Corporation") and (y) are held in substantially
the same proportions after such Business Combination as they were immediately
prior to such Business Combination; (ii) no Person (excluding any employee
benefit plan (or related trust) of Company or such corporation resulting from
such Business Combination) beneficially owns, directly or indirectly, 50% or
more of the combined voting power of the then outstanding voting securities
eligible to elect directors of the Parent Corporation (or, if there is no
Parent Corporation, the Surviving Corporation) except to the extent that such
ownership of Company existed prior to the Business Combination; and (iii) at
least a majority of the members of the board of directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
were members of the Incumbent Board at the time of the execution of the initial
agreement, or the action of the Board, providing for such Business Combination;
or
(4)upon approval by the stockholders of Company of a complete liquidation or
dissolution of Company.
(e)"Code" shall mean the Internal Revenue Code of 1986, as amended.
(f)"Company" shall mean Integra LifeSciences Holdings Corporation and any
corporation, partnership or other entity owned directly or indirectly, in whole
or in part, by Integra LifeSciences Holdings Corporation.
(g)"Disability" shall mean Executive's inability to perform his duties
hereunder by reason of any medically determinable physical or mental impairment
which is expected to result in death or which has lasted or is expected to last
for a continuous period of not fewer than six months.
(h)"Good Reason" shall mean:
(1) a material breach of this Agreement by Company which is not cured by
Company within 15 days of its receipt of written notice of the breach;
(2) without Executive's express written consent, the Company reduces
Executive's Base Salary or the aggregate fringe benefits provided to Executive
(except to the extent permitted by Section 5 or Section 6, respectively);
provided Executive resigns within 60 days after the change objected to;
(3) during the one-year period following a Change in Control, the Company,
without Executive's express written consent: (i) reduces Executive's Base
Salary or the aggregate fringe benefits provided to Executive (except to the
extent the decrease is pursuant to a general compensation or benefits reduction
applicable to all, or substantially all, executive officers of Company); (ii)
substantially diminishes Executive's responsibilities compared to the extent of
such responsibilities immediately prior to a Change in Control; or (iii)
requires Executive to be based more than 50 miles from Executive's office
location immediately prior to the Change in Control (except for required travel
on Company business to an extent substantially consistent with Executive's
business travel obligations immediately prior to the Change in Control); or
(4) Company fails to obtain the assumption of this Agreement by any successor
to Company.
(i)"Principal Executive Office" shall mean Company's principal office for
executives, presently located at 311 Enterprise Drive, Plainsboro, New Jersey
08536.
(j)"Retirement" shall mean the termination of Executive's employment with
Company in accordance with the retirement policies, including early retirement
policies, generally applicable to Company's salaried employees.
(k)"Termination Date" shall mean the date specified in the Termination Notice.
(l)"Termination Notice" shall mean a dated notice which: (i) indicates the
specific termination provision in this Agreement relied upon (if any); (ii)
sets forth in reasonable detail the facts and circumstances claimed to provide
a basis for the termination of Executive's employment under such provision;
(iii) specifies a Termination Date; and (iv) is given in the manner specified
in Section 15(h).
2
2. Employment. Company hereby employs Executive as Senior Vice President,
Manufacturing Operations, and Executive hereby agrees to accept such employment
and agrees to render services to Company in such capacity (or in such other
capacity in the future as the chief executive officer of the Company (the
"Chief Executive Officer") may decide in his sole discretion. Executive's
primary place of employment shall be at the Principal Executive Office or other
corporate location as the Chief Executive Officer deems appropriate.
3. Term.
(a) Term and Renewal of Agreement. Unless earlier terminated by Executive or
Company as provided in Section 10 hereof, the term of Executive's employment
under this Agreement shall commence on the date of this Agreement and terminate
on December 31, 2003. Subject to subsection 3(b), this Agreement shall be
deemed automatically, without further action, to extend for an additional year
on December 31, 2003 and each anniversary thereof.
(b) Annual Review. Prior to December 31, 2003 and each annual anniversary
thereof, the Board shall consider extending the term of this Agreement. The
term shall continue to extend in the manner set forth in subsection 3(a) unless
either the Board does not approve the extension and provides written notice to
Executive of such event, or Executive gives written notice to Company of
Executive's election not to extend the term. In either case, the written notice
shall be given not fewer than 30 days prior to any such renewal date.
References herein to the term of this Agreement shall refer both to the initial
term and successive terms.
4. Duties. Executive shall:
(a)faithfully and diligently do and perform all such acts and duties, and
furnish such services as are assigned to Executive as of the date this
Agreement is signed, and (subject to Section 2) such additional or different
acts, duties and services as the Chief Executive Officer may assign in the
future; and
(b)devote his full professional time, energy, skill and best efforts to the
performance of his duties hereunder, in a manner that will faithfully and
diligently further the business and interests of Company, and shall not be
employed by or participate or engage in or in any manner be a part of the
management or operations of any business enterprise other than Company without
the prior written consent of the Chief Executive Officer or the Board, which
consent may be granted or withheld in his or its sole discretion.
5. Compensation. Company shall compensate Executive for his services at a
minimum base salary of $180,000 per year ("Base Salary"), payable in periodic
installments in accordance with Company's regular payroll practices in effect
from time to time. Executive's Base Salary shall be subject to annual reviews,
but may not be decreased without Executive's express written consent (unless
the decrease is pursuant to a general compensation reduction applicable to all,
or substantially all, executive officers of Company). Bonus payments may be
made as determined appropriate by the Board in its sole discretion.
6. Benefit Plans. Executive shall be entitled to participate in and receive
benefits under any employee benefit plan or stock-based plan of Company, and
shall be eligible for any other plans and benefits covering executives of
Company, to the extent commensurate with his then duties and responsibilities
fixed by the Board. Company shall not make any change in such plans or
benefits which would adversely affect Executive's rights thereunder, unless
such change affects all, or substantially all, executive officers of the
Company.
7. Vacation. Executive shall be entitled to paid annual vacation in
accordance with the policies established from time to time by the Board, which
shall in no event be fewer than three weeks per annum.
8. Business Expenses. Company shall reimburse Executive or otherwise pay for
all reasonable expenses incurred by Executive in furtherance of or in
connection with the business of Company, including, but not limited to,
automobile and traveling expenses and all reasonable entertainment expenses,
subject to such reasonable documentation and other limitations as may be
established by the Company.
9. Disability. In the event Executive incurs a Disability, Executive's
obligation to perform services under this Agreement will terminate, and the
Board may terminate this Agreement upon written notice to Executive.
10. Termination.
(a) Termination without Salary Continuation. In the event (i) Executive
terminates his employment hereunder other than for Good Reason, or (ii)
Executive's employment is terminated by Company due to his Retirement,
Disability or death, or for Cause, Executive shall have no right to
compensation or other benefits pursuant to this Agreement for any period
after his last day of active employment.
3
(b) Termination with Salary Continuation (No Change in Control). Except as
provided in subsection 10(c) in the event of a Change in Control, in the event
(i) Executive's employment is terminated by Company for a reason other than
Retirement, Disability, death or Cause, or (ii) Executive terminates his
employment for Good Reason, or (iii) Company shall fail to extend this
Agreement pursuant to the provisions of Section 3, then Company shall:
(1) pay Executive a severance amount equal to Executive's Base Salary
(determined without regard to any reduction in violation of Section 5) as of
his last day of active employment; the severance amount shall be paid in a
single sum on the first business day of the month following the Termination
Date; and
(2) maintain and provide to Executive, at no cost to Executive, for a period
ending at the earliest of (i) the first anniversary of the Termination Date;
(ii) the date of Executive's full-time employment by another employer; or
(iii) Executive's death, continued participation in all group insurance, life
insurance, health and accident, disability, and other employee benefit plans in
which Executive would have been entitled to participate had his employment with
Company continued throughout such period, provided that such participation is
not prohibited by the terms of the plan or by Company for legal reasons.
(c) Termination with Salary Continuation (Change in Control). Notwithstanding
anything to the contrary set forth in subsection 10(b), in the event within
twelve months of a Change in Control: (i) Executive terminates his employment
for Good Reason, or (ii) Executive's employment is terminated by Company for a
reason other than Retirement, Disability, death or Cause, or (iii) Company
shall fail to extend this Agreement pursuant to Section 3, then Company shall:
(1) pay Executive a severance amount equal to 2.99 times Executive's Base
Salary (determined without regard to any reduction in violation of Section 5)
as of his last day of active employment; the severance amount shall be paid in
a single sum on the first business day of the month following the Termination
Date; and
(2) maintain and provide to Executive, at no cost to Executive, for a period
ending at the earliest of (i) the third anniverary of the Termination Date;
(ii) the date of Executive's full-time employment by another employer; and
(iii) Executive's death, continued participation in all group insurance, life
insurance, health and accident, disability, and other employee benefit plans
in which Executive would have been entitled to participate had his employment
with Company continued throughout such period, provided that such
participation is not prohibited by the terms of the plan or by Company for
legal reasons; and
(3) pay to Executive all reasonable legal fees and expenses incurred by
Executive as a result of such termination of employment (including all fees
and expenses, if any, incurred by Executive in contesting or disputing any
such termination or in seeking to obtain to enforce any right or benefit
provided to Executive by this Agreement whether by arbitration or otherwise).
(d) Termination Notice. Except in the event of Executive's death, a
termination under this Agreement shall be effected by means of a Termination
Notice.
11. Withholding. Company shall have the right to withhold from all payments
made pursuant to this Agreement any federal, state, or local taxes and such
other amounts as may be required by law to be withheld from such payments.
12. Assignability. Company may assign this Agreement and its rights and
obligations hereunder in whole, but not in part, to any entity to which
Company may transfer all or substantially all of its assets, if in any such
case said entity shall expressly in writing assume all obligations of Company
hereunder as fully as if it had been originally made a party hereto. Company
may not otherwise assign this Agreement or its rights and obligations
hereunder. This Agreement is personal to Executive and his rights and duties
hereunder shall not be assigned except as expressly agreed to in writing by
Company.
13. Death of Executive. Any amounts due Executive under this Agreement (not
including any Base Salary not yet earned by Executive) unpaid as of the date
of Executive's death shall be paid in a single sum as soon as practicable
after Executive's death to Executive's surviving spouse, or if none, to the
duly appointed personal representative of his estate.
14 Restrictive Covenants.
(a) Covenant Not to Compete. During the term of this Agreement and for a
period of eighteen (18) months following the Termination Date, Executive sha
in which Company is conducting business operations or providing services as of
the date of Executive's termination of employment, in the tissue engineer
bioactive component, to attempt to elicit a specific cellular response in
order to regenerate tissue or to impede the growth of tissue or migration of
cells) (the "Tissue Engineering Business") or any other business the revenues
4
of which constituted at least 30% of Company's revenues during the six (6)
month period prior to the Termination Date (together with the Tissue
Engineering Business, the "Business"); (ii) be or become a stockholder,
partner, owner, officer, director or employee or agent of, or a consultant to
or give financial or other assistance to, any person or entity engaged in the
Business; (iii) seek in competition with the business of the Company to procure
orders from or do business with any customer of Company; (iv) solicit or
contact with a view to the engagement or employment by any person or entity of
any person who is an employee of Company; (v) seek to contract with or engage
(in such a way as to adversely affect or interfere with the business of
Company) any person or entity who has been contracted with or engaged to
manufacture, assemble, supply or deliver products, goods, materials or services
to Company; or (vi) engage in or participate in any effort or act to induce
any of the customers, associates, consultants, or employees of Company to take
any action which might be disadvantageous to Company; provided, however, that
nothing herein shall prohibit Executive and his affiliates from owning, as
passive investors, in the aggregate not more than 5% of the outstanding
publicly traded stock of any corporation so engaged.
(b) Confidentiality. Executive acknowledges a duty of confidentiality owed to
Company and shall not, at any time during or after his employment by Company,
retain in writing, use, divulge, furnish, or make accessible to anyone, without
the express authorization of the Board, any trade secret, private or
confidential information or knowledge of Company obtained or acquired by him
while so employed. All computer software, business cards, telephone lists,
customer lists, price lists, contract forms, catalogs, Company books, records,
files and know-how acquired while an employee of Company are acknowledged to
be the property of Company and shall not be duplicated, removed from Company's
possession or premises or made use of other than in pursuit of Company's
business or as may otherwise be required by law or any legal process, or as is
necessary in connection with any adversarial proceeding against Company and
upon termination of employment for any reason, Executive shall deliver to
Company, without further demand, all copies thereof which are then in his
possession or under his control. No information shall be treated as
"confidential information" if it is generally available public knowledge at the
time of disclosure or use by Executive.
(c) Inventions and Improvements. Executive shall promptly communicate to
Company all ideas, discoveries and inventions which are or may be useful to
Company or its business. Executive acknowledges that all such ideas,
discoveries, inventions, and improvements which heretofore have been or are
hereafter made, conceived, or reduced to practice by him at any time during his
employment with Company heretofore or hereafter gained by him at any time
during his employment with Company are the property of Company, and Executive
hereby irrevocably assigns all such ideas, discoveries, inventions and
improvements to Company for its sole use and benefit, without additional
compensation. The provisions of this Section 14(c) shall apply whether such
ideas, discoveries, inventions, or improvements were or are conceived, made or
gained by him alone or with others, whether during or after usual working
hours, whether on or off the job, whether applicable to matters directly or
indirectly related to Company's business interests (including potential
business interests), and whether or not within the specific realm of his
duties. Executive shall, upon request of Company, but at no expense to
Executive, at any time during or after his employment with Company, sign
all instruments and documents reasonably requested by Company and otherwise
cooperate with Company to protect its right to such ideas, discoveries,
inventions, or improvements including applying for, obtaining and enforcing
patents and copyrights thereon in such countries as Company shall determine.
(d) Breach of Covenant. Executive expressly acknowledges that damages alone
will be an inadequate remedy for any breach or violation of any of the
provisions of this Section 14 and that Company, in addition to all other
remedies, shall be entitled as a matter of right to equitable relief,
including injunctions and specific performance, in any court of competent
jurisdiction. If any of the provisions of this Section 14 are held to be in any
respect unenforceable, then they shall be deemed to extend only over the maximum
period of time, geographic area, or range of activities as to which they may be
enforceable.
15. Miscellaneous.
(a) Amendment. No provision of this Agreement may be amended unless such
amendment is signed by Executive and such officer as may be specifically
designated by the Board to sign on Company's behalf.
(b) Nature of Obligations. Nothing contained herein shall create or require
Company to create a trust of any kind to fund any benefits which may be payable
hereunder, and to the extent that Executive acquires a right to receive
benefits from Company hereunder, such right shall be no greater than the right
of any unsecured general creditor of the Company.
(c) Prior Employment. Executive represents and warrants that his acceptance of
employment with Company has not breached, and the performance of his duties
hereunder will not breach, any duty owed by him to any prior employer or other
person.
5
(d) Headings. The Section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation or this Agreement. In the event of a conflict between a heading
and the content of a Section, the content of the Section shall control.
(e) Gender and Number. Whenever used in this Agreement, a masculine pronoun
is deemed to include the feminine and a neuter pronoun is deemed to include
both the masculine and the feminine, unless the context clearly indicates
otherwise. The singular form, whenever used herein, shall mean or include the
plural form where applicable.
(f) Severability. If any provision of this Agreement or the application
thereof to any person or circumstance shall be invalid or unenforceable under
any applicable law, such event shall not affect or render invalid or
unenforceable any other provision of this Agreement and shall not affect the
application of any provision to other persons or circumstances.
(g) Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, permitted
assigns, heirs, executors and administrators.
(h) Notice. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given if hand-delivered, sent by documented overn
delivery service or by certified or registered mail, return receipt requested,
postage prepaid, addressed to the respective addresses set forth below:
To the Company:
Integra LifeSciences Holdings Corporation
311 Enterprise Drive
Plainsboro, New Jersey 08536
Attn: President
To the Executive:
Donald Nociolo
154 Moores Mill Mount Rose Road
Hopewell, NJ 08525
(i) Entire Agreement. This Agreement sets forth the entire understanding of
the parties and supersedes all prior agreements, arrangements and
communications, whether oral or written, pertaining to the subject matter
hereof.
(j) Governing Law. The validity, interpretation, construction and performance
of this Agreement shall be governed by the laws of the United States where
applicable and otherwise by the laws of the State of New Jersey.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
INTEGRA LIFESCIENCES
HOLDINGS CORPORATION EXECUTIVE
By: /s/ Stuart M. Essig /s/ Donald Nociolo
Its: President and Chief Executive Officer
6
Exhibit 21
Subsidiaries of Integra LifeSciences Holdings Corporation
State or Country of
Name of Subsidiary Incorporation or Organization
- ------------------ -----------------------------
Caveangle Ltd. United Kingdom
GMSmbH Germany
Integra Clinical Education Institute, Inc. Delaware
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 Selector Corporation Delaware
Spembly Cryosurgery Ltd. United Kingdom
Spembly Medical Ltd. United Kingdom
Integra Signature Technologies Inc. Delaware
Integra NeuroSciences(IP), Inc. Delaware
Integra NeuroSciences,(International), Inc. Delaware
Integra NeuroSciences Holdings BV Netherlands
Integra NeuroSciences (Belgium) SA Belgium
NMT NeuroSciences Instruments BV Netherlands
NMT NeuroSciences GmbH Germany
Integra NeuroSciences Implants (France) SA France
Integra NeuroSciences Holdings (France) SA France
J. Jamner Surgical Instruments, Inc. Delaware
Spinal Specialties, Inc. Delaware
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,
333-73512 and 333-109042) and Form S-3 (File Nos. 333-106625) of Integra
LifeSciences Holdings Corporation and Subsidiaries of our report dated February
25, 2004 relating to the consolidated financial statements, which appears in the
Annual Report to Shareholders, which is included in this Annual Report on Form
10-K. We also consent to the incorporation by reference of our report dated
February 25, 2004 relating to the financial statement schedule, which appears in
this Form 10-K.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 11, 2004
Exhibit 31.1
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the
end of the period covered by this report based on
such evaluation; and
c) disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has
materially affected, or is reasonably likely to
materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: March 12, 2004
/s/ Stuart M. Essig
------------------------
Stuart M. Essig
Chief Executive Officer
Exhibit 31.2
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the
end of the period covered by this report based on
such evaluation; and
c) disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has
materially affected, or is reasonably likely to
materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: March 12, 2004
/s/ David B. Holtz
--------------------------
David B. Holtz
Senior Vice President,
Finance and Treasurer
Exhibit 32.1
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, 2003 (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 12, 2004 By: /s/ Stuart M. Essig
-----------------------
Stuart M. Essig
Chief Executive Officer
Exhibit 32.2
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, 2003 (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 12, 2004 By: /s/ David B. Holtz
----------------------
David B. Holtz
Sr. Vice President,
Finance and Treasurer
