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.
9. SUBSEQUENT EVENTS
In April 2004, the Company acquired Berchtold Medizin-Elektronik GmbH from
Berchtold Holding Company for approximately $5.0 million in cash subject to a
working capital adjustment. Berchtold Medizin-Elektronik, based in Tuttlingen,
Germany, manufactures and markets the Elektrotom(R) line of electrosurgery
generators and the Sonotom(R) ultrasonic surgical aspirator as well as a broad
line of related handpieces, instruments and disposables used in many surgical
procedures including neurosurgery. The acquired business generated approximately
$6.5 million in revenues for the year ended December 31, 2003, primarily in
foreign currency denominated transactions. The Company plans to market these
products through an international distributor network. This acquisition will
allow the Company to continue to expand its European operations through an
existing infrastructure through which its can sell its other products directly
into Germany and to offer additional market leading devices to the European and
international markets.
In May 2004, the Company acquired the surgical business from Schaerer Mayfield
USA, Inc. for approximately $20.0 million in cash subject to a working capital
adjustment. The acquired business generated approximately $10.3 million in
revenues for the year ended December 31, 2003. The products purchased include
the Mayfield(R) Cranial Stabilization and Positioning Systems and the BUDDE(R)
Halo Retractor System used in head surgery. Mayfield systems are the market
leader in the United States, and have been used by neurosurgeons for over thirty
years. This acquisition allows Integra to continue to broaden and strengthen the
product lines offered by its well-trained and experienced sales group. The
Mayfield and BUDDE product lines, which are sold to hospitals and physicians,
will be sold in the United States through the Integra NeuroSciences direct sales
organization and through distributors internationally. Mayfield's five sales and
marketing employees will join Integra's growing sales and marketing teams.
The determination of the fair value of the assets acquired and liabilities
assumed as a result of these acquisitions is in progress.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes thereto appearing elsewhere in this report and
our consolidated financial statements for the year ended December 31, 2003
included in our Annual Report on Form 10-K.
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 set forth below under the heading
"Factors That May Affect Our Future Performance."
GENERAL
Integra develops, manufactures, and markets medical devices for use primarily in
neuro-trauma, neurosurgery, plastic and reconstructive surgery, and general
surgery. Our product lines include monitoring and drainage systems, surgical
instruments, fixation systems and innovative tissue repair products that
incorporate our proprietary absorbable implant technology.
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.
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 32% of
product revenues in the three months ended March 31, 2004 and 2003.
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 product lines.
14
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, gross
margins on products revenues, which we hope to increase to more than 65% over a
period of several years, operating margins, 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, technologies, and companies. Our acquisitions of the R&B and
Sparta instrument businesses in January 2004, Spinal Specialties, Inc. in
November 2003, the Tissue Technologies, Inc. business in August 2003, and J.
Jamner Surgical Instruments, Inc. ("JARIT") in March 2003, may make our
financial results for the three month period ended March 31, 2004 not directly
comparable to those of the corresponding prior year period.
Reported product revenues for the three month periods ended March 31, 2004 and
2003 included the following amounts in revenues from product lines acquired
since January 1, 2003:
Three Months Ended
March 31,
(in thousands) 2004 2003
------ ------
Total Monitoring product revenues ............... $11,198 $10,532
Total Operating Room product revenues ........... 18,332 12,588
Instruments
Products acquired during 2004 ................ $ 336 $ --
Products acquired during 2003 ................ 9,787 1,142
All other product revenues ................... 5,920 5,105
------ ------
Total Instruments product revenues .............. 16,043 6,247
Total Private Label product revenues ............ 5,862 5,763
Consolidated
Products acquired during 2004 ................ $ 336 $ --
Products acquired during 2003 ................ 9,787 1,142
All other product revenues ................... 41,312 33,988
------ ------
Total product revenues ....................... 51,435 35,130
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2004 COMPARED TO QUARTER ENDED MARCH 31, 2003
Total Revenues And Gross Margin On Product Revenues:
For the quarter ended March 31, 2004, total revenues increased by $15.7 million,
or 43%, over the quarter ended March 31, 2003 to $52.4 million. This increase
was primarily attributable to an increase in product revenues of $16.3 million,
or 46%, over the prior year period. Other revenue decreased by $0.6 million due
to the termination of the ETHICON distribution and development agreement in
December 2003.
15
Revenues from product lines acquired since the first quarter of 2003 accounted
for $9.0 million of the $16.3 million increase in product revenues over the
prior year period. Changes in foreign currency exchange rates also accounted for
$1.0 million of the increase in product revenues. Domestic product revenues
increased $13.1 million in the first quarter of 2004 to $40.4 million, or 79% of
product revenues, as compared to 78% of product revenues in the first quarter
ended March 31, 2003.
Revenues from our monitoring product lines increased $0.7 million, or 6%, over
the prior year period primarily as a result of increased sales of our
intracranial monitoring products and drainage systems. Our operating room
product line revenues increased over the prior year period by $5.7 million, or
46%. This increase is largely the result of growth in sales of our DuraGen(R)
and DuraGen Plus(TM) Dural Graft Matrix products and the inclusion of INTEGRA(R)
Dermal Regeneration Template sales in the operating room category. Prior to our
resuming the direct sale and marketing of the INTEGRA product on January 1,
2004, we reported sales of the INTEGRA product to ETHICON, Inc. in the private
label category.
Revenues from our instrument product lines increased by $9.8 million, or 157%,
principally as a result of revenues from the JARIT surgical instrument line and
Spinal Specialties product line we acquired in 2003. We also experienced growth
over the prior year period in each of our existing instrument product lines. Our
private label product revenue increased by $0.1 million, or 2%, over the prior
year period as increased revenues from the Absorbable Collagen Sponge we supply
for use in Medtronic's INFUSE bone graft product offset by the removal of
INTEGRA Dermal Regeneration Template revenues from this category for inclusion
in operating room product revenues. Although sales of certain private label
products vary highly from quarter to quarter depending on the timing and size of
orders placed by our marketing partners, we do not believe that the variability
is as significant on an annual basis.
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 revenue growth will be driven by 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.
Our gross margin on product revenues was 61% in both the quarter ended March 31,
2004 and the prior year period. The current quarter's gross margin benefited
from strong growth in our higher margin products sold during the quarter and the
resumption of direct sales of INTEGRA Dermal Regeneration Template which was
offset by the full period impact of JARIT's instrument sales.
Other Operating Expenses:
The following is a summary of other operating expenses as a percent of product
revenues:
Three Months Ended
March 31,
(in thousands) 2004 2003
------ ------
Research and development ............................... 5 % 8 %
Selling and marketing .................................. 22 % 22 %
General and administrative ............................. 11 % 14 %
Total other operating expenses, which exclude cost of product revenue but
include amortization, increased 32% to $20.7 million in the first quarter of
2004, compared to $15.6 million in the first quarter of 2003.
16
Research and development expenses increased approximately $0.2 million to $2.8
million in the first quarter of 2004. The savings that resulted from closing our
San Diego research center were offset by increased spending on new product
development and clinical studies.
The decline in research and development expenses as a percentage of product
revenues in the first quarter of 2004 is primarily related to 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. Research and development expenses on products other than our
traditional hand-held instruments was 7% of product revenues in the first
quarter of 2004, as compared to 8% in the first quarter of 2003.
We are obligated to pay $1.5 million to the sellers of the Novus Monitoring
Limited assets upon their achievement of a product development milestone. If
such payment is made, we estimate that approximately $1.0 million will be
recorded as an in-process research and development charge.
Sales and marketing expenses increased 47% over the prior year period to $11.2
million as a result of the expansion of our direct sales organizations and
because we owned JARIT for the entire current period compared to a portion of
the prior year period. Sales and marketing expenses were 22% of product revenues
in both the quarter ending March 31, 2004 and the prior year period.
General and administrative expenses increased $1.0 million to $5.9 million in
the quarter, largely as a result of increases in professional fees.
Amortization expense increased approximately $300,000 to approximately $900,000
in the first quarter of 2004 as a result of amortization of intangible assets
from recent acquisitions.
Non-Operating Income And Expenses
In the first quarter of 2004, we recorded $871,000 in interest expense
associated with the $120 million of contingent convertible subordinated notes we
issued in March and April of 2003 and a related interest rate swap agreement.
Our reported interest expense includes $205,000 of non-cash amortization of debt
issuance costs. Debt issuance costs totaled $4.1 million and are being amortized
using the straight-line method over the five-year term of the notes.
We will pay additional interest ("Contingent Interest") on our convertible notes
under certain conditions. 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. In the first quarter of 2004, the change in
the estimated fair value of the Contingent Interest obligation increased
interest expense by $102,000.
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. 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 three months ended March 31, 2004 reflects a $210,000 reduction in interest
expense associated with the interest rate swap.
17
The net fair value of the interest rate swap at December 31, 2003 was
$1,072,000. At March 31, 2004, the net fair value of the interest rate swap
decreased $509,000 to $563,000, and this amount is included in other
liabilities. In connection with this fair value hedge transaction, during the
first quarter of 2004, we recorded a $467,000 net increase in the carrying value
of our convertible notes. The net $42,000 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.
Our net other income/expense decreased by $366,000 from $349,000 of income in
the first quarter of 2003 to $17,000 of expense in the first quarter of 2004. In
the first quarter of 2003, we recorded $221,000 of gains realized on the sale of
marketable securities.
Income tax expense was approximately 36.8% and 36.5% of income before income
taxes for the first quarters of 2004 and 2003, respectively. Income tax expense
for the first quarters of 2004 and 2003 included a deferred income tax provision
of $3.2 million and $2.6 million, respectively. The increase in the effective
income tax rate in 2004 results primarily from a change in the geographic mix of
projected taxable income for 2004.
We reported net income for the first quarter of 2004 of $7.4 million, or $0.24
per diluted share, as compared to net income of $5.4 million, or $0.18 diluted
per share, for the prior year quarter.
In periods when the holders of our convertible notes are permitted to exercise
their conversion rights, the "if-converted" method will be used to determine the
dilutive effect on earnings per share of the notes. The notes are convertible
into approximately 3.5 million shares of common stock.
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 have currency exchange risk
with respect to those foreign currency denominated revenues or expenses.
In the first quarter of 2004, 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. We
currently do not hedge our exposure to foreign currency risk. Accordingly, a
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.
18
Product revenues by major geographic area are summarized below:
United Asia Other
States Europe Pacific Foreign Total
-------- -------- -------- -------- --------
(in thousands)
Product revenues:
Three months ended March 31, 2004 $ 40,386 $ 7,248 $ 1,829 $ 1,972 $ 51,435
Three months ended March 31, 2003 27,262 5,001 1,458 1,409 35,130
In the three months ending March 31, 2004, product revenues from customers
outside the United States totaled $11.0 million, or 21% of consolidated product
revenues, of which approximately 66% were to European customers. Of this amount,
$8.1 million was generated in foreign currencies primarily by our subsidiaries
in the Europe.
In the three months ending March 31, 2003, product revenues from customers
outside the United States totaled $7.9 million, or 22% of consolidated product
revenue, of which approximately 64% were to European customers. Of this amount,
$4.1 million was generated in foreign currencies by our subsidiaries in Europe.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Marketable Securities
At March 31, 2004, we had cash, cash equivalents and current and non-current
investments totaling approximately $212.1 million. Our investments consist
almost entirely of highly liquid, interest bearing debt securities. We believe
that our cash and marketable securities are sufficient to finance our operations
and capital expenditures in the short term. However, given the significant level
of liquid assets and our objective to grow by acquisitions and alliances, our
financial position and future financial results could change significantly if we
were to use a significant portion of our liquid assets.
Cash Flows
Cash provided by operations has recently been and is expected to continue to be
our primary means of funding existing operations and capital expenditures. We
have generated positive operating cash flows on an annual basis, including $32.0
million in 2002, $34.8 million in 2003, and $10.9 million of operating cash
flows in the three months ending March 31, 2004. Operating cash flows for the
quarter ending March 31, 2003, were $8.8 million.
Our principal uses of funds during the three month period ended March 31, 2004
were $3.9 million for acquisition consideration, $8.3 million for purchases of
investments, net of maturities and sales, and $2.9 million for purchases of
property and equipment. In addition to the $10.9 million in operating cash
flows, we received $1.2 million from the issuance of common stock through the
exercise of stock options during the period.
Working Capital
At March 31, 2004 and December 31, 2003, working capital was $170.0 million and
$167.3 million, respectively. The increase in working capital was primarily due
to additional investments in inventory to support our growth in product revenues
and higher accounts receivable balances related to increased sales, offset by a
net use of cash in the first quarter of 2004.
19
Convertible Debt and Related Hedging Activities
We have outstanding $120.0 million of 2 1/2% contingent convertible subordinated
notes due 2008. We are obligated to pay $3.0 million of interest per year on the
notes and to repay their principal amount on March 15, 2008, if the notes are
not converted into common stock before that date. 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, subject to certain conditions.
We also have outstanding 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 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 on March 15, 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 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. We did not
repurchase any shares of common stock during the first quarter of 2004.
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
Under certain agreements, we are required to make payments based on sales levels
of certain products or if specific development milestones are achieved.
20
In April 2004, we acquired the Berchtold Medizin-Elektronik GmbH from Berchtold
Holding Company for approximately $5.0 million in cash subject to a working
capital adjustment. Berchtold Medizin-Elektronik, based in Tuttlingen, Germany,
manufactures and markets the Elektrotom(R) line of electrosurgery generators and
the Sonotom(R) ultrasonic surgical aspirator as well as a broad line of related
handpieces, instruments and disposables used in many surgical procedures
including neurosurgery.
In May 2004, we acquired the surgical business from Schaerer Mayfield USA, Inc.
for approximately $20.0 million in cash subject to a working capital adjustment.
The products purchased include the Mayfield(R)Cranial Stabilization and
Positioning Systems and the BUDDE(R) Halo Retractor System used in head surgery.
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:
|X| the impact of acquisitions;
|X| the timing of significant customer orders;
|X| market acceptance of our existing products, as well as products in
development;
|X| the timing of regulatory approvals;
|X| the timing of payments received and the recognition of those payments
as revenue under collaborative arrangements and other alliances;
|X| changes in the rate of exchange between the U.S. dollar, the euro and
the British pound;
|X| expenses incurred and business lost in connection with product field
corrections or recalls;
|X| our ability to manufacture our products efficiently; and
|X| 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 may introduce
such a product in the near future.
21
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 18 businesses or product lines at a
total cost of approximately $123 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
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.
22
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.
Certain Of Our Products Contain Materials Derived From Animal Sources And May
Become Subject To Additional Regulation.
23
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
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, we source all of our tendon 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
24
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
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 also depends 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
25
techniques or otherwise gain access to our trade secrets, that our trade secrets
will not be disclosed, or that we can effectively protect our rights to
unpatented trade secrets.
In an effort to protect our trade secrets, we have a policy of requiring our
employees, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with us. These agreements provide that, except in specified
circumstances, all confidential information developed or made known to the
individual during the course of their relationship with us must be kept
confidential. We cannot assure you, however, that these agreements will provide
meaningful protection for our trade secrets or other proprietary information in
the event of the unauthorized use or disclosure of confidential information.
Our Success Will Depend Partly On Our Ability To Operate Without Infringing Or
Misappropriating The Proprietary Rights Of Others.
We may be sued for infringing the intellectual property rights of others. In
addition, we may find it necessary, if threatened, to initiate a lawsuit seeking
a declaration from a court that we do not infringe the proprietary rights of
others or that their rights are invalid or unenforceable. If we do not prevail
in any litigation, in addition to any damages we might have to pay, we would be
required to stop the infringing activity or obtain a license. Any required
license may be unavailable to us on acceptable terms, or at all. In addition,
some licenses may be nonexclusive, and allow our competitors to access the same
technology we license. If we fail to obtain a required license or are unable to
design our product so as not to infringe on the proprietary rights of others, we
may be unable to sell some of our products, which could have a material adverse
effect on our revenues and profitability.
It May Be Difficult To Replace Some Of Our Suppliers.
Outside vendors, some of whom are sole-source suppliers, provide key components
and raw materials used in the manufacture of our products. Although we believe
that alternative sources for many of these components and raw materials are
available, any supply interruption in a limited or sole source component or raw
material could harm our ability to manufacture our products until a new source
of supply is identified and qualified. In addition, an uncorrected defect or
supplier's variation in a component or raw material, either unknown to us or
incompatible with our manufacturing process, could harm our ability to
manufacture products. We may not be able to find a sufficient alternative
supplier in a reasonable time period, or on commercially reasonable terms, if at
all, and our ability to produce and supply our products could be impaired. We
believe that these factors are most likely to affect our Camino(R) and
Ventrix(R) lines of intracranial pressure monitors and catheters, which we
assemble using many different electronic parts from numerous suppliers. While we
are not dependent on sole-source suppliers, if we were suddenly unable to
purchase products from one or more of these companies, we could need 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,
26
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.
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.
27
Changes In The Health Care Industry May Require Us To Decrease The Selling Price
For Our Products Or Reduce The Size Of The Market For Our Products, Either 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:
|X| 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;
|X| Medicare, Medicaid and private health care insurer cutbacks could
create downward price pressure on our products;
|X| 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;
|X| 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;
|X| 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;
|X| there is economic pressure to contain health care costs in
international markets;
|X| 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
|X| 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:
|X| 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
|X| government regulators or courts will interpret those laws or
regulations in a manner consistent with our interpretation.
28
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.
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 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.
29
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.
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" which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are subject to a number of risks, uncertainties
and assumptions about the Company, including those described under "Factors that
May Affect Our Future Performance" in the Company's Annual Report on Form 10-K
for the year ended December 31, 2003 filed with the Securities and Exchange
Commission and those set forth under the heading "Factors That May Affect our
Future Performance" in this report. 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.
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.
30
ITEM 3. 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
A discussion of foreign currency exchange risks is provided under the caption
"International Product Revenues and Operations" under "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
Interest Rate Risk - Marketable 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 March 31, 2004 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 March 31, 2004, 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 March 31, 2004, the net fair value of the interest rate swap approximated
$563,000 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.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Senior Vice President, Finance and Treasurer, as appropriate, to
allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
31
As required by SEC Rule 13a-15(b), we have carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Senior Vice President, Finance and Treasurer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the quarter covered by this report. Based on the
foregoing, our Chief Executive Officer and Senior Vice President, Finance and
Treasurer concluded that our disclosure controls and procedures were effective
at the reasonable assurance level.
There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to 18 U.S.C. Section 1350, as created by Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On February 27, 2004 we filed a Report on Form 8-K under items 7 and 12
regarding our earnings for the quarter and year ended December 31, 2003.
On March 3, 2004, we filed a Report on Form 8-K under item 12 regarding a
conference call we held to discuss our earnings for the quarter and year ended
December 31, 2003.
On March 8, 2004, we filed a Report on Form 8-K under item 5 regarding a board
resolution authorizing the Company to repurchase up to an additional 1.5 million
shares of its common stock for an aggregate purchase price not to exceed $40.0
million.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
Date: May 7, 2004 /s/ Stuart M. Essig
-------------------
Stuart M. Essig
President and Chief Executive Officer
Date: May 7, 2004 /s/ David B. Holtz
-------------------
David B. Holtz
Senior Vice President, Finance and Treasurer
33
Exhibits
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906
of the Sarbanes-Oxley Act of 2002
34
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 quarterly report on Form 10-Q of Integra
LifeSciences Holdings Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 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 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
quarterly 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: May 7, 2004
/s/ Stuart M. Essig
------------------------
Stuart M. Essig
Chief Executive Officer
35
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 quarterly report on Form 10-Q of Integra
LifeSciences Holdings Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officers 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 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
quarterly 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: May 7, 2004
/s/ David B. Holtz
------------------------
David B. Holtz
Senior Vice President, Finance and
Treasurer
36
Exhibit 32.1
Certification of Principal Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
I, Stuart M. Essig, Chief Executive Officer of Integra LifeSciences
Holdings Corporation (the "Company"), hereby certify that, to my knowledge:
1. The Quarterly Report on Form 10-Q of the Company for the
period ending March 31, 2004 (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: May 7, 2004
By: /s/ Stuart M. Essig
-----------------------
Stuart M. Essig
Chief Executive Officer
Certification of Principal 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 Quarterly Report on Form 10-Q of the Company for the
period ending March 31, 2004 (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: May 7, 2004
By: /s/ David B. Holtz
--------------------------------------
David B. Holtz
Sr. Vice President, Finance and
Treasurer
37
