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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. 0-26224
DECEMBER 31, 2002
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0317849
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
311 ENTERPRISE DRIVE
PLAINSBORO, NEW JERSEY 08536
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(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 275-0500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
As of June 28, 2002, the aggregate market value of the registrant's common stock
held by non-affiliates was approximately $356,962,914, based upon the closing
sales price of the registrant's common stock on NASDAQ on such date. For
purposes of this calculation only, all directors, executive officers and holders
of more than 10% of the registrant's outstanding common stock as of such date
were deemed to be "affiliates" of the registrant.
The number of shares of the registrant's Common Stock outstanding as of March
14, 2003 was 27,325,902.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating to its
scheduled May 21, 2003 Annual Meeting of Stockholders are incorporated by
reference in Part III of this report.
PART I
ITEM 1. BUSINESS
The terms "we," "our," "us," "Company" and "Integra" refer to Integra
LifeSciences Holdings Corporation and its subsidiaries unless the context
suggests otherwise.
Integra develops, manufactures, and markets medical devices, implants and
biomaterials primarily for use in neurosurgery, orthopedics and soft tissue
repair. Our business operates globally and is divided into two segments, which
we sometimes refer to as divisions: Integra NeuroSciences(TM) and Integra
LifeSciences(TM).
Integra was founded in 1989 and over the next decade developed technologies and
a product portfolio directed toward tissue regeneration. In 1999, we entered the
neurosurgery market through an acquisition and the launch of our DuraGen(R)
Dural Graft Matrix product for the repair of the dura mater. Since 1999, Integra
NeuroSciences has grown to comprise more than 77% of our total revenues. During
that period, we have increased our revenues from $40.0 million to $117.8
million, for an average annual growth rate of 41%, and we have broadened our
product offerings to include more than 10,000 products. We have achieved this
growth in our overall business through eleven acquisitions, the development and
introduction of new products, and the expansion of Integra NeuroSciences' direct
sales force.
Integra is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, which we refer to as the "Exchange Act". In accordance
with the Exchange Act, we file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may view our financial information, including the information contained in
this report, and other reports we file with the Securities and Exchange
Commission, on the Internet in the "SEC Filings" page of the Investor Relations
section of our website at www.Integra-LS.com. You may also obtain a copy of any
of these reports, without charge, from our investor relations department, 311
Enterprise Drive, Plainsboro, NJ 08536. Alternatively, you may view or obtain
reports filed with the Securities and Exchange Commission at the SEC Public
Reference Room at 450 Fifth Street, N.W. in Washington, D.C. 20549, or at the
SEC's Internet site at www.sec.gov. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference facilities.
Integra NeuroSciences Segment
Our Integra NeuroSciences segment comprises our businesses that primarily sell
directly to healthcare providers. Through our Integra NeuroSciences segment we
are a leading provider of implants, devices, and systems used in neurosurgery,
neurotrauma, and related critical care, a marketer of surgical instruments and
devices, and a distributor of disposables and supplies used in the diagnosis and
monitoring of neurological disorders.
We market the majority of these products directly to neurosurgeons and critical
care units. We believe that we are able to access this focused group of
hospital-based practitioners cost effectively through our direct sales and
marketing infrastructure in the United States and Europe and our distribution
network elsewhere. Integra NeuroSciences' direct selling effort in the United
States and Europe currently involves more than 100 professionals, including
direct salespeople (called neurospecialists in the United States), sales
management, and clinical educators who educate and train both our salespeople
and customers in the use of our products. A national sales manager and seven
regional managers lead the United States sales force. We increased the number
of our domestic sales territories from 44 to 63 in 2002. We believe our
expanded sales force allows for smaller, more focused territories, better
coverage of our customers, greater participation in trade shows and more
extensive marketing efforts.
We market surgical instruments and other devices directly to plastic and
reconstructive surgeons, burn surgeons, hand surgeons, ear, nose and throat
(ENT) surgeons and other physicians through a separate eight-person sales force
in the United States and a network of distributors outside the United States. We
also market a broad range of disposables and supplies used in the diagnosis and
monitoring of neurological, ENT and pulmonary disorders directly to
neurologists, hospitals and sleep clinics through our Integra NeuroSupplies
catalog business.
Integra LifeSciences Segment
Our Integra LifeSciences segment comprises our businesses that primarily sell
through intermediaries, such as strategic partners and original equipment
manufacturer customers. Through our Integra LifeSciences segment we develop and
manufacture a variety of medical products and devices, including products based
on our proprietary tissue regeneration technology. We partner with market
leaders for the development and marketing of most of our Integra LifeSciences
products. We believe that because these products address large, diverse markets,
we can promote them more cost-effectively through leveraging the sales
capabilities of our marketing partners than through developing our own sales
infrastructure. This strategy allows us to achieve our growth objectives cost-
effectively while enabling us to focus our management efforts on developing new
products. Our strategic partners include Ethicon, Inc. (a division of Johnson &
Johnson), Wyeth Biopharma, Medtronic Sofamor Danek, and Centerpulse.
Financial information about our segments and geographical areas, is set forth in
our financial statements under Notes to Consolidated Financial Statements, Note
13 - Segment and Geographic Information. We do not disaggregate nonoperating
revenues and expenses nor identifiable assets on a segment basis.
Recent Development
On March 17, 2003, we acquired JARIT(R) Surgical Instruments, Inc. (JARIT)
for $44.5 million in cash, subject to a working capital adjustment and other
adjustments with respect to certain income tax elections. For more than 30
years, JARIT has marketed a wide variety of high quality, reusable surgical
instruments to virtually all surgical disciplines. JARIT sells its products to
more than 5,200 hospitals and surgery centers worldwide. In the United
States, JARIT sells through a 20 person sales management force that works
with over 100 distributor sales representatives.
With more than 5,000 instrument patterns and a 98% order fill rate, JARIT has
developed a strong reputation as a leading provider of high-quality surgical
instruments. JARIT manages its vendor relationships and purchases, packages
and labels its products directly from instrument manufacturers through its
facility in Tuttlingen, Germany.
The acquisition of JARIT broadens Integra's existing customer base and
surgical instrument product offering and provides an opportunity to achieve
operating costs savings, including the procurement of Integra's Redmond(TM)-
Ruggles(TM) and Padgett Instruments Inc.(R) products directly from the
instrument manufacturers.
The acquired business generated approximately $30.9 million in revenues and
$7.8 million in income before income taxes for the year ended December 31, 2002.
We expect to report the results of JARIT in the Integra NeuroSciences segment.
STRATEGY
Our goal is to become a global leader in the development, manufacturing and
marketing of medical devices, implants and biomaterials in the markets in which
we compete. Key elements of our strategy include the following:
Expand Integra NeuroSciences. Through acquisitions and internal growth, we have
rapidly grown Integra NeuroSciences into a leading provider of products used in
the diagnosis, monitoring and treatment of chronic diseases and acute injuries
involving the brain, spine and nervous system. We believe that additional growth
potential in the Integra NeuroSciences segment exists through
* expanding our product portfolio and market reach through additional
acquisitions;
* increasing the penetration of our existing products into closely related
markets, such as the ENT, neurology, and spine markets;
* continuing the development and promotion of innovative new products, such as
the NeuraGen(TM) Nerve Guide and the LICOX(R) Brain Tissue Oxygen Monitoring
System; and
* expanding our sales force and product offerings focused on plastic
and reconstructive surgeons.
Additional Strategic Acquisitions. Since 1999 we have completed twelve
acquisitions focused primarily in the Integra NeuroSciences division. We
regularly evaluate potential acquisition candidates in this market and in other
specialty medical technology markets characterized by high margins, fragmented
competition and focused target customers.
Continue To Form Strategic Alliances For Integra LifeSciences' Products. We have
collaborated with well-known medical device companies to develop and market the
majority of our non-neurosurgical product lines. Significant ongoing strategic
alliances include those with Ethicon to market our INTEGRA(R) Dermal
Regeneration Template and Wyeth BioPharma and Medtronic Sofamor Danek to develop
products for use in orthopedics. We intend to pursue additional strategic
alliances selectively.
Continue To Develop New And Innovative Medical Products. As evidenced by our
development of the INTEGRA(R) Dermal Regeneration Template, biomaterials for the
orthopedic implant market, Biomend(R) and Biomend(R) Extend Absorbable Collagen
Membrane, DuraGen(R) Dural Graft Matrix and the NeuraGen(TM) Nerve Guide, we
have a leading proprietary absorbable implant franchise. We currently are
developing a variety of innovative neurosurgical and other medical products and
are seeking expanded applications for our existing products.
BUSINESS SEGMENTS
[INTEGRA NEUROSCIENCES LOGO]
OVERVIEW
The Integra NeuroSciences segment sells medical devices, implants, systems and
instruments used in the diagnosis, monitoring and treatment of chronic diseases
and acute injuries involving the brain, spine and nervous system, and disposable
medical supplies, such as electrodes, used in neurological testing. These
products are used primarily by neurosurgeons and nurses in the intensive care
unit and the operating room and by neurologists in hospital and outpatient
settings. We also sell products that vascular surgeons use to divert blood to
vital organs, such as the brain, during surgical procedures involving blood
vessels. Additionally, our Padgett Instruments, Inc. subsidiary sells
instruments and other devices through a separate direct sales force to plastic
and reconstructive surgeons, burn surgeons, ENT surgeons and other physicians.
According to industry sources and our estimates, our Integra NeuroSciences
products address markets that exceed $400 million in the aggregate and are
expected to grow at an annual rate of 6-8%.
Integra NeuroSciences offers one of the most comprehensive product lines serving
the neuro intensive care unit and operating room. We have established market
positions in intracranial monitoring, dural repair, tumor ablation,
neurosurgical shunting,surgical instrumentation, carotid shunting, peripheral
nerve repair and central nervous system diagnostic and monitoring supplies.
Integra NeuroSciences' products can be divided by use into the following
functional areas: i) the neuro intensive care unit, ii) the neurosurgical
operating room, and iii) all other. The table below provides a summary of
Integra NeuroSciences' products:
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PRODUCT LINES APPLICATION
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NEURO INTENSIVE CARE UNIT
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Camino(R) and Ventrix(R) fiber Access, drainage and continuous
optic-based intracranial monitoring of intracranial pressure,
Monitoring systems, LICOX(R) oxygen and temperature following
oxygen monitoring Systems, injury or neurosurgical procedures
Integra Systems of CSF Drainage and
Cranial Access
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NEUROSURGICAL OPERATING ROOM
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DuraGen(R) Dural Graft Matrix Graft to close brain and spine membrane
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PRODUCT LINES APPLICATION
NeuraGen(TM) Nerve Guide Repair of peripheral nerves
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Selector(R) Integra Ultrasonic Use of ultrasonic energy to
Aspirator; Dissectron(R) ablate tissue
Ultrasonic Aspirator
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Neurosurgical shunts, including the Specifically designed for the
Orbis-Sigma II(R), and the H-V Lumbar, management of hydrocephalus, a chronic
Novus and Equi-Flow(R) Valves condition involving excess
cerebrospinal fluid in the brain
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Redmond(TM)-Ruggles(TM) neurosurgical Specialized surgical instruments for
and spinal instruments use in brain or spinal surgery
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Integra epilepsy monitoring electrodes Electrodes for the intraoperative
monitoring of epileptic seizures
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ALL OTHER
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JARIT(R) Surgical Instruments Instruments for general, plastic, neuro
ENT cardiovascular, ob-gyn, and
ophthalmic surgery
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Padgett Instruments Devices and instruments used in burn,
reconstructive and plastic surgery
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Integra NeuroSupplies(TM) Disposables and supplies used in the
diagnosis and monitoring of
neurological, ENT and pulmonary
disorders
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Sundt(TM) and other carotid shunts For shunting blood during surgical
procedures involving blood vessels
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MARKETS AND PRODUCTS
Neuro Intensive Care Unit
The Monitoring Of Brain Parameters. Neurosurgeons use intracranial monitors to
diagnose and treat cases of severe head trauma and other diseases. There are
approximately 400,000 cases of head trauma each year in the United States, and
the market for monitoring and intervention is estimated to be approximately $40
million.
Integra NeuroSciences sells the Camino(R) and Ventrix(R) lines of intracranial
pressure and temperature monitoring systems and the LICOX(R) Brain Tissue Oxygen
Monitoring System. Integra NeuroSciences currently has over 3,000 intracranial
monitors installed worldwide. The Camino(R) and Ventrix(R) systems measure the
intracranial pressure and temperature in the brain and ventricles, and the
LICOX(R) system allows for continuous qualitative regional monitoring of
dissolved oxygen in cerebral tissues. Core technologies underlying the brain
parameter monitoring product line include the design and manufacture of the
disposable catheters used in the monitoring systems, pressure transducer
technology, optical detection/fiber optic transmission technology, sensor
characterization and calibration technology and monitor design.
External Drainage And Cranial Access. Neurosurgeons use external drainage
systems and cranial access kits to gain access to the cranial cavity and to
drain excess cerebrospinal fluid from the ventricles of the brain into an
external container. Integra NeuroSciences manufactures and markets a broad line
of cranial access kits and ventricular and lumbar external drainage systems
under the Integra CSF Drainage and Cranial Access Systems brand names.
Neurosurgical Operating Room
Repair Of The Dura Mater. The dura mater is the thick membrane that contains the
cerebrospinal fluid within the brain and the spine. The dura mater often must be
penetrated during brain surgery and is often damaged during spinal surgery. In
either case, surgeons may close or repair the dura mater with a graft. The graft
may consist of tissue taken from elsewhere in the patient's body, or it may be
one of the dural substitute products currently on the market, which are made of
synthetic materials, processed human cadaver, or bovine pericardium. The
worldwide market for dural repair, including cranial and spinal applications, is
estimated to be $80 million.
The DuraGen(R) Dural Graft Matrix is an absorbable collagen matrix indicated for
the repair of the dura mater surrounding the brain and spine. We believe that
the DuraGen(R) Dural Graft Matrix addresses the shortcomings from which other
methods for repairing the dura mater suffer. Clinical trials have shown our
DuraGen(R) product to be an effective means for closing the dura mater without
the need for suturing, which allows the neurosurgeon to conclude the operation
more efficiently. In addition, because the human body ultimately absorbs the
DuraGen(R) product and replaces it with new natural tissues, the patient avoids
some of the risks associated with a permanent implant inside the cranium or
spinal cavity.
Repair Of Peripheral Nerves. Peripheral nerves may become severed through
traumatic accidents or surgical injuries, often resulting in the permanent loss
of motor and sensory function. Although severed peripheral nerves regenerate
spontaneously, they do not establish functional connections unless the nerve
stumps are surgically reconnected. We estimate the market for the repair of
severed peripheral nerves to be $40 million.
The NeuraGen(TM) Nerve Guide is an absorbable implant for the repair of severed
peripheral nerves. The NeuraGen(TM) product is a collagen tube designed to
provide a protective environment for the regenerating nerve and to provide a
conduit through which regenerating nerves can bridge the gap caused by the
injury. The NeuraGen(TM) Nerve Guide offers a rapid method for rejoining severed
peripheral nerves. In addition to targeting the neurosurgical operating room, we
are also marketing the NeuraGen(TM) product to Integra NeuroSupplies' customer
base of non-hospital and private practice-based neurologists and to Padgett
Instruments' customer base of hand and reconstructive surgeons.
Neurosurgical Systems For Tissue Ablation. More than 145,000 primary and
metastatic brain tumors are diagnosed annually in the United States. Our
Selector(R) Integra Ultrasonic Aspirator and Dissectron(R) Ultrasonic Surgical
Aspirator systems address the market for the surgical destruction and removal of
malignant and non-malignant tumors and other tissue.
The Selector(R) Integra Ultrasonic Aspirator and Dissectron(R) Ultrasonic
Surgical Aspirator use very high frequency sound waves to pulverize cancer
tumors and allow the surgeon to remove the damaged tumor tissue by aspiration.
Unlike other surgical techniques, ultrasonic surgery selectively dissects and
fragments soft tissue leaving fibrous tissues such as nerves and blood vessels
intact. Ultrasonic aspiration facilitates the removal of unwanted tissue
adjacent or attached to vital structures. In September 2002, we received FDA
510(k) clearance to market the Selector(R) product for use in general,
gynecological, urological, plastic and reconstructive, orthopedic, thoracic and
thorascopic surgery procedures. We offer the Dissectron(R) product only outside
the United States.
Hydrocephalus Management. Hydrocephalus is an incurable condition resulting from
an imbalance between the amount of cerebrospinal fluid produced by the brain and
the rate at which the body absorbs cerebrospinal fluid. This condition causes
the ventricles of the brain to enlarge and the pressure inside the head to
increase. Hydrocephalus often is present at birth, but may also result from head
trauma, spina bifida, intraventricular hemorrhage, intracranial tumors and
cysts. Hydrocephalus is most commonly treated by inserting a shunt into the
ventricular system of the brain to divert the flow of cerebrospinal fluid out of
the brain and using a pressure valve to maintain a normal level of cerebrospinal
fluid within the ventricles.
According to the Hydrocephalus Association, hydrocephalus affects approximately
one in 500 children born in the United States. We estimate that approximately
80% of total cerebrospinal fluid shunt sales address birth-related
hydrocephalus, and the remaining 20% address surgical procedures involving
excess cerebrospinal fluid due to head trauma. Based on industry sources, we
believe that the total United States market for hydrocephalus management,
including monitoring, shunting and drainage, is approximately $70 million. Of
that amount, it is estimated that a little more than half consists of sales of
monitoring products, and the balance consists of sales of shunts and drains for
the management of hydrocephalus.
In 2002 we strengthened our offering of hydrocephalus management products
through our acquisition of the neurosciences division of NMT Medical, Inc. and
certain assets of the Radionics business, a division of Tyco Healthcare Group.
Those acquisitions added a range of leading pressure valves, including the
Orbis-Sigma(R), Integra Hakim(R) horizontal-vertical ("H-V"), Equiflow(R) and
Contour Flex(R) valves to our existing line of hydrocephalus management shunting
products. We have sold the Heyer-Schulte(R), Novus(R), LPV(R) and Pudenz(TM)
shunts, ventricular, peritoneal and cardiac catheters, physician-specified
hydrocephalus management shunt kits, Ommaya(R) cerebrospinal fluid reservoirs
and Spetzler(R) lumbar and syringo-peritoneal shunts since our acquisition of
the NeuroCare group of companies in 1999.
In recent years, neurosurgeons have increased their use of programmable valves,
which allow the neurosurgeon to adjust the pressure settings of the shunt while
it is implanted in the patient. Shunts that do not incorporate programmable
valve technology must be removed from the patient for subsequent pressure
adjustments, a process that requires an additional surgical procedure. We do not
market hydrocephalus management shunts with programmable valves and believe that
the increasing use of programmable valves may negatively affect the future sales
of our shunt products.
Neurosurgical And Spinal Instrumentation. We provide neurosurgeons and spine
surgeons with a full line of specialty hand-held spinal and neurosurgical
instruments sold under the Redmond(TM) and Ruggles(TM) brand names and a line
of disposable neuroendoscopy products sold under the Neuro Navigational(R)
brand name.
The Redmond(TM)-Ruggles(TM) products include retractors, kerrisons, dissectors,
and curettes. Major product segments include spinal instruments, microsurgical
neuro instruments, and products customized by Integra NeuroSciences and sold
through other companies and distributors. Specialty surgical steel fabricators
in Germany manufacture most of the Redmond(TM) and Ruggles(TM) products to our
specifications. The Neuro Navigational(R) product line consists of fiber optic
instruments used to facilitate minimally invasive neurosurgery, including third
ventriculostomies, which are increasingly substituted for shunt placement for
patients who meet the criteria.
Epilepsy Electrodes. We sell a line of electrodes for the intraoperative
monitoring of epileptic seizures through our NeuroSciences sales force. We
acquired these products and other assets in December 2002 from Radionics, a
division of the Tyco Healthcare Group, and are transferring the manufacture of
these products to our facility in Biot, France.
All Other
Neurological Supplies. Through our Integra NeuroSupplies business, we distribute
a wide variety of disposables and supplies, including surface electrodes, needle
electrodes, recording transducers and stimulators, and respiratory sensors, that
are used in the diagnosis and monitoring of neurological disorders. These
products are designed to monitor and perform tests of the nervous system and
brain, including electromyography (EMG), evoked potential (EP) and
electroencephalography (EEG) tests, and to test sleep disorders.
We sell these products under the Integra NeuroSupplies(TM) name primarily
through a catalog to more than 6,000 neurologists, hospitals, sleep clinics, and
other physicians. Neurologists are the referring physicians for Integra's
existing neurosurgeon customers and participate in the decision to use our line
of epilepsy monitoring electrodes.
Padgett Instruments. Padgett Instruments , Inc.(R) markets a wide variety of
high quality, reusable surgical instruments to plastic and reconstructive
surgeons, burn surgeons, ENT surgeons, hospitals, surgery centers, and other
physicians. We sell these products in the United States through an eight-person
direct sales force and through certain distributors and original equipment
manufacturer accounts. We sell these products internationally through
distributors. Padgett's customer base represents an attractive potential market
for certain of our other products, such as the NeuraGen(TM) Nerve Guide.
Hemodynamic Shunts. Our Sundt(TM) and other carotid shunts are used to divert
blood to vital organs, such as the brain, during surgical procedures involving
blood vessels. The Integra NeuroSciences sales force sells these products
directly in the United States for use by vascular surgeons and neurosurgeons.
[INTEGRA LIFESCIENCES LOGO]
OVERVIEW
The Integra LifeSciences segment develops and manufactures implants and other
medical devices used primarily for the treatment of defects, diseases and
injuries involving soft tissue and bone and for infection control. Many of the
current products of Integra LifeSciences are built on our expertise in
absorbable collagen products.
The Integra LifeSciences segment comprises our businesses that sell primarily
through intermediaries, such as strategic partners and original equipment
manufacturer customers. Because its products generally address large, diverse
markets, we have constructed Integra LifeSciences segment's marketing, research
and development programs around strategic alliances with leading medical device
companies. We believe that we can promote these products more cost-effectively
through leveraging our marketing partners' sales capabilities than through
developing our own sales force. According to industry sources and our estimates,
the aggregate size of the markets addressed by Integra LifeSciences' products
exceeds $1 billion.
We have established a reputation as a value-added and dependable development and
manufacturing partner. In addition, we have expertise in the development,
manufacture and supply of a variety of absorbable materials and can provide
experienced personnel to support product quality and regulatory review efforts.
Although the Integra LifeSciences products serve a wide variety of markets, they
can be segmented into two general groups: i) tissue repair products and ii)
other medical devices. The table below provides a summary of our Integra
LifeSciences products, their application, and marketing/development partner:
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PRODUCT LINES APPLICATION MARKETING/DEVELOPMENT PARTNER
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TISSUE REPAIR PRODUCTS
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INTEGRA(R) Dermal Regenerate dermis Ethicon, Inc., a division of
Regeneration Template and repair skin Johnson & Johnson, and Century
defects Medical, Inc. in Japan
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BioMend(R) and Used in guided tissue Centerpulse
BioMend(R) Extend regeneration in
Absorbable Collagen periodontal surgery
Membrane
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Absorbable Collagen Fracture management/ Wyeth BioPharma; Medtronic
Sponge and other matrices enabling spinal Sofamor Danek
for use with bone fusion
morphogenetic protein
(rhBMP-2)
______________________________________________________________________________
OTHER MEDICAL DEVICES
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VitaCuff(R) catheter Provides protection Arrow International, Inc.,
access infection against infection Bard Access Systems, Inc.,
control device arising from Tyco HealthCare,
long-term catheters
BioPatch(R)(1) Antimicrobial wound Ethicon, Inc.
Antimicrobial Wound dressing
Dressing
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PRODUCT LINES APPLICATION MARKETING/DEVELOPMENT PARTNER
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CollaCote(R), Used to control Centerpulse
CollaTape(R) and bleeding in dental
CollaPlug(R) absorbable surgery
wound dressings
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Instat(R)(1),Helistat(R) Control of bleeding Ethicon, Inc. and various
and Helitene(R) distributors
Absorbable Collagen
Hemostats
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Spembly Medical Allows surgeon to Various distributors
cryosurgery products use low temperature
moreto easily extract
diseased tissue
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Cranial fixation Allows neurosurgeon Medtronic
fixation devices; to repair injuries
custom cranial plates to the cranium
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(1) BioPatch and Instat are registered trademarks of Johnson & Johnson.
MARKETS AND PRODUCTS
Tissue Repair Products
Skin Replacement. Integra LifeSciences' skin replacement products address the
market need created by severe burns, reconstructive surgery, and chronic wounds.
INTEGRA(R) Dermal Regeneration Template is designed to enable the human body to
regenerate functional dermal tissue. The FDA initially approved the product
under a Premarket Approval application ("PMA") for the post-excisional treatment
of life-threatening deep or full-thickness dermal injury where sufficient
autograft is not available at the time of excision or not desirable due to the
physiological condition of the patient. In 2002, the FDA approved a PMA
supplement to permit the marketing of the INTEGRA(R) Dermal Regeneration
Template for the repair of scar contractures in patients who have already
recovered from their initial wound. In 2002, we also received FDA 510(k)
clearance to sell a related product, Integra(TM) Bilayer Matrix Wound Dressing
and Integra(TM) Matrix Wound Dressing, for the dressing of wounds, including
chronic wounds.
The Ethicon division of Johnson & Johnson is the exclusive seller of the
INTEGRA(R) Dermal Regeneration Template and the Integra(TM) BiLayer Wound Matrix
worldwide, except in Japan where Century Medical, Inc. has rights to distribute
the INTEGRA(R) Dermal Regeneration Template.
In 2002, we sold $4.2 million of INTEGRA(r) Dermal Regeneration Template to
Ethicon and received $2.0 million in research payments and $1.0 million in
clinical and regulatory event payments that were recorded in other revenue.
Ethicon has not been successful in selling the minimum amounts of INTEGRA(R)
Dermal Regeneration Template specified in its agreement with us. In addition,
we have notified Ethicon that certain clinical and regulatory events have
been achieved under the agreement and that payments for the achievement of
those events is due to us. Ethicon has informed us that it disagrees that the
clinical and regulatory events in question have been achieved, and that it
does not intend to make the payments we have demanded. In addition, Ethicon
has informed us that if we do not agree to substantial amendments to its
agreement with us, it will consider alternatives that may include exercising
its right to terminate the agreement.
The agreement requires Ethicon to give us notice one year in advance of a
termination of the agreement, during which time Ethicon is required to continue
to comply with the terms of the contract. At the end of that period, Ethicon
may be required to pay additional amounts based on the termination provisions
of the agreement and is required to cooperate in the transfer of the business
back to Integra. Additionally, Ethicon may apply the value of any minimum
payments in excess of actual product purchases against future purchases of
products for sale on a non-exclusive basis for a specified period of time.
If Ethicon does terminate the agreement or if we determine that Ethicon is in
breach of the agreement and we terminate the agreement, there is no assurance
that we will be able to recover the money that we believe Ethicon is obligated
to pay us under the agreement. If Ethicon does give us notice that it will
terminate the agreement, it is possible that Ethicon will diminish its
sales and marketing efforts for the product during the one-year notice period
and that its sales will decline as a result. In addition, we may not be
successful in sustaining or restoring the sales of the INTEGRA(R) Dermal
Regeneration Template at current levels after the termination date. Finally,
if Ethicon terminates the agreement it is possible that we may become
involved in litigation with Ethicon, which could also impair our ability to
sell products under our other agreements with Ethicon, including the
BioPatch(R) and Instat(R) products.
Guided Tissue Regeneration In Periodontal Surgery. Our BioMend(R) Absorbable
Collagen Membrane is used for guided tissue regeneration in periodontal surgery.
The BioMend(R) membrane is inserted between the gum and the tooth after surgical
treatment of periodontal disease, preventing the gum tissue from interfering
with the regeneration of the periodontal ligament that holds the tooth in place.
The body absorbs the BioMend(R) product after approximately four to seven weeks,
avoiding the requirement for additional surgical procedures to remove a
non-absorbable membrane. The BioMend(R) Extend product has the same indication
for use as the BioMend(R) product, except that it absorbs in approximately 16
weeks. The BioMend(R) and BioMend(R) Extend Absorbable Collagen Membranes are
sold through Centerpulse.
Orthopedic Biomaterials. Integra LifeSciences supplies Wyeth BioPharma with
Absorbable Collagen Sponges for use in developing bone regeneration implants.
Since 1994, we have supplied Absorbable Collagen Sponges for use with Wyeth
BioPharma's recombinant human bone morphogenetic protein-2 (rhBMP-2), a
manufactured version of human protein naturally present in very small quantities
in the body. Wyeth BioPharma is developing rhBMP-2 for clinical evaluation in
several areas of bone repair and augmentation, including orthopedic, oral and
maxillofacial surgery applications.
We are selling Absorbable Collagen Sponges for spinal applications through a
related collaboration with Medtronic Sofamor Danek in North America. In July
2002, the FDA approved Medtronic Sofamor Danek's InFUSE(TM) Bone Graft used with
the LT-CAGE(TM) Lumbar Tapered Fusion Device for use in spinal fusion
procedures. The InFUSE(TM) Bone Graft uses rhBMP-2 applied to our Absorbable
Collagen Sponge in place of a painful secondary procedure to harvest small
pieces of bone from the patient's own hip (autograft). When used with the
LT-CAGE Lumbar Tapered Fusion Device, the InFUSE(TM) Bone Graft is indicated to
treat certain types of spinal degenerative disc disease, a common cause of low
back pain.
Wyeth BioPharma has filed a PMA application with the FDA seeking approval for
the use of InductOs(TM), rhBMP-2 used in conjunction with our Absorbable
Collagen Sponge, for use in the treatment of acute long-bone fractures requiring
open surgical management. In November 2002, the Orthopedic and Rehabilitation
Panel of the FDA Medical Devices Advisory Committee recommended that the FDA
approve, with conditions, Wyeth BioPharma's PMA application.
We receive development funding and other payments from Medtronic Sofamor Danek
and Wyeth BioPharma related to the development of additional matrices for
various applications. Although the agreement provides for no milestone or other
contingent payments, Wyeth BioPharma pays us to assist with regulatory affairs
and research.
In addition, we are continuing to develop additional biomaterial technologies,
such as a new class of absorbable polycarbonates created through the
polymerization of tyrosine, that enhance the rate and quality of healing and
tissue regeneration with synthetic biodegradable scaffolds that support cell
attachment and growth. No medical device containing these materials has yet been
approved for sale.
Other Medical Devices
Other current products of Integra LifeSciences include the VitaCuff(R) catheter
access infection control device, the BioPatch(R) anti-microbial wound dressing,
a wide range of absorbable collagen products for hemostasis for use in dental
surgery sold under the names CollaCote(R), CollaTape(R) and CollaPlug(R), the
Helistat(R) Absorbable Collagen Hemostatic Agent, the Instat(R) Absorbable
Collagen Hemostat and cranial fixation devices for use in craniomaxillofacial
surgery. Our Spembly Medical cryosurgery products allow surgeons to use low
temperatures to more easily extract diseased tissue in ophthalmic, general,
gynecological, urological and cardiac applications.
RESEARCH AND DEVELOPMENT STRATEGY
Our research and development programs focus on developing new products based on
our materials and collagen engineering technologies and our expertise in
fiber optics. Contract development revenues from strategic alliance partners and
governmen grants fund a portion of our research and development activities. We
spent approximately $10.6 million, $8.0 million, and $7.5 million in 2002, 2001,
and 2000, respectively, on research and development activities. The 2002 amount
includes $2.3 million of acquired in-process research and development charges
recorded in connection with acquisitions. Research and development activities
funded by contract development and government grant revenues amounted to $3.5
million, $3.9 million, and $2.8 million in 2002, 2001, and 2000, respectively.
We have either acquired or secured the proprietary rights to several important
technological and scientific platforms, including collagen matrix, peptide,
biomaterials, and intracranial monitoring technologies. These technologies
provide support for our critical applications in neurosciences and tissue
regeneration and additional opportunities for generating near-term and long-term
revenues from medical applications. We have been able to identify and bring
together critical platform technology components from which we work to develop
products for both tissue regeneration and neuroscience applications. These
efforts have led to the successful development of new products, such as the
NeuraGen(TM) Nerve Guide and DuraGen(R) Dural Graft Matrix.
We regularly review our research and development programs to ensure that they
remain consistent with and supportive of our growth strategies. To that end, in
2002 we expanded our product development staff to increase the focus on our
Integra NeuroSciences product development efforts and to seek additional
strategic alliances and applications for our Integra LifeSciences products and
technologies.
GOVERNMENT REGULATION
As a manufacturer of medical devices, we are subject to extensive regulation by
the Food and Drug Administration (FDA) and, in some jurisdictions, by state and
foreign governmental authorities. These regulations govern the introduction of
new medical devices, the observance of certain standards with respect to the
design, manufacture, testing, labeling and promotion of the devices, the
maintenance of certain records, the ability to track devices, the reporting of
potential product defects, the export of devices and other matters. We believe
that we are in substantial compliance with these governmental regulations.
From time to time, we have recalled certain of our products. We have recalled
defective components or devices supplied by other vendors, kits assembled by us
that included incorrect combinations of products and defective devices
manufactured by us. None of these recalls resulted in material direct expense to
us or a long-term disruption of an important customer or supplier relationship.
However, a future voluntary or involuntary recall of one of our major products,
particularly if it involved a potential or actual risk to patients, could have
an adverse financial impact on us, as a result both of direct expenses and
disrupted customer relationships.
The FDA requires, as a condition of marketing a medical device in the United
States, that we secure a Premarket Notification clearance pursuant to Section
510(k) of the Federal Food, Drug and Cosmetic Act, an approved PMA application
or a supplemental PMA application. Alternatively, we may seek United States
market clearance through a Product Development Protocol approved by the FDA.
Establishing and completing a Product Development Protocol, or obtaining a PMA
application or supplemental PMA application, can take up to several years and
can involve preclinical studies and clinical testing. To perform clinical
testing in the United States on an unapproved product, we are also required to
obtain an Investigational Device Exemption from the FDA. In addition to
requiring clearance for new products, FDA rules may require a filing and FDA
approval, usually through a PMA application supplement or a 510(k) Premarket
Notification clearance, prior to marketing products that are modifications of
existing products or new indications for existing products. The FDA Medical
Device User Fee and Modernization Act of 2002 (MDUFMA) imposes user fees
payable to FDA for submission of Premarket Notifications, PMA applications,
Product Development Protocols, and certain supplemental PMA applications. The
regulatory process of obtaining product approvals/clearances can be onerous and
costly.
We may not receive the necessary regulatory approvals, including approval
for product improvements and new products, on a timely basis, if at all.
Delays in receipt of, or failure to receive, regulatory approvals could
have a material adverse effect on our business. Moreover, after clearance is
given, if the product is shown to be hazardous or defective, the FDA and foreign
regulatory agencies have the power to withdraw the clearance or require us to
change the device, its manufacturing process or its labeling, to supply
additional proof of its safety and effectiveness or to recall, repair, replace
or refund the cost of the medical device. In addition, federal, state and
foreign regulations regarding the manufacture and sale of medical devices are
subject to future changes. We cannot predict what impact, if any, these changes
might have. However, the changes could have a material impact on
our business.
We have received or acquired more than 190 Premarket Notification 510(k)
clearances, five approved PMA applications and 54 supplemental PMA applications.
We expect to file new applications during the next year to cover new products
and variations on existing products.
We are also required to register with the FDA as a device manufacturer. As such,
we are subject to periodic inspection by the FDA for compliance with the FDA's
Quality Systems Regulations. These regulations require that we manufacture our
products and maintain our documents in a prescribed manner with respect to
design, manufacturing, testing and control activities. Further, we are required
to comply with various FDA requirements for labeling and promotion. The Medical
Device Reporting regulations require that we provide information to the FDA
whenever there is evidence to reasonably suggest that one of our devices may
have caused or contributed to a death or serious injury or, if a malfunction
were to recur, could cause or contribute to a death or serious injury. In
addition, the FDA prohibits us from promoting a medical device before marketing
clearance has been received or promoting an approved device for unapproved
indications. Under FDA regulations, we are required to submit reports of certain
voluntary recalls and corrections to FDA. If the FDA believes that a company is
not in compliance with applicable regulations, it can institute proceedings to
detain or seize products, issue a warning letter, issue a recall order, impose
operating restrictions, enjoin future violations and assess civil penalties
against that company, its officers or its employees and can recommend criminal
prosecution to the Department of Justice. These actions could have a material
impact on our business. Other regulatory agencies may have similar powers.
Medical Device Regulations also are in effect in many of the countries outside
the United States in which we do business. These laws range from comprehensive
device approval and quality system requirements for some or all of our medical
device products to simpler requests for product data or certifications. The
number and scope of these requirements are increasing. In June 1998, the
European Union Medical Device Directive became effective, and all medical
devices must meet the Medical Device Directive standards and receive CE Mark
certification. CE Mark certification requires a comprehensive Quality System
program, and submission of data on a product to the Notified Body in Europe. The
Medical Device Directive, and ISO 9000; 2000, ISO 13485 and EN46001 are
recognized international quality standards that are designed to ensure that
we develop and manufacture quality medical devices. A recognized Notified Body
(an organization designated by the national governments of the European Union
member states to make independent judgments about whether or not a product
complies with the protection requirements established by each CE marking
directive) audits each of our facilities annually to verify our compliance with
these standards. In 2002, each of our certified facilities was audited, and we
have maintained our certification to these standards.
In addition, we are required to notify the FDA if we export specified medical
devices manufactured in the United States that have not been approved by the FDA
for distribution in the United States. We are also required to maintain certain
records relating to exports and make the records available to the FDA for
inspection, if required. We do not currently export medical devices manufactured
in the United States that have not been approved by the FDA, although we have in
the past.
OTHER UNITED STATES REGULATORY REQUIREMENTS
In addition to the regulatory framework for product approvals, we are and may be
subject to regulation under federal and state laws, including requirements
regarding occupational health and safety; laboratory practices; the maintenance
of personal health information; sales and marketing practices, including product
discounting practices; and the use, handling and disposal of toxic or hazardous
substances. We may also be subject to other present and possible future local,
state, federal and foreign regulations.
Our research, development and manufacturing processes involve the controlled use
of certain hazardous materials. We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of these materials and certain waste products. Although we believe that our
safety procedures for handling and disposing of these materials comply with the
standards prescribed by the controlling laws and regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated. In
the event of this type of an accident, we could be held liable for any damages
that result and any liability could exceed our resources. Although we believe
that we are in compliance in all material respects with applicable environmental
laws and regulations, we could incur significant costs to comply with
environmental laws and regulations in the future, and our operations, business
or assets could be materially adversely affected by current or future
environmental laws or regulations.
PATENTS AND INTELLECTUAL PROPERTY
We pursue a policy of seeking patent protection of our technology, products and
product improvements both in the United States and in selected foreign
countries. When determined appropriate, we have enforced and plan to continue to
enforce and defend our patent rights. In general, however, we do not rely on our
patent estate to provide us with any significant competitive advantages as it
relates to our existing product lines. We rely upon trade secrets and continuing
technological innovations to develop and maintain our competitive position. In
an effort to protect our trade secrets, we have a policy of requiring our
employees, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of their
relationship with us must be kept confidential, except in specified
circumstances.
BioMend(R), Camino(R), CollaCote(R), CollaPlug(R), CollaStat(TM), CollaTape(R),
Dissectron(R), DuraGen(R), EquiFlow(R), Helistat(R), Helitene(R),
Heyer-Schulte(R), INTEGRA(R) Dermal Regeneration Template, Integra Life-
Sciences(TM), Integra NeuroSciences(TM), Integra NeuroSupplies(TM), JARIT(R),
LICOX(R), NeuraGen(TM), NeuroNavigational(R), Novus(R), LPV(R), Ommaya(R),
Orbis-Sigma(R), Padgett Instruments, Inc(R), Pudenz(TM), Redmond(TM),
Ruggles(TM), Selector(R), Spetzler(R), Sundt(TM), Ventrix(R), VitaCuff(R) are
some of the trademarks of Integra and its subsidiaries. All other brand names,
trademarks and service marks appearing in this report are the property of their
respective holders.
COMPETITION
The largest competitors of Integra NeuroSciences in the neurosurgery markets are
the Medtronic Neurotechnologies division of Medtronic, Inc., the Codman division
of Johnson & Johnson, the Aesculap division of B. Braun and the Valleylab
division of Tyco International Ltd. In addition, various of the Integra
NeuroSciences product lines compete with smaller specialized companies or larger
companies that do not otherwise focus on neurosurgery. The products of Integra
LifeSciences face diverse and broad competition, depending on the market
addressed by the product. Finally, in certain cases our products compete
primarily against medical practices that treat a condition without using a
medical device, rather than any particular product (such as autograft tissue as
a substitute for INTEGRA(R) Dermal Regeneration Template). Depending on the
product line, we compete on the basis of our products' features, strength of our
sales organization or marketing partner, sophistication of our technology, and
cost effectiveness of our solution to the customer's medical requirements.
EMPLOYEES
At December 31, 2002, we had approximately 760 regular employees engaged in
production and production support (including warehouse, engineering, and
facilities personnel), quality assurance/quality control, research and
development, regulatory and clinical affairs, sales, marketing, administration
and finance. Except for certain employees at our Biot, France facility, none of
our current employees are subject to a collective bargaining agreement.
Many of our employees, including those holding senior positions in our
regulatory, operations, research and development, and sales and marketing
departments, were recruited from large pharmaceutical or medical technology
companies. Our sales representatives and regional sales managers attend in-depth
product training meetings throughout the year, and our clinical development team
consists of medical professionals who specialize in specific therapeutic areas
that our Integra NeuroSciences products serve. We believe that our clinical
development team differentiates us from our competition, as their knowledge and
experience as medical professionals allows them to more effectively educate and
train both our sales force and the customers who use our products. This team is
especially valuable in communicating the clinical benefits of new products.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this report, including statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business", which constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to a number
of risks, uncertainties and assumptions about Integra, including, among other
things:
* general economic and business conditions, both nationally and in our
international markets;
* our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
* anticipated trends in our business;
* existing and future regulations affecting our business;
* our ability to obtain additional debt and equity financing to fund capital
expenditures and working capital requirements and acquisitions;
* our ability to complete acquisitions and integrate operations
post-acquisition; and
* other risk factors described in the section entitled "Risk Factors" in this
report.
You can identify these forward-looking statements by forward-looking words such
as believe, may, could, will, estimate, continue, anticipate, intend, seek,
plan, expect, should, would and similar expressions in this report.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this report may not occur and actual results could
differ materially from those anticipated or implied in the forward-looking
statements.
RISK FACTORS
We believe that the following important factors, among others, have affected,
and in the future could affect, our business, financial condition, and results
of operations and could cause our future results to differ materially from our
historical results and those anticipated in any forward-looking statements made
by us. Such factors are not meant to represent an exhaustive list of the risks
and uncertainties associated with our business. These and other factors may
affect our future results and our stock price, particularly on a quarterly
basis.
Our Operating Results May Fluctuate.
Our operating results may fluctuate from time to time, which could affect our
stock price. Our operating results have fluctuated in the past and can be
expected to fluctuate from time to time in the future. Some of the factors that
may cause these fluctuations include:
* the impact of acquisitions;
* the timing of significant customer orders;
* market acceptance of our existing products, as well as products in
development;
* the timing of regulatory approvals;
* the timing of payments received and the recognition of those payments as
revenue under collaborative arrangements and strategic alliances;
* expenses incurred and business lost in connection with product field
corrections or recalls;
* our ability to manufacture our products efficiently; and
* the timing of our research and development expenditures.
The Industry And Market Segments In Which We Operate Are Highly Competitive, And
We May Be Unable To Compete Effectively With Other Companies.
In general, the medical technology industry is characterized by intense
competition. We compete with established medical technology and pharmaceutical
companies. Competition also comes from early stage companies that have
alternative technological solutions for our primary clinical targets, as well as
universities, research institutions and other non-profit entities. Many of our
competitors have access to greater financial, technical, research and
development, marketing, manufacturing, sales, distribution services and other
resources than we do. Further, our competitors may be more effective at
implementing their technologies to develop commercial products.
Our competitive position will depend on our ability to achieve market acceptance
for our products, implement production and marketing plans, secure regulatory
approval for products under development, obtain patent protection and secure
adequate capital resources. We may need to develop new applications for our
products to remain competitive. Technological advances by one or more of our
current or future competitors could render our present or future products
obsolete or uneconomical. Our future success will depend upon our ability to
compete effectively against current technology as well as to respond effectively
to technological advances. Competitive pressures could adversely affect our
profitability.
The largest competitors of Integra NeuroSciences in the neurosurgery markets are
the Medtronic Neurotechnologies division of Medtronic, Inc., the Codman division
of Johnson & Johnson, the Aesculap division of B. Braun, and the Valleylab
division of Tyco International Ltd. In addition, various of the Integra
NeuroSciences product lines compete with smaller specialized companies or larger
companies that do not otherwise focus on neurosurgery. The products of Integra
LifeSciences face diverse and broad competition, depending on the market
addressed by the product. Finally, in certain cases our products compete
primarily against medical practices that treat a condition without using a
device, rather than any particular product, such as autograft tissue as a
substitute for INTEGRA(R) Dermal Regeneration Template.
Our Current Strategy Involves Growth Through Acquisitions, Which Requires Us To
Incur Substantial Costs And Potential Liabilities For Which We May Never Realize
The Anticipated Benefits.
In addition to internal growth, our current strategy involves growth through
acquisitions. Since 1999, we have acquired twelve businesses or product lines at
a total cost of approximately $107 million.
We may be unable to continue to implement our growth strategy, and this strategy
may be ultimately unsuccessful. A significant portion of our growth in revenues
has resulted from, and is expected to continue to result from, the acquisition
of businesses complementary to our own. We engage in evaluations of potential
acquisitions and are in various stages of discussion regarding possible
acquisitions, certain of which, if consummated, could be significant to us. Any
potential acquisitions may result in material transaction expenses, increased
interest and amortization expense, increased depreciation expense and increased
operating expense, any of which could have a material adverse effect on our
operating results. As we grow by acquisitions, we must integrate and manage the
new businesses to realize economies of scale and control costs. In addition,
acquisitions involve other risks, including diversion of management resources
otherwise available for ongoing development of our business and risks associated
with entering new markets with which our marketing and sales force has limited
experience or where experienced distribution alliances are not available. Our
future profitability will depend in part upon our ability to develop further our
resources to adapt to these new products or business areas and to identify and
enter into satisfactory distribution networks. We may not be able to identify
suitable acquisition candidates in the future, obtain acceptable financing or
consummate any future acquisitions. If we cannot integrate acquired operations,
manage the cost of providing our products or price our products appropriately,
our profitability could suffer. In addition, as a result of our acquisitions of
other healthcare businesses, we may be subject to the risk of unanticipated
business uncertainties or legal liabilities relating to those acquired
businesses for which the sellers of the acquired businesses may not indemnify
us. Future acquisitions may also result in potentially dilutive issuances of
securities.
To Market Our Products Under Development We Will First Need To Obtain Regulatory
Approval. Further, If We Fail To Comply With The Extensive Governmental
Regulations That Affect Our Business, We Could Be Subject To Penalties And Could
Be Precluded From Marketing Our Products.
Our research and development activities and the manufacturing, labeling,
distribution and marketing of our existing and future products are subject to
regulation by numerous governmental agencies in the United States and in other
countries. The FDA and comparable agencies in other countries impose mandatory
procedures and standards for the conduct of clinical trials and the production
and marketing of products for diagnostic and human therapeutic use.
Our products under development are subject to FDA approval or clearance prior to
marketing for commercial use. The process of obtaining necessary FDA approvals
or clearances can take years and is expensive and full of uncertainties. Our
inability to obtain required regulatory approval on a timely or acceptable basis
could harm our business. Further, approval or clearance may place substantial
restrictions on the indications for which the product may be marketed or to whom
it may be marketed. Further studies, including clinical trials and FDA
approvals, may be required to gain approval for the use of a product for
clinical indications other than those for which the product was initially
approved or cleared or for significant changes to the product. In addition, for
products with an approved PMA application, the FDA requires annual reports and
may require post-approval surveillance programs to monitor the products' safety
and effectiveness. Results of post-approval programs may limit or expand the
further marketing of the product.
We believe that the most significant risk of our recent applications to the FDA
relates to the regulatory classification of certain of our new products or
proposed new uses for existing products. In the filing of each application, we
make a legal judgment about the appropriate form and content of the application.
If the FDA disagrees with our judgment in any particular case and, for example,
requires us to file a PMA application rather than allowing us to market for
approved uses while we seek broader approvals or requires extensive additional
clinical data, the time and expense required to obtain the required approval
might be significantly increased or approval might not be granted.
Approved products are subject to continuing FDA requirements relating to quality
control and quality assurance, maintenance of records, reporting of adverse
events, and product recalls, documentation, and labeling and promotion of
medical devices.
The FDA and foreign regulatory authorities require that our products be
manufactured according to rigorous standards. These regulatory requirements may
significantly increase our production or purchasing costs and may even prevent
us from making or obtaining our products in amounts sufficient to meet market
demand. If a third-party manufacturer or we change our approved manufacturing
process, the FDA may require a new approval before that process may be used.
Failure to develop our manufacturing capability may mean that even if we develop
promising new products, we may not be able to produce them profitably, as a
result of delays and additional capital investment costs. Manufacturing
facilities, both international and domestic, are also subject to inspections by
or under the authority of the FDA. In addition, failure to comply with
applicable regulatory requirements could subject us to enforcement action,
including product seizures, recalls, withdrawal of clearances or approvals,
restrictions on or injunctions against marketing our product or products based
on our technology, and civil and criminal penalties. See "Business -- Government
Regulation".
Certain Of Our Products Contain Materials Derived From Animal Sources And May
Become Subject To Additional Regulation.
Certain of our products, including the DuraGen(R) Dural Graft Matrix and the
INTEGRA(R) Dermal Regeneration Template, contain material derived from bovine
tissue. Products, including food as well as pharmaceuticals and medical devices,
that contain materials derived from animal sources are increasingly subject to
scrutiny in the press and by regulatory authorities. Regulatory authorities are
concerned about the potential for the transmission of disease from animals to
humans via those materials. This public scrutiny has been particularly acute in
Japan and Western Europe with respect to products derived from cattle, because
of concern that materials infected with the agent that causes bovine spongiform
encephalopathy, otherwise known as BSE or mad cow disease, may, if ingested or
implanted, cause a variant of the human Creutzfeldt-Jakob Disease, an ultimately
fatal disease with no known cure.
We take great care to provide that our products are safe, and free of agents
that can cause disease. In particular, the collagen used in the manufacture of
our products is derived only from the Achilles tendon of cattle from the United
States, where no cases of BSE have been reported. Scientists and regulatory
authorities classify the Achilles tendon as having a negligible risk of
containing the agent that causes BSE (an improperly folded protein known as a
prion) compared with other parts of the body. Additionally, we use processes in
the manufacturing of our products that are believed to inactivate prions.
Nevertheless, products that contain materials derived from animals, including
our products, may become subject to additional regulation, or even be banned in
certain countries, because of concern over the potential for prion transmission.
Accordingly, new regulation, or a ban of our products, could have a significant
adverse effect on our current business or our ability to expand our business.
Lack Of Market Acceptance For Our Products Or Market Preference For Technologies
That Compete With Our Products Could Reduce Our Revenues And Profitability.
We cannot be certain that our current products or any other products that we may
develop or market, will achieve or maintain market acceptance. Certain of the
medical indications that can be treated by our devices can also be treated by
other medical devices or by medical practices that do not include a device. The
medical community widely accepts many alternative treatments, and certain of
these other treatments have a long history of use. For example, the use of
autograft tissue is a well-established means for repairing the dermis, and it
may interfere with the widespread acceptance in the market for INTEGRA(R) Dermal
Regeneration Template.
We cannot be certain that our devices and procedures will be able to replace
those established treatments or that either physicians or the medical community
in general will accept and utilize our devices or any other medical products
that we may develop. For example, we cannot be certain that the medical
community will accept the NeuraGen(TM) Nerve Guide over conventional
microsurgical techniques for connecting severed peripheral nerves.
In addition, our future success depends, in part, on our ability to develop
additional products. Even if we determine that a product candidate has medical
benefits, the cost of commercializing that product candidate may be too high to
justify development. Competitors may develop products that are more effective,
cost less, or are ready for commercial introduction before our products. For
example, our sales of shunt products could decline if neurosurgeons increase
their use of programmable valves and we fail to introduce a competitive product.
If we are unable to develop additional, commercially viable products, our future
prospects could be adversely affected.
Market acceptance of our products depends on many factors, including our ability
to convince prospective collaborators and customers that our technology is an
attractive alternative to other technologies, to manufacture products in
sufficient quantities and at acceptable costs, and to supply and service
sufficient quantities of our products directly or through our strategic
alliances. In addition, limited funding available for product and technology
acquisitions by our customers, as well as internal obstacles to customer
approvals of purchases of our products, could harm acceptance of our products.
The industry is subject to rapid and continuous change arising from, among other
things, consolidation and technological improvements. One or more of these
factors may vary unpredictably, which could materially adversely affect our
competitive position. We may not be able to adjust our contemplated plan of
development to meet changing market demands.
Our Business Depends Significantly On Key Relationships With Third Parties,
Which We May Be Unable To Establish And Maintain.
Our revenue stream and our business strategy depend in part on our entering into
and maintaining collaborative or alliance agreements with third parties
concerning product marketing, as well as research and development programs. Our
most important strategic alliances are our agreement with Ethicon, Inc., a
division of Johnson & Johnson, relating to INTEGRA(R) Dermal Regeneration
Template, and our agreement with the Wyeth BioPharma division of Wyeth for the
development of collagen matrices to be used in conjunction with Wyeth
BioPharma's recombinant bone protein, a protein that stimulates the growth of
bone in humans. Termination of these alliances would require us to develop other
means to distribute the affected products and could adversely affect our
expectations for the growth of our Integra LifeSciences segment.
Ethicon has informed us that if we do not agree to substantial amendments to its
agreement with us, it will consider alternatives that may include exercising its
right to terminate the agreement.
Our ability to enter into agreements with collaborators depends in part on
convincing them that our technology can help them achieve their goals and
execute their strategies. This may require substantial time, effort and expense
on our part with no guarantee that a strategic relationship will result. We may
not be able to establish or maintain these relationships on commercially
acceptable terms. Our future agreements may not ultimately be successful. Even
if we enter into collaborative or alliance agreements, our collaborators could
terminate these agreements, or these agreements could expire before meaningful
developmental milestones are reached. The termination or expiration of any of
these relationships could have a material adverse effect on our business.
Much of the revenue that we may receive under these collaborations will depend
upon our collaborators' ability to successfully introduce, market and sell new
products derived from our products. Our success depends in part upon the
performance by these collaborators of their responsibilities under these
agreements. Some collaborators may not perform their obligations as we expect.
Some of the companies we currently have alliances with or are targeting as
potential allies offer products competitive with our products or may develop
competitive production technologies or competitive products outside of their
collaborations with us that could have a material adverse effect on our
competitive position.
In addition, our role in the collaborations is mostly limited to the production
aspects. As a result, we may also be dependent on collaborators for other
aspects of the development, preclinical and clinical testing, regulatory
approval, sales, marketing and distribution of our products. If our current or
future collaborators fail to market our products effectively or to develop
additional products based on our technology, our sales and other revenues could
significantly be reduced.
Finally, we have received and may continue to receive payments from
collaborators that may not be immediately recognized as revenue and therefore
may not contribute to reported profits until further conditions are satisfied.
Our Intellectual Property Rights May Not Provide Meaningful Commercial
Protection For Our Products, Which Could Enable Third Parties To Use Our
Technology Or Very Similar Technology And Could Reduce Our Ability To Compete In
The Market.
Our ability to compete effectively depends in part, on our ability to maintain
the proprietary nature of our technologies and manufacturing processes, which
includes the ability to obtain, protect and enforce patents on our technology
and to protect our trade secrets. We own or have licensed patents that cover
significant aspects of many of our product lines. However, you should not rely
on our patents to provide us with any significant competitive advantage. Others
may challenge our patents and, as a result, our patents could be narrowed,
invalidated or rendered unenforceable. Competitors may develop products similar
to ours that our patents do not cover. In addition, our current and future
patent applications may not result in the issuance of patents in the United
States or foreign countries. Further, there is a substantial backlog of patent
applications at the U.S. Patent and Trademark Office, and the approval or
rejection of patent applications may take several years.
Our Competitive Position Depends, In Part, Upon Unpatented Trade Secrets Which
We May Be Unable To Protect.
Our competitive position is also dependent upon unpatented trade secrets. Trade
secrets are difficult to protect. We cannot assure you that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, that our trade secrets
will not be disclosed, or that we can effectively protect our rights to
unpatented trade secrets.
In an effort to protect our trade secrets, we have a policy of requiring our
employees, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with us. These agreements provide that, except in specified
circumstances, all confidential information developed or made known to the
individual during the course of their relationship with us must be kept
confidential. We cannot assure you, however, that these agreements will provide
meaningful protection for our trade secrets or other proprietary information in
the event of the unauthorized use or disclosure of confidential information.
Our Success Will Depend Partly On Our Ability To Operate Without Infringing Or
Misappropriating The Proprietary Rights Of Others.
We may be sued for infringing the intellectual property rights of others. In
addition, we may find it necessary, if threatened, to initiate a lawsuit seeking
a declaration from a court that we do not infringe the proprietary rights of
others or that their rights are invalid or unenforceable. If we do not prevail
in any litigation, in addition to any damages we might have to pay, we would be
required to stop the infringing activity or obtain a license. Any required
license may be unavailable to us on acceptable terms, or at all. In addition,
some licenses may be nonexclusive, and allow our competitors to access the same
technology we license. If we fail to obtain a required license or are unable to
design our product so as not to infringe on the proprietary rights of others, we
may be unable to sell some of our products, which could have a material adverse
effect on our revenues and profitability.
It May Be Difficult To Replace Some Of Our Suppliers.
Outside vendors, some of whom are sole-source suppliers, provide key components
and raw materials used in the manufacture of our products. Although we believe
that alternative sources for many of these components and raw materials are
available, any supply interruption in a limited or sole source component or raw
material could harm our ability to manufacture our products until a new source
of supply is identified and qualified. In addition, an uncorrected defect or
supplier's variation in a component or raw material, either unknown to us or
incompatible with our manufacturing process, could harm our ability to
manufacture products. We may not be able to find a sufficient alternative
supplier in a reasonable time period, or on commercially reasonable terms, if at
all, and our ability to produce and supply our products could be impaired. We
believe that these factors are most likely to affect our Camino(R) and
Ventrix(R) lines of intracranial pressure monitors and catheters, which we
assemble using many different electronic parts from numerous suppliers. While we
are not dependent on sole-source suppliers, if we were suddenly unable to
purchase products from one or more of these companies, we could need time a
significant period of time to qualify a replacement, and the production of any
affected products could be disrupted. While it is our policy to maintain
sufficient inventory of components so that our production will not be
significantly disrupted even if a particular component or material is not
available for a period of time, we remain at risk that we will not be able to
qualify new components or materials quickly enough to prevent a disruption if
one or more of our suppliers ceases production of important components or
materials.
If Any Of Our Manufacturing Facilities Were Damaged And/Or Our Manufacturing
Processes Interrupted, We Could Experience Lost Revenues And Our Business Could
Be Seriously Harmed.
We manufacture our products in a limited number of facilities. Damage to our
manufacturing, development or research facilities due to fire, natural disaster,
power loss, communications failure, unauthorized entry or other events could
cause us to cease development and manufacturing of some or all of our products.
In particular, our San Diego, California facility that manufactures our
Camino(R) and Ventrix(R) product line is as susceptible to earthquake damage and
power losses from electrical shortages as are other businesses in the Southern
California area. Our silicone manufacturing plant in Anasco, Puerto Rico is
vulnerable to hurricane damage. Although we maintain property damage and
business interruption insurance coverage on these facilities, we may not be able
to renew or obtain such insurance in the future on acceptable terms with
adequate coverage or at reasonable costs.
We May Be Involved In Lawsuits To Protect Or Enforce Our Intellectual Property
Rights, Which May Be Expensive.
In order to protect or enforce our intellectual property rights, we may have to
initiate legal proceedings against third parties, such as infringement suits or
interference proceedings. Intellectual property litigation is costly, and, even
if we prevail, the cost of that litigation could affect our profitability. In
addition, litigation is time consuming and could divert management attention and
resources away from our business. We may also provoke these third parties to
assert claims against us.
We Are Exposed To A Variety Of Risks Relating To Our International Sales And
Operations, Including Fluctuations In Exchange Rates, Local Economic Conditions,
And Delays In Collection Of Accounts Receivable.
We generate significant revenues outside the United States, a substantial
portion of which are U.S. dollar-denominated transactions conducted with
customers who generate revenue in currencies other than the U.S. dollar. As a
result, currency fluctuations between the U.S. dollar and the currencies in
which those customers do business may have an impact on the demand for our
products in foreign countries where the U.S. dollar has increased in value
compared to the local currency. We cannot predict the effects of exchange rate
fluctuations upon our future operating results because of the number of
currencies involved, the variability of currency exposure and the potential
volatility of currency exchange rates.
Because we have operating subsidiaries based in Europe and we generate certain
revenues and incur certain operating expenses in British Pounds and the Euro, we
experience currency exchange risk with respect to those foreign currency
denominated revenues or expenses.
Our sales to foreign markets may be affected by local economic conditions.
Relationships with customers and effective terms of sale frequently vary by
country, often with longer-term receivables than are typical in the United
States.
Changes In The Health Care Industry May Require Us To Decrease The Selling Price
For Our Products Or Could Result In A Reduction In The Size Of The Market For
Our Products, And Limit The Means By Which We May Discount Our Products, Each Of
Which Could Have A Negative Impact On Our Financial Performance.
Trends toward managed care, health care cost containment, and other changes in
government and private sector initiatives in the United States and other
countries in which we do business are placing increased emphasis on the delivery
of more cost-effective medical therapies that could adversely affect the sale
and/or the prices of our products. For example:
* major third-party payors of hospital services, including Medicare, Medicaid
and private health care insurers, have substantially revised their payment
methodologies, which has resulted in stricter standards for reimbursement of
hospital charges for certain medical procedures;
* Medicare, Medicaid and private health care insurer cutbacks could create
downward price pressure on our products;
* numerous legislative proposals have been considered that would result in major
reforms in the U.S. health care system that could have an adverse effect on
our business;
* there has been a consolidation among health care facilities and purchasers of
medical devices in the United States who prefer to limit the number of suppliers
from whom they purchase medical products, and these entities may decide to stop
purchasing our products or demand discounts on our prices;
* there is economic pressure to contain health care costs in international
markets;
* there are proposed and existing laws and regulations in domestic and
international markets regulating the sales and marketing practices and the
pricing and profitability of companies in the health care industry; and
* there have been initiatives by third-party payors to challenge the prices
charged for medical products that could affect our ability to sell products on
a competitive basis.
Both the pressures to reduce prices for our products in response to these trends
and the decrease in the size of the market as a result of these trends could
adversely affect our levels of revenues and profitability of sales.
In addition, there are laws and regulations that regulate the means by which
companies in the health care industry may market their products to health care
professionals and may compete by discounting the prices of their products.
Although we exercise care in structuring our sales and marketing practices and
customer discount arrangements to comply with those laws and regulations, we
cannot assure you that:
* government officials charged with responsibility for enforcing those laws will
not assert that our sales and marketing practices or customer discount
arrangements are in violation of those laws or regulations, or
* government regulators or courts will interpret those laws or regulations in a
manner consistent with our interpretation.
We May Have Significant Product Liability Exposure And Our Insurance May Not
Cover All Potential Claims.
We are exposed to product liability and other claims in the event that our
technologies or products are alleged to have caused harm. We may not be able to
obtain insurance for the potential liability on acceptable terms with adequate
coverage or at reasonable costs. Any potential product liability claims could
exceed the amount of our insurance coverage or may be excluded from coverage
under the terms of the policy. Our insurance may not be renewed at a cost and
level of coverage comparable to that then in effect.
We Are Subject To Other Regulatory Requirements Relating To Occupational Health
And Safety And The Use Of Hazardous Substances Which May Impose Significant
Compliance Costs On Us.
We are subject to regulation under federal and state laws regarding occupational
health and safety, laboratory practices, and the use, handling and disposal of
toxic or hazardous substances. Our research, development and manufacturing
processes involve the controlled use of certain hazardous materials. Although we
believe that our safety procedures for handling and disposing of those materials
comply with the standards prescribed by the applicable laws and regulations, the
risk of accidental contamination or injury from these materials cannot be
eliminated. In the event of such an accident, we could be held liable for any
damages that result and any related liability could exceed the limits or fall
outside the coverage of our insurance and could exceed our resources. We may not
be able to maintain insurance on acceptable terms or at all. We may incur
significant costs to comply with environmental laws and regulations in the
future. We may also be subject to other present and possible future local,
state, federal and foreign regulations.
The Loss Of Key Personnel Could Harm Our Business.
We believe our success depends on the contributions of a number of our key
personnel, including Stuart M. Essig, our President and Chief Executive Officer.
If we lose the services of key personnel, those losses could materially harm
our business. We maintain key person life insurance on Mr. Essig.
Our Stock Price May Continue To Be Highly Volatile And You May Not Be Able To
Resell Your Shares At Or Above The Price You Paid For Them.
The stock market in general, and the stock prices of medical device companies,
biotechnology companies and other technology-based companies in particular, have
experienced significant volatility that often has been unrelated to the
operating performance of and beyond the control of any specific public company.
The market price of our common stock has fluctuated widely in the past and is
likely to continue to fluctuate in the future. Factors that may have a
significant impact on the market price of our common stock include:
* our actual financial results differing from guidance provided by management;
* our actual financial results differing from that expected by securities
analysts;
* future announcements concerning us or our competitors, including the
announcement of acquisitions;
* changes in the prospects of our business partners or suppliers;
* developments regarding our patents or other proprietary rights or those of
our competitors;
* quality deficiencies in our products;
* competitive developments, including technological innovations by us or our
competitors;
* government regulation, including the FDA's review of our products
and developments;
* changes in recommendations of securities analysts and rumors that may be
circulated about us or our competitors;
* public perception of risks associated with our operations;
* conditions or trends in the medical device and biotechnology industries;
* additions or departures of key personnel; and
* sales of our common stock.
Any of these factors could immediately, significantly and adversely affect the
trading price of our common stock.
Our Major Stockholders Could Make Decisions Adverse To Your Interests.
Our directors and executive officers and affiliates of certain directors own or
control more than one-third of our outstanding voting securities and generally
have significant influence over the election of all directors, the outcome of
any corporate action requiring stockholder approval, and other aspects of the
business. The ability of the board of directors to issue preferred stock, while
providing flexibility in connection with financing, acquisitions and other
corporate purposes, could have the effect of discouraging, deferring or
preventing a change in control or an unsolicited acquisition proposal, since the
issuance of preferred stock could be used to dilute the share ownership of a
person or entity seeking to obtain control of us. This significant influence
could preclude any unsolicited acquisition of Integra and consequently adversely
affect the market price of the common stock. Furthermore, we are subject to
Section 203 of the Delaware General Corporation Law, which could have the effect
of delaying or preventing a change of control.
ITEM 2. PROPERTIES
Our principal executive offices are located in Plainsboro, New Jersey. Principal
manufacturing and research facilities are located in Plainsboro, New Jersey,
Biot, France, San Diego, California, Anasco, Puerto Rico, Andover, England and
Mielkendorf, Germany. Our primary distribution centers are located in Cranbury,
New Jersey, Hawthorne, New York, Andover, England and Biot, France. In addition,
we lease several smaller facilities to support additional administrative,
assembly, and distribution operations. We lease all of our facilities other than
our facilities in Biot, France, and Tuttlingen, Germany, which we own.
All of our manufacturing and distribution facilities are registered with the
FDA. Our facilities are subject to FDA inspection to assure compliance with
Quality System Regulations. We believe that our manufacturing facilities are in
substantial compliance with Quality System Regulations, suitable for their
intended purposes and have capacities adequate for current and projected needs
for existing products. Some capacity of the plants is being converted, with any
needed modification, to meet the current and projected requirements of existing
and future products.
ITEM 3. LEGAL PROCEEDINGS
In July 1996, we filed a patent infringement lawsuit in the United States
District Court for the Southern District of California (the "Court") against
Merck KGaA, a German corporation, Scripps Research Institute, a California
nonprofit corporation, and David A. Cheresh, Ph.D., a research scientist with
Scripps, seeking damages and injunctive relief. The complaint charged, among
other things, that the defendant Merck KGaA willfully and deliberately induced,
and continues willfully and deliberately to induce, defendants Scripps Research
Institute and Dr. Cheresh to infringe certain of our patents. These patents are
part of a group of patents granted to The Burnham Institute and licensed by us
that are based on the interaction between a family of cell surface proteins
called integrins and the arginine-glycine-aspartic acid ("RGD") peptide sequence
found in many extracellular matrix proteins. The defendants filed a countersuit
asking for an award of defendants' reasonable attorney fees.
In March 2000, a jury returned a unanimous verdict in our favor and awarded us
$15,000,000 in damages, finding that Merck KGaA had willfully infringed and
induced the infringement of our patents. The Court dismissed Scripps and Dr.
Cheresh from the case.
In October 2000, the Court entered judgment in our favor and against Merck KGaA
in the case. In entering the judgment, the Court also granted to us pre-judgment
interest of approximately $1,350,000, bringing the total award to approximately
$16,350,000, plus post-judgment interest. Merck KGaA filed various post-trial
motions requesting a judgment as a matter of law notwithstanding the verdict or
a new trial, in each case regarding infringement, invalidity and damages. In
September 2001, the Court entered orders in favor of us and against Merck KGaA
on the final post-judgment motions in the case, and denied Merck KGaA's motions
for judgment as a matter of law and for a new trial.
Merck KGaA and we have each appealed various decisions of the Court. The court
of appeals heard arguments in the appeal in November 2002, and we expect the
court to issue its opinion in 2003. We have not recorded any gain in connection
with this matter.
In addition to the Merck KGaA matter, we are subject to various claims, lawsuits
and proceedings in the ordinary course of our business, including claims by
current or former employees and distributors and with respect to our products.
In the opinion of management, such claims are either adequately covered by
insurance or otherwise indemnified, or are not expected, individually or in the
aggregate, to result in a material adverse effect on our financial condition.
However, it is possible that our results of operations, financial position and
cash flows in a particular period could be materially affected by these
contingencies.
In September, 2001, three subsidiaries of the recently acquired neurosciences
division of NMT Medical, Inc. received a tax reassessment notice from the French
tax authorities seeking in excess $1.5 million in back taxes, interest and
penalties. NMT Medical, Inc., the former owner of these entities, has agreed to
specifically indemnify Integra against any liability in connection with these
tax claims. In addition, NMT Medical, Inc. has agreed to provide the French tax
authorities with payment of the tax liabilities on behalf of each of these
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ADDITIONAL INFORMATION:
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K.
Executive Officers
The executive officers of Integra are elected annually and serve at the
discretion of the Board of Directors. The only family relationship between any
of the executive officers and our Board of Directors is that Mr. Holtz is the
nephew of Richard E. Caruso, Ph.D., who is Chairman of the Board of Directors.
The following information indicates the position and age of our executive
officers as of the date of this report and their previous business experience.
NAME AGE POSITION
Stuart M. Essig ................... 41 President, Chief Executive Officer and Director
John B. Henneman, III.............. 41 Executive Vice President, Chief Administrative
Officer and Secretary
David B. Holtz..................... 36 Senior Vice President, Finance and Treasurer
Donald R. Nociolo ................. 40 Senior Vice President, Operations
Judith E. O'Grady.................. 52 Senior Vice President, Regulatory, Quality
Assurance and Clinical Affairs
Robert D. Paltridge ............... 45 Senior Vice President, Global Sales
Michael D. Pierschbacher, Ph.D..... 51 Senior Vice President Research and Development,
Director of the Corporate Research Center
Deborah A. Leonetti ............... 47 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.
John B. Henneman, III is Integra's Executive Vice President, Chief
Administrative Officer and Secretary, and is responsible for the law department,
regulatory affairs and quality systems, 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. In March 1999, Neuromedical Systems, Inc.
filed a petition under Chapter 11 of the federal bankruptcy laws. Mr. Henneman
received his A.B. from Princeton University and his J.D. from the University of
Michigan Law School.
David B. Holtz joined Integra as Controller in 1993 and has served as Vice
President, Finance and Treasurer since March 1997 and was promoted to Senior
Vice President, Finance and Treasurer in February 2001. In August 2002, Mr.
Holtz was given responsibility for managing Integra's European operations.
His responsibilities include managing all financial reporting and accounting
functions as well as the management of our European operations. Before
joining Integra, Mr. Holtz was an associate with Coopers & Lybrand, L.L.P. in
Philadelphia and Cono Leasing Corporation, a private leasing company. He
received a BS degree in Business Administration from Susquehanna University and
has been certified as a public accountant.
Donald R. Nociolo joined Integra as Director of Manufacturing in 1994 and has
served as Vice President, Operations since March 1997 and was promoted to Senior
Vice President of Operations in May 2000. His responsibilities include managing
all manufacturing and distribution operations in the United States. Mr. Nociolo
has over fifteen years experience working in engineering and manufacturing
management in the medical device industry. Six of those years were spent working
at Ethicon, Inc., a division of Johnson & Johnson. Mr. Nociolo received a BS
degree in Industrial Engineering from Rutgers University and an MBA in
Industrial Management from Fairleigh Dickinson University.
Judith E. O'Grady has served as Senior Vice President of Regulatory Affairs,
Quality Assurance and Clinical Affairs, since 1985. Ms. O'Grady has worked in
the areas of medical devices and collagen technology for over 20 years. Prior to
joining Integra, Ms. O'Grady worked for Colla-Tec, Inc., a Marion Merrell Dow
Company. During her career she has held positions with Surgikos, a Johnson &
Johnson Company, and was on the faculty of Boston University College of Nursing
and Medical School. Ms. O'Grady led the team that obtained the FDA approval for
INTEGRA(R) Dermal Regeneration Template, the first regenerative product approved
by the FDA, and has led teams responsible for more than 500 FDA and
international submissions. She received her BS degree from Marquette University
and MSN in Nursing from Boston University.
Robert D. Paltridge joined Integra as National Sales Director in February 1995
and was appointed Vice President, North American Sales in September 1997. He was
promoted to Vice President, Global Sales in October 2002 and Senior Vice
President, Global Sales in January 2003. His responsibilities include managing
both the direct sales force and distributor network for Integra NeuroSciences
products. Mr. Paltridge has 20 years of sales and sales management experience in
the medical device industry. Before joining Integra, he was National Sales
Manager at Strato Medical, a division of Pfizer, Inc. He received a BS degree in
Business Administration from Rutgers University.
Michael D. Pierschbacher, Ph.D. joined Integra in October 1995 as Senior Vice
President, Research and Development. In May 1998 he was named Senior Vice
President and Director of the Corporate Research Center. From June 1987 to
September 1995, Dr. Pierschbacher served as Senior Vice President and Scientific
Director of Telios Pharmaceuticals, Inc. ("Telios"), which we acquired in 1995.
He co-founded Telios in May 1987 and is the co-discoverer and developer of
Telios' matrix peptide technology. Before joining Telios as a full-time employee
in October 1988, he was a staff scientist at the Burnham Institute for five
years and remained on staff there in an adjunct capacity until the end of 1997.
He received his post-doctoral training at Scripps Clinical and Research
Foundation and at the Burnham Institute. Dr. Pierschbacher received his Ph.D. in
Biochemistry from the University of Missouri.
Deborah A. Leonetti joined Integra in May of 1997 as Director of Marketing and
was promoted to Vice President of Global Marketing in April 1999. Her
responsibilities include worldwide strategic marketing for all Integra products.
From September 1989 through May 1997, Ms. Leonetti worked for Cabot Medical,
which was later acquired by Circon Corporation, and held positions in sales,
sales training, and marketing. Prior to her experience at Cabot-Circon, Ms.
Leonetti completed fifteen years of clinical practice as a registered nurse at
St. Christopher's Hospital for Children in Philadelphia. She received her
nursing degree from St. Joseph's Hospital School of Nursing and La Salle
University.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Integra's Common Stock trades on The NASDAQ National Market under the symbol
IART. The following table lists the high and low sales prices for our Common
Stock for each quarter for the last two years:
HIGH LOW
2002
Fourth Quarter $ 18.99 $ 12.06
Third Quarter $ 21.80 $ 14.30
Second Quarter $ 29.00 $ 17.35
First Quarter $ 33.50 $ 24.61
2001
Fourth Quarter $ 31.03 $ 22.77
Third Quarter $ 32.15 $ 18.80
Second Quarter $ 22.45 $ 11.40
First Quarter $ 18.31 $ 9.87
The closing price for the Common Stock on March 14, 2003 was $20.26. For
purposes of calculating the aggregate market value of the shares of voting stock
of Integra held by non-affiliates, as shown on the cover page of this report, we
have assumed that all outstanding shares not held by our directors and executive
officers and stockholders owning 10% or more of outstanding shares were held by
non-affiliates. However, this should not be deemed to constitute an admission
that any such persons are, in fact, affiliates of Integra. Further information
concerning ownership of the Integra's voting stock by executive officers,
directors and principal stockholders will be included in our definitive proxy
statement to be filed with the Securities and Exchange Commission.
We have not paid any cash dividends on our common stock since our formation. Any
future determinations to pay cash dividends on the common stock will be at the
discretion of our Board of Directors and will depend upon our results of
operations and financial condition and other factors deemed relevant by the
Board of Directors.
The number of stockholders of record as of March 15, 2003 was approximately 600,
which includes stockholders whose shares were held in nominee name. The number
of beneficial stockholders at that date was over 5,000.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes included elsewhere in
this report. We have acquired numerous businesses and product lines during the
previous four years. As a result of these acquisitions, the consolidated
financial results and balance sheet data for certain of the periods presented
below may not be directly comparable.
Years Ended December 31,
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(in thousands, except per share data)
Operating Results:
Total revenue .......................................... $117,822 $ 93,442 $ 71,649 $ 42,876 $ 17,561
Total operating costs and expenses (1) ................. 98,635 79,156 83,370 55,256 31,741
------- ------ ------ ------ ------
Operating income (loss) ................................ 19,187 14,286 (11,721) (12,380) (14,180)
Interest income (expense), net ......................... 3,535 1,393 (473) 294 1,250
Gain on disposition of product line .................... -- -- 1,146 4,161 --
Other income (expense), net ............................ 3 (136) 201 141 588
------ ------ ------ ------ ------
Income (loss) before income taxes ...................... 22,725 15,543 (10,847) (7,784) (12,342)
Income tax expense (benefit) (2) ....................... (12,552) (10,863) 108 (1,818) --
------ ------ ------ ------ ------
Net income (loss) before extraordinary item and
cumulative effect of accounting change .............. 35,277 26,406 (10,955) (5,966) (12,342)
Extraordinary loss on the early retirement of debt,
net of income tax benefit(3) ........................ -- (243) -- -- --
Cumulative effect of accounting change(4) .............. -- -- (470) -- --
------ ------ ------ ------ ------
Net income (loss) ...................................... $35,277 $ 26,163 $(11,425) $ (5,966) $(12,342)
====== ====== ====== ====== ======
Diluted net income (loss) per share .................... $ 1.14 $ 0.94 $(0.97) $(0.40) $(0.77)
Weighted average shares outstanding .................... 30,895 27,796 17,553 16,802 16,139
Pro Forma Data (4):
Total revenue .......................................... $ 42,974 $ 16,993
Net loss ............................................... (5,868) (12,910)
Basic and diluted net loss per share ................... $ (0.40) $ (0.80)
December 31,
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(in thousands)
Financial Position(3):
Cash, cash equivalents, and marketable securities ...... $132,311 $131,036 $ 15,138 $ 23,612 $ 20,187
Total assets ........................................... 274,668 227,588 86,514 66,253 34,707
Long-term debt ......................................... -- -- 4,758 7,625 --
Accumulated deficit .................................... (44,323) (79,600) (105,729) (94,304) (88,287)
Stockholders' equity ................................... 247,597 204,056 53,781 37,989 31,366
(1) Total operating costs and expenses include the following significant special
items: $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.
(2) 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.
(3) In August 2001, we issued 4,747,500 shares of common stock at $25.50 per
share in a follow-on public offering. The net proceeds generated by the
offering, after expenses, was $113.4 million. We subsequently used a portion of
these proceeds to repay outstanding indebtedness totaling $9.3 million, for
which we recorded a $243,000 extraordinary loss, net of tax, on the early
retirement of debt.
(4) As the result of the adoption of SEC Staff Accounting Bulletin No. 101
"Revenue Recognition" (SAB 101), we recorded a $470,000 cumulative effect of an
accounting change to defer a portion of a nonrefundable, up-front fee received
and recorded in other revenue in 1998. The cumulative effect of this accounting
change was measured as of January 1, 2000. As a result of this accounting
change, other revenue in 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read together with the selected consolidated financial data
and our financial statements and the related notes appearing elsewhere in this
report. This discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including but not limited to those under the heading
"Risk Factors".
General
Integra develops, manufactures, and markets medical devices, implants and
biomaterials primarily for use in neurosurgery, orthopedics and soft tissue
repair. Our business operates globally and is divided into two segments: Integra
NeuroSciences(TM) and Integra LifeSciences(TM).
Integra NeuroSciences Segment
Our Integra NeuroSciences segment comprises our businesses that primarily sell
directly to healthcare providers. Through our Integra NeuroSciences segment we
are a leading provider of implants, devices, and systems used in neurosurgery,
neurotrauma, and related critical care, a marketer of surgical instruments and
devices, and a distributor of disposables and supplies used in the diagnosis and
monitoring of neurological disorders. We sell our neurosurgery, neurotrauma, and
related critical care products through a direct sales force of more than 80
people in the United States and western Europe. We market surgical instruments
and other devices to plastic and reconstructive surgeons, burn surgeons, hand
surgeons, ENT surgeons and other physicians through a direct sales force of
eight people in the United States. Integra NeuroSupplies provides neurologists,
hospitals, sleep clinics and other physicians with products used in the
diagnosis and monitoring of neurological conditions and sleep disorders.
Integra LifeSciences Segment
Our Integra LifeSciences segment includes our businesses that primarily sell
through strategic partners or to original equipment manufacturer customers.
These businesses develop and manufacture a variety of medical products and
devices, including products based on our proprietary tissue regeneration
technology that are used to treat soft tissue and orthopedic conditions. We have
partnered with market leaders for the development and marketing efforts related
to the majority of the products manufactured by the Integra LifeSciences
segment. These products address large, diverse markets, and we believe that we
can promote them more cost-effectively through leveraging marketing partners
than through developing our own sales infrastructure. We have strategic
alliances with Ethicon, Inc. (a division of Johnson & Johnson), Wyeth BioPharma,
Medtronic Sofamor Danek, and Centerpulse.
Acquisitions
Our recent growth in product revenues reflect increased sales of existing
products, sales of newly launched products and sales of acquired businesses and
product lines. We have acquired ten businesses and product lines since January
1, 2000, and those acquisitions have contributed significantly to our growth.
Reported product revenues for 2002 and 2001 included the following amounts in
sales of acquired product lines:
2002 Revenues 2001 Revenues
------------- -------------
(in thousands)
Integra NeuroSciences
Products acquired in 2002 ................ $ 6,196 $ --
Products acquired in 2001(1) ................ 8,381 2,044
---------- ----------
Subtotal .................................... 14,577 2,044
All other product revenues .................. 76,032 66,288
---------- ----------
Total Integra NeuroSciences product revenues. 90,609 68,332
Integra LifeSciences
Products acquired in 2002 ................... $ 1,419 $ --
All other product revenues .................. 20,597 19,576
---------- ----------
Total Integra LifeSciences product revenues.. 22,016 19,576
Consolidated product revenues .................. $112,625 $ 87,908
(1) Excludes sales of the LICOX(R) product in those territories where Integra
NeuroSciences had exclusive distribution rights to the product prior to our
acquisition of GMSmbH.
Since the beginning of 2000, we have acquired the following businesses and
product lines:
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 are moving 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 expect to
complete the consolidation of Padgett's operations into our distribution center
located in Cranbury, New Jersey in March 2003.
In September 2002, we acquired certain assets, including the NeuroSensor(TM)
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 neuromonitoring 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. The
NeuroSensor(TM) monitor received 510(k) clearance from the FDA in February 2002
but has not been launched, pending the results of clinical trials and other
factors. We expect the Novus products to complement our existing line of brain
parameter monitoring products.
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 neuromonitoring system. The design and functionality of this
next generation neuromonitoring system is based, in part, on certain technology
employed in the NeuroSensor(TM) system that has been modified specifically for
this project and which has no alternative use in the modified state. Early
prototypes of this next generation neuromonitoring system have been designed and
manufactured based on this modified core technology. Novus remains responsible
for the costs to complete development and obtain regulatory clearance for this
project, the value of which we have 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 include a facility
located in Biot, France that manufactures, packages and distributes shunting,
catheter and drainage products, and a distribution facility located in Atlanta,
Georgia. We completed the consolidation of the Atlanta operations into our
Cranbury, New Jersey distribution center as of September 30, 2002.
In July 2002, we acquired the assets of Signature Technologies, Inc., a
specialty manufacturer of titanium and stainless steel implants for the
neurosurgical and spinal markets, and certain other intellectual property
assets. The purchase price consisted of $2.9 million in cash, $0.5 million of
deferred consideration, and royalties on future sales of products to be
developed. Our acquisition of Signature Technologies gave us the capability of
developing and manufacturing metal implants for our strategic partners and for
our direct sale. Signature Technologies currently manufactures cranial fixation
systems for sale primarily under a single contract manufacturing agreement that
expires in June 2004.
In connection with this acquisition, we recorded a $1.2 million in-process
research and development charge for the value associated with a project for the
development of an enhanced cranial fixation system using patented technology for
improved identification and delivery of certain components of the system.
Signature Technologies has manufactured prototypes of this enhanced cranial
fixation system and we do not expect to incur significant costs to complete
development and obtain regulatory clearance to market the product. We estimated
the value of the in-process research and development charge with the assistance
of a third party appraiser using probability weighted cash flow projections with
factors for successful development ranging from 10% to 35% and a 15% discount
rate.
In December 2001, we acquired NeuroSupplies, Inc., a specialty distributor of
disposables and supplies for neurologists, pulmonologists and other physicians,
for $4.1 million. The purchase price consisted of $0.2 million in cash, a $3.6
million note paid in January 2002, and 10,000 shares of Integra Common Stock.
Integra NeuroSupplies markets a wide variety of supplies to neurologists,
hospitals, sleep clinics, and other physicians in the United States as well as
to original equipment manufacturers and distributors.
In April 2001, we acquired Satelec Medical, a subsidiary of the Satelec-Pierre
Rolland group, for $3.9 million in cash. Satelec Medical, based in France,
manufactures and markets the Dissectron(R) ultrasonic surgical aspirator console
and a line of related handpieces. We completed the consolidation of the Satelec
manufacturing operations into our Andover, England and Biot, France facilities
in 2002.
In April 2001, we acquired GMSmbH, the German manufacturer of the LICOX(R)
product, for $3.2 million. The purchase price consisted of $2.6 million in cash,
the forgiveness of $0.2 million in notes receivable from GMSmbH, and $0.4
million of future minimum royalty payments to the seller. Prior to the
acquisition, the Integra NeuroSciences segment had exclusive marketing rights to
the LICOX(R) products in the United States and certain other markets.
In April 2000, we purchased the Selector(R) Ultrasonic Aspirator, Ruggles(TM)
hand-held neurosurgical instruments and Spembly Medical cryosurgery product
lines from NMT Medical, Inc. for $11.6 million in cash. We report revenues of
the cryosurgery product line in our Integra LifeSciences segment.
In January 2000, we purchased the business of Clinical Neuro Systems, Inc. for
$6.8 million. The purchase price consisted of $4.0 million in cash and a $2.8
million promissory note issued to the seller, which we repaid in full in 2001.
The acquired business designed and manufactured neurosurgical external
ventricular drainage systems, catheters, drainage bags, and cranial access kits.
We have accounted for these acquisitions using the purchase method of accounting
and have included the results of operations of each of the acquired businesses
in our consolidated financial statements since its date of acquisition. The
following table provides a comparison of pro forma product revenues for the
years 2002 and 2001 as if all acquisitions completed after January 1, 2001 had
occurred as of the beginning of that year. This pro forma product revenues data
is based upon estimates of product revenues generated by the acquired businesses
during the period prior to which Integra acquired them and does not necessarily
represent results that would have occurred if the acquisitions had taken place
on the basis assumed above.
2002 2001 Growth Over Prior Year
Reported Pro Forma Reported Pro Forma Reported Pro Forma
-------- --------- -------- --------- -------- ---------
($ in thousands)
Integra NeuroSciences product revenues . $ 90,609 $ 105,129 $ 68,332 $ 95,761 32.6% 9.8%
Integra LifeSciences product revenues .. 22,016 23,780 19,576 22,737 12.5% 4.6%
-------- --------- -------- --------- -------- ---------
Consolidated product revenues .......... 112,625 128,909 87,908 118,498 28.1% 8.8%
Other revenue .......................... 5,197 5,197 5,534 5,534 (0.6%) (0.6%)
-------- --------- -------- --------- -------- ---------
Total revenue .......................... $117,822 $ 134,106 $ 93,442 $ 124,032 26.1% 8.1%
On March 17, 2003, we acquired JARIT(R) Surgical Instruments, Inc. (JARIT)
for $44.5 million in cash, subject to a working capital adjustment and other
adjustments with respect to certain income tax elections. For more than 30
years, JARIT has marketed a wide variety of high quality, reusable surgical
instruments to virtually all surgical disciplines. JARIT sells its products to
more than 5,200 hospitals and surgery centers worldwide. In the United
States, JARIT sells through a 20 person sales management force that works
with over 100 distributor sales representatives.
With more than 5,000 instrument patterns and a 98% order fill rate, JARIT has
developed a strong reputation as a leading provider of high-quality surgical
instruments. JARIT manages its vendor relationships and purchases, packages
and labels its products directly from instrument manufacturers through its
facility in Tuttlingen, Germany.
The acquisition of JARIT broadens Integra's existing customer base and
surgical instrument product offering and provides an opportunity to achieve
operating costs savings, including the procurement of Integra's
Redmond(TM)-Ruggles(TM) and Padgett Instruments Inc.(R) products directly from
the instrument manufacturers.
The acquired business generated approximately $30.9 million in revenues and
$7.8 million in income before income taxes for the year ended December 31, 2002.
We expect to report the results of JARIT in the Integra NeuroSciences segment.
Results of Operations
As a result of our recent acquisitions, the following financial results may not
be directly comparable.
Years Ended December 31,
2002 2001 2000
------ ------ ------
(in thousands, except per share data)
Product revenue ........................................ $ 112,625 $ 87,908 $ 65,360
Total revenue .......................................... 117,822 93,442 71,649
Cost of product revenues ............................... 45,772 36,014 29,511
Gross margin on product revenues ....................... 66,853 51,894 35,849
Gross margin as a percentage of product revenues ....... 59% 59% 55%
Total other operating costs and expenses ............... 52,863 43,142 53,859
------ ------ ------
Operating income (loss) ................................ 19,187 14,286 (11,721)
Interest income (expense), net ......................... 3,535 1,393 (473)
Gain on disposition of product line .................... -- -- 1,146
Other income (expense), net ............................ 3 (136) 201
------ ------ ------
Income (loss) before income taxes ...................... 22,725 15,543 (10,847)
Income tax expense (benefit) ........................... (12,552) (10,863) 108
------ ------ ------
Net income (loss) before extraordinary item and
accounting change ................................... 35,277 26,406 (10,955)
Extraordinary loss / accounting change ................. -- (243) (470)
------ ------ ------
Net income (loss) ...................................... $ 35,277 $ 26,163 $(11,425)
====== ====== ======
Diluted net income (loss) per share .................... $ 1.14 $ 0.94 $ (0.97)
Weighted average shares outstanding .................... 30,895 27,796 17,553
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, as compared to 78% of product revenues in 2001 and 79% of product
revenues in 2000. The Integra NeuroSciences segment, which reported a $21.3
million increase in total revenues to $90.7 million, a 31% increase over 2001,
led the growth in total revenues and product revenues in 2002. The Integra
LifeSciences segment reported a $3.1 million increase in total revenues to $27.1
million, a 13% increase over 2001.
In 2001, total revenues increased 30% over 2000 to $93.4 million, led by a 35%
increase in product revenues to $87.9 million. Domestic product revenues
increased $16.9 million in 2001 to $68.6 million, or 78% of total product
revenues, as compared to 79% of product revenues in 2000. The Integra
NeuroSciences segment, which reported an $18.9 million increase in total
revenues to $69.4 million, a 37% increase over 2000, led growth in total
revenues and product revenues in 2001. The Integra LifeSciences segment reported
a $2.9 million increase in total revenues to $24.0 million, a 14% increase over
2000.
Gross margins as a percentage of product revenue remained unchanged between 2002
and 2001. Cost of product revenues included $447,000, $203,000, and $429,000 in
fair value inventory purchase accounting adjustments recorded in connection with
acquisitions in 2002, 2001, and 2000, respectively. Excluding these adjustments,
gross margin as a percentage of product revenues would have been 60%, 59% and
56%, in 2002, 2001 and 2000, respectively. The adjusted gross margins as a
percentage of product revenue increased slightly in 2002 as the increased
percentage of overall product revenues from the higher margin Integra
NeuroSciences segment was offset by the lower margins in our Integra
LifeSciences segment. We expect our future gross margins to benefit as the
higher margin Integra NeuroSciences segment continues to grow faster than the
Integra LifeSciences segment. We also have developed or are developing plans to
improve gross margins by consolidating our manufacturing facilities and
increasing the efficiency of various manufacturing sites.
Net income in 2002 was $35.3 million, or $1.14 per diluted share, as compared to
net income of $26.2 million in 2001, or $0.94 per diluted share, and a net loss
of $11.4 million in 2000, or $(0.97) per diluted share. Included in these
amounts are certain charges or gains resulting from facts and circumstances
that, based on our recent history and future expectations, may not recur with
similar materiality or impact on continuing operations. We believe that the
identification of all charges and gains that meet this criteria promotes
comparability of reported financial results. The following special charges and
gains were included in net income (loss) and net income (loss) per share:
Recorded in 2002
- - A $20.4 million deferred income tax benefit primarily from the reduction of
the valuation allowance recorded against our deferred tax assets associated with
net operating loss carryforwards; and
- - acquired in-process research and development charges of $2.3 million recorded
in connection with acquisitions.
Recorded in 2001
- - A $11.5 million deferred income tax benefit from the reduction of a portion of
the valuation allowance recorded against our deferred tax assets associated with
net operating loss carryforwards; and
- - An extraordinary loss of $243,000, net of tax, from the early retirement of
debt;
Recorded in 2000
- - A $13.5 million non-cash, stock-based compensation charge related to the
extension of the Chief Executive Officer's employment agreement recorded in
operating expenses;
- - A $1.1 million gain on the sale of product lines;
- - A $470,000 charge recorded as the cumulative effect of an accounting change
associated with the adoption of a new accounting policy for revenue recognition;
and
- - A $4.2 million non-recurring, non-cash dividend related to the beneficial
conversion feature of our Series C Convertible Preferred Stock when it was
issued in March 2000 that did not affect the reported net loss for 2000 but was
reflected in the calculation of net loss per share for 2000;
The following discussion of segment financial results excludes corporate general
and administrative expenses and amortization of intangible assets, which are not
included in the measurement of segment operating results.
INTEGRA NEUROSCIENCES SEGMENT
2002 2001 2000
-------- -------- --------
(in thousands)
Product revenues:
- Neuro intensive care unit .................. 31,697 $ 27,830 $ 23,521
- Neuro operating room ....................... 47,934 36,213 21,820
- Other NeuroSciences products ............... 10,978 4,289 3,861
-------- -------- --------
Total product revenues .......................... 90,609 68,332 49,202
Other revenue ................................... 111 1,061 1,312
-------- -------- --------
Total revenue ................................... 90,720 69,393 50,514
Cost of product revenues ........................ 34,263 25,973 20,485
Gross margin on product revenues ................ 56,346 42,359 28,717
Gross margin as a percentage of product revenues 62% 62% 58%
Research and development expenses ............... 4,506 3,027 2,470
Acquired in-process research and development .... 2,328 -- --
Sales and marketing expenses .................... 24,340 18,750 13,165
General and administrative expenses ............. 6,459 3,849 4,358
-------- -------- --------
Operating income ................................ 18,824 $ 17,794 $ 10,036
Product revenues in the Integra NeuroSciences segment increased $22.3 million in
2002 to $90.6 million, a 33% increase over 2001, and included $6.2 million in
sales of product lines acquired in 2002. Product revenues increased $19.1
million in 2001 to $68.3 million, a 39% increase over 2000, and included $2.0
million in sales of product lines acquired in 2001. We have generated this
growth through acquisitions, new product launches, and increased direct sales
and marketing efforts, both domestically and in Europe.
Increased sales of our DuraGen(R) Dural Graft Matrix accounted for most of
our growth in neurosurgical operating room product revenue in 2002. Revenue from
sales of neurosurgical shunt product lines acquired in 2002, offset in part by
a decline in sales from our existing shunt lines, and increased sales of our
NeuraGen(TM) Nerve Guide and ultrasonic aspirators also contributed to the
growth in our 2002 neurosurgical operating room product revenue. Revenue from
sales of drainage product lines acquired in 2002 and increased sales of our
intracranial monitoring systems and existing drainage systems all contributed
significantly to the growth in our neurosurgical intensive care unit product
revenues in 2002. Substantially all of the growth in other neurosciences
products revenue in 2002 was attributable to product lines acquired in 2002 and
in December 2001.
We expect that our future growth will derive from our expanded domestic sales
force, the continued implementation of our direct sales strategy in Europe and
from internally developed and acquired products. We also intend to acquire
businesses that complement our existing businesses and products.
Cost of product revenues included $447,000, $203,000, and $339,000 in fair value
inventory purchase accounting adjustments recorded in connection with
acquisitions in 2002, 2001, and 2000, respectively. Excluding these adjustments,
gross margin as a percentage of product revenues would have been 63%, 62% and
59%, in 2002, 2001 and 2000, respectively. The continued improvement in gross
margins is primarily the result of an improved sales mix of higher margin
products and increased direct sales to hospitals in Europe.
Effective January 2003, we began to sell our neurosurgical products to certain
hospitals through a group purchasing organization. Group purchasing
organizations use the leverage of large, organized buying groups to obtain
better prices for medical products for the participating hospitals and other
health care providers than might otherwise be available to these institutions
individually. We expect that our participation in group purchasing organizations
will improve our ability to sell our products to those participating hospitals
that have not historically purchased from us.
In 2000 and 2001, other revenue consisted primarily of technology related
royalties. Other revenue decreased by $950,000 in 2002 from the expiration of a
technology related royalty agreement.
In 2002, we recorded $2.3 million of in-process research and development charges
in connection with our acquisitions of Signature Technologies, Inc. and certain
assets of Novus Monitoring Limited. Other research and development expenses
increased in 2002 as a result of increased headcount and spending on product
development. We expect to continue to increase our efforts and focus on product
development in the future. Research and development expenses increased in 2001
primarily due to the development of a collagen hemostatic device for use in
neurosurgical procedures and development costs for the NeuraGen(TM) Nerve Guide
product. Excluding the in-process research and development charges recorded on
the Signature and Novus acquisitions, research and development expenses
represented 5%, 4%, and 5% of total product revenues in 2002, 2001, and 2000,
respectively.
Sales and marketing expenses have increased significantly since 2000, consistent
with the expansion of our domestic and international sales and marketing
infrastructure and increased trade show activities. Sales and marketing expenses
represented 27% of total product revenues in each of the years 2000 through
2002.
Since the end of 1999, we have more than doubled the size of our domestic
neurosurgical sales organization to more than 80 professionals, including
neurospecialists, regional managers and clinical educators. With the
acquisitions of GMSmbH and Satelec Medical in April 2001 and the neurosciences
division of NMT Medical in July 2002, we have a direct neurosurgical sales and
marketing presence in the key markets of western Europe. Through the acquisition
of Padgett Instruments in 2002 we have an eight person direct sales force in the
United States that sells to plastic and reconstructive surgeons, burn surgeons,
hand surgeons, ENT surgeons and other physicians. Through the acquisition of
JARIT Surgical Instruments in March 2003, we have a 20 person sales management
force in the United States that works with over 100 distributor sales
representatives selling to virtually all surgical disciplines.
General and administrative expenses increased $2.6 million in 2002, $1.8 million
of which were operating costs associated with recently acquired businesses that
were not reflected in our results for the full year in 2001. General and
administrative expenses decreased $509,000 in 2001, primarily as a result of the
recording in 2000 of a write-off of a large distributor account and improved
accounts receivable collections in 2001.
INTEGRA LIFESCIENCES SEGMENT
2002 2001 2000
-------- -------- --------
(in thousands)
Product revenues:
- Tissue repair products ........................ $ 10,365 $ 8,698 $ 6,168
- Other medical devices ......................... 11,651 10,878 9,990
-------- -------- --------
Total product revenues ............................. 22,016 19,576 16,158
Other revenue ...................................... 5,086 4,473 4,977
-------- -------- --------
Total revenue ...................................... 27,102 24,049 21,135
Cost of product revenues ........................... 11,509 10,041 9,026
Gross margin on product revenues ................... 10,507 9,535 7,132
Gross margin as a percentage of product revenues ... 48% 49% 44%
Research and development expenses .................. 3,798 4,965 5,054
Sales and marketing expenses ....................... 778 1,572 2,206
General and administrative expenses ................ 1,239 1,256 1,470
-------- -------- --------
Operating income ................................... $ 9,778 $ 6,215 $ 3,379
Product revenues in the Integra LifeSciences segment increased $2.4 million in
2002 to $22.0 million, a 12% increase over 2001. This growth was generated
primarily by increased revenues from the Absorbable Collagen Sponge component of
Medtronic's recently approved InFUSE(TM) Bone Graft product. Other medical
devices product revenues in 2002 included $1.4 million in sales of product lines
acquired in 2002.
Product revenues in the Integra LifeSciences segment increased $3.4 million in
2001 to $19.6 million, a 21% increase over 2000. This growth was generated
primarily by a $2.5 million increase in revenues from tissue repair products and
a $600,000 increase in revenues from the cryosurgery product line acquired in
the second quarter of 2000. The increase in sales of tissue repair products was
primarily generated by higher sales of the INTEGRA(R) Dermal Regeneration
Template and our Absorbable Collagen Sponge.
Gross margins decreased slightly in 2002 from 2001 as unfavorable manufacturing
overhead variances and the inclusion of lower margin Signature Technologies
products offset the effect of increased sales of our higher margin products. We
have identified and corrected the source of 2002's unfavorable manufacturing
variances.
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 by $613,000 in 2002 as the receipt of $1.0 million in event
related payments offset a decline in government grant funding. The decline in
other revenue in 2001 was primarily the result of $1.5 million of event-related
revenues received in 2000, as compared to none in 2001, partially offset by
higher research and development funding received in 2001. Other revenue includes
$2.0 million per year in research and development funding related to our
strategic alliance with Ethicon. The Ethicon Agreement provides us with research
funding of $2.0 million per year through the year 2004. After 2004, funding
amounts are based on a percentage of net revenues of the INTEGRA(R) Dermal
Regeneration Template.
In 2002, the FDA approved a Premarket Approval ("PMA") supplement to permit the
marketing of the INTEGRA(R) Dermal Regeneration Template for the repair of scar
contractures in patients who have already recovered from their initial wound. In
2002 we also received FDA 510(k) clearance to sell related products, Integra(TM)
Bilayer Matrix Wound Dressing and Integra(TM) Matrix Wound Dressing, for the
dressing of wounds, including chronic wounds. We are continuing to work with
Ethicon to obtain additional marketing indications for the INTEGRA(R) product.
Although the research, development and distribution agreements with our
strategic partners provide us with funding when certain events occur, such as
advances in research programs, critical publications or product approvals, the
timing of these event payments is uncertain and difficult to predict.
Research and development expense declined $1.2 million in 2002 from reduced
spending on INTEGRA(R) Dermal Regeneration Template and a $0.5 million decrease
in government grants for research. The decrease in research and development
expenses in 2001 was the result of the termination of a program with a partner
to develop a product to regenerate articular cartilage, partially offset by
increased spending on programs with our other development partners.
Our strategic marketing partners and distributors are primarily responsible for
sales and marketing activities in the Integra LifeSciences segment. Sales and
marketing costs have decreased since 2000 as a result of the transition of
INTEGRA(R) Dermal Regeneration Template selling and marketing activities to
Ethicon in June 1999 and lower distributor selling costs.
In 2002, we sold $4.2 million of INTEGRA(r) Dermal Regeneration Template to
Ethicon and received $2.0 million in research payments and $1.0 million in
clinical and regulatory event payments that were recorded in other revenue.
Ethicon has not been successful in selling the minimum amounts of INTEGRA(R)
Dermal Regeneration Template specified in its agreement with us. In addition,
we have notified Ethicon that certain clinical and regulatory events have
been achieved under the agreement and that payments for the achievement of
those events is due to us. Ethicon has informed us that it disagrees that the
clinical and regulatory events in question have been achieved, and that it
does not intend to make the payments we have demanded. In addition, Ethicon
has informed us that if we do not agree to substantial amendments to its
agreement with us, it will consider alternatives that may include exercising
its right to terminate the agreement.
The agreement requires Ethicon to give us notice one year in advance of a
termination of the agreement, during which time Ethicon is required to continue
to comply with the terms of the contract. At the end of that period, Ethicon
may be required to pay additional amounts based on the termination provisions
of the agreement and is required to cooperate in the transfer of the business
back to Integra. Additionally, Ethicon may apply the value of any minimum
payments in excess of actual product purchases against future purchases of
products for sale on a non-exclusive basis for a specified period of time.
If Ethicon does terminate the agreement or if we determine that Ethicon is in
breach of the agreement and we terminate the agreement, there is no assurance
that we will be able to recover the money that we believe Ethicon is obligated
to pay us under the agreement. If Ethicon does give us notice that it will
terminate the agreement, it is possible that Ethicon will diminish its
sales and marketing efforts for the product during the one-year notice period
and that its sales will decline as a result. In addition, we may not be
successful in sustaining or restoring the sales of the INTEGRA(R) Dermal
Regeneration Template at current levels after the termination date. Finally,
if Ethicon terminates the agreement it is possible that we may become
involved in litigation with Ethicon, which could also impair our ability to
sell products under our other agreements with Ethicon, including the
BioPatch(R) and Instat(R) products.
CORPORATE EXPENSES AND AMORTIZATION
2002 2001 2000
-------- -------- --------
(in thousands)
Total segment operating costs and expenses ............... $ 89,220 $ 69,433 $ 58,234
Corporate general and administrative expenses ............ 7,771 6,939 22,655
Amortization ............................................. 1,644 2,784 2,481
-------- -------- --------
Consolidated total operating expenses .................... $ 98,635 $ 79,156 $ 83,370
Corporate general and administrative expenses increased by $832,000 in 2002
primarily as a result of increased facility rent at our expanded corporate
headquarters and higher insurance and legal costs.
Corporate general and administrative expenses in 2000 included the $13.5 million
non-cash, stock-based compensation charge related to the extension of the Chief
Executive Officer's employment agreement. Excluding this amount, the $2.2
million decrease in corporate general and administrative expenses in 2001
resulted primarily from a decrease in legal expenses related to the conclusion
of the jury trial in the patent infringement lawsuit against Merck KGaA in the
first quarter of 2000 as well as a reduction in other litigation matters
outstanding in 2001, and reduced spending in other corporate functions.
Amortization expense decreased in 2002 because of the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets",
which requires that goodwill no longer be amortized. Excluding the effect of
the recently acquired Jarit Instruments business, annual amortization expense is
expected to approximate $2.1 million in both 2003 and 2004, $1.8 million in both
2005 and 2006, and $1.6 million in 2007.
NON-OPERATING INCOME AND EXPENSES
In August 2001, we raised $113.4 million from a follow-on public offering of 4.7
million shares of common stock, of which $9.3 million was subsequently used to
repay all outstanding indebtedness. Accordingly, net interest income in 2002
increased to $3.5 million, as compared to net interest income of $1.4 million in
2001 and net interest expense of $473,000 in 2000.
We recorded a $1.1 million pre-tax gain on the disposition of two product lines
in 2000.
INCOME TAXES
Since 1999, we have generated positive taxable income on a cumulative basis. In
light of this trend, our current projections for future taxable earnings, and
the expected timing of the reversal of deductible temporary differences, we
concluded in the fourth quarter of 2001 that we no longer needed to maintain a
portion of the valuation allowance recorded against federal and state net
operating loss carryforwards and certain other temporary differences. We reduced
the valuation allowance by $12.0 million in 2001 because we believed that it was
more likely than not that we would realize the benefit of that portion of the
deferred tax assets recorded at December 31, 2001. The $12.0 million reduction
in the valuation allowance consisted of an $11.5 million deferred income tax
benefit and a $450,000 credit to additional paid-in capital related to net
operating loss carryforwards generated through the exercise of stock options.
In the fourth quarter of 2002, we reduced the remaining valuation allowance
recorded against net operating loss carryforwards by $23.4 million, which
reflected our estimate of additional tax benefits that we expect to realize in
the future. The $23.4 million reduction in the valuation allowance consisted of
a $20.4 million deferred income tax benefit and a $3.0 million credit to
additional paid-in capital related to net operating loss carryforwards generated
through the exercise of stock options. A valuation allowance of $7.7 million is
recorded against the remaining $32.9 million of net deferred tax assets recorded
at December 31, 2002. This valuation allowance relates to deferred tax assets
for certain expenses which will be deductible for tax purposes in very limited
circumstances and for which we believe it is unlikely that we will recognize the
associated tax benefit. We do not anticipate additional income tax benefits
through future reductions in the valuation allowance. However, in the event that
we determine that we would be able to realize more or less than the recorded
amount of net deferred tax assets, we will record an adjustment to the deferred
tax asset valuation allowance in the period such a determination is made.
The net change in the Company's valuation allowance was $(26.7) million, $(10.4)
million, and $3.3 million, in 2002, 2001, and 2000, respectively. Included in
the 2002 reduction was the write off of the valuation allowance associated with
$3.3 million of deferred tax assets which the Company wrote off because they are
no longer expected to be utilizable.
At December 31, 2002, we had net operating loss carryforwards of approximately
$74.4 million and $19.8 million for federal and state income tax purposes,
respectively, to offset future taxable income. The federal and state net
operating loss carryforwards expire through 2013 and 2010, respectively. New
Jersey has imposed a moratorium on the ability of corporations to use their net
operating loss carryforwards to reduce their New Jersey state tax obligations.
In 2000, we recognized a tax benefit of $467,000 from the sale of certain state
net operating loss carryforwards through a special program offered by the State
of New Jersey.
At December 31, 2002, several of our subsidiaries had unused net operating loss
carryforwards and tax credit carryforwards arising from periods prior to our
ownership which expire through 2010. The Internal Revenue Code limits the timing
and manner in which we may use any acquired net operating losses or tax credits.
International Product Revenues and Operations
Because we have operations based in Europe and we generate certain revenues and
incur certain operating expenses in British Pounds and the Euro, we will
experience currency exchange risk with respect to those foreign currency
denominated revenues or expenses.
Currently, we do not use derivative financial instruments to manage foreign
currency risk. As the volume of our business transacted in foreign currencies
increases, we will continue to assess the potential effects that changes in
foreign currency exchange rates could have on our business. If this potential
impact is believed to present a significant risk to our business, we may enter
into derivative financial instruments, including forward contracts to purchase
or sell foreign currencies, to mitigate this risk.
Additionally, we generate significant revenues outside the United States, a
substantial portion of which are U.S. dollar-denominated transactions conducted
with customers who generate revenue in currencies other than the U.S. dollar. As
a result, currency fluctuations between the U.S. dollar and the currencies in
which those customers do business may have an impact on the demand for our
products in foreign countries where the U.S. dollar has increased compared to
the local currency.
Our sales to foreign markets may be affected by local economic conditions.
Relationships with customers and effective terms of sale frequently vary by
country, often with longer-term receivables than are typical in the United
States.
Product revenues by major geographic area are summarized below:
United Asia Other
States Europe Pacific Foreign Consolidated
---------- ---------- ---------- ---------- ------------
(in thousands)
Product revenues:
2002 ................. $ 90,422 $ 14,737 $ 4,062 $ 3,404 $ 112,625
2001 ................. 68,612 10,577 4,838 3,881 87,908
2000 ................. 51,752 6,759 4,628 2,221 65,360
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 from our foreign-based subsidiaries in the
United Kingdom, Germany and France. We expect revenues from customers outside
the United States and expenses and revenues denominated in foreign currencies to
increase in absolute terms, but not as a proportion of our total revenues, in
2003 as our acquisition of a significant facility in France in July 2002 and our
continued expansion of our European sales force offset the effect of our recent
acquisitions of entities that sell solely in the United States.
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 from our foreign subsidiaries in the United
Kingdom, Germany and France.
In 2000, revenues from customers outside the United States totaled $13.6
million, or 21% of consolidated product revenues, of which approximately 50%
were to European customers. Of this amount, $3.2 million of these revenues were
generated in foreign currencies from our subsidiary based in the United Kingdom,
which was acquired in April 2000.
Liquidity And Capital Resources
Historically, we have funded our operations primarily through private and public
offerings of equity securities, product revenues, research and collaboration
funding, borrowings under a revolving credit line and cash acquired in
connection with business acquisitions and dispositions. Since 1999, we have
substantially reduced our net use of cash from operations and, in 2002 and 2001,
we generated positive operating cash flows of $32.0 million and $15.7 million,
respectively. Operating cash flows improved in 2002 as a result of higher net
income and improved working capital management.
Our principal uses of funds in 2002 were $25.0 million for business
acquisitions, the repayment of a $3.6 million note given to a seller as
consideration for the acquisition of NeuroSupplies, Inc. and $2.3 million for
purchases of property and equipment. Principal sources of funds were
approximately $3.3 million from the issuance of common stock and $32.0 million
of positive operating cash flow.
On August 13, 2001, we issued 4.7 million shares of common stock in a public
offering at $25.50 per share. The net proceeds generated by the offering, after
expenses, were $113.4 million. With the proceeds from the public offering of
common stock, we repaid all outstanding debt, including $7.9 million of bank
loans and $1.4 million payable under the terms of a promissory note, in the
third quarter of 2001. Additionally, a related term loan and revolving credit
facility was terminated in August 2001. We had no debt outstanding at December
31, 2002.
At December 31, 2002, we had cash, cash equivalents and marketable securities
totaling $132.3 million. Investments consist almost entirely of highly liquid,
interest bearing debt securities. We believe that our cash and marketable
securities are sufficient to finance our operations in the short term. However,
given the significant level of liquid assets and our objective to grow by
acquisition and alliances, our financial position and future financial results
could change significantly if we were to complete a business acquisition by
utilizing a significant portion of our liquid assets. On March 17, 2003, we used
$44.5 million to acquire the business of JARIT Instruments.
Excluding the effect of the acquisition of JARIT Surgical Instruments in March
2003, we are obligated to pay approximately $2.5 million and $2.2 million in
2003 and 2004 respectively, under the terms of operating lease agreements for
our facilities. Thereafter, through 2012, we are contractually obligated to pay
an aggregate of $6.1 million in total lease costs. We may be obligated to pay
Novus an additional $1.5 million upon Novus' achievement of a development
milestone and up to an additional $2.5 million based upon revenues from Novus'
products. Additionally, we are obligated to pay royalties based on sales of
certain of our products, including $0.3 million in future guaranteed minimum
royalty payments to the seller of the GMSmbH business. We have no other
significant future contractual obligations.
In February 2003, our Board of Directors authorized us to repurchase up to one
million shares of our common stock for an aggregate cost not to exceed $15.0
million. We may repurchase shares under this program through February 2004
either in the open market or in privately negotiated transactions. During 2002,
we repurchased 100,000 shares of our stock for an aggregate purchase price of
$1.8 million under a previously authorized share repurchase program.
Use of Estimates and Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities, and the reported amounts
of revenues and expenses. Significant estimates affecting amounts reported or
disclosed in the consolidated financial statements include allowances for
doubtful accounts receivable and sales returns, net realizable value of
inventories, estimates of future cash flows associated with long-lived asset
valuations and acquired in-process research and development charges,
depreciation and amortization periods for long-lived assets, valuation
allowances recorded against deferred tax assets, loss contingencies, and
estimates of costs to complete performance obligations associated with research,
licensing, and distribution arrangements for which revenue is accounted for
using percentage of completion accounting. These estimates are based on
historical experience and on various other assumptions that are believed to be
reasonable under the current circumstances. Actual results could differ from
these estimates.
We believe the following accounting policies, which form the basis for
developing these estimates, are those that are most critical to the presentation
of our financial statements and require the most difficult, subjective and
complex judgments:
Allowances For Doubtful Accounts And Sales Returns. We evaluate the
collectibility of accounts receivable based on a combination of factors. In
circumstances where a specific customer is unable to meet its financial
obligations to us, we record an allowance against amounts due to reduce the net
recognized receivable to the amount that we reasonably expect to collect. For
all other customers, we record allowances for doubtful accounts based on the
length of time the receivables are past due, the current business environment
and our historical experience. If the financial condition of customers or the
length of time that receivables are past due were to change, we may change the
recorded amount of allowances for doubtful accounts in the future.
We record a provision for estimated sales returns and allowances on product
revenues in the same period as the related revenues are recorded. We base these
estimates on historical sales returns and other known factors. Actual returns
could be different from our estimates and the related provisions for sales
returns and allowances, resulting in future changes to the sales returns and
allowances provision.
Inventories. Inventories, consisting of purchased materials, direct labor and
manufacturing overhead, are stated at the lower of cost, determined on the
first-in, first-out method, or market. At each balance sheet date, we evaluate
ending inventories for excess quantities, obsolescence or shelf life expiration.
Our evaluation includes an analysis of historical sales levels by product and
projections of future demand. To the extent that we determine there are excess,
obsolete or expired inventory quantities, we record valuation reserves against
all or a portion of the value of the related products. If future demand or
market conditions are different than our projections, a change in recorded
inventory valuation reserves may be required and would be reflected in cost of
revenues in the period the revision is made.
Long-Lived Assets. We review long-lived assets to be held and used, including
property, plant, and equipment and intangible assets, for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. We evaluate the recoverability of long-lived assets to
be held and used by comparing its carrying value with the projected undiscounted
net cash flows applicable to the long-lived assets. If an impairment exists, we
calculate the amount of such impairment based on the estimated fair value of the
asset. We record impairments to long-lived assets to be disposed of based upon
the fair value of the applicable assets. If future events that would trigger an
impairment review occur or we change our estimates of projected future
undiscounted net cash flows related to long-lived assets to be held and used, we
may need to record an impairment charge.
Goodwill. Upon the adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" in January 2002, our assessment of
the recoverability of goodwill changed to a method based upon a comparison of
the carrying value of the reporting units to which goodwill is assigned with its
respective fair value. We completed our initial impairment review for goodwill
as of June 30, 2002 and determined that our reporting unit goodwill was not
impaired. If future events that would trigger an impairment review occur or we
change our estimates of the fair value of our reporting units, we may need to
record an impairment charge.
Acquired In-Process Research and Development Charges. In-process research and
development charges are recorded in connection with acquisitions and represent
the value assigned to acquired assets which have not yet reached technological
feasibility and for which there is no alternative use. Fair value is generally
assigned to these assets based on the net present value of the projected cash
flows expected to be generated by those assets. Significant assumptions
underlying these cash flows include our assessment of the timing and our
ability to successfully complete the in-process research and development
project, projected cash flows associated with the successful completion of the
project, and interest rates used to discount these cash flows to their present
value.
Depreciation And Amortization Periods. We provide for depreciation and
amortization using the straight-line method over the estimated useful lives of
property, plant and equipment and other intangible assets. We base the
determination of these useful lives on the period over which we expect the
related assets to contribute to our cash flows. If our assessment of the useful
lives of these long-lived assets changes, we may change future depreciation and
amortization expense.
Income Taxes. We recognize deferred tax assets and liabilities for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. We have
considered our projections for future taxable earnings and the expected timing
of the reversal of deductible temporary differences in determining the need for
a valuation allowance. In 2002, this analysis resulted in our reducing the
recorded valuation allowance by $23.4 million. In the event that we determine
that we would be able to realize more or less than the recorded amount of net
deferred tax assets, we would record an adjustment to the deferred tax asset
valuation allowance in the period we make such a determination. We would record
the adjustment in the earnings of such period or, to the extent the valuation
allowance relates to tax benefits from the exercise of stock options, as a
credit to additional paid-in capital.
Revenue Recognition. We recognize product sales when delivery has occurred and
title has passed to the customer, there is a fixed or determinable sales price,
and collectibility of that sales price is reasonably assured. We recognize
research grant revenue when the related expenses are incurred. Under the terms
of existing research grants, we are reimbursed for allowable direct and indirect
research expenses. We recognize royalty revenue over the period our customers
sell the royalty products and the amount earned by Integra is fixed and
determinable. We recognize non-refundable fees received under research,
licensing and distribution arrangements as revenue when received if we have no
continuing obligations to the other party. For those arrangements where we have
continuing performance obligations, we recognize revenue using the lesser of the
amount of non-refundable cash received or the result achieved using percentage
of completion accounting based upon our estimated cost to complete these
obligations. If our estimates of the costs to complete these obligations change,
we may change the amount of revenue we recognized for fees received under
research, licensing and distribution arrangements where we have continuing
performance obligations.
Loss Contingencies. We are subject to claims and lawsuits in the ordinary course
of our business, including claims by employees or former employees and with
respect to our products. Our financial statements do not reflect any material
amounts related to possible unfavorable outcomes of claims and lawsuits to which
we are currently a party because we currently believe that such claims and
lawsuits are either adequately covered by insurance or otherwise indemnified,
and are not expected, individually or in the aggregate, to result in a material
adverse effect on our financial condition. However, it is possible that our
results of operations, financial position and cash flows in a particular period
could be materially affected by these contingencies if we change our assessment
of the likely outcome of these matters.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to financial risk from changes in foreign exchange rates and
interest rates.
Foreign Currency Exchange
A discussion of foreign currency exchange risks is provided under the caption
"International Product Revenues and Operations" under "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
Interest Rate and Credit Risk
We are exposed to the risk of interest rate fluctuations on the fair value and
interest income earned on our cash and cash equivalents and investments in
available-for-sale marketable debt securities. A hypothetical 100 basis point
movement in interest rates applicable to our cash and cash equivalents and
investments in marketable debt securities outstanding at December 31, 2002 would
increase or decrease interest income by approximately $1.3 million on an annual
basis. We are not subject to material foreign currency exchange risk with
respect to these investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and the financial statement schedules specified by this
Item, together with the reports thereon of PricewaterhouseCoopers LLP, are
presented following Item 15 of this report.
Information on quarterly results of operations is set forth in our financial
statements under Notes to Consolidated Financial Statements, Note 14 - Selected
Quarterly Information - Unaudited.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
INCORPORATED BY REFERENCE
The information called for by Item 10 Directors and Executive Officers of the
Registrant (other than the information concerning executive officers set forth
after Item 4 herein), Item 11 Executive Compensation, Item 12 Security Ownership
of Certain Beneficial Owners and Management, and Item 13 Certain Relationships
and Related Transactions, is incorporated herein by reference to the Company's
definitive proxy statement for its Annual Meeting of Stockholders scheduled to
be held on May 21, 2003, which definitive proxy statement is expected to be
filed with the Commission not later than 120 days after the end of the fiscal
year to which this report relates.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, our Chief Executive
Officer and Senior Vice President, Finance, conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-14(c). Based on that evaluation,
the Chief Executive Officer and Senior Vice President, Finance concluded that
our disclosure controls and procedures were effective as of the date of that
evaluation. There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date the Chief Executive Officer and Senior Vice President, Finance completed
their evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report.
1. Financial Statements. The following financial statements and financial
statement schedule are filed as a part of this report.
Report of Independent Accountants ....................................... F-1
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001, and 2000 ...................................... F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001 ............ F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000 ...................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2002, 2001, and 2000 .................. F-5
Notes to Consolidated Financial Statements .............................. F-6
Report of Independent Accountants on Financial Statement Schedule ....... F-28
Financial Statement Schedule ............................................ F-29
2. 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.
3. Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibit in
Incorporated Filing
-------------------
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 Stock Option Grant and Agreement dated December 27,
1997 between the Company and Stuart M. Essig*(7) (Exh. 10.2)
4.2 Restricted Units Agreement dated December 27, 1997
between the Company and Stuart M. Essig* (7) (Exh. 10.3)
4.3 Stock Option Grant and Agreement dated December 22,
2000 between Integra LifeSciences Holdings
Corporation and Stuart M. Essig* (12) (Exh. 4.1)
4.4 Stock Option Grant and Agreement dated December 22,
2000 between Integra LifeSciences Holdings
Corporation and Stuart M. Essig* (12) (Exh. 4.2)
4.5 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 1996 Incentive Stock Option and Non-Qualified Stock
Option Plan* (5) (Exh. 4.3)
10.6 Amendment to 1996 Incentive Stock Option and
Non-Qualified Stock Option Plan* (7) (Exh. 10.4)
10.7 1998 Stock Option Plan* (6) (Exh. 10.2)
10.8 1999 Stock Option Plan* (9) (Exh. 10.13)
10.9 Employee Stock Purchase Plan* (6) (Exh. 10.1)
10.10 Deferred Compensation Plan* (9) (Exh. 10.15)
10.11 2000 Equity Incentive Plan* (13) (Exh. 10.17)
10.12 2001 Equity Incentive Plan (14) (Exh. 4)
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 Employment Agreement between John B. Henneman, III
and the Company dated September 10, 2002* (15) (Exh. 10.2)
10.17 Employment Agreement between Judith O'Grady and the
Company dated February 20, 2003* (1)
10.18 Employment Agreement between David B. Holtz and the
Company dated September 10, 2002* (15) (Exh. 10.1)
10.19 Employment Agreement between Michael D. Pierschbacher
and the Company dated December 31, 1998* (10) (Exh. 10.8)
10.20 Employment Agreement between Donald R. Nociolo and
the Company dated December 31, 1998* (10) (Exh. 10.9)
10.21 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 Lease Contract dated June 30, 1994 between the Puerto
Rico Industrial Development Company and Heyer-Schulte
NeuroCare, Inc. (9) (Exh. 10.32)
10.23 Industrial Real Estate Triple Net Sublease dated
April 1, 1993 between GAP Portfolio Partners and
Camino Laboratories. (9) (Exh. 10.33)
10.24 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)
99 Certifications (1)
* Indicates a management contract or compensatory plan or arrangement.
** Schedules and other attachments to the indicated exhibit were omitted.
The Company agrees to furnish supplementally to the Commission upon request a
copy of any omitted schedules or attachments.
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form 10/A (File No. 0-26224) which became effective on
August 8, 1995.
(3) Incorporated by reference to the indicated exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
(4) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-98698) which became effective
on January 24, 1996.
(5) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-8 (File No. 333-06577) which became effective
on June 22, 1996.
(6) Incorporated by reference to the indicated exhibit to the Company's
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 30,2002.
(b) Reports on Form 8-K.
On December 6, 2002, we filed with the Securities and Exchange Commission a
Report on Form 8-K with respect to the amendment of a previously executed sales
plans pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as
amended, by the Chief Executive Officer of the Company.
On December 13, 2002, we filed with the Securities and Exchange Commission a
Report on Form 8-K with respect to the execution of a sales plan pursuant to
Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, by an Executive
Officer of the Company.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, as of the 20th day of March, 2003.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
By: /s/ Stuart M. Essig
- -----------------------------
Stuart M. Essig
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, on behalf of the registrant in
the capacities indicated, on the 20th day of March, 2003.
Signature Title
/s/ Stuart M. Essig President, Chief Executive Officer
- -------------------------------- and Director
Stuart M. Essig (Principal Executive Officer)
/s/ David B. Holtz Senior Vice President, Finance and Treasurer
- -------------------------------- (Principal Financial and Accounting
David B. Holtz Officer)
/s/ Richard E. Caruso Chairman of the Board
- --------------------------------
Richard E. Caruso, Ph.D.
/s/ Keith Bradley Director
- --------------------------------
Keith Bradley, Ph.D.
/s/ David Auth Director
- --------------------------------
David Auth
/s/ Neal Moszkowski Director
- --------------------------------
Neal Moszkowski
/s/ James M. Sullivan Director
- --------------------------------
James M. Sullivan
CERTIFICATIONS
I, Stuart M. Essig, certify that:
1. I have reviewed this annual report on Form 10-K of Integra LifeSciences
Holdings Corporation.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the 'Evaluation Date'); and
(c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 20, 2003 By: /s/ Stuart M. Essig
-----------------------
Stuart M. Essig
Chief Executive Officer
I, David B. Holtz, certify that:
1. I have reviewed this annual report on Form 10-K of Integra LifeSciences
Holdings Corporation.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the 'Evaluation Date'); and
(c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 20, 2003 By: /s/ David B. Holtz
--------------------
David B. Holtz
Sr. Vice President, Finance and Treasurer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Integra LifeSciences
Holdings Corporation and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Integra
LifeSciences Holdings Corporation and Subsidiaries (the Company) at December 31,
2002 and 2001 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed more fully in Note 2 to the consolidated financial statements, in
2000 the Company changed its method of accounting for nonrefundable fees
received under its various research, license and distribution agreements.
As discussed in Note 2 to the consolidated financial statements, the Company has
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", effective January 1, 2002.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 21, 2003, except Note 15 for which the date is March 17, 2003
F1
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts
Years Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
REVENUES
Product revenue ................................. $112,625 $ 87,908 $ 65,360
Other revenue ................................... 5,197 5,534 6,289
-------- -------- --------
Total revenue ............................... 117,822 93,442 71,649
COSTS AND EXPENSES
Cost of product revenue ......................... 45,772 36,014 29,511
Research and development ........................ 8,304 7,992 7,524
Acquired in-process research and development .... 2,328 -- --
Selling and marketing ........................... 25,118 20,322 15,371
General and administrative ...................... 15,469 12,044 28,483
Amortization .................................... 1,644 2,784 2,481
-------- -------- --------
Total costs and expenses .................... 98,635 79,156 83,370
Operating income (loss) ......................... 19,187 14,286 (11,721)
Interest income (expense), net .................. 3,535 1,393 (473)
Gain on dispositions of product lines ........... -- -- 1,146
Other income (expense), net ..................... 3 (136) 201
-------- -------- --------
Income (loss) before income taxes ............... 22,725 15,543 (10,847)
Income tax expense (benefit) .................... (12,552) (10,863) 108
-------- -------- --------
Income (loss) before extraordinary loss and
cumulative effect of accounting change ....... 35,277 26,406 (10,955)
Extraordinary loss on early retirement of debt,
net of income tax benefit .................... -- (243) --
Cumulative effect of accounting change .......... -- -- (470)
-------- -------- --------
Net income (loss) ............................... $ 35,277 $ 26,163 $(11,425)
======== ======== ========
Basic net income (loss) per share before
extraordinary loss and cumulative effect
of accounting change ....................... $ 1.21 $ 1.09 $ (0.95)
Basic net income (loss) per share ............ $ 1.21 $ 1.08 $ (0.97)
Diluted net income (loss) per share before
extraordinary loss and cumulative effect
of accounting change ....................... $ 1.14 $ 0.95 $ (0.95)
Diluted net income (loss) per share .......... $ 1.14 $ 0.94 $ (0.97)
Weighted average common shares outstanding:
Basic ........................................ 29,021 23,353 17,553
Diluted ...................................... 30,895 27,796 17,553
The accompanying notes are an integral part of these consolidated financial statements
F2
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
In thousands, except per share amounts
December 31,
-----------------------
ASSETS 2002 2001
--------- ---------
Current Assets:
Cash and cash equivalents ...................................... $ 43,583 $ 44,518
Short-term investments ......................................... 55,278 22,183
Trade accounts receivable, net of allowances
of $1,387 and $1,403 ....................................... 19,412 14,024
Inventories .................................................... 28,502 24,329
Prepaid expenses and other current assets ...................... 5,498 2,898
--------- ---------
Total current assets ....................................... 152,273 107,952
Noncurrent investments .......................................... 33,450 64,335
Property, plant, and equipment, net ............................. 16,556 11,662
Deferred income taxes, net ...................................... 25,218 10,243
Goodwill, net ................................................... 22,073 14,627
Intangible assets, net .......................................... 23,091 16,898
Other assets .................................................... 2,007 1,871
--------- ---------
Total assets ..................................................... $ 274,668 $ 227,588
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt ................................................ $ -- $ 3,576
Accounts payable, trade ........................................ 3,764 2,924
Income taxes payable ........................................... -- 1,481
Customer advances and deposits ................................. 7,908 4,843
Deferred revenue ............................................... 816 772
Accrued expenses and other current liabilities ................. 9,433 5,550
--------- ---------
Total current liabilities .................................. 21,921 19,146
Deferred revenue ................................................ 3,263 3,949
Other liabilities ............................................... 1,887 437
--------- ---------
Total liabilities ................................................ 27,071 23,532
Commitments and contingencies
Stockholders' Equity:
Preferred stock; $0.01 par value; 15,000 authorized shares; 0
and 54 Series C Convertible shares issued and outstanding ... -- 1
Common stock; $.01 par value; 60,000 authorized shares; 27,204
and 26,129 issued and outstanding ........................... 272 261
Additional paid-in capital ..................................... 292,007 284,021
Treasury stock, at cost; 106 and 6 shares ...................... (1,812) (51)
Other .......................................................... (15) (37)
Accumulated other comprehensive income (loss):
Unrealized gain on available-for-sale securities ............ 861 237
Foreign currency translation adjustment ..................... 1,618 (776)
Minimum pension liability adjustment ........................ (1,011) --
Accumulated deficit ............................................ (44,323) (79,600)
--------- ---------
Total stockholders' equity ................................... 247,597 204,056
--------- ---------
Total liabilities and stockholders' equity ...................... $ 274,668 $ 227,588
========= =========
The accompanying notes are an integral part of these consolidated financial statements
F3
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Years Ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
OPERATING ACTIVITIES:
Net income (loss) ......................................... $ 35,277 $ 26,163 $(11,425)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ 5,020 5,959 5,357
Loss (gain) on sale of product line and other assets ..... 28 -- (1,316)
In process research and development charge ............... 2,328 -- --
Loss on early retirement of debt ......................... -- 256 --
Deferred tax benefit ..................................... (13,401) (12,085) --
Amortization of discount and premium on investments ...... 2,142 298 (181)
Stock based compensation ................................. 31 29 13,587
Other, net ............................................... 129 158 43
Changes in assets and liabilities, net of business
acquisitions:
Accounts receivable .................................... (2,109) 98 (3,475)
Inventories ............................................ 1,153 (6,987) (3,061)
Prepaid expenses and other current assets .............. (1,131) (1,443) (571)
Non-current assets ..................................... 185 1,858 (3,565)
Accounts payable, accrued expenses and other
liabilities ................................. (90) (941) 2,831
Customer advances and deposits ......................... 2,565 4,020 (3,078)
Deferred revenue ....................................... (142) (1,682) (106)
-------- -------- --------
Net cash provided by (used in) operating activities ...... $ 31,985 15,701 (4,960)
-------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sale of product line and other assets ....... -- -- 1,600
Proceeds from the maturities of investments ............... 35,402 3,000 16,981
Purchases of available for sale investments ............... (39,113) (88,533) (13,391)
Purchases of property and equipment ....................... (2,254) (2,860) (3,268)
Cash used in business acquisitions, net of cash acquired .. (25,015) (6,348) (16,187)
Loans made ................................................ -- -- (238)
-------- -------- --------
Net cash used in investing activities .................... $(30,980) (94,741) (14,503)
-------- -------- --------
FINANCING ACTIVITIES:
Net proceeds (repayments) from revolving credit facility .. -- (3,147) 3,143
Repayments of term loan ................................... (3,600) (7,705) (2,250)
Repayment of note payable ................................. -- (2,800) --
Proceeds from sales of preferred stock and warrants ....... -- -- 5,375
Proceeds from the issuance of common stock ................ -- 113,433 5,000
Proceeds from exercise of common stock purchase warrants .. -- 3,616 50
Proceeds from stock issued under employee benefit plans ... 3,323 6,060 3,156
Purchases of treasury stock ............................... (1,761) -- (170)
Collection of related party note receivable ............... -- -- 35
Preferred stock dividends paid ............................ -- -- (67)
-------- -------- --------
Net cash (used in) provided by financing activities ...... $ (2,038) 109,457 14,272
Effect of exchange rate changes on cash and cash equivalents .. 98 15 (24)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .......... $ (935) 30,432 (5,215)
Cash and cash equivalents at beginning of period .............. 44,518 14,086 19,301
-------- -------- --------
Cash and cash equivalents at end of period .................... $ 43,583 $ 44,518 $ 14,086
======== ======== ========
Cash paid during the year for interest ........................ $ 20 $ 778 $ 922
Cash paid during the year for income taxes .................... 1,435 928 508
The accompanying notes are an integral part of these consolidated financial statements
F4
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, 1999 .................. $ 6 $ 161 $ (7) $ 132,340 $ (143) $ (64) $ (94,304) $ 37,989
Net loss .................................... (11,425) (11,425)
Unrealized losses on investments ............ (32) (32)
Foreign currency translation ................ (457) (457)
---------
Total comprehensive loss ............. $(11,914)
=========
Issuance of 54 shares of Series C Preferred
Stock and warrants ....................... 1 5,374 5,375
Conversion of 500 shares of Series A
Preferred Stock into 250 shares of
common stock ............................. (5) 3 2 --
Private placement of 333 shares of common
stock .................................... 3 4,997 5,000
Issuance of 564 shares of common stock
through employee benefit plans ............ 6 3,201 3,207
Warrants exercised for cash ................. 50 50
Issuance of 45 shares of common stock in
settlement of obligation .................. 641 641
Amortization of unearned compensation ....... 72 72
Tax benefit related to stock optio
exercises ................................ 51 51
Issuance of 1,250 Restricted Units .......... 13,515 13,515
Unearned compensation related to
Non-employee stock options ................ 30 (30) --
Dividends paid on Series A Preferred Stock .. (67) (67)
Repurchase 19 shares of common stock ........ (173) (173)
Collection of related party note ............ 35 35
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 (1) ......... 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 gains on investments ............ 624 624
Foreign currency translation ................ 2,394 2,394
Minimum pension liability adjustment, net
of tax .................................. (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
========= ========= ========= ========== ========= =========== =========== =========
(1) Includes $95 reclassification adjustment for other than temporary impairment of available for sale securities
The accompanying notes are an integral part of these consolidated financial statements
F5
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Integra LifeSciences Holdings Corporation (the "Company") is a global,
diversified medical device company that develops, manufactures, and markets
medical devices, implants and biomaterials primarily for use in neurosurgery,
orthopedics and soft tissue repair. Our business is divided into two segments:
Integra NeuroSciences(TM) and Integra LifeSciences(TM).
The Integra NeuroSciences segment includes our businesses that primarily sell
directly to healthcare providers. It is a leading provider of implants, devices,
and systems used in neurosurgery, neurotrauma, and related critical care and is
a distributor of disposables and supplies used in the diagnosis and monitoring
of neurological disorders. The segment also includes our Padgett Instruments
business, which sells instruments and other devices to plastic and
reconstructive surgeons, burn surgeons, ENT surgeons and other physicians.
Our Integra LifeSciences segment includes our businesses that primarily sell
through intermediaries such as strategic partners or OEM customers. Integra
LifeSciences develops and manufactures a variety of medical products and
devices, including products based on our proprietary tissue regeneration
technology that are used to treat soft tissue and orthopedic conditions. For the
majority of the products manufactured by the Integra LifeSciences segment, we
have partnered with market leaders for the development and marketing efforts
related to these products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All intercompany accounts and
transactions are eliminated in consolidation.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS
Investments in marketable debt and equity securities are classified and
accounted for as available-for-sale securities and are carried at fair value,
which was based on quoted market prices. Unrealized gains and losses are
reported as a component of accumulated other comprehensive income (loss).
Realized gains and losses are determined on the specific identification cost
basis and reported in other income (expense), net. Investment balances as of
December 31, 2002 and 2001 were as follows:
Unrealized Fair
Cost Gains Losses Value Maturity
------- ------- ------- ------- ----------
(in thousands)
2002:
- -----
Marketable debt securities, current..... $54,695 $ 504 $ (1) $55,198 less than 1 year
Marketable equity securities ........... 60 21 (1) 80
Marketable debt securities, non-current. 33,112 347 (9) 33,450 less than 40 months
------- ------- ------- -------
$87,867 $ 872 $ (11) $88,728
2001:
- -----
Marketable debt securities, current..... $22,092 $ 53 $ (35) $22,110 less than 1 year
Marketable equity securities ........... 78 3 (8) 73
Marketable debt securities, non-current. 64,111 357 (133) 64,335 less than 30 months
------- ------- ------- -------
$86,281 $ 413 $ (176) $86,518
The carrying values of all other financial instruments were not materially
different from their estimated fair values.
F6
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE AND SALES RETURNS
The Company evaluates the collectibility of accounts receivable based on a
combination of factors. In circumstances where a specific customer is unable to
meet its financial obligations to us, an allowance is recorded against amounts
due to reduce the net recognized receivable to the amount that is reasonably
expected to be collected. For all other customers, allowances for doubtful
accounts are recorded based on the length of time the receivables are past due,
the current business environment and our historical experience.
The Company records a provision for estimated returns and allowances on product
sales in the same period as the related revenues are recorded. These estimates
are based on historical sales returns and other known factors.
INVENTORIES
Inventories, consisting of purchased materials, direct labor and manufacturing
overhead, are stated at the lower of cost, determined on the first-in, first-out
method, or market. Inventories consisted of the following:
December 31,
2002 2001
---------- ----------
(in thousands)
Finished goods .......................... $ 19,198 $ 13,277
Work in process ......................... 3,019 3,493
Raw materials ........................... 6,285 7,559
---------- ----------
$ 28,502 $ 24,329
At each balance sheet date, the Company evaluates ending inventories for excess
quantities, obsolescence or shelf-life expiration. This evaluation includes an
analyses of historical sales levels by product and projections of future demand.
To the extent that management determines there are excess, obsolete or expired
inventory quantities, valuation reserves are recorded against all or a portion
of the value of the related products.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the lesser of the lease
term or the useful life. The cost of major additions and improvements is
capitalized, while maintenance and repair costs that do not improve or extend
the lives of the respective assets are charged to operations as incurred.
Property, plant and equipment balances and corresponding lives were as follows:
December 31,
2002 2001 Lives
---------- ---------- ---------------
(in thousands)
Land ............................................ $ 511 $ --
Buildings and leasehold improvements ............ 11,877 10,095 2 to 40 years
Machinery and equipment ......................... 16,492 13,320 3 - 15 years
Furniture and fixtures .......................... 3,561 1,657 5 - 7 years
Construction in progress ........................ 500 310
---------- ----------
32,941 25,382
Less: Accumulated depreciation .................. (16,385) (13,720)
---------- ----------
$ 16,556 $ 11,662
Depreciation expense associated with property, plant and equipment was $3.4
million, $3.2 million, and $2.9 million, in 2002, 2001, and 2000 respectively.
F7
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess of the cost over the fair value of net assets of acquired businesses
is recorded as goodwill. Goodwill acquired prior to July 1, 2001 was amortized
on a straight line basis over a period of 15 years through December 31, 2001.
Goodwill acquired after July 1, 2001 was not subject to amortization. Effective
January 1, 2002, goodwill was no longer amortized but is instead subject to
annual impairment reviews.
Upon the adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" in January 2002, our assessment of the
recoverability of goodwill has changed to a method based upon a comparison of
the carrying value of the reporting units to which goodwill is assigned with its
respective fair value. The Company completed its initial impairment review for
goodwill as of June 30, 2002 and determined that its reporting unit goodwill was
not impaired.
Changes in the carrying amount of reporting unit goodwill in 2002 were as
follows:
Integra Integra
NeuroSciences LifeSciences Total
------------- ------------- -------------
(in thousands)
Goodwill, net of accumulated amortization
at December 31, 2001 .................... $ 13,815 $ 812 $ 14,627
Reclassification of assembled workforce
intangible, net of amortization ......... 1,245 30 1,275
Acquisitions ................................ 5,775 -- 5,775
Adjustments to previously recorded
pre-acquisition income tax contingencies.. (484) -- (484)
Other, net ................................. 64 -- 64
Foreign currency translation ................ 814 2 816
-------- -------- --------
Goodwill at December 31, 2002 ............... $ 21,229 $ 844 $ 22,073
======== ======== ========
The components of the Company's identifiable intangible assets were as follows:
December 31, 2002 December 31, 2001
Weighted ---------------------- ----------------------
Average Accumulated Accumulated
Life Cost Amortization Cost Amortization
-------- -------- ------------ -------- ------------
(in thousands)
Completed technology ........... 15 years $ 13,165 $ (2,380) $ 11,255 $ (1,516)
Customer relationships ......... 10 years 4,661 (1,085) 3,575 (674)
Trademarks / brand names ....... 34 years 7,151 (445) 1,715 (305)
Assembled work force ........... -- -- 1,581 (306)
All other ...................... 10 years 2,601 (577) 1,824 (251)
-------- ------------ -------- ------------
$ 27,578 $ (4,487) $ 19,950 $ (3,052)
Accumulated amortization .................... (4,487) (3,052)
-------- --------
$ 23,091 $ 16,898
======== ========
Excluding the effect of the recently acquired JARIT Surgical Instruments
business (Note 15), annual amortization expense is expected to approximate
$2.1 million in both 2003 and 2004, $1.8 million in both 2005 and 2006, and
$1.6 million in 2007. Identifiable intangible assets are initially recorded at
fair market value at the time of acquisition generally using an income or cost
approach.
F8
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
Long-lived assets held and used by the Company, including property, plant and
equipment and intangible assets, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of evaluating the recoverability of long-lived
assets to be held and used, a recoverability test is performed using projected
undiscounted net cash flows applicable to the long-lived assets. If an
impairment exists, the amount of such impairment is calculated based on the
estimated fair value of the asset. Impairments to long-lived assets to be
disposed of are recorded based upon the fair value of the applicable assets.
FOREIGN CURRENCY
All assets and liabilities of foreign subsidiaries are translated at the rate of
exchange at year-end, while elements of the income statement are translated at
the average exchange rates in effect during the year. The net effect of these
translation adjustments is shown as a component of accumulated other
comprehensive income (loss). Foreign currency transaction gains and losses are
reported in other income (expense), net.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
REVENUE RECOGNITION
Product revenues include both product sales and royalties earned on sales by
strategic alliance partners of the Company's products or of products
incorporating one or more of the Company's products. Product sales are
recognized when delivery has occurred and title has passed to the customer,
there is a fixed or determinable sales price, and collectability of that sales
price is reasonably assured. Product royalties are recognized as the royalty
products are sold by our customers and the amount earned by Integra is fixed and
determinable.
Other revenues include research grants, fees received under research, licensing,
and distribution arrangements, and technology-related royalties. Research grant
revenue is recognized when the related expenses are incurred. Under the terms of
existing research grants, the Company is reimbursed for allowable direct and
indirect research expenses. Non-refundable fees received under research,
licensing and distribution arrangements or for the licensing of technology are
recognized as revenue when received if the Company has no continuing obligations
to the other party. For those arrangements where the Company has continuing
performance obligations, revenue is recognized using the lesser of the amount of
non-refundable cash received or the result achieved using percentage of
completion accounting based upon the estimated cost to complete these
obligations.
In December 1999 (as amended in March 2000 and June 2000) the staff of the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 101,
"Revenue Recognition" (SAB 101). As the result of the adoption of SAB 101, the
Company recorded a $470,000 cumulative effect of an accounting change in 2000 to
defer a portion of a nonrefundable, up-front fee received and recorded in other
revenue in 1998. The cumulative effect of this accounting change was measured as
of January 1, 2000. As a result of this accounting change, other revenue for
each of the years ended December 31, 2002, 2001 and 2000 includes $112,000 of
amortization of the amount deferred as of January 1, 2000.
SHIPPING AND HANDLING FEES AND COSTS
Amounts billed to customers for shipping and handling are included in products
revenues. The related shipping and handling fees and costs incurred by the
Company are included in cost of product revenues.
F9
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRODUCT WARRANTIES
Certain of the Company's medical devices, including monitoring systems and
ablation systems, are reusable and are designed to operate over long periods
of time. These products are sold with warranties extending for up to two years
from date of purchase. The Company accrues estimated product warranty costs at
the time of sale based on historical experience. Any additional amounts are
recorded when such costs are probable and can be reasonably estimated. Accrued
warranty expense consisted of the following:
December 31,
2002 2001
-------- --------
(in thousands)
Beginning balance .................. $ 226 $ 124
Charged to expense ................. 257 347
Deductions ......................... (267) (245)
-------- --------
Ending balance ..................... $ 216 $ 226
RESEARCH AND DEVELOPMENT
Research and development costs, including salaries, depreciation, consultant and
other external fees, and facility costs directly attributable to research and
development activities, are expensed in the period in which they are incurred.
In-process research and development charges recorded in connection with
acquisitions represent the value assigned to acquired assets to be used in
research and development activities and for which there is no alternative use.
Value is generally assigned to these assets based on the net present value of
the projected cash flows expected to be generated by those assets.
STOCK BASED COMPENSATION
Employee stock based compensation is recognized using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" and Financial Accounting Standards Board Interpretation No.
44 "Accounting for Certain Transactions Involving Stock Compensation an
interpretation of APB Opinion No. 25".
Had the compensation cost for the Company's stock option plans been determined
based on the fair value at the grant consistent with the provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation", the Company's net income (loss) and basic and diluted net income
(loss) per share would have been as follows:
2002 2001 2000
-------- -------- --------
(in thousands, except per share amounts)
Net income (loss):
As reported ...................................... $ 35,277 $ 26,163 $(11,425)
Less: Total stock-based employee compensation
expense determined under the fair
value-based method for all awards, net
of related tax effects ..................... (4,774) (5,911) (3,436)
-------- -------- --------
Pro forma ........................................ $ 30,503 $ 20,252 $(14,861)
Net income (loss) per share:
Basic
As reported ...................................... $ 1.21 $ 1.08 $ (0.97)
Pro forma ........................................ $ 1.05 $ 0.82 $ (1.17)
Diluted
As reported ...................................... $ 1.14 $ 0.94 $ (0.97)
Pro forma ........................................ $ 1.03 $ 0.75 $ (1.17)
F10
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As options vest over a varying number of years and awards are generally made
each year, the pro forma impacts shown above may not be representative of future
pro forma expense amounts. The pro forma additional compensation expense was
calculated based on the fair value of each option grant using the Black-Scholes
model with the following weighted-average assumptions:
2002 2001 2000
---------- ---------- ----------
Dividend yield ....................... 0% 0% 0%
Expected volatility .................. 65% 80% 90%
Risk free interest rate .............. 3.00% 4.50% 6.50%
Expected option lives ................ 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,
in-process research and development charges, and estimates of costs to complete
performance obligations associated with research, licensing, and distribution
arrangements for which revenue is accounted for using percentage of completion
accounting. These estimates are based on historical experience and on various
other assumptions that are believed to be reasonable under the current
circumstances. Actual results could differ from these estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". Among other things, FIN 45 requires
guarantors to recognize, at fair value, their obligations to stand ready to
perform under certain guarantees. FIN 45 is effective for guarantees issued or
modified on or after January 1, 2003. FIN 45 is not expected to have any impact
on the Company's financial statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities"
(Statement 146). Statement 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Statement 146 nullifies Emerging Issues Task Force Issue 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)," which required
that an entity recognize a liability for an exit cost at the date it commits to
an exit plan. The provisions of this Statement are effective for exit or
disposal activities initiated after December 31, 2002. The adoption of Statement
146 is not expected to have a material impact on the Company's financial
statements.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement
144). Statement 144 supercedes Statement of Financial Accounting Standards No
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Statement 144 applies to all long-lived assets,
including discontinued operations, and consequently amends Accounting Principles
Board Opinion No. 30, "Reporting Results of Operations-- Reporting the Effects
of Disposal of a Segment of a Business." The Company adopted Statement 144 on
January 1, 2002. The adoption of Statement 144 had no impact on the Company's
financial statements.
F11
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In July 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations" (Statement 141), and No. 142, "Goodwill and Other
Intangible Assets" (Statement 142).
Statement 141 requires that all business combinations initiated after June 30,
2001 be accounted for using the purchase method of accounting and further
clarifies the criteria to recognize intangible assets separately from goodwill.
The Company determined that its assembled workforce intangible asset does not
meet the criteria for recognition as a separate identifiable intangible asset
and thus, effective January 1, 2002, reclassified the net book value of its
assembled workforce intangible asset into goodwill.
Under Statement 142, goodwill and indefinite-lived intangible assets are no
longer amortized, but are reviewed for impairment at the reporting unit level
annually, or more frequently if impairment indicators arise. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. Upon adoption of Statement 142, the
Company reassessed the useful lives of its existing identifiable intangible
assets and determined that they continue to be appropriate. As required by
Statement 142, the Company amortized through December 31, 2001 all goodwill
acquired prior to July 1, 2001. Effective January 1, 2002, the Company stopped
amortizing all goodwill.
If the Company had applied the non-amortization provisions of Statement 142 for
all of 2001 and 2000, net income (loss) would have been as follows:
2001 2000
-------- --------
(in thousands)
Net income (loss), as reported ............................ $ 26,163 $(11,425)
Effect of goodwill and assembled workforce amortization ... 858 611
-------- --------
Net income (loss), as adjusted ............................ $ 27,021 $(10,814)
Basic net income (loss) per share, as reported ............ $ 1.08 $ (0.97)
Effect of goodwill and assembled workforce amortization ... .03 .03
-------- --------
Basic net income (loss) per share, as adjusted............ $ 1.11 $ (0.94)
Diluted net income (loss) per share, as reported .......... $ 0.94 $ (0.97)
Effect of goodwill and assembled workforce amortization ... .03 .03
-------- --------
Basic net income (loss) per share, as adjusted............ $ 0.97 $ (0.94)
3. ACQUISITIONS
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 expenses associated with the acquisition. The
manufacturing of the acquired product lines is being transferred to Integra's
manufacturing facility located in Biot, France. This acquisition broadened
Integra's neurosurgical product line offering and customer base and is expected
to increase 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 expenses
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.
Integra is consolidating the distribution operations of Padgett into the
Company's distribution center located in Cranbury, New Jersey, which is expected
to result in future operating cost savings. This acquisition also broadened
Integra's direct sales and marketing infrastructure in the United States and its
existing surgical customer base, which represents an additional call point to
market certain of Integra's existing products.
F12
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
In August 2002, the Company acquired all of the capital stock of the
neurosciences division of NMT Medical, Inc. for $5.7 million in cash, including
expenses associated with the acquisition. Through this acquisition, the Company
added a range of leading differential pressure valves and external ventricular
drainage products to its neurosurgical product line. The acquired operations
included a facility located in Biot, France that manufactures, packages and
distributes shunting, catheter and drainage products, and a distribution
facility located in Atlanta, Georgia that was consolidated into Integra's
Cranbury, New Jersey distribution center in September 2002. The $4.2 million
fair value assigned to the land, building and equipment in Biot was determined
based on a third party appraisal.
This acquisition broadened Integra's neurosurgical product line offering and
provided a more technologically advanced neurosurgical shunting product line
than was previously sold by the Company. Additionally, the acquired Biot
facility and European-based direct sales organization are expected to become an
important part of Integra's continental European operating activities.
In connection with this acquisition, the Company terminated all of NMT's
independent neurosciences sales agents based in the United States and exited the
Atlanta, Georgia distribution facility. The estimated costs to terminate the
independent sales agents, all rent payments made after the shutdown of the
facility, and the costs paid to terminate the Atlanta facility lease were
accrued as part of the purchase price because they provided no future benefit to
the Company's operations. The amounts recorded are summarized below:
Initial Change in Balance
Balance Estimate Utilized 12/31/02
--------- --------- -------- --------
(in thousands)
Termination of sales agents ........ $ 211 $ -- $ (62) $ 149
Lease obligations .................. 175 (96) (79) --
Severance costs totaling $130,000 were paid to employees of the Atlanta facility
as a condition for their continued employment until operations at the facility
ceased. These costs were expensed over the period in which the related services
were performed.
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 expenses associated with the acquisition), $0.5 million of deferred
consideration that is included in accrued liabilities at December 31, 2002, 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
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 expenses 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.
F13
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
In April 2001, the Company acquired all of the outstanding capital stock of
Satelec Medical, a subsidiary of the Satelec-Pierre Rolland group, for $3.9
million in cash, including expenses associated with the acquisition. Satelec
Medical, based in France, manufactures and markets the Dissectron(R) ultrasonic
surgical aspirator console and a line of related handpieces. The Company
completed the consolidation of the Satelec manufacturing operations into its
Andover, England and Biot, France facilities in 2002. This acquisition broadened
Integra's neurosurgical product line offering and its direct sales and marketing
presence in Europe.
In April 2001, the Company acquired all of the outstanding capital stock of
GMSmbH, the German manufacturer of the LICOX(R) Brain Tissue Oxygen Monitoring
System, for $3.2 million. The purchase price consisted of $2.6 million in cash
(including expenses associated with the acquisition), the forgiveness of $0.2
million in notes receivable from GMSmbH, and $0.4 million of future minimum
royalty payments to the seller. Prior to the acquisition, the Company's Integra
NeuroSciences segment had exclusive marketing rights to the LICOX(R) products in
the United States and certain other markets. This acquisition provided Integra
with full rights to the LICOX(R) product technology.
In April 2000, the Company purchased the Selector(R) Ultrasonic Aspirator,
Ruggles(TM) hand-held neurosurgical instruments and Spembly Medical cryosurgery
product lines from NMT Medical, Inc. for $11.6 million in cash. This acquisition
broadened Integra's neurosurgical product line offering and provided Integra
with its first direct sales and marketing presence in Europe.
In January 2000, the Company purchased the business of Clinical Neuro Systems,
Inc. for $6.8 million. The purchase price consisted of $4.0 million in cash and
a 5% $2.8 million promissory note issued to the seller, which was repaid in
2001. The acquired business designed and manufactured neurosurgical external
ventricular drainage systems, including catheters and drainage bags, as well as
cranial access kits.
All of these acquisitions have been accounted for using the purchase method of
accounting, and the results of operations of the acquired businesses have been
included in the consolidated financial statements since their respective dates
of acquisition. The following table summarizes the fair value of the assets
acquired and liabilities assumed as a result of these acquisitions:
(All amounts in thousands)
2002 Acquisitions Radionics Padgett NMT Neuro Signature
- ----------------- --------- --------- --------- ---------
Current assets ....................... $ 1,049 $ 2,164 $ 5,605 $ 490
Property, plant and equipment ........ 75 65 4,510 1,165
Intangible assets .................... 391 6,437 -- 626
Goodwill ............................. 2,152 3,389 -- --
In-process research and development .. -- -- -- 1,177
Other non-current assets ............. 18 281 -- --
--------- --------- --------- ---------
Total assets acquired ............. 3,685 12,336 $10,115 3,458
Current liabilities .................. -- 200 3,789 76
Deferred tax liabilities ............. -- 2,524 665 --
--------- --------- --------- ---------
Total liabilities assumed ......... -- 2,724 4,454 76
Net assets acquired .................. $ 3,685 $ 9,612 $ 5,661 $ 3,382
2001 Acquisitions NeuroSupplies Satelec GMS
- ----------------- ------------- ----------- -----------
Current assets ....................... $ 931 $ 999 $ 484
Property, plant and equipment ........ 74 55 336
Intangible assets .................... 470 1,064 613
Goodwill ............................. 3,044 2,210 2,383
Other non-current assets ............. -- 75 --
------------- ----------- -----------
Total assets acquired ............. 4,519 4,403 3,816
Current liabilities .................. 255 9 339
Deferred tax liabilities ............. 179 448 272
------------- ----------- -----------
Total liabilities assumed ......... 434 457 611
Net assets acquired .................. $ 4,085 $ 3,946 $ 3,205
F14
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONTINUED)
All of the goodwill acquired in 2002 and 2001 was assigned to the Integra
NeuroSciences segment. The goodwill acquired in the Radionics acquisition is
expected to be deductible for tax purposes. The acquired intangible assets are
being amortized on a straight-line basis over lives ranging from 2 to 40 years.
The following unaudited pro forma financial information summarizes the results
of operations for the periods indicated as if the acquisitions consummated in
2002 and 2001 had been completed as of January 1, 2001. The pro forma results
are based upon certain assumptions and estimates and they give effect to actual
operating results prior to the acquisitions and adjustments to reflect decreased
depreciation expense, increased intangible asset amortization, and increased
income taxes at a rate consistent with Integra's effective rate in each year. No
effect has been given to cost reductions or operating synergies. As a result,
these pro forma results do not necessarily represent results that would have
occurred if the acquisition had taken place on the basis assumed above, nor are
they indicative of the results of future combined operations.
2002 2001
-------- --------
(in thousands)
Total revenue ......................................... $134,106 $124,032
Income before extraordinary loss ...................... 36,253 27,760
Net income ............................................ 36,253 27,517
Basic income per share before extraordinary loss ...... $ 1.25 $ 1.19
Diluted income per share before extraordinary loss .... $ 1.25 $ 1.00
Basic net income per share ............................ $ 1.17 $ 1.18
Diluted net income per share .......................... $ 1.17 $ 0.99
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 expenses 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. The
NeuroSensor(TM) system, which has received 510(k) clearance from the United
States Food and Drug Administration but has not yet been launched pending the
results of clinical trials and other factors, measures both intracranial
pressure and cerebral blood flow using a single combined probe and an electronic
monitor for data display. 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 Company expects Novus' products to complement our existing line of
brain parameter monitoring 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 design and functionality of this
next generation neuromonitoring system is based, in part, on certain technology
employed in the NeuroSensor(TM) system that has been modified specifically for
this project and which has no alternative use in the modified state. Early
prototypes of this next generation neuromonitoring system have been designed and
manufactured based on this modified core technology. Novus remains responsible
for the costs to complete development and obtain regulatory clearance for this
project, the value of which was recorded as prepaid research and development.
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.
F15
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DEBT
In connection with the acquisition of NeuroSupplies in December 2001, the
Company issued a one month, interest-free $3.6 million promissory note to the
seller that was repaid in January 2002.
In connection with the prepayment of all outstanding bank loans and a $2.8
million note payable issued in connection with an acquisition, the Company
recorded in 2001 an extraordinary loss on the early retirement of debt of
$243,000, net of a $13,000 tax benefit.
5. COMMON AND PREFERRED STOCK
PREFERRED STOCK TRANSACTIONS
The Company is authorized to issue up to 15,000,000 shares of preferred stock in
one or more series, of which 2,000,000 shares have been designated as Series A,
120,000 shares have been designated as Series B, and 54,000 shares have been
designated as Series C.
On March 29, 2000, the Company issued 54,000 shares of Series C Convertible
Preferred Stock (Series C Preferred) and warrants to purchase 300,000 shares of
common stock at $9.00 per share to affiliates of Soros Private Equity Partners
LLC (SPEP) for $5.4 million, net of issuance costs. The Series C Preferred
ranked on a parity with the Company's Series B Convertible Preferred Stock, was
senior to the Company's common stock and all other preferred stock of the
Company, and had a 10% cumulative annual dividend yield payable only upon
liquidation. The Series C Preferred was converted into 600,000 shares of common
stock in April 2002.
The Series C Preferred was issued with a beneficial conversion feature that
resulted in a nonrecurring, non-cash dividend of $4.2 million, which has been
reflected in the net loss per share in 2000. The beneficial conversion dividend
was based upon the excess of the price of the underlying common stock as
compared to the fixed conversion price of the Series C Preferred, after taking
into account the value assigned to the common stock warrants. The warrants
issued with the Series C Preferred were exercised in December 2001 for proceeds
of $2.7 million.
In connection with the NeuroCare acquisition, the Company issued 100,000 shares
of Series B Convertible Preferred Stock (Series B Preferred) and warrants to
purchase 240,000 shares of common stock at $3.82 per share to SPEP for $9.9
million, net of issuance costs. In June 2001, SPEP converted the Series B
Preferred into 2,617,800 shares of common stock. The Series B Preferred had a
10% cumulative annual dividend yield payable only upon liquidation. The warrants
issued with the Series B Preferred were exercised in March 2001 for proceeds of
$916,800.
SPEP is entitled to certain registration rights for shares of common stock
obtained through conversion of the Series B Preferred or Series C Preferred or
the exercise of the related warrants.
During the second quarter of 1998, the Company sold 500,000 shares of Series A
Convertible Preferred Stock (Series A Preferred) for $4.0 million to Century
Medical, Inc. (CMI). CMI converted the Series A Preferred into 250,000 shares of
common stock in October 2000. The Series A Preferred paid an annual dividend of
$0.16 per share.
COMMON STOCK TRANSACTIONS
In August 2001, the Company issued 4,747,500 shares of common stock at $25.50
per share in a follow-on public offering. The net proceeds generated by the
offering, after expenses, were $113.4 million.
In September 2000, the Company completed a $5.0 million private placement of
333,334 shares of common stock.
In 2002 and 2000, respectively, the Company repurchased 100,000 and 19,000
shares of its common stock for $1.8 million and $173,000. In February 2003, the
Company received authorization from its Board of Directors to repurchase up to
one million shares of its common stock for an aggregate cost not to exceed $15.0
million.
F16
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STOCK PURCHASE AND AWARD PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Company received stockholder approval for its Employee Stock Purchase Plan
(ESPP) in May 1998. The purpose of the ESPP is to provide eligible employees of
the Company with the opportunity to acquire shares of common stock at periodic
intervals by means of accumulated payroll deductions. Under the ESPP, a total of
500,000 shares of common stock have been reserved for issuance. These shares
will be made available either from the Company's authorized but unissued shares
of common stock or from shares of common stock reacquired by the Company as
treasury shares. At December 31, 2002, approximately 248,000 shares remain
available for purchase under the ESPP.
STOCK OPTION PLANS
As of December 31, 2002, the Company had stock options outstanding under six
plans, the 1993 Incentive Stock Option and Non-Qualified Stock Option Plan (the
1993 Plan), the 1996 Incentive Stock Option and Non-Qualified Stock Option Plan
(the 1996 Plan), the 1998 Stock Option Plan (the 1998 Plan), the 1999 Stock
Option Plan (the 1999 Plan), the 2000 Equity Incentive Plan (the 2000 Plan), and
the 2001 Equity Incentive Plan (the 2001 Plan and collectively, the Plans).
The Company has reserved 750,000 shares of common stock for issuance under both
the 1993 Plan and 1996 Plan, 1,000,000 shares under the 1998 Plan, and 2,000,000
shares each under the 1999 Plan, the 2000 Plan and the 2001 Plan. The 1993 Plan,
1996 Plan, 1998 Plan, and the 1999 Plan permit the Company to grant both
incentive and non-qualified stock options to designated directors, officers,
employees and associates of the Company. The 2000 Plan and 2001 Plan permit the
Company to grant incentive and non-qualified stock options, stock appreciation
rights, restricted stock, performance stock, or dividend equivalent rights to
designated directors, officers, employees and associates of the Company. Options
issued under the Plans become exercisable over specified periods, generally
within four years from the date of grant, and generally expire six years from
the grant date.
Option activity for all the Plans was as follows:
2002 2001 2000
--------------------- --------------------- ---------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Options Ex.Price Options Ex. Price Options Ex. Price
-----------------------------------------------------------------------
(shares in thousands)
Options outstanding at
January 1, ........... 4,261 $10.79 4,519 $ 7.74 3,791 $ 5.82
Granted ................. 618 $17.73 748 $24.61 1,548 $11.62
Exercised ............... (425) $ 6.15 (836) $ 6.49 (493) $ 5.68
Cancelled ............... (159) $13.39 (170) $11.88 (327) $ 6.90
Options outstanding at
December 31, ......... 4,295 $12.15 4,261 $10.79 4,519 $ 7.74
Options exercisable at
December 31, .......... 2,380 $ 8.75 1,986 $ 6.89 1,759 $ 6.27
At December 31, 2002, there were 1,270,000 shares available for grant under the Plans.
F17
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STOCK PURCHASE AND AWARD PLANS (CONTINUED)
The following table summarizes information about stock options outstanding as of
December 31, 2002:
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 2002 Price Contractual Life 2002 Price
----------------- ---------- ------------ -------------------- ---------- -----------
(shares in thousands)
$ 3.375 - $ 4.375 567 $ 3.73 2.0 years 548 $ 3.73
$ 4.438 - $ 5.875 1,014 $ 5.81 3.9 years 882 $ 5.81
$ 5.906 - $12.563 885 $ 10.03 5.8 years 401 $ 9.31
$12.625 - $17.650 1,106 $ 15.35 4.8 years 342 $ 14.16
$17.680 - $32.420 723 $ 25.36 5.0 years 207 $ 24.52
------- -------- ----------- ------- --------
4,295 $ 12.15 4.5 years 2,380 $ 8.75
The weighted average fair market value of options granted in 2002, 2001 and 2000
was $9.57, $16.14, and $8.20 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. In connection with the
issuance of the Restricted Units, the Company incurred a non-cash compensation
charge of $13.5 million in the fourth quarter of 2000, which is included in
general and administrative expenses. The Executive also received 1,000,000
Restricted Units in December 1997, each of which entitles him to receive one
share of the Company's common stock. The Restricted Units issued in December
1997 were not issued under any of the Plans. The Executive has demand
registration rights under the Restricted Units issued in December 1997 and
December 2000.
No other stock-based awards are outstanding under any of the Plans.
7. 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:
2002 2001 2000
-------- -------- --------
(in thousands)
Service cost ..................................... $ 123 $ 115 $ 76
Interest cost .................................... 356 332 228
Expected return on plan assets ................... (331) (356) (256)
Recognized net actuarial loss .................... 86 7 --
-------- -------- --------
Net periodic benefit cost ..................... $ 231 $ 98 $ 48
The following weighted average assumptions were used to develop net periodic
benefit cost and the actuarial present value of projected benefit obligations:
2002 2001 2000
-------- -------- --------
Discount rate .................................... 5.5% 5.9% 6.0%
Expected return on plan assets ................... 6.5% 6.5% 6.5%
Rate of compensation increase .................... 3.8% 4.1% 4.1%
F18
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. RETIREMENT BENEFIT PLANS (CONTINUED)
The following sets forth the change in benefit obligations and change in plan
assets at December 31, 2002 and 2001 and the prepaid (accrued) benefit cost:
December 31,
2002 2001
-------- --------
(in thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year .......................... $ 5,733 $ 5,841
Service cost ................................................... 123 115
Interest cost .................................................. 356 332
Participant contributions ...................................... 33 33
Actuarial (gain) loss .......................................... 30 (323)
Benefits paid .................................................. (105) (101)
Effect of foreign currency exchange rates ...................... 633 (164)
-------- --------
Benefit obligation, end of year ................................ $ 6,803 $ 5,733
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning of year ................... $ 5,153 $ 5,683
Actual return on plan assets ................................... (669) (427)
Employer contributions ......................................... 153 127
Benefits paid .................................................. (105) (101)
Participant contributions ...................................... 33 33
Effect of foreign currency exchange rates ...................... 503 (162)
-------- --------
Plan assets at fair value, end of year ......................... $ 5,068 $ 5,153
RECONCILIATION OF FUNDED STATUS
Funded status, Benefit obligation in excess of plan assets ........ $(1,735) $ (580)
Unrecognized net actuarial loss ................................... 2,001 1,036
Adjustment to recognize minimum liability ......................... (1,444) --
-------- --------
Prepaid (accrued) benefit cost .................................... $(1,178) $ 456
The accrued benefit liability recorded at December 31, 2002 is included in other
liabilities. The prepaid benefit asset recorded at December 31, 2001 is included
in other assets.
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
plan were $575,000, $411,000 and $310,000 in 2002, 2001 and 2000, respectively.
8. LEASES
The Company leases administrative, manufacturing, research and distribution
facilities and various manufacturing, office and transportation equipment
through operating lease agreements.
In November 1992, a corporation whose shareholders are trusts, whose
beneficiaries include beneficiaries of the Company's Chairman, acquired from
independent third parties a 50% interest in the general partnership from which
the Company leases its manufacturing facility in Plainsboro, New Jersey. The
lease provides for a rent escalations of 8.5% in 2007 and expires in October
2012.
The lease agreement related to the Company's research facility in San Diego
provides for annual escalations.
In June 2000, the Company signed a ten year agreement to lease certain
production equipment from a corporation whose sole stockholder is a general
partnership, for which the Company's Chairman is a partner and the President.
Under the terms of the lease agreement, the Company paid $90,000 to the related
party lessor in both 2002 and 2001.
F19
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LEASES (CONTINUED)
Future minimum lease payments under operating leases at December 31, 2002 were
as follows:
Related Third
Parties Parties Total
--------- --------- ---------
(in thousands)
2003 ............................ 321 2,160 2,481
2004 ............................ 321 1,925 2,246
2005 ............................ 321 1,110 1,431
2006 ............................ 321 781 1,102
2007 ............................ 324 777 1,101
Thereafter ...................... 1,340 1,135 2,475
--------- --------- ---------
Total minimum lease payments..... 2,948 7,888 10,836
========= ========= =========
Total rental expense in 2002, 2001, and 2000 was $2.0 million, $1.9 million, and
$1.4 million, respectively, and included $321,000, $306,000, and $255,000, in
related party expense, respectively.
9. INCOME TAXES
The income tax expense (benefit) consisted of the following:
2002 2001 2000
-------- -------- --------
(in thousands)
Current:
Federal .............................. $ -- $ 221 $ 100
State ................................ 1,276 446 (131)
Foreign .............................. (427) 555 139
-------- -------- --------
Total current .......................... 849 1,222 108
Deferred:
Federal .............................. $(13,671) $(10,774) $ --
State ................................ 373 (739) --
Foreign .............................. (103) (572) --
-------- -------- --------
Total deferred ......................... (13,401) (12,085) --
Income tax expense (benefit) ........... $(12,552) $(10,863) $ 108
======== ======== ========
The temporary differences which give rise to deferred tax assets are presented
below:
December 31
2002 2001
-------- --------
(in thousands)
Net operating loss and tax credit carryforwards ........... $ 23,749 $ 32,765
Inventory reserves and capitalization ..................... 2,722 2,616
Other ..................................................... 2,102 1,403
Deferred compensation ..................................... 7,692 7,756
Deferred revenue .......................................... 2,167 2,403
-------- --------
Total deferred tax assets before valuation allowance .... 38,432 46,943
Valuation allowance ....................................... (7,692) (34,356)
Depreciation and amortization ............................. (5,130) (1,952)
Other ..................................................... (392) (392)
-------- --------
Net deferred tax assets ................................... $ 25,218 $ 10,243
======== ========
F20
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (CONTINUED)
Since 1999, the Company has generated positive taxable income on a cumulative
basis. In light of this recent trend, current projections for future taxable
earnings, and the expected timing of the reversal of deductible temporary
differences, management concluded in the fourth quarter of 2001 that a portion
of the valuation allowance recorded against federal and state net operating loss
carryforwards and certain other temporary differences was no longer necessary.
The valuation allowance was reduced by $12.0 million in 2001 because management
believed that it was more likely than not that the Company will realize the
benefit of that portion of the deferred tax assets recorded at December 31,
2001. The $12.0 million reduction in the valuation allowance consisted of an
$11.5 million deferred income tax benefit and a $450,000 credit to additional
paid-in capital related to net operating loss carryforwards generated through
the exercise of stock options.
In the fourth quarter of 2002, the Company reduced the remaining valuation
allowance recorded against net operating loss carryforwards by $23.4 million,
which reflected the Company's estimate of additional tax benefits that it
expects to realize in the future. The $23.4 million reduction in the valuation
allowance consisted of a $20.4 million deferred income tax benefit and a $3.0
million credit to additional paid-in capital related to net operating loss
carryforwards generated through the exercise of stock options. A valuation
allowance of $7.7 million is recorded against the remaining $32.9 million of net
deferred tax assets recorded at December 31, 2002. This valuation allowance
relates to deferred tax assets for certain expenses which will be deductible for
tax purposes in very limited circumstances and for which the Company believes it
is unlikely that it will recognize the associated tax benefit. The Company does
not anticipate additional income tax benefits through future reductions in the
valuation allowance. However, in the event that the Company determines that it
would be able to realize more or less than the recorded amount of net deferred
tax assets, an adjustment to the deferred tax asset valuation allowance would be
recorded in the period such a determination is made.
The net change in the Company's valuation allowance was $(26.7) million, $(10.4)
million, and $3.3 million, in 2002, 2001, and 2000, respectively. Included in
the 2002 reduction was the write off of the valuation allowance associated with
$3.3 million of deferred tax assets which the Company wrote off because they are
no longer expected to be utilizable.
A reconciliation of the United States Federal statutory rate to the Company's
effective tax rate for the years ended December 31, 2002, 2001, and 2000 is as
follows:
2002 2001 2000
------ ------ ------
Federal statutory rate ..................................... 35.0% 34.0% (34.0%)
Increase (reduction) in income taxes resulting from:
State income taxes - before deferred benefit ............. 3.7% 1.9% 3.1%
Benefit from sale of state net operating loss
carryforwards, net of federal effect .................. -- -- (4.3%)
Foreign taxes booked at different rates .................. (2.5%) (1.3%) (0.5%)
Alternative minimum tax, net of state benefit ............ -- 1.4% 0.9%
Nondeductible items ...................................... (0.5%) 1.1% 2.1%
Other .................................................... (1.0%) 1.9% 2.9%
Change in valuation allowance ............................ (89.9%) (108.9%) 30.8%
------ ------ ------
Effective tax rate ......................................... (55.2%) (69.9%) 1.0%
====== ====== ======
At December 31, 2002, the Company had net operating loss carryforwards of
approximately $74.4 million and $19.8 million for federal and state income tax
purposes, respectively, to offset future taxable income. The federal and state
net operating loss carryforwards expire through 2013 and 2010, respectively. In
2000, the Company recognized a tax benefit of $467,000 from the sale of certain
state net operating loss carryforwards through a special program offered by the
State of New Jersey.
At December 31, 2002, several of 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.
F21
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. NET INCOME (LOSS) PER SHARE
Amounts used in the calculation of basic and diluted net income (loss) per share
were as follows:
2002 2001 2000
-------- -------- --------
(in thousands, except per share amounts)
Basic:
- ------
Income (loss) before extraordinary item and accounting change.. $ 35,277 $ 26,406 $(10,955)
Dividends on preferred stock .................................. (159) (1,026) (5,642)
-------- -------- --------
Income (loss) before extraordinary item and accounting
change applicable to common stock .......................... $ 35,118 $ 25,380 $(16,597)
Basic income (loss) per share before extraordinary
item and accounting change ................................. $ 1.21 $ 1.09 $ (0.95)
======== ======== ========
Net income (loss) ............................................. $ 35,277 $ 26,163 $(11,425)
Dividends on preferred stock .................................. (159) (1,026) (5,642)
-------- -------- --------
Net income (loss) applicable to common stock .................. $ 35,118 $ 25,137 $(17,067)
Basic net income (loss) per share ............................. $ 1.21 $ 1.08 $ (0.97)
======== ======== ========
Weighted average common shares outstanding - Basic ............ 29,021 23,353 17,553
======== ======== ========
Diluted:
- --------
Income (loss) before extraordinary item and accounting change.. $ 35,277 $ 26,406 $(10,955)
Dividends on preferred stock .................................. -- -- (5,642)
-------- -------- --------
Income (loss) before extraordinary item and accounting
change applicable to common stock .......................... $ 35,277 $ 26,406 $(16,597)
Diluted income (loss) per share before extraordinary
item and accounting change ................................. $ 1.14 $ 0.95 $ (0.95)
======== ======== ========
Net income (loss) ............................................. $ 35,277 $ 26,163 $(11,425)
Dividends on preferred stock .................................. -- -- (5,642)
-------- -------- --------
Net income (loss) applicable to common stock .................. $ 35,277 $ 26,163 $(17,067)
Diluted net income (loss) per share ........................... $ 1.14 $ 0.94 $ (0.97)
======== ======== ========
Weighted average common shares outstanding - Basic ............ 29,021 23,353 17,553
Effect of dilutive securities:
Assumed conversion of Preferred Stock ...................... 175 1,873 --
Stock options and warrants ................................. 1,699 2,570 --
-------- -------- --------
Weighted average common shares outstanding .................... 30,895 27,796 17,553
======== ======== ========
Dividends on preferred stock in 2000 include a $4,170 beneficial conversion
feature on preferred stock issuance.
The $243,000 extraordinary loss on the early retirement of debt reduced basic
and diluted earnings per share by $0.01 in 2001. The $470,000 cumulative effect
of the accounting change for SAB 101 reduced basic and diluted earnings per
share by $0.02 in 2000.
Shares of common stock issuable through exercise or conversion of the following
dilutive securities were not included in the computation of diluted net income
(loss) per share for each period because their effect would have been
antidilutive:
2002 2001 2000
-------- -------- --------
(in thousands)
Convertible Preferred Stock ........................ -- -- 3,218
Stock options and warrants ......................... 1,104 65 5,068
Restricted Units issued by the Company (see Note 7) that entitle the holder to
2,250,000 shares of common stock are included in the weighted average shares
outstanding calculation from their date of issuance because no further
consideration is due related to the issuance of the underlying common shares.
F22
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DEVELOPMENT, DISTRIBUTION, AND LICENSE AGREEMENTS AND GOVERNMENT GRANTS
The Company has various development, distribution, and license agreements under
which it receives payments. Significant agreements and grant awards include the
following:
In 1999, the Company and Ethicon, Inc., a division of Johnson & Johnson,
signed an agreement (the Ethicon Agreement) providing Ethicon with exclusive
marketing and distribution rights to INTEGRA(R) Dermal Regeneration Template
worldwide, excluding Japan. Under the Ethicon Agreement, the Company will
continue to manufacture INTEGRA(R) Dermal Regeneration Template and will
collaborate with Ethicon to conduct research and development and clinical
research aimed at expanding indications and developing future products in the
field of skin repair and regeneration. Upon signing the Ethicon Agreement, the
Company received a nonrefundable payment from Ethicon of $5.3 million for the
exclusive use of the Company's trademarks and regulatory filings related to
INTEGRA(R) Dermal Regeneration Template and certain other rights. This amount
was initially recorded as deferred revenue and is being recognized as revenue in
accordance with the Company's revenue recognition policy for nonrefundable,
up-front fees received. The unamortized balance of $3.3 million at December 31,
2002 is recorded in deferred revenue, of which $528,000 is classified as
short-term. Additionally, the Ethicon Agreement requires Ethicon to make
nonrefundable payments to the Company each year based upon minimum purchases of
INTEGRA(R) Dermal Regeneration Template.
The Ethicon Agreement also provides for annual research funding of $2.0 million
through 2004, after which such funding amounts will be determined based on a
percentage of net sales of the INTEGRA(R) product, as defined. Additional
funding will be received upon the occurrence of certain clinical and regulatory
events and for funding certain expansions of the Company's INTEGRA(R) Dermal
Regeneration Template production capacity. In 2002 and 2000, the Company
received $1.0 million and $750,000, respectively, of event-related payments from
Ethicon which were recorded in other revenue in accordance with the Company's
revenue recognition policy.
Ethicon has not been successful in selling the minimum amounts of INTEGRA(R)
Dermal Regeneration Template specified in the Ethicon Agreement. In addition,
Integra has notified Ethicon that certain clinical and regulatory events have
been achieved under the Ethicon Agreement and that payments for the achievement
of those events is due to the Company. Ethicon has informed Integra that it
disagrees that the clinical and regulatory events in question have been
achieved, and that it does not intend to make the payments the Company has
demanded. In addition, Ethicon has informed Integra that if the Company does
not agree to substantial amendments to the Ethicon Agreement, it will
consider alternatives that may include exercising its right to terminate the
agreement.
The Ethicon Agreement requires Ethicon to give the Company notice one year in
advance of a termination of the agreement, during which time Ethicon is
required to continue to comply with the terms of the contract. At the end of
that period, Ethicon may be required to pay additional amounts based on the
termination provisions of the contract and is required to cooperate in the
transfer of the business back to Integra. Additionally, Ethicon may apply the
value of any minimum payments in excess of actual product purchases against
future purchases of products for sale on a non-exclusive basis for a specified
period of time.
The Company has an agreement with Wyeth and Medtronic Sofamor Danek for the
development of collagen and other absorbable matrices to be used in conjunction
with Wyeth's recombinant human bone morphogenetic protein-2 (rhBMP-2) in a
variety of bone regeneration applications. The agreement with Wyeth requires
Integra to supply Absorbable Collagen Sponges to Wyeth (including those that
Wyeth sells to Medtronic Sofamor Danek with rhBMP-2 for use in Medtronic Sofamor
Danek's InFUSE(TM) product) at specified prices. In addition, the Company
receives a royalty equal to a percentage of Wyeth's sales of surgical kits
combining rhBMP-2 and the Absorbable Collagen Sponges. The agreement terminates
in 2004, but may be extended for successive five year terms at the option of
Wyeth. The agreement does not provide for milestones or other contingent
payments, but Wyeth pays the Company to assist with regulatory affairs and
research. The Company received $1.2 million, $1.1 million, and $0.3 million of
research and development revenues under the agreement in 2002, 2001, and 2000,
respectively.
F23
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
As consideration for certain technology, manufacturing, distribution and selling
rights and licenses granted to the Company, the Company has agreed to pay
royalties on the sales of products that are commercialized relative to the
granted rights and licenses. Royalty payments under these agreements by the
Company were not significant for any of the periods presented.
Various lawsuits claims and proceedings are pending or have been settled by the
Company. The most significant of those are described below.
In July 1996, the Company filed a patent infringement lawsuit in the United
States District Court for the Southern District of California (the "Court")
against Merck KGaA, a German corporation, Scripps Research Institute, a
California nonprofit corporation, and David A. Cheresh, Ph.D., a research
scientist with Scripps, seeking damages and injunctive relief. The complaint
charged, among other things, that the defendant Merck KGaA willfully and
deliberately induced, and continues to willfully and deliberately induce,
defendants Scripps Research Institute and Dr. Cheresh to infringe certain of the
Company's patents. These patents are part of a group of patents granted to The
Burnham Institute and licensed by the Company that are based on the interaction
between a family of cell surface proteins called integrins and the
arginine-glycine-aspartic acid ("RGD") peptide sequence found in many
extracellular matrix proteins. The defendants filed a countersuit asking for an
award of defendants' reasonable attorney fees.
This case went to trial in February 2000, and in March, 2000, a jury returned a
unanimous verdict for the Company, finding that Merck KGaA had willfully
infringed and induced the infringement of the Company's patents, and awarded
$15,000,000 in damages. The Court dismissed Scripps and Dr. Cheresh from the
case.
In October, 2000, the Court entered judgment in the Company's favor and against
Merck KGaA in the case. In entering the judgment, the Court also granted the
Company pre-judgment interest of approximately $1,350,000, bringing the total
amount to approximately $16,350,000, plus post-judgment interest. Merck KGaA
filed various post-trial motions requesting a judgment as a matter of law
notwithstanding the verdict or a new trial, in each case regarding infringement,
invalidity and damages. In September 2001, the Court entered orders in favor of
the Company and against Merck KGaA on the final post-judgment motions in the
case, and denied Merck KGaA's motions for judgment as a matter of law and for a
new trial.
Merck KGaA and Integra have each appealed various decisions of the Court. The
court of appeals heard arguments in the appeal in November 2002, and we expect
the court to issue its opinion in 2003. Integra has not recorded any gain in
connection with this matter.
Bruce D. Butler, Ph.D., Bruce A. McKinley, Ph.D., and C. Lee Parmley (the Optex
Claimants), each parties to a Letter Agreement (the Letter Agreement) with a
wholly-owned subsidiary of the Company (Subsidiary), dated as of December 18,
1996, alleged that Subsidiary breached the terms of the Letter Agreement prior
to the Company's acquisition of the NeuroCare Group (Subsidiary's prior parent
company). In August, 2000, the Company and the Optex Claimants reached an
agreement whereby the Company paid the Optex Claimants $250,000 cash and issued
45,000 shares of the Company's common stock, valued at $641,250, in settlement
of all claims under the Letter Agreement. Subsequent to the settlement of this
matter, the Company received $350,000 from the seller of the NeuroCare Group
through assertion of the Company's right of indemnification. The Company did not
record any provision for this matter, as liabilities recorded at the time of the
Company's acquisition of the NeuroCare Group and the $350,000 indemnification
payment were adequate to cover this liability.
The Company is also subject to various claims, lawsuits and proceedings in the
ordinary course of our business, including claims by current or former employees
and distributors and with respect to our products. In the opinion of management,
such claims are either adequately covered by insurance or otherwise indemnified,
or are not expected, individually or in the aggregate, to result in a material
adverse effect on our financial condition. However, it is possible that our
results of operations, financial position and cash flows in a particular period
could be materially affected by these contingencies.
In September, 2001, three subsidiaries of the recently acquired neurosciences
division of NMT Medical, Inc. received a tax reassessment notice from the French
tax authorities seeking in excess $1.5 million in back taxes, interest and
penalties. NMT Medical, Inc., the former owner of these entities, has agreed to
specifically indemnify Integra against any liability in connection with these
tax claims. In addition, NMT Medical, Inc. has agreed to provide the French tax
authorities with payment of the tax liabilities on behalf of each of these
subsidiaries.
F24
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT AND GEOGRAPHIC INFORMATION
Integra is a global, diversified medical device company that develops,
manufactures, and markets medical devices, implants and biomaterials primarily
for use in neurosurgery, orthopedics and soft tissue repair. The Company's
operating segments are organized based on marketing and distribution strategies.
The Integra NeuroSciences segment includes our businesses that primarily sell
directly to healthcare providers. The Integra LifeSciences segment includes our
businesses that primarily sell through intermediaries such as strategic partners
or OEM customers.
Selected financial information on the Company's segments is reported below:
Total
Integra Integra Reportable
NeuroSciences LifeSciences Segments
------------- ------------- -------------
(in thousands)
2002
- ------
Product revenue ...................... 90,609 22,016 112,625
Total revenue ........................ 90,720 27,102 117,822
Operating expenses ................... 71,896 17,324 89,220
Operating income ..................... 18,824 9,778 28,602
Segment depreciation ................. 2,163 1,085 3,248
2001
- ------
Product revenue ...................... $ 68,332 $ 19,576 $ 87,908
Total revenue ........................ 69,393 24,049 93,442
Operating expenses ................... 51,599 17,834 69,433
Operating income ..................... 17,794 6,215 24,009
Segment depreciation ................. 2,030 1,064 3,094
2000
- ------
Product revenue ...................... $ 49,202 $ 16,158 $ 65,360
Total revenue ........................ 50,514 21,135 71,649
Operating expenses ................... 40,478 17,756 58,234
Operating income ..................... 10,036 3,379 13,415
Segment depreciation ................. 1,457 1,158 2,615
Integra NeuroSciences operating expenses in 2002 included $2.3 million of
acquired in-process research and development.
Product revenues and the related cost of product revenues between segments are
eliminated in computing segment operating results. The Company does not
disaggregate nonoperating revenues and expenses nor identifiable assets on a
segment basis.
A reconciliation of the amounts reported for total reportable segments to
consolidated results is as follows:
2002 2001 2000
-------- -------- --------
(in thousands)
Operating expenses:
Total reportable segments ................................ 89,220 $ 69,433 $ 58,234
Plus: Corporate general and administrative expenses ...... 7,771 6,939 22,655
Amortization ....................................... 1,644 2,784 2,481
-------- -------- --------
Consolidated total operating expenses .................... 98,635 79,156 83,370
Operating income (loss):
Total reportable segments ................................ 28,602 $ 24,009 $ 13,415
Less: Corporate general and administrative expenses ...... 7,771 6,939 22,655
Amortization ....................................... 1,644 2,784 2,481
-------- -------- --------
Consolidated operating income (loss) ..................... 19,187 $ 14,286 $(11,721)
Included in corporate general and administrative expenses in 2000 was the $13.5
million stock-based charge recorded in connection with the issuance of the
Restricted Units in the fourth quarter of 2000.
F25
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Product revenues consisted of the following:
2002 2001 2000
-------- -------- --------
(in thousands)
Integra NeuroSciences:
Neuro intensive care unit ............................. 31,697 $ 27,830 $ 23,521
Neuro operating room .................................. 47,934 36,213 21,820
Other NeuroSciences products .......................... 10,978 4,289 3,861
-------- -------- --------
Total product revenue ................................. 90,609 68,332 49,202
Integra LifeSciences:
Tissue repair products ................................ 10,365 $ 8,698 $ 6,168
Other medical devices ................................. 11,651 10,878 9,990
-------- -------- --------
Total product revenues ................................ 22,016 19,576 16,158
Consolidated product revenue .......................... 112,625 $ 87,908 $ 65,360
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:
2002 ................... $ 90,422 $ 14,737 $ 4,062 $ 3,404 $112,625
2001 ................... 68,612 10,577 4,838 3,881 87,908
2000 ................... 51,752 6,759 4,628 2,221 65,360
Long-lived assets:
December 31, 2002 ...... $ 45,319 $ 18,408 $ -- $ -- $ 63,727
December 31, 2001 ...... 33,001 12,057 -- -- 45,058
December 31, 2000 ...... 33,428 6,869 -- -- 40,297
14. SELECTED QUARTERLY INFORMATION -- UNAUDITED
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- --------- --------- ----------
(in thousands, except per share data)
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
F26
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SELECTED QUARTERLY INFORMATION - UNAUDITED (CONTINUED)
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- --------- --------- ----------
(in thousands, except per share data)
2001:
- -----
Total revenue .......................... $ 25,088 $ 23,750 $ 22,920 $ 21,684
Cost of product revenues ............... 9,957 9,153 8,310 8,594
Total other operating expenses ......... 10,419 10,861 11,154 10,708
Operating income ....................... 4,712 3,736 3,456 2,382
Interest income (expense), net ......... 1,029 556 (114) (78)
Other income (expense), net ............ (19) 96 (151) (62)
Income before income taxes ............. 5,722 4,388 3,191 2,242
Income tax expense (benefit) ........... (11,903) 365 429 246
Income before extraordinary loss ....... 17,625 4,023 2,762 1,996
Extraordinary loss on early retirement
of debt, net of income tax benefit .. -- (243) -- --
Net income ............................. $ 17,625 $ 3,780 $ 2,762 $ 1,996
Basic income per share before
extraordinary loss .................. $ 0.63 $ 0.15 $ 0.12 $ 0.08
Basic net income per share ............. 0.63 0.14 0.12 0.08
Diluted income per share before
extraordinary loss ................... $ 0.56 $ 0.14 $ 0.10 $ 0.07
Diluted net income per share ........... 0.56 0.13 0.10 0.07
15. SUBSEQUENT EVENT
On March 17, 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 $44.5 million in cash, subject to a working capital
adjustment and other adjustments with respect to certain income tax
elections. For more than 30 years, JARIT has marketed a wide variety of high
quality, reusable surgical instruments to virtually all surgical disciplines.
JARIT sells its products to more than 5,200 hospitals and surgery centers
worldwide. In the United States, JARIT sells through a 20 person sales
management force that works with over 100 distributor sales representatives.
With more than 5,000 instrument patterns and a 98% order fill rate, JARIT has
developed a strong reputation as a leading provider of high-quality surgical
instruments. JARIT manages its vendor relationships and purchases, packages
and labels its products directly from instrument manufacturers through its
facility in Germany.
The acquisition of JARIT broadens Integra's existing customer base and
surgical instrument product offering and provides an opportunity to achieve
operating costs savings, including the procurement of Integra's
Redmond(TM)-Ruggles(TM) and Padgett Instruments Inc.(R) products directly from
the instrument manufacturers.
The acquired business generated approximately $30.9 million in revenues and
$7.8 million in income before income taxes for the year ended December 31, 2002.
We expect to report the results of JARIT in the Integra NeuroSciences segment.
The determination of the fair value of the assets acquired and liabilities
assumed as a result of this acquisition is in progress. The Company expects to
record in excess of $30.0 million of intangible assets, consisting primarily of
customer relationships and tradename.
F27
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of Integra LifeSciences
Holdings Corporation and Subsidiaries:
Our audits of the consolidated financial statements referred to in our report
dated February 21, 2003, except Note 15 for which the date is March 17, 2003,
appearing in the 2002 Annual Report on Form 10-K of Integra LifeSciences
Holdings Corporation and Subsidiaries also included an audit of the financial
statement schedule listed in the index in Item 15 of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 21, 2003
F28
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
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, 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
Year ended December 31, 2000
- ----------------------------
Allowance for doubtful accounts
and sales returns .......... $ 944 $ 935 $ 30 $ (656) $ 1,253
Inventory reserves ...................... 3,137 892 903 (1,512) 3,420
Deferred tax asset valuation allowance .. 41,434 3,342 -- -- 44,776
(1) All amounts shown were recorded to goodwill in connection with acquisitions
except for the $3.3 million reduction in the deferred tax asset valuation
allowance in 2002 which was 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.
F29
Exhibit 21
Subsidiaries of Integra LifeSciences Holdings Corporation
State or Country of
Name of Subsidiary Incorporation or Organization
- ------------------ -----------------------------
Caveangle Ltd. United Kingdom
GMS mbH Germany
Integra LifeSciences Corporation Delaware
Integra LifeSciences Investment Corporation Delaware
Integra NeuroSciences CA Corporation Delaware
Integra NeuroSciences PR, Inc. Delaware
Integra NeuroSciences Holdings Ltd. United Kingdom
Integra NeuroSciences Ltd. United Kingdom
Integra NeuroSupplies, Inc. Connecticut
Integra Selector Corporation Delaware
Satelec Medical France
Spembly Cryosurgery Ltd. United Kingdom
Spembly Medical Ltd. United Kingdom
Integra Signature Technologies Inc. Delaware
NMT NeuroSciences(IP), Inc. Delaware
NMT NeuroSciences,(International), Inc. Delaware
NMT NeuroSciences Holdings BV Netherlands
NMT NeuroSciences (Belgium) SA Belgium
NMT NeuroSciences Instruments BV Netherlands
NMT NeuroSciences (Hong Kong) Limited Hong Kong
NMT NeuroSciences GmbH Germany
NMT NeuroSciences (Spain) SA Spain
Integra NeuroSciences Implants (France) SA France
Integra NeuroSciences Instruments (France)SARL France
Integra NeuroSciences Holdings (France) SA France
J. Jamner Surgical Instruments, Inc. Delaware
Padgett Instruments, Inc. Missouri
Swedemed AB Sweden
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-46024, 333-82233, 333-58235, 333-06577,
and 333-73512) of Integra LifeSciences Holdings Corporation and Subsidiaries of
our report dated February 21, 2003, except Note 15 for which the date is March
17, 2003, relating to the consolidated financial statements and financial
statement schedule, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 18, 2003
Exhibit 99
Certification of Chief Executive Officer
Pursuant to Section 906 of the
Sarbanes -Oxley Act of 2002
I, Stuart M. Essig, Chief Executive Officer and Director of Integra LifeSciences
Holdings Corporation (the "Company"), hereby certify that, to my knowledge:
1. The Annual Report on Form 10-K of the Company for the year ended December 31,
2002 (the "Report") fully complies with the requirement of Section 13(a) or
Section 15(d), as applicable, of the Securities Exchange Act of 1934, as
amended; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: March 20, 2003 By: /s/ Stuart M. Essig
-------------------
Stuart M. Essig
Chief Executive Officer
Certification of Chief Financial Officer
Pursuant to Section 906 of the
Sarbanes -Oxley Act of 2002
I, David B. Holtz, Senior Vice President, Finance and Treasurer of Integra
LifeSciences Holdings Corporation (the "Company"), hereby certify that, to my
knowledge:
1. The Annual Report on Form 10-K of the Company for the year ended December 31,
2002 (the "Report") fully complies with the requirement of Section 13(a) or
Section 15(d), as applicable, of the Securities Exchange Act of 1934, as
amended; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: March 20, 2003 By: /s/ David B. Holtz
-------------------
David B. Holtz
Sr. Vice President, Finance and
Treasurer