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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 0-26224
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0317849
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
311 ENTERPRISE DRIVE
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(609) 275-0500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1)
HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO
FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS
FOR THE PAST 90 DAYS.
/X/ - YES / / - NO
AS OF NOVEMBER 11, 2002 THE REGISTRANT HAD OUTSTANDING 27,066,102 SHARES OF
COMMON STOCK, $.01 PAR VALUE.
31
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
INDEX
Page
Number
- ----------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002 (Unaudited)
and December 31, 2001 3
Consolidated Statements of Operations for the three and
nine months ended September 30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 (Unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 4. Controls & Procedures 27
PART II. OTHER INFORMATION
Item 1. Litigation 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
Exhibits 30
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousands, except per share amounts September 30, December 31,
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 50,142 $ 44,518
Short-term investments .................................. 54,173 22,183
Accounts receivable, net of allowances of
$1,150 and $964 ....................................... 17,724 14,024
Inventories ............................................. 26,571 24,329
Prepaid expenses and other current assets ............... 4,718 2,898
-------- --------
Total current assets ................................ 153,328 107,952
Noncurrent investments ................................... 31,659 64,335
Property, plant, and equipment, net ...................... 16,424 11,662
Deferred income taxes, net ............................... 5,074 10,243
Identifiable intangible assets, net ...................... 17,102 16,898
Goodwill ................................................. 16,846 14,627
Other assets ............................................. 2,140 1,871
-------- --------
Total assets .............................................. $242,573 $ 227,588
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt ......................................... $ -- $ 3,576
Accounts payable, trade ................................. 3,737 2,924
Income taxes payable .................................... 1,751 1,481
Customer advances and deposits .......................... 4,639 4,843
Deferred revenue ........................................ 1,324 772
Accrued expenses and other current liabilities .......... 9,567 5,550
-------- --------
Total current liabilities ........................... 21,018 19,146
Deferred revenue ......................................... 3,437 3,949
Other liabilities ........................................ 512 437
-------- ---------
Total liabilities ......................................... $ 24,967 $ 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
at September 30, 2002 and December
31, 2001, respectively .................................... -- 1
Common stock; $0.01 par value; 60,000 authorized shares;
27,041 and 26,129 issued and outstanding at September 30,
2002 and December 31, 2001, respectively .............. 270 261
Additional paid-in capital .............................. 285,966 284,021
Treasury stock, at cost; 6 shares at September 30, 2002 and
December 31, 2001, respectively ....................... (51) (51)
Other ................................................... (17) (37)
Accumulated other comprehensive income (loss) ........... 1,135 (539)
Accumulated deficit ..................................... (69,697) (79,600)
--------- ---------
Total stockholders' equity ............................ 217,606 204,056
--------- ---------
Total liabilities and stockholders' equity ............... $ 242,573 $ 227,588
========= =========
The accompanying notes are an integral part of the consolidated financial statements
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Product sales ................................. $29,166 $22,319 $78,299 $63,988
Other revenue ................................. 1,038 1,431 4,262 4,366
------- ------- ------- -------
Total revenues ....................... 30,204 23,750 82,561 68,354
COSTS AND EXPENSES
Cost of product sales.......................... 12,611 9,153 31,604 26,057
Research and development ...................... 2,160 2,172 6,055 6,082
In-process research and development ........... 2,322 -- 2,322 --
Selling and marketing ......................... 6,720 5,148 18,320 15,168
General and administrative .................... 4,374 2,757 10,714 9,280
Amortization .................................. 425 784 1,139 2,193
------- ------- ------- -------
Total costs and expenses ............. 28,612 20,014 70,154 58,780
Operating income .............................. 1,592 3,736 12,407 9,574
Interest income,net ........................... 822 556 2,808 364
Other income (expense), net ................... (11) 96 21 (117)
------- ------- ------- -------
Income before income taxes .................... 2,403 4,388 15,236 9,821
Income tax expense ............................ 840 365 5,333 1,040
------- ------- ------- -------
Income before extraordinary item .............. 1,563 4,023 9,903 8,781
Extraordinary loss on the early retirement of
debt, net of income tax benefit............. --- (243) --- (243)
------- ------- ------- -------
Net income .................................... $ 1,563 $ 3,780 $ 9,903 $ 8,538
======= ======= ======= =======
Earnings per share:
Basic net income per share before
extraordinary item ....................... $ 0.05 $ 0.15 $ 0.34 $ 0.36
Basic net income per share.................. $ 0.05 $ 0.14 $ 0.34 $ 0.35
Diluted net income per share before
extraordinary item ....................... $ 0.05 $ 0.14 $ 0.32 $ 0.32
Diluted net income per share......... ....... $ 0.05 $ 0.13 $ 0.32 $ 0.31
Weighted average common shares outstanding:
Basic....................................... 29,258 25,585 28,933 21,816
Diluted..................................... 30,654 28,472 30,740 25,996
The accompanying notes are an integral part of the consolidated financial statements
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
September 30,
--------------------
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income .................................................. $ 9,903 $ 8,538
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................ 3,714 4,559
Loss on sale of product line and investments ............. -- 94
Loss on early retirement of debt ......................... -- 256
Deferred income tax provision ............................ 4,202 --
In process research and development....................... 2,322 --
Amortization of discount and premium on investments ...... 1,471 49
Other, net ............................................... 53 22
Changes in assets and liabilities, net of acquisitions:
Accounts receivable ................................... (1,053) (834)
Inventories ........................................... (175) (6,738)
Prepaid expenses and other current assets ............. (550) (830)
Non-current assets .................................... (42) 934
Accounts payable, accrued expenses and
other liabilities .................................. 807 1,721
Customer advances and deposits ........................ (204) 3,257
Deferred revenue ...................................... 40 (2,001)
-------- --------
Net cash provided by operating activities ................ 20,488 9,027
-------- --------
INVESTING ACTIVITIES:
Proceeds from sale/maturity of investments .................. 20,940 2,000
Purchases of available-for-sale investments ................. (21,227) (63,622)
Cash used in acquisitions, net of cash acquired ............. (11,344) (6,143)
Purchases of property and equipment ......................... (1,646) (1,957)
-------- --------
Net cash used in investing activities .................... (13,277) (69,722)
-------- --------
FINANCING ACTIVITIES:
Net repayments of revolving credit facility ................. -- (3,147)
Repayments of term loan ..................................... -- (7,705)
Repayment of note payable ................................... (3,600) (2,986)
Proceeds from issuance of common stock ...................... -- 114,185
Proceeds from exercised stock options and warrants........... 1,951 5,473
Treasury stock reissued ..................................... -- 95
--------- --------
Net cash (used in) provided by financing activities ...... (1,649) 105,915
--------- --------
Effect of exchange rate changes on cash and cash equivalents ... 62 27
Net increase in cash and cash equivalents ....................... 5,624 45,247
Cash and cash equivalents at beginning of period ................ 44,518 14,086
-------- --------
Cash and cash equivalents at end of period ...................... $ 50,142 $ 59,333
======== ========
Non-cash investing and financing activities:
Business acquisition costs accrued in liabilities .......... 744 --
The accompanying notes are an integral part of the consolidated financial statements
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
General
In the opinion of management, the September 30 unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position,
results of operations and cash flows of the Company. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. These unaudited consolidated financial statements should be read
in conjunction with the Company's consolidated financial statements for the year
ended December 31, 2001 included in the Company's Annual Report on Form 10-K.
Operating results for the three-month and nine-month periods ended September 30,
2002 are not necessarily indicative of the results to be expected for the entire
year.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent liabilities, and the reported amounts of revenues and
expenses. Significant estimates affecting amounts reported or disclosed in the
consolidated financial statements include allowances for doubtful accounts
receivable and sales returns, net realizable value of inventories, estimates of
future cash flows associated with long-lived asset valuations and 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.
The Company has reclassified certain prior year amounts to conform with the
current year's presentation.
Recently Issued Accounting Standards
On July 31, 2002, the Financial Accounting Standard Board (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
that are initiated after December 31, 2002.
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."
1. BASIS OF PRESENTATION (continued)
The Company adopted Statement 144 on January 1, 2002. The adoption of Statement
144 has had no impact on the Company's financial statements.
In July 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations" (Statement 141), and No. 142, "Goodwill and
Other Intangible Assets" (Statement 142).
Statement 141 requires that all business combinations initiated after June 30,
2001 be accounted for using the purchase method of accounting and further
clarifies the criteria to recognize intangible assets separately from goodwill.
The Company determined that its assembled workforce intangible asset does not
meet the criteria for recognition as a separate identifiable intangible asset
and thus, effective January 1, 2002, reclassified the net book value of its
assembled workforce intangible asset into goodwill.
Under Statement 142, goodwill and indefinite-lived intangible assets are no
longer amortized, but are reviewed for impairment at the reporting unit level
annually, or more frequently if impairment indicators arise. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. The Company reassessed the useful lives
of its identifiable intangible assets and determined that they continue to be
appropriate. As required by Statement 142, the Company amortized through
December 31, 2001 all goodwill acquired prior to July 1, 2001. Effective January
1, 2002, the Company ceased all amortization of goodwill. The Company expects
that implementation of Statement 142 will reduce amortization expense by
approximately $1.0 million in 2002.
If the Company had applied the non-amortization provisions of Statement 142 for
all of 2001, net income for the three and nine months ended September 30, 2001
would have been as follows:
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
----------------- -----------------
(in thousands)
Net income, as reported ................... $ 3,780 $ 8,538
Add: Goodwill amortization ................ 229 593
Assembled workforce amortization ..... 37 102
------- -------
Net income, as adjusted ................... $ 4,046 $ 9,233
Net income per share, as adjusted
Basic .................................. $ 0.16 $ 0.39
Diluted ................................ $ 0.14 $ 0.33
The Company completed its initial impairment review for reporting unit goodwill
as of June 30, 2002 and determined that its reporting unit goodwill was not
impaired.
2. ACQUISITIONS
On July 1, 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. We acquired Signature Technologies to gain the capability of developing
and manufacturing metal implants for strategic partners and for direct sale by
us. The purchase price consisted of $2.8 million in cash paid at closing, $0.5
million of deferred consideration and royalties on future sales of products to
be developed. The acquired product lines generated approximately $3.2 million in
sales during the year ended December 31, 2001, primarily from the manufacture
of cranial fixation systems for sale under a single contract manufacturing
agreement that expires in June 2004.
On August 1, 2002, we acquired the neurosciences division of NMT Medical, Inc.
for $5.4 million in cash. Through this acquisition, the Company 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 its neurosurgical product line. The acquired product lines
generated sales of approximately $13.9 million during the year ended December
31, 2001. 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
National Distribution Center as of September 30, 2002.
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 preliminary allocation of the purchase price for these
acquisitions resulted in approximately $0.6 million of acquired intangible
assets, which are being amortized on a straight-line basis over lives ranging
from 2 to 5 years, and approximately $0.4 million of goodwill, none of which is
expected to be deductible for tax purposes. The preliminary allocation of the
Signature Technologies purchase price resulted in an in-process research and
development ("IPR&D") charge of approximately $1.2 million 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. Prototypes of this enhanced cranial fixation
system have been manufactured and costs to complete development and obtain
regulatory clearance to market the product are not expected to be significant.
The value of the IPR&D 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 35% and a 15% discount rate.
The following unaudited proforma financial information assumes that all
acquisitions consumated in 2002 and 2001 had occurred as of the beginning of
each period (in thousands, except per share data):
For the Nine Months
Ended September 30,
2002 2001
------- -------
Total revenue ............................. $92,894 $86,681
Net income before extraordinary item ...... 11,816 8,610
Net income ................................ 11,816 8,367
Net income per share before extraordinary item:
Basic .................................. $ 0.40 $ 0.35
Diluted................................. $ 0.38 $ 0.32
Net income per share:
Basic .................................. $ 0.40 $ 0.34
Diluted................................. $ 0.38 $ 0.31
2. ACQUISITIONS (continued)
The pro forma results do not necessarily represent results that would have
occurred if the acquisitions had taken place on the basis assumed above, nor are
they indicative of the results of future combined operations. The proforma
results for the nine months ended September 30, 2002 exclude the $2.3 million of
IPR&D charges recorded in the actual results for the period.
On August 28, 2002, the Company acquired certain assets, including the
NeuroSensor(TM) monitoring system and rights to certain intellectual property
from Novus Monitoring Limited ("Novus") of the United Kingdom for $3.5 million
in cash paid at closing and an additional $1.5 million payable upon the
achievement of a product development milestone and up to $2.5 million payable
based upon sales of acquired and developed 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, at their own cost,
conduct certain clinical studies on the NeuroSensor(TM) system, continue
development of a next generation, advanced system for use in the neuromonitoring
field, and design and transfer to Integra a validated manufacturing process for
these products. We expect the NeuroSensor(TM) monitoring system and the next
generation neuromonitoring system under development 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 FASB Statement No. 141,
"Business Combinations". The allocation of the purchase price resulted in
approximately $1.7 million of acquired intangible assets, consisting primarily
of technology-related intangible assets which are being amortized on a
straight-line basis over lives ranging from 3 to 15 years, prepaid research and
development expense of approximately $0.7 million, and in an IPR&D charge of
approximately $1.1 million. The prepaid research and development expense
represents the estimated fair value of future services to be provided by Novus
under the development agreement. The $1.1 million IPR&D charge represents the
value associated with the project for the development of a next generation
neuromonitoring system. This 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. Costs to complete development and
obtain regulatory clearance for this project are the responsibility of Novus
and are included in the prepaid asset recorded by the Company in connection
with the development agreement. The value of the IPR&D 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.
3. INVENTORIES
Inventories consisted of the following:
September 30, December 31,
2002 2001
---- ----
(in thousands)
Raw materials.............................. $ 6,390 $ 7,559
Work-in process............................ 4,514 3,493
Finished goods............................. 15,667 13,277
------- -------
$ 26,571 $24,329
======= =======
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of reporting unit goodwill for the nine months
ended September 30, 2002, were as follows:
Integra Integra
NeuroSciences LifeSciences Total
------------- ------------- -------------
(in thousands)
Goodwill, net of accumulated amortization
at December 31, 2001 .................... $ 13,815 $ 812 $ 14,627
Reclassification of assembled workforce
intangible, net of accumulated
amortization ............................ 1,245 30 1,275
Foreign currency translation ............... 500 3 503
Acquisitions ............................... 441 -- 441
-------- -------- --------
Goodwill at September 30, 2002 ............. $ 16,001 $ 845 $ 16,846
======== ======== ========
The components of the Company's identifiable intangible assets were as follows:
September 30, 2002 December 31, 2001
---------------------- ----------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
-------- ------------ -------- ------------
(in thousands)
Technology ................................ $ 13,204 $ (2,133) $ 11,255 $ (1,516)
Customer base ............................. 4,195 (1,034) 3,575 (674)
Trademarks ................................ 1,715 (391) 1,715 (305)
Assembled work force ...................... -- -- 1,581 (306)
Other ..................................... 1,932 (386) 1,824 (251)
-------- ------------ -------- ------------
$ 21,046 $ (3,944) $ 19,950 $ (3,052)
Accumulated amortization .................. (3,944) (3,052)
-------- --------
$ 17,102 $ 16,898
======== ========
Before the effects of the recent acquisition of Padgett Instruments, Inc. (see
Note 11), amortization expense is expected to approximate $1.7 million annually
through 2004.
5. COMMON AND PREFERRED STOCK
On April 16, 2002, the holders of all 54,000 shares of the Company's Series C
Preferred Stock exercised their right to convert those shares into 600,000
shares of common stock.
6. INCOME TAXES
Income tax expense was approximately 35% and 11% of income before income taxes
for the nine months ended September 30, 2002 and 2001, respectively. Income tax
expense for the nine months ended September 30, 2002 included a deferred income
tax provision of $4.2 million, or 28% of income before income taxes. The
effective tax rate of 11% for the nine months ended September 30, 2001 reflects
the utilization of net operating loss carryforwards during the period. In the
quarter ended December 31, 2001, the Company reversed a portion of the valuation
allowance recorded against the deferred tax assets related to these net
operating loss carryforwards.
7. COMPREHENSIVE INCOME
Comprehensive income was as follows:
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income ......................... $ 1,563 $ 3,780 $ 9,903 $ 8,538
Foreign currency translation
adjustment ...................... 61 696 1,188 (49)
Unrealized gain on investments ..... 409 262 486 274
-------- -------- -------- --------
Comprehensive income ............... $ 2,033 $ 4,738 $ 11,577 $ 8,763
======== ======== ======== ========
8. NET INCOME PER SHARE
Basic and diluted net income per share were as follows:
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
Basic net income per share:
Income before extraordinary item............ $ 1,563 $ 4,023 $ 9,903 $ 8,781
Dividends on preferred stock ............... -- (135) (159) (891)
------- ------- ------- -------
Income before extraordinary loss applicable
to common stock ...................... $ 1,563 $ 3,888 $ 9,744 $ 7,890
Basic net income per share before
extraordinary loss..................... $ 0.05 $ 0.15 $ 0.34 $ 0.36
Net income .................................... $ 1,563 $ 3,780 $ 9,903 $ 8,538
Dividends on preferred stock .................. -- (135) (159) (891)
------- ------- ------- -------
Net income applicable to common stock ......... $ 1,563 $ 3,645 $ 9,744 $ 7,647
Basic net income per share .................... $ 0.05 $ 0.14 $ 0.34 $ 0.35
======= ======= ======= =======
Weighted average common shares outstanding
for basic earnings per share ............... 29,258 25,585 28,933 21,816
======= ======= ======= =======
8. NET INCOME PER SHARE (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
Diluted net income (loss) per share:
Income before extraordinary item............ $ 1,563 $ 4,023 $ 9,903 $ 8,781
Dividends on preferred stock ............... -- (135) (159) (405)
------- ------- ------- -------
Income before extraordinary loss applicable
to common stock ...................... $ 1,563 $ 3,888 $ 9,744 $ 8,376
Diluted net income per share before
extraordinary loss.................... $ 0.05 $ 0.14 $ 0.32 $ 0.32
Net income .................................... $ 1,563 $ 3,780 $ 9,903 $ 8,538
Dividends on preferred stock .................. -- (135) (159) (405)
------- ------- ------- -------
Net income applicable to common stock.......... $ 1,563 $ 3,645 $ 9,744 $ 8,133
Diluted net income per share .................. $ 0.05 $ 0.13 $ 0.32 $ 0.31
======= ======= ======= =======
Weighted average common shares outstanding
for basic earnings per share ............... 29,258 25,585 28,933 21,816
Effect of dilutive securities:
Assumed conversion of Series B
Preferred Stock .......................... -- -- -- 1,697
Stock options ............................ 1,388 2,680 1,799 2,276
Stock purchase warrants .................. 8 207 8 207
------- ------- ------- -------
Weighted average common shares outstanding
for diluted earnings per share ............. 30,654 28,472 30,740 25,996
======= ======= ======= =======
Prior to its conversion on April 16, 2002 into 600,000 shares of common stock,
the Series C Preferred Stock was excluded from the computation of diluted net
income per share for the nine month period ended September 30, 2002 because its
inclusion would have been antidilutive. Options outstanding at September 30,
2002 to purchase 712,000 shares of common stock were excluded from the
computation of diluted net income per share for the three and nine month
periods ended September 30, 2002 because their exercise price exceeded the
average market price of the common stock for the applicable period.
9. DIVISION AND GEOGRAPHIC INFORMATION
Integra's business is divided into two divisions: Integra NeuroSciences(TM) and
Integra LifeSciences(TM).
The Integra NeuroSciences division is a leading provider of implants, devices,
and systems used in neurosurgery, neurotrauma, and related critical care and a
distributor of disposables and supplies used in the diagnosis and monitoring of
neurological disorders. The Integra LifeSciences division develops and
manufactures a variety of medical products and devices, including products based
on the Company's proprietary tissue regeneration technology that are used to
treat soft tissue and orthopedic conditions.
Integra NeuroSciences sells primarily through a direct sales force in the United
States and portions of Western Europe and through a network of distributors
elsewhere throughout the world. For the majority of the
9. DIVISION AND GEOGRAPHIC INFORMATION (continued)
products manufactured by the Integra LifeSciences division, the Company has
partnered with market leaders for the development and marketing efforts related
to these products.
The contract manufacturing operations of Signature Technologies are included in
the results of the Integra LifeSciences division. The assets acquired from
Novus Monitoring Ltd., the acquired operations of the neurosciences division of
NMT Medical, Inc., NeuroSupplies, Inc. (acquired in December 2001), and GMSmbH
and Satelec Medical (acquired in April 2001) and the remaining business of
Signature Technologies, including the $1.2 million IPR&D charge related to the
acquisition of Signature Technologies are included in the results of the
Integra NeuroSciences division. These inclusions make the following 2002
financial results for each division not directly comparable to those
for the prior year periods.
Total
Integra Integra Reportable
NeuroSciences LifeSciences Divisions
------------- ------------ ----------
(in thousands)
Three months ended September 30, 2002
----------------------------------
Product sales .................... $ 23,040 $ 6,126 $ 29,166
Total revenue .................... 23,068 7,136 30,204
Operating expenses ............... 21,364 4,527 25,891
Operating income ................. 1,704 2,609 4,313
Depreciation included in division
operating expenses ............ 535 285 820
Three months ended September 30, 2001
----------------------------------
Product sales .................... $ 17,234 $ 5,085 $ 22,319
Total revenue .................... 17,512 6,238 23,750
Operating expenses ............... 13,101 4,707 17,808
Operating income ................. 4,411 1,531 5,942
Depreciation included in division
operating expenses ............ 573 282 855
Nine months ended September 30, 2002
----------------------------------
Product sales .................... $ 62,897 $ 15,402 $ 78,299
Total revenue .................... 62,981 19,580 82,561
Operating expenses ............... 50,788 11,946 62,734
Operating income ................. 12,193 7,634 19,827
Depreciation included in division
operating expenses ............ 1,607 782 2,389
Nine months ended September 30, 2001
------------------------------------
Product sales .................... $ 50,052 $ 13,936 $ 63,988
Total revenue .................... 50,886 17,468 68,354
Operating expenses ............... 37,758 13,567 51,325
Operating income ................. 13,128 3,901 17,029
Depreciation included in division
operating expenses ............ 1,363 801 2,164
9. DIVISION AND GEOGRAPHIC INFORMATION (continued)
A reconciliation of the amounts reported for total reportable divisions to the
consolidated financial statements is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
(in thousands)
Operating expenses:
Total reportable divisions .............. $25,891 $ 17,808 $62,734 $51,325
Plus: Corporate general and
administrative expenses ........ 2,296 1,422 6,281 5,262
Amortization ...................... 425 784 1,139 2,193
------ ------ ------ ------
Consolidated total operating expenses ... $28,612 $20,014 $70,154 $58,780
Operating income:
Total reportable divisions .............. $ 4,313 $ 5,942 $19,827 $17,029
Less: Corporate general and
administrative expenses ........ 2,296 1,422 6,281 5,262
Amortization ...................... 425 784 1,139 2,193
------ ------ ------ ------
Consolidated operating income ........... $ 1,592 $ 3,736 $12,407 $ 9,574
Product sales consisted of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
(in thousands)
Integra NeuroSciences:
Neuro intensive care unit ...... $ 8,393 $ 6,957 $22,607 $20,449
Neuro operating room ........... 12,217 9,291 32,919 26,585
Other NeuroSciences products ... 2,430 986 7,371 3,018
------ ------ ------ ------
Total product sales ............ 23,040 17,234 62,897 50,052
Integra LifeSciences:
Tissue repair products ......... $ 2,583 2,497 7,037 6,123
Other medical devices .......... 3,543 2,588 8,365 7,813
------ ------ ------ ------
Total product sales ............ 6,126 5,085 15,402 13,936
Consolidated product sales ........ $29,166 $22,319 $78,299 $63,988
Product sales by major geographic area are summarized below:
United Asia Other
States Europe Pacific Foreign Total
-------- -------- -------- -------- --------
(in thousands)
Three months ended September 30, 2002 $ 23,539 $ 3,959 $ 878 $ 790 $ 29,166
Three months ended September 30, 2001 17,387 2,780 1,149 1,003 22,319
Nine months ended September 30, 2002 $ 62,844 $ 9,809 $ 3,220 $ 2,426 $ 78,299
Nine months ended September 30, 2001 49,722 7,648 3,691 2,927 63,988
10. COMMITMENTS AND CONTINGENCIES
As consideration for certain technology, manufacturing, distribution and selling
rights and licenses, we have agreed to pay royalties on the sales of certain of
our products. Our payments under these agreements were not significant for any
of the periods presented.
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 to willfully and deliberately 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 to
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, 2002, 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, is appealing this reassessment and 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 a bank guaranty on behalf of each of these
subsidiaries totaling approximately $1.2 million.
11. SUBSEQUENT EVENT
On October 21, 2002, we acquired Padgett Instruments, Inc., a marketer of
instruments used in reconstructive, plastic and burn surgery, for $9.7 million
in cash. Padgett generated revenues of $4.9 million during the year ended
December 31, 2001. The results of the acquired operations will be included in
our Integra NeuroSciences division. Management has not assessed the allocation
of the purchase price pending receipt of additional information needed to
complete this analysis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes thereto appearing elsewhere in this report and
in our 2001 Annual Report on Form 10-K filed with the Securities and Exchange
Commission. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. 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" contained in our 2001 Annual Report on Form 10-K.
General
Integra is a global, diversified medical device company that develops,
manufactures, and markets medical devices, implants and biomaterials primarily
for use in neurosurgery, orthopedics and soft tissue repair. Our business is
divided into two divisions: Integra NeuroSciences(TM) and Integra
LifeSciences(TM).
Our Integra NeuroSciences division is a leading provider of implants, devices,
and systems used in neurosurgery, neurotrauma, and related critical care and a
distributor of disposables and supplies used in the diagnosis and monitoring of
neurological disorders. Integra NeuroSciences sells primarily through a direct
sales force of more than 90 people in the United States and portions of
Western Europe.
Our Integra LifeSciences division develops and manufactures a variety of medical
products and devices, including products based on our proprietary tissue
regeneration technology that are used to treat soft tissue and orthopedic
conditions. For the majority of the products manufactured by our Integra
LifeSciences division, we have partnered with market leaders for the development
and marketing efforts related to these products. Many of these products address
large, diverse markets, and we believe that they can be promoted more
cost-effectively through leveraging marketing partners than through developing
our own sales infrastructure. We have strategic alliances with Ethicon, a
division of Johnson & Johnson, Wyeth, Medtronic, and Centerpulse.
Acquisitions
Our strategy for growing our business includes the acquisition of complementary
product lines and companies. Our acquisitions of certain assets of Novus
Monitoring Limited in September 2002, the neurosciences division of NMT Medical,
Inc. in August 2002, Signature Technologies, Inc. in July 2002, NeuroSupplies,
Inc. in December 2001, and GMSmbH and Satelec Medical in April 2001 may make our
division financial results for the three and nine month periods ended September
30, 2002 not directly comparable to those of the corresponding prior year
periods. Reported product sales for the nine month periods ended
September 30, 2002 and 2001 included the following amounts in sales of acquired
product lines:
Nine Months Ended
September 30,
------------------
(in thousands) 2002 2001
------ ------
Integra NeuroSciences
Products acquired during 2001(1) ............. $ 5,887 $ 1,010
Products acquired during 2002 ................ 1,801 --
All other product sales ...................... 55,209 49,042
------ ------
Total Integra NeuroSciences product sales .... 62,897 50,052
Integra LifeSciences
Products acquired during 2002 ................ $ 732 $ --
All other product sales ...................... 14,670 13,936
------ ------
Total Integra LifeSciences product sales ..... 15,402 13,936
Consolidated product sales ...................... $78,299 $63,988
(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.
We expect that our acquisition of Padgett Instruments, Inc. on October 21, 2002
for $9.7 million in cash will also affect our future divisional results. Padgett
generated revenues of $4.9 million during the year ended December 31, 2001. We
believe that the acquisition of Padgett Instruments will broaden our existing
customer base and give us access to new market segments through which to sell
our other products such as the NeuraGen Nerve Guide(R). The results of the
acquired operations will be included in our Integra NeuroSciences division.
Results of Operations
Third Quarter Ended September 30, 2002 Compared to Third Quarter Ended September
30, 2001
For the third quarter ended September 30, 2002, total revenues increased 27%
over the quarter ended September 30, 2001 to $30.2 million, as product sales
increased by 31% to $29.2 million. Sales of products acquired since the end of
the third quarter of 2001 accounted for $3.8 million of the $6.8 million
increase in product sales over the prior year period. Excluding acquired product
line sales, third quarter product sales grew 14% over the prior year quarter.
Domestic product sales increased $6.2 million in the third quarter of 2002 to
$23.5 million, or 81% of product sales, as compared to 78% of product sales in
the third quarter ended September 30, 2001.
The Integra NeuroSciences division led growth in total revenues and product
sales for the third quarter of 2002, with $23.1 million in total revenues, an
increase of $5.6 million, or 32%, over the prior year quarter. The Integra
LifeSciences division reported a $0.9 million increase in total revenues to $7.1
million, a 14% increase over the third quarter of 2001.
We reported net income for the third quarter of 2002 of $1.6 million, or $0.05
per share, as compared to net income of $3.8 million, or $0.13 per share, for
the prior year quarter. We included the following items in our reported results:
o $2.3 million of in process research and development ("IPR&D") charges incurred
in connection with our acquisitions of Novus Monitoring Ltd. and Signature
Technologies, Inc.,
o $0.6 million of charges related to the termination of distribution agreements,
o $0.2 million of inventory fair value purchase accounting adjustments
relating to our sale during the period of acquired inventory, and
o $0.4 million of employee severance and other acquisition related costs.
We reported consolidated gross margin on product sales in the third quarter of
2002 of 57%. Excluding the effects of $0.2 million of inventory fair value
purchase accounting adjustments and $0.4 million of inventory we wrote off in
connection with the termination of a distribution agreement, our consolidated
gross margin on product sales was 59%, the same as we realized in the prior-year
period. The negative effect of decreased capacity utilization and the inclusion
of sales of lower margin products acquired since the third quarter of 2001 were
largely offset in the third quarter of 2002 by the continued improvement in the
sales mix of our existing products.
Our effective tax rate increased from 8% in the third quarter of 2001 to 35% in
the third quarter of 2002. Our effective rate for the third quarter of 2001
reflected our utilization of net operating loss carryforwards during the period.
In the quarter ended December 31, 2001, we reversed a portion of the valuation
allowance recorded against the deferred tax assets related to these net
operating loss carryforwards, which we expect to result in an ongoing effective
tax rate of 35%. We expect our actual cash tax rate to be in the 6% to 8% range
in 2002. Had our effective tax rate been 35% in 2001, reported earnings would
have been $0.09 per share in the third quarter of 2001.
The following discussion of divisional financial results excludes corporate
general and administrative expenses and amortization of intangible assets, which
are not included in the measurement of divisional operating results.
INTEGRA NEUROSCIENCES DIVISION
Quarter Ended September 30,
2002 2001
-------- --------
(in thousands)
Product sales:
- Neuro intensive care unit .................. $ 8,393 $ 6,957
- Neuro operating room ....................... 12,217 9,291
- Other NeuroSciences products ............... 2,430 986
-------- --------
Total product sales ............................. 23,040 17,234
Other revenue ................................... 28 278
-------- --------
Total revenue ................................... 23,068 17,512
Cost of product sales ........................... 9,464 6,564
Gross margin as a percentage of product sales ... 59% 62%
Research and development expenses ............... 3,598 817
In process research and development charge ...... 2,322 --
Sales and marketing expenses .................... 6,520 4,775
General and administrative expenses ............. 1,782 945
-------- --------
Operating income ................................ $ 1,704 $ 4,411
Product sales in our Integra NeuroSciences division increased $5.8 million in
the third quarter of 2002 to $23.0 million, a 34% increase over the prior year
quarter. This increase included $3.1 million in sales of products acquired since
the end of the third quarter of 2001. Excluding these acquired product line
sales, third quarter product sales grew 16% over the prior year quarter, led by
sales growth in products used in the neuro operating room, including the
DuraGen(R) and NeuraGen(TM) product lines, and in products used in the neuro
intensive care unit, including the LICOX(R) Brain Tissue Oxygen Monitoring
System. The $1.4 million increase in other NeuroSciences products to $2.4
million was primarily attributable to sales of acquired product lines. The $0.3
million decrease in other revenues was the result of decreased royalty revenues
due to the expiration of an agreement.
We expect our recent increase in the domestic sales force to 63 territories, the
continued implementation of our direct sales strategy in Europe and increased
sales of products which have been recently launched or acquired to drive future
revenue growth and improve gross margin in the Integra NeuroSciences division.
The Integra NeuroSciences division reported gross margin on product sales of 59%
in the third quarter of 2002. Excluding the effects of $0.2 million of fair
value purchase accounting adjustments and $0.4 million write-off of inventory,
the gross margin on the Integra NeuroSciences division's product sales would
have been 61% in the third quarter of 2002, down from 62% in the prior year
period. The one percentage point decrease in gross margin is attributable to the
lower gross margins realized on sales of Integra NeuroSupplies products, which
we acquired in the fourth quarter of 2001, and lower capacity utilization, both
of which were partially offset by increased sales of the division's higher
margin products.
We recorded a $2.3 million IPR&D charge in the third quarter of 2002 in
connection with the following acquired projects:
- - a $1.1 million charge related to the development of a next generation
neuromonitoring system acquired from Novus Monitoring Limited
("Novus"); and
- - a $1.2 million charge related to the development of an enhanced
cranial fixation system using patented technology acquired from
Signature Technologies, Inc.
Other research and development expenses increased $0.5 million related to
continuing research and development activities of acquired businesses,
including post-approval clinical trials related to the acquired NeuroSensor(TM)
monitoring system product line, and increases in existing product development
programs. We anticipate that we will record additional research and development
expenses through the beginning of 2004 totaling $0.3 million and $1.6 million,
respectively, for the completion of clinical trials and other post-approval
activities related to the acquired NeuroSensor(TM) monitoring system product
line and the completion of development of the acquired next generation
neuromonitoring system project. Of these amounts, $0.6 million has already been
paid to Novus, who is responsible for a substantial portion of these remaining
development costs and efforts. The remaining $1.3 million of anticipated
research and development costs related to the next generation neuromonitoring
system project, including an additional $1.0 million IPR&D charge, will be paid
to Novus upon their achievement of a product development milestone . The
development program for the acquired cranial fixation system project is
expected to require an additional $0.2 million in additional spending through
2004. The increase in overall research and development spending for the Integra
NeuroSciences division in 2003 from these acquired projects is expected to be
slightly mitigated by reductions in spending on other research and development
programs.
The $1.7 million increase in sales and marketing expense for the Integra
NeuroSciences division to $6.5 million reflected the continued expansion of the
domestic and international Integra NeuroSciences direct sales force. Sales and
marketing expenses remained consistent at approximately 28% of product sales in
the third quarter of both 2002 and 2001. General and administrative expenses of
the Integra NeuroSciences division increased by $0.8 million to $1.8 million in
the third quarter of 2002 and included $0.6 million of ongoing general and
administrative expenses related to acquired operations. Also included in Integra
NeuroSciences' total other operating expenses were $0.4 million of redundant
operating costs associated with the Atlanta distribution facility we acquired in
connection with the purchase of the neurosciences division of NMT Medical, Inc.
and shut down during the third quarter.
The Integra NeuroSciences division reported an operating profit of $1.7 million
for the third quarter of 2002, a $2.7 million decrease from the $4.4 million
profit reported for the prior year period.
INTEGRA LIFESCIENCES DIVISION
Quarter Ended September 30,
2002 2001
-------- --------
(in thousands)
Product sales:
- Tissue repair products ..................... $ 2,583 $ 2,497
- Other medical devices ...................... 3,543 2,588
-------- --------
Total product sales ............................. 6,126 5,085
Other revenue ................................... 1,010 1,153
-------- --------
Total revenue ................................... 7,136 6,238
Cost of product sales ........................... 3,147 2,589
Gross margin as a percentage of product sales ... 49% 49%
Research and development expenses ............... 884 1,355
Sales and marketing expenses .................... 200 373
General and administrative expenses ............. 296 390
-------- --------
Operating income ................................ $ 2,609 $ 1,531
Product sales in the Integra LifeSciences division increased $1.0 million in the
third quarter of 2002 to $6.1 million, a 20% increase over the prior year
quarter. This increase is primarily attributable to $0.7 million in sales of
products acquired from Signature Technologies, Inc. in July 2002 and increased
sales to Wyeth of Absorbable Collagen Sponges used as a component in Medtronic's
recently approved INFUSE(TM) Bone Graft.
Gross margin on product sales in the Integra LifeSciences division was 49% in
the third quarter of 2002, consistent with the gross margin realized in the
prior year quarter, as sales of lower-margin products acquired from Signature
Technologies offset the improved mix in sales among the division's existing
products.
Research and development expenses fell by $0.5 million from the prior year
period to $0.9 million in the third quarter of 2002, as the Integra LifeSciences
division reduced spending on research programs with its alliance partners. Sales
and marketing expenses decreased $0.2 million in the third quarter of 2002
primarily due to a decrease in marketing efforts directed to Integra
LifeSciences products not sold by strategic partners.
CORPORATE EXPENSES AND AMORTIZATION
Quarter Ended September 30,
2002 2001
-------- --------
(in thousands)
Total divisional operating costs and expenses ....... $ 25,891 $ 17,808
Corporate general and administrative expenses ....... 2,296 1,422
Amortization ........................................ 425 784
-------- --------
Consolidated total operating expenses ............... $ 28,612 $ 20,014
Corporate general and administrative expenses increased $0.9 million in the
third quarter of 2002 primarily related to expenses associated with terminated
distribution agreements, to increases over the prior year period in spending
on the Merck KGaA litigation, and to expenses related to abandoned acquisitions.
Amortization expense decreased $0.4 million in the third quarter of 2002 to $0.4
million as a result of the full implementation of Statement of Financial
Accounting Standard No 142 in January 2002. The reduction in goodwill
amortization related to the implementation of Statement 142 had a favorable
impact on earnings of approximately $0.01 per share in the third quarter of
2002.
We reported operating EBITDA, representing operating income before depreciation
and amortization, of $3.0 million ($5.3 million excluding the effect of the $2.3
million of IPR&D charges) in the third quarter of 2002, as compared to $5.4
million in the prior year quarter.
NON-OPERATING INCOME AND EXPENSES
We raised $113.4 million in a follow-on public offering of 4.7 million shares of
common stock in August 2001 and subsequently used $9.3 million to repay all
outstanding indebtedness. We recorded an extraordinary loss of $0.2 million on
the early retirement of this debt in the third quarter of 2001. Accordingly,
net interest income increased $0.3 million in the third quarter of 2002 to $0.8
million.
INCOME TAXES
Income tax expense was approximately 35% and 8% of income before income taxes
for the third quarter of 2002 and 2001, respectively. Income tax expense for the
third quarter of 2002 included a deferred income tax provision of $0.6 million,
or 25% of income before income taxes.
Nine Month Period Ended September 30, 2002 Compared to Nine Month Period Ended
September 30, 2001
For the nine month period ended September 30, 2002, total revenues increased 21%
over the nine month period ended September 30, 2001 to $82.6 million, led by an
22% increase in product sales to $78.3 million. Domestic product sales increased
$13.1 million in the nine month period ended September 30, 2002 to $62.8
million, or 80% of product sales, as compared to 78% of product sales in the
prior year period.
The Integra NeuroSciences division, which reported a $12.1 million increase in
total revenues to $63.0 million in the nine month period ended September 30,
2002, a 24% increase over the prior year period, led growth in total revenues
and product sales in 2002. The Integra LifeSciences division reported a $2.1
million increase in total revenues to $19.6 million, a 12% increase over the
prior year period.
Net income for the nine month period ended September 30, 2002 was $9.9 million,
or $0.32 per share, as compared to net income of $8.5 million, or $0.31 per
share, reported in the prior year period. In addition
to the increase in revenues, results for the nine month period ended September
30, 2002 benefited from a one percentage point improvement in consolidated
gross margin on product sales to 60%. The improvement in gross margins reflects
a greater proportion of sales of higher margin products in 2002, increased
direct sales in Europe, and an increase in capacity utilization, offset by lower
gross margins from our Integra NeuroSupplies business.
Offsetting the improved gross margin results in 2002 was an increase in our
effective tax rate from 11% in the nine month period ended September 30, 2001 to
a 35% rate recorded in the nine month period ended September 30, 2002. Had our
effective tax rate been 35% in 2001, reported earnings would have been $0.22 per
share in the nine month period ended September 30, 2001.
The following discussion of divisional financial results excludes corporate
general and administrative expenses and amortization of intangible assets, which
are not included in the measurement of divisional operating results.
INTEGRA NEUROSCIENCES DIVISION
Nine Month Period Ended September 30,
2002 2001
-------- --------
(in thousands)
Product sales:
- Neuro intensive care unit .................. $ 22,607 $ 20,449
- Neuro operating room ....................... 32,919 26,585
- Other NeuroSciences products ............... 7,371 3,018
-------- --------
Total product sales ............................. 62,897 50,052
Other revenue ................................... 84 834
-------- --------
Total revenue ................................... 62,981 50,886
Cost of product sales ........................... 23,886 18,690
Gross margin as a percentage of product sales ... 62% 63%
Research and development expenses ............... 3,102 2,217
In process research and development charge ...... 2,322 --
Sales and marketing expenses .................... 17,743 13,930
General and administrative expenses ............. 3,735 2,921
-------- --------
Operating income ................................ $ 12,193 $ 13,128
Product sales in the Integra NeuroSciences division increased $12.8 million in
the nine month period ended September 30, 2002 to $62.9 million, a 26% increase
over the prior year period. Sales in the nine month periods ended September 30,
2002 and 2001 included $7.7 million and $1.0 million, respectively, in sales of
products acquired since January 1, 2001.
Sales of neuro intensive care unit products increased $2.2 million to $22.6
million in the nine month period ended September 30, 2002. Neuro intensive care
unit sales in the nine month periods ended September 30, 2002 and 2001 included
$0.8 million and $0.4 million, respectively, in sales of products acquired since
January 1, 2001. Neuro operating room product sales increased $6.3 million to
$32.9 million, led by increased sales of our DuraGen(R) Dural Graft Matrix
product. Neuro operating room product sales in the nine month periods ended
September 30, 2002 and 2001 included $2.9 million and $0.6 million,
respectively, in sales of products acquired since January 1, 2001. The $4.4
million increase in other Integra NeuroSciences products to $7.4 million was
primarily related to $4.0 million in sales of
acquired products. The $0.8 million decrease in other revenues was the result
of decreased royalty revenues from an agreement that expired.
Research and development expenses increased $0.9 million related to continuing
research and development activities of acquired businesses, and increases in
existing product development programs, including the completion of the
development of the Helitene(R) pad product, a new collagen hemostatic device
for use in neurosurgical procedures. Sales and marketing spending in the nine
month period ended September 30, 2002 increased $3.8 million as a result of the
continued expansion in the domestic and international sales force. General and
administrative expenses in the nine month period ended September 30, 2002
increased $0.8 million due to additional general and administrative expenses for
acquired companies.
INTEGRA LIFESCIENCES DIVISION
Nine Month Period Ended September 30,
2002 2001
-------- --------
(in thousands)
Product sales:
- Tissue repair products ..................... $ 7,037 $ 6,123
- Other medical devices ...................... 8,365 7,813
-------- --------
Total product sales ............................. 15,402 13,936
Other revenue ................................... 4,178 3,532
-------- --------
Total revenue ................................... 19,580 17,468
Cost of product sales ........................... 7,718 7,367
Gross margin as a percentage of product sales ... 50% 47%
Research and development expenses ............... 2,953 3,865
Sales and marketing expenses .................... 577 1,238
General and administrative expenses ............. 698 1,097
-------- --------
Operating income ................................ $ 7,634 $ 3,901
Product sales in the Integra LifeSciences division increased $1.5 million in the
nine month period ended September 30, 2002 to $15.4 million, an 11% increase
over the prior year period. This growth was generated primarily by a $0.9
million increase in sales of tissue repair products, or 15% growth over the
prior year period, along with a $0.6 million increase in sales of other medical
devices. The increase in sales of tissue repair products was primarily related
to increased sales to Wyeth of our Absorbable Collagen Sponges. The increase in
sales of other medical devices was primarily attributable to sales of products
by Integra Signature Technologies, Inc.
Gross margin on product sales in the LifeSciences division increased three
percentage points to 50% in the nine month period ended September 30, 2002,
primarily as a result of increased sales of higher margin products and increased
capacity utilization.
The $0.6 million increase in other revenue in the nine month period ended
September 30, 2002 was primarily related to $1.0 million in event payments
received from Johnson & Johnson, offset by a decrease in grant revenue.
The $0.9 million decrease in research and development expenses in the nine month
period ended September 30, 2002 was primarily related to the completion of a
grant program in the first quarter of 2001, and is consistent with the decrease
in grant revenue. Sales and marketing activities decreased $0.7 million in the
nine month period ended September 30, 2002, primarily due to the termination of
distributors who had been paid commissions during the prior year period.
CORPORATE EXPENSES AND AMORTIZATION
Nine Month Period Ended September 30,
2002 2001
-------- --------
(in thousands)
Total divisional operating costs and expenses ....... $ 62,734 $ 51,325
Corporate general and administrative expenses ....... 6,281 5,262
Amortization ........................................ 1,139 2,193
-------- --------
Consolidated total operating expenses ............... $ 70,154 $ 58,780
Amortization expense decreased $1.1 million in the nine month period ended
September 30, 2002 to $1.1 million as a result of the full implementation of
Statement of Financial Accounting Standard No 142 in January 2002. The
eduction in goodwill amortization related to the implementation of Statement 142
had a favorable impact on earnings of approximately $0.02 per share in the nine
month period ended September 30, 2002.
We reported operating EBITDA of $16.1 million in the nine month period ended
September 30, 2002, as compared to $14.1 million in the prior year period.
NON-OPERATING INCOME AND EXPENSES
Net interest income increased $2.4 million in the nine month period ended
September 30, 2002 to $2.8 million primarily as a result of the $113.4 million
raised in the August 2001 follow-on public offering and the subsequent repayment
of all outstanding indebtedness.
INCOME TAXES
Income tax expense was approximately 35% and 11% of income before income taxes
for the nine month periods ended September 30, 2002 and 2001, respectively.
Income tax expense for the nine month period ended September 30, 2002 included a
deferred income tax provision of $4.2 million, or 28% of income before income
taxes.
International Product Sales and Operations
Product sales by major geographic area are summarized below:
United Asia Other
States Europe Pacific Foreign Total
-------- -------- -------- -------- --------
(in thousands)
Nine months ended September 30, 2002..$ 62,844 $ 9,809 $ 3,220 $ 2,426 $ 78,299
Nine months ended September 30, 2001.. 49,722 7,648 3,691 2,927 63,988
In the nine month period ended September 30, 2002, sales to customers outside
the United States totaled $15.5 million, or 20% of consolidated product sales,
of which approximately 63% were to European customers. Of this amount, $8.5
million of these sales were generated in foreign currencies from our
foreign-based subsidiaries in the United Kingdom, Germany and France. In the
nine month period ended September 30, 2001, sales to customers outside the
United States totaled $14.3 million, or 22% of consolidated product sales, of
which approximately 54% were to European customers. Of this amount, $4.8 million
of these sales were generated in foreign currencies from our subsidiaries.
Our international sales and operations are subject to the risk of foreign
currency fluctuations, both in terms of exchange risk related to transactions
conducted in foreign currencies and the price of our products in those markets
for which sales are denominated in the U.S. dollar. We expect that our recent
establishment of direct sales and marketing activities in portions of Western
Europe, the recent transfer of certain distributor accounts to our European
operations, and the recent acquisition of the NMT
Neurosciences business will cause our sales generated in countries outside the
United States and sales denominated in foreign currencies, particularly the
Euro and the British pound, to increase as a percentage of total sales in the
future. Approximately 55% of sales of the acquired NMT neurosciences products
were generated outside the United States during the year ended December 31,
2001.
We do not currently use any financial instruments to hedge foreign currency
fluctuations.
Liquidity and Capital Resources
Historically, we have funded our operations primarily through private and public
offerings of equity securities, product revenues, research and collaboration
funding, borrowings under a revolving credit line and cash acquired in
connection with business acquisitions and dispositions. Since 1999, we have
substantially reduced our net use of cash from operations and, in 2001, we
generated positive operating cash flows on an annual basis for the first time.
For the nine month period ended September 30, 2002, we generated $20.5 million
in cash flows from operations.
Our principal uses of funds during the nine month period ended September 30,
2002 were $11.3 million for acquisition consideration, $3.6 million for
repayment of indebtedness, and $1.6 million for purchases of property and
equipment. Principal sources of funds were approximately $20.5 million in
operating cash flows and $2.0 million from the issuance of common stock through
the exercise of stock options.
At September 30, 2002, we had cash, cash equivalents and current and non-current
investments totaling approximately $136.0 million and no outstanding debt. In
October 2002 we used approximately $9.7 million of cash to acquire Padgett
Instruments, Inc. (see Note 11).
Investments consist almost entirely of highly-liquid, interest bearing debt
securities. Our financial position and future financial results could change
significantly if we were to use a large portion of our liquid assets to complete
one or more business acquisitions.
In February 2002, our Board of Directors reauthorized our share repurchase
program. Under the program, we may repurchase up to 500,000 shares of our common
stock for an aggregate purchase price not to exceed $15 million. Shares may be
repurchased under this program through December 31, 2002 either in the open
market or in privately negotiated transactions. Although we have not repurchased
any shares of our common stock under this program in 2001 or in the nine month
period ended September 30, 2002, we have authorized a broker to make open market
purchases of our stock on our behalf if certain conditions are met.
Other Matters
A valuation allowance of $34.4 million is recorded against net deferred tax
assets. However, we may recognize a deferred income tax benefit in future
periods if we determine that all or a portion of the remaining deferred tax
assets can be realized.
FORWARD-LOOKING STATEMENTS
We have made statements in this report, including statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are subject to a number of risks, uncertainties
and assumptions about the Company, including those described under "Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended December
31, 2001 filed with the Securities and Exchange Commission. In light of these
risks and uncertainties, the forward-looking events and circumstances discussed
in this report may not occur and actual results could differ materially from
those anticipated or implied in the forward-looking statements.
You can identify these forward-looking statements by forward-looking words such
as "believe," "may," "could," "will," "estimate," "continue," "anticipate,"
"intend," "seek," "plan," "expect," "should," "would" and similar expressions in
this report.
Item 4 - CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND
PROCEDURES
Disclosure controls and procedures. Within 90 days before filing this report,
the Chief Executive Officer and Senior Vice President, Finance and Treasurer
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures. The Company's disclosure controls and procedures are
the controls and other procedures that the Chief Executive Officer and Senior
Vice President, Finance and Treasurer have designed to ensure that it records,
processes, summarizes and reports in a timely manner the information the
Company must disclose in its reports filed under the Securities Exchange Act.
Stuart M. Essig, Chief Executive Officer, and David B. Holtz, Senior Vice
President, Finance and Treasurer, reviewed and participated in this evaluation.
Based on this evaluation, Messrs. Essig and Holtz concluded that, as of the
date of their evaluation, the Company's disclosure controls and procedures were
effective.
Internal controls. Since the date of the evaluation described above, there have
not been any significant changes in the Company's internal controls or in other
factors that could significantly affect those controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LITIGATION
See Note 10 to the Unaudited Consolidated Financial Statements.
ITEM 5. OTHER INFORMATION
Board of Directors
On October 31, 2002, we increased the size of our board of directors to six and
appointed David C. Auth, an expert in bioengineering, with particular expertise
in least invasive surgery and energy interactions in biological tissue, to fill
the newly created vacancy. Dr. Auth has several widely distributed inventions in
the fields of gastrointestinal endoscopy and interventional cardiology and is
the primary inventor of the contact laser scalpel. Dr. Auth is an independent
investor and serves on the Boards of Directors of several other companies
including Novacept, Inc., Pathway Medical Technologies, Inc., AcousTx, and until
its acquisition by Boston Scientific in 2001, RadioTherapeutics, Inc. Dr. Auth
holds a Ph.D. in physics from Georgetown University.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement of David B. Holtz dated as of September 10, 2002
10.2 Employment Agreement of John B. Henneman, III, dated as of September
10, 2002
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as created by
Section 302 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On August 30, 2002, we filed with the Securities and Exchange Commission a
Report on Form 8-K with respect to the execution of sales
plans pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as
amended, by certain Executive Officers of the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
Date: November 14, 2002 /s/ Stuart M. Essig
-------------------
Stuart M. Essig
President and Chief Executive Officer
Date: November 14, 2002 /s/ David B. Holtz
-------------------
David B. Holtz
Senior Vice President, Finance and Treasurer