Back to GetFilings.com
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, 1999
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.)
105 Morgan Lane
Plainsboro, New Jersey 08536
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
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. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 24, 2000 was approximately $134
million. (Reference is made to page 28 herein for a statement of the assumptions
upon which this calculation is based.)
The number of shares of the registrant's Common Stock outstanding as of
March 24, 2000 was 16,312,345.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating
to its scheduled May 16, 2000 Annual Meeting of Stockholders are incorporated by
reference in Part III of this report.
PART I
ITEM 1. BUSINESS
The terms "we", "our", "us" 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. Our operations consist of (1) Integra NeuroSciences, which is a
leading provider of implants, instruments, and monitors used in neurosurgery,
neurotrauma, and related critical care and (2) Integra LifeSciences, which
develops and manufactures a variety of medical products and devices, including
products based on our proprietary tissue regeneration technology which are used
to treat soft tissue and orthopedic conditions. Integra NeuroSciences sells
primarily through a direct sales organization, and Integra LifeSciences sells
primarily through strategic alliances and distributors.
Integra was founded in 1989 and over the next decade built a product portfolio
based on resorbable collagen and a product and development platform based on
technologies directed toward tissue regeneration. During 1999, we expanded into
the neurosurgical market, an attractive niche market, through acquisitions and
new products. Our 1999 revenues increased to $42.5 million as compared to $17.5
million in 1998.
In 1999, we sold over 1,000 different products to over 1,900 hospitals and other
customers in more than 60 countries. We generate revenues from product sales,
strategic alliances and royalties and invested $8.7 million in research and
development relating to new products using our biomaterials, peptide chemistry
and collagen engineering technologies.
Integra Neurosciences accounted for 54% of total revenues in 1999. We market
these products to neurosurgeons and critical care units, which comprise a
focused group of hospital-based practitioners. As a result, we are able to
access this market through a cost-effective sales and marketing infrastructure.
For the majority of the products we manufacture under Integra LifeSciences, we
partner with market leaders, which we believe allows us to achieve our growth
objectives cost effectively while enabling us to focus our management efforts on
developing new products. Our strategic alliances include Johnson & Johnson
Medical, a division of Ethicon, Inc., Sulzer Medica Ltd., the Linvatec division
of CONMED Corporation, Bionx Implants, Inc., the Genetics Institute division of
American Home Products Corporation, the Sofamor-Danek division of Medtronic,
Inc. and Baxter Healthcare.
Strategy
Our goal is to become a leader in the development, manufacture and marketing of
medical devices, implants and biomaterials in the markets in which we compete.
Our products are principally used in the diagnosis and treatment of acute or
chronic neurosurgical, soft-tissue and orthopedic conditions and we intend to
expand our presence in those markets. Key elements of our strategy include the
following:
Expand our neurosurgery market presence. Through acquisitions and internal
growth, we have rapidly grown Integra NeuroSciences into a leading provider of
devices for the neurosurgery market. We believe there exists additional growth
potential in this market through:
o Increasing market share of existing product lines;
o Expanding our product portfolio through acquisitions; and
o Continuing development and promotion of innovative products, such as our
recently introduced DuraGen(TM) Dural Graft Matrix.
2
Continue to develop new and innovative medical products. As evidenced by our
development of INTEGRA(R) Artificial Skin, Biomend(R) and DuraGen(TM), we have a
leading proprietary resorbable implant franchise. INTEGRA(R) Artificial Skin is
a proprietary resorbable collagen used to enable the human body to regenerate
functional dermal tissue. In 1999, we introduced our DuraGen(TM) dural graft
matrix to close brain and spine casings. We are currently developing a variety
of innovative neurosurgical and non-neurosurgical medical products using our
resorbable collagen technology as well as expanded applications for our existing
products.
Continue to form strategic alliances for Integra LifeSciences products. We have
collaborated with leading companies to develop and market the majority of our
non-neurosurgical product lines. These products address large and diverse
markets, and we believe that they can be more cost effectively sold through
marketing partners than through developing our own sales infrastructure. We
recently partnered with Johnson & Johnson Medical to market our INTEGRA(R)
Artificial Skin and intend to pursue additional strategic alliances selectively.
Additional strategic acquisitions. Since March 1999 we have completed or entered
into contracts for three acquisitions in the neurosurgical market. We intend to
seek additional acquisitions in this market and seek strategic acquisitions in
other niche medical technology areas characterized by high margins, fragmented
competition and focused target customers.
Products
We manufacture and market a broad range of medical products for the diagnosis
and treatment of spinal and cranial disorders, soft tissue repair and orthopedic
conditions. We are also actively engaged in a variety of research and
development programs relating to new products or product enhancements utilizing
our tissue regeneration technology. Our products and products under development
are summarized in the following table.
Integra NeuroSciences
- ----------------------------------------------------------------------------------------------------
Product Application Status
- ----------------------------------------------------------------------------------------------------
Camino(R) and Ventrix(R) fiber For continuous pressure and Marketed
optic-based intracranial temperature monitoring of the brain
pressure monitoring systems following injury, and drainage
and Clinical Neuro Systems(TM) of excess fluid
drainage systems & cranial
access kits
- ----------------------------------------------------------------------------------------------------
Heyer - Schulte(R) Specifically designed for the Marketed
neurosurgical shunts maintenance of the chronic
condition, hydrocephalus (i.e.,
excess pressure in the brain)
- ----------------------------------------------------------------------------------------------------
3
Integra NeuroSciences, continued
- ----------------------------------------------------------------------------------------------------
Product Application Status
- ----------------------------------------------------------------------------------------------------
DuraGen(TM) Dural Graft Graft to close brain and spine Marketed
Matrix (absorbable collagen-based) casing
- ----------------------------------------------------------------------------------------------------
Redmond(TM) neurosurgical and Specialized surgical instruments Marketed
spinal instruments for use in brain or spinal surgery
- ----------------------------------------------------------------------------------------------------
Neuro-Navigational(R) flexible For minimally invasive surgical Marketed
endoscopes for neurosurgery access to the brain
- ----------------------------------------------------------------------------------------------------
Helitene(R) Microfibrillar Control of bleeding during Approved in
Hemostat surgery Europe; Pending
approval for
neurosurgical use
in U.S.
- ----------------------------------------------------------------------------------------------------
Peripheral nerve conduit Repair of peripheral nerves Development
- ----------------------------------------------------------------------------------------------------
Integra LifeSciences
- ------------------------------------------------------------------------------------------------------------------------
Product Application Status Marketing/Development Partner
- ------------------------------------------------------------------------------------------------------------------------
INTEGRA(R) Artificial Skin Regenerate dermis Marketed Johnson & Johnson Medical, Century
and skin defects Medical, Inc.
- ------------------------------------------------------------------------------------------------------------------------
BioMend(R) and Biomend(R) Extend, Used in guided Marketed Sulzer Medica
Absorbable Collagen Membrane tissue regeneration
in periodontal
surgery
- ------------------------------------------------------------------------------------------------------------------------
Articular cartilage repair Regeneration of Development DePuy division of Johnson & Johnson
joint cartilage
- ------------------------------------------------------------------------------------------------------------------------
Collagen material for use with bone Fracture Development Genetics Institute (AHP), Medtronic
morphogenetic protein (rhBMP-2) management/enabling Sofamor Danek
spinal fusion
- ------------------------------------------------------------------------------------------------------------------------
Tyrosine polycarbonates for fixation Fixation or Development Linvatec (CONMED), Bionx Implants, Inc.
devices such as resorbable screws, alignment of
plates, pins, wedges and nails fractures
- ------------------------------------------------------------------------------------------------------------------------
4
Integra LifeSciences, continued
- ---------------------------------------------------------------------------------------------------
VitaCuff(TM) Provides Marketed Bard Access Systems, Inc., Arrow
protection International, Inc
against
infection
arising from
long-term
catheters
- ----------------------------------------------------------------------------------------------------
BioPatch(TM) Anti-microbial Marketed Johnson & Johnson Medical
wound dressing
- ----------------------------------------------------------------------------------------------------
Helitene(R) and Helistat(R) Control of Marketed Sold through various distributors
absorbable collagen hemostatic bleeding
agents
- ----------------------------------------------------------------------------------------------------
CollaCote(R), CollaTape(R) and Used to control Marketed Sulzer Medica
CollaPlug(R) absorbable wound bleeding in
dressings dental surgery
- ----------------------------------------------------------------------------------------------------
Sundt(R) Shunt Carotid Marketed Sold directly and through various
endarterectomy distributors
shunts for
shunting blood
during
surgical
procedures
involving
blood vessels
- ----------------------------------------------------------------------------------------------------
INTEGRA NEUROSCIENCES
In General
We manufacture and market a multi-line offering of innovative neurosurgical
devices used for brain and spine injuries. We intend to be the neurosurgeon's
and intensive care unit's "one-stop shop" for these products. For the intensive
care unit, we sell the Camino(R) and Ventrix(R) lines of intracranial pressure
("ICP") monitoring systems and external drainage systems manufactured under the
Camino(R), Heyer-Schulte(R) and Clinical Neuro Systems(TM) brand names. For the
operating room, we sell a wide range of products, including cerebrospinal fluid
("CSF") shunting products, the DuraGen(TM) Dural Graft Matrix, Neuro
Navigational(R) endoscopes, and Redmond(TM) neurosurgical instruments.
We sell our neurosurgical products in the United States through a direct sales
force organized into five regions each with a region manager. We employ 27
direct sales personnel called neurospecialists covering 40 territories. We
intend to increase the number of sales personnel to 40. We also employ seven
clinical development specialists who directly educate and train both the
neurospecialists and our customers in the use of our products. In addition, we
employ a physician as medical director, and a Ph.D. in neurosciences as
scientific director. The sales organization has approximately doubled in size
since the acquisition of the first neurosciences business in early 1999. We
believe this expansion allows for smaller, more focused territories, greater
participation in trade shows and more extensive marketing efforts.
5
Outside of the United States, we sell our products through approximately 60
specialized neurosurgical distributors and dealers.
Industry
Integra NeuroSciences addresses the market need created by trauma cases and
hydrocephalus through its established market positions in ICP monitoring,
neurosurgical shunting, neuroendoscopy and specialty neurosurgical
instrumentation. Integra NeuroSciences currently has more than 3,000 ICP
monitors installed worldwide.
ICP monitors are used by neurosurgeons in diagnosing and treating cases of
severe head trauma and other diseases. There are approximately 400,000 cases of
head trauma each year in the United States.
Hydrocephalus is an incurable condition resulting from an imbalance between the
amount of CSF produced by the body and the rate at which CSF is absorbed by the
brain. 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. The most common method of treatment of
hydrocephalus is the insertion of a shunt into the ventricular system of the
brain to divert the flow of CSF out of the brain. A pressure valve then
maintains the CSF at normal levels within the ventricles. According to the
Hydrocephalus Association, hydrocephalus affects approximately one in 500
children born in the United States. Approximately 80% of total CSF shunt sales
address birth-related hydrocephalus with the remaining 20% addressing surgical
procedures involving excess CSF due to head trauma.
Integra NeuroSciences's design, manufacture and production of minimally invasive
neuroendoscopy products addresses what we believe is significant growth
potential in the neuroendoscopy market resulting from an increasing number of
neurosurgeons embracing minimally invasive surgical techniques. We believe that
the worldwide market for neuroendoscopy products will grow more quickly than
most other neurosurgical device lines. This growth is expected, in part, because
of the introduction of new procedures called third ventriculostomies which are
increasingly substituting for shunt placement for patients who meet the
criteria. Accordingly, we believe that our Neuro Navigational(R) line of
disposable, semi-flexible, fiber-optic scopes will continue to grow and that the
Neuro Navigational(R) line addresses the needs of neurosurgeons employing these
techniques.
Our DuraGen(TM) product line addresses the market for dural substitutes,
including cranial and spinal procedures.
Integra NeuroSciences's broad line of neurosurgery and spinal instrumentation
products, including hand-held spinal and neurosurgery instruments such as
retractors, kerrisons, dissectors and curettes, addresses the market for
neurosurgical instruments.
Products
Intracranial Pressure Product Line. Integra NeuroSciences sells the Camino(R)
and Ventrix(R) lines of intracranial pressure monitoring systems. Core
technologies in the intracranial pressure monitoring product line include the
design and manufacture of the disposable catheters used in the monitoring
systems, patented pressure transducer technology, optical detection/fiber optic
transmission technology, sensor characterization and calibration technology and
monitor design and manufacture. The research, development and manufacture of
Integra NeuroSciences's ICP monitoring products are located in San Diego,
California.
6
External Drainage System Product Line. Integra NeuroSciences's external drainage
systems are manufactured under the Camino(R), Heyer-Shulte(R) and Clinical Neuro
Systems(TM) brand names. We manufacture the drainage systems in both Anasco,
Puerto Rico (for sale under the Camino(R) and Heyer-Schulte(R) brand names) and
in Exton, Pennsylvania (for sale under the Clinical Neuro Systems(TM) brand
name).
Shunts for Hydrocephalus Management. Our line of shunting products for
hydrocephalus management includes the Novus, LPV and Pudenz shunts, ventricular,
peritoneal and cardiac catheters, physician-specified hydrocephalus management
shunt kits, Ommaya CSF reservoirs and Spetzler lumbar and syringo-peritoneal
shunts. Shunts are implanted in the patient to drain excess CSF from the
ventricles of the brain into the peritoneal cavity or externally. Integra
NeuroSciences's hydrocephalus management shunt manufacturing operations are
located in the Anasco, Puerto Rico facility.
DuraGen(TM) Product Line. The DuraGen(TM) Dural Graft Matrix is a resorbable
collagen matrix indicated for the repair of the dura mater. The dura mater is
the thick membrane that contains the CSF within the brain and the spine. The
dura mater must be penetrated during brain surgery, and is often nicked or
otherwise damaged during spinal surgery. In either case, surgeons often close or
repair the dura mater with a graft. The graft may consist of other 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. We believe that each of the
prevailing methods for repairing the dura mater suffer from shortcomings
addressed by the DuraGen(TM) Dural Graft Matrix. We manufacture the DuraGen(TM)
Dural Graft Matrix product in our Plainsboro, New Jersey facility.
Our DuraGen(TM) product is an engineered resorbable collagen implant that has
been shown in clinical trials 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 DuraGen(TM) product is
ultimately resorbed by the body and replaced with new natural tissue, the
patient avoids some of the risks associated with a permanent implant inside the
cranium.
Redmond(TM) Product Line. We provide neurosurgeons and spine surgeons with a
full line of specialty hand-held spinal and neurosurgical instruments sold under
the Redmond(TM) brand name. These 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. We import most
of these instruments from Germany.
Neuro Navigational(R) Endoscope Product Line. We manufacture and sell disposable
minimally invasive neuroendoscopy products under the Neuro Navigational(R) brand
name. These fiber optic instruments are used to facilitate minimally invasive
neurosurgery. Neuroendoscopy manufacturing operations are located in San Diego,
California.
Helitene(R) Neurosurgical Hemostat Product Line. Helitene(R) hemostatic agent
consists of microfibular collagen, and is intended to control bleeding during
surgery. Outside of the United States, it is indicated for use in neurosurgery,
in addition to general surgery. During 2000, Integra NeuroSciences will begin to
sell Helitene(R) outside of the United States for use in neurosurgery.
Peripheral Nerve Conduit Product Line. Although peripheral nerves are one of the
few tissues of the body that spontaneously regenerate, in the majority of cases
they fail to make useful, functional connections. Consequently, peripheral nerve
injuries often result in permanent loss of sensation and motor control. At
present, there is no product on the market that regenerates peripheral nerves.
The conventional method of treatment for a severed peripheral nerve is
microsurgical repair or nerve grafts. Our peripheral
7
nerve regeneration device is a collagen tube designed to facilitate regeneration
of the severed nerve and to act as a bridge between the severed nerve ends. The
collagen conduit supports nerve regeneration and is then absorbed into the body.
Our pre-clinical studies have demonstrated the closure of 5-cm gaps in
peripheral nerves in non-human primates with restored nerve function. Our
proprietary resorbable conduit for regenerating and reconnecting peripheral
nerves is expected to enter clinical trials in Europe in humans during the first
half of 2000.
INTEGRA LIFESCIENCES
In General
Integra LifeSciences develops and markets tissue regeneration products and sells
surgical products that are primarily sold outside of neurosurgery and
neurotrauma. Many of the current products of Integra LifeSciences are built on
our expertise in resorbable collagen products. Integra LifeSciences's research
and development programs are generally constructed around strategic alliances
with leading medical device companies.
Products
INTEGRA(R) Artificial Skin. INTEGRA(R) Artificial Skin is designed to enable the
human body to regenerate functional dermal tissue. Human skin consists of the
epidermis and the dermis. The epidermis is the thin, outer layer that serves as
a protective seal for the body and the dermis is the thicker layer underneath
that provides structural strength and flexibility and supports the viability of
the epidermis through a vascular network. The body normally responds to severe
damage to the dermis by producing scar tissue in the wound area. This scar
tissue is accompanied by contraction that pulls the edges of the wound closer
which, while closing the wound, often permanently reduces flexibility. In severe
cases, this contraction leads to a reduction in the range of motion for the
patient, who subsequently requires extensive physical rehabilitation or
reconstructive surgery. Physicians treating severe wounds, such as
full-thickness burns, seek to minimize scarring and contraction.
INTEGRA(R) Artificial Skin was designed to minimize scar formation and wound
contracture in full thickness skin defects. INTEGRA(R) Artificial Skin consists
of two layers, a thin collagen-glycosaminoglycan sponge and a silicone membrane.
The product is applied with the sponge layer in contact with the excised wound.
The sponge material serves as a template for the growth of new functional dermal
tissue. The outer membrane layer acts as a temporary substitute for the
epidermis to control water vapor transmission, prevent re-injury and minimize
bacterial contamination.
INTEGRA(R) Artificial Skin is marketed and sold, except in Japan, by Johnson &
Johnson Medical. INTEGRA(R) Artificial Skin was approved by the FDA under a
premarket approval application ("PMA") for the post-excisional treatment of
life-threatening full-thickness or deep partial-thickness thermal injury where
sufficient autograft is not available at the time of excision or not desirable
due to the physiological condition of the patient. The FDA's approval order
includes requirements to provide a comprehensive practitioner training program
and to conduct a post approval study at multiple clinical sites. We have
enrolled more than the required number of patients in the post-approval study,
and expect to file the results with the FDA this year.
We estimate that the worldwide market for use of skin replacement products (such
as INTEGRA(R) Artificial Skin) in the treatment of severe burns is only about
$75 million. However, the potential market for the use of INTEGRA(R) Artificial
Skin for reconstructive surgery and the treatment of chronic wounds is much
larger, which we estimate to be in excess of $1 billion. In June 1999, Integra
LifeSciences
8
entered into a strategic alliance with Johnson & Johnson Medical to distribute
INTEGRA(R) Artificial Skin throughout the world, except Japan. As part of that
strategic alliance, Johnson & Johnson Medical has agreed to pay for clinical
trials to support applications to the FDA for these broader indications. We
cannot be certain that such clinical trials will be completed, or that
INTEGRA(R) Artificial Skin will receive the approvals necessary to permit
Johnson & Johnson Medical to promote it for such indications.
BioMend(R) Absorbable Collagen Membrane. Integra LifeSciences has also developed
the BioMend(R) Absorbable Collagen Membrane for use in 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 BioMend(R) product is
intended to be absorbed after approximately four to seven weeks, avoiding the
requirement for additional surgical procedures to remove a non-absorbable
membrane. The BioMend(R) Absorbable Collagen Membrane is sold through the
Calcitek division of Sulzer Medica. It has been approved for marketing in the
United States and has received CE Mark certification for sales in the European
Union. Sulzer Medica is seeking regulatory approval in Japan. BioMend(R) Extend
was developed by Integra LifeSciences and has the same indication for use as
BioMend(R) except that it absorbs in approximately 16 weeks. The product has
received FDA clearance to market, and has been submitted for CE mark
certification and for approval in Canada and Japan.
Cartilage Repair Products. Damaged articular cartilage, which connects the
skeletal joints, is associated with the onset of progressive pain, degeneration
and, ultimately, long-term osteoarthritis. Normal articular cartilage does not
effectively heal. The conventional procedure for treating traumatic damage to
cartilage involves smoothing damaged portions of the tissue and removing
free-floating material from the joint using arthroscopic surgery with the
objective of reducing pain and restoring mobility. However, this therapy does
not stop joint surface degeneration, often requires two or more surgeries and
results in the formation of fibrocartilage, which is rough and non-weight
bearing over prolonged periods. Moreover, the long-term result of this procedure
often is permanent reduction of joint mobility and an increased risk of
developing osteoarthritis.
We are developing a device to allow in vivo regeneration of the patient's own
articular cartilage. This technology will allow the patient's body to regenerate
a smooth, weight-bearing surface. Our objective in developing this
cartilage-specific technology is to produce a product that provides the proper
matrix system to allow the natural regeneration of the patient's cartilage, with
full restoration of function and diminished risk of osteoarthritis.
The product under development would use our proprietary peptide technology to
encourage cells to grow into the template once implanted into the patient. Our
peptide portfolio includes bioactive agents designed to mimic natural proteins
to promote cell adhesion, cell survival and other important cellular functions.
Our product would employ proprietary designs based on multiple layers of
collagen material of varying but tightly controlled densities and pore sizes to
provide a scaffold for all proliferation and cartilage formation. Simultaneously
it would prevent the in-growth of unwanted cells that could lead to scar tissue
formation. We anticipate that the device will be absorbed into the body over a
period of several weeks. Pre-clinical studies involving several variations of
the above protocols are in progress.
Collagen matrices for use with rhBMP-2. We supply the Genetics Institute
division of American Home Products with absorbable collagen sponges for use in
developing bone regeneration implants. Since 1994, we have supplied absorbable
collagen sponges for use with Genetics Institute's recombinant human bone
morphogenic protein-2 (rhBMP-2). Recombinant human BMP-2 is a manufactured
version of human protein naturally present in very small quantities in the body.
Genetics Institute is developing rhBMP-2
9
for clinical evaluation in several areas of bone repair and augmentation. Spine
applications are being developed through a related collaboration with Medtronic
Sofamor Danek in North America.
Tyrosine polycarbonates for orthopedic implants. We are continuing to develop
additional biomaterial technologies that enhance the rate and quality of healing
and tissue regeneration with synthetic biodegradable scaffolds that support cell
attachment and growth. We are developing a new class of resorbable
polycarbonates created through the polymerization of tyrosine, a naturally
occurring amino acid. A well-defined and commercially scaleable manufacturing
process prepares these materials. Device fabrication by traditional techniques
such as compression molding and extrusion is readily achieved. We believe that
this new biomaterial will be useful in promoting full bone healing when
implanted in damaged sites. This material is currently being developed for
orthopedic and tissue engineering applications where strength and bone
compatibility are critical issues for success of healing. We have entered into
agreements to supply the material to Bionx Implants, Inc. and the Linvatec
division of CONMED, in each case for specified orthopedic implants. No medical
device containing the material has yet been approved for sale.
Other Surgical Products. Other current products of Integra LifeSciences include
the VitaCuff(TM) catheter access infection control device (sold to Bard Access
Systems, Inc., Arrow International, Inc. and the Quinton division of Tyco
International Ltd.), the BioPatch(TM) anti-microbial wound dressing (sold to
Johnson & Johnson Medical), and a wide range of resorbable collagen products for
hemostasis (sold to Sulzer Calcitek for use in periodontal surgery, and to
Baxter International and other distributors under the Helistat(R) and
Helitene(R) Absorbable Collagen Hemostatic Agent names). All of the foregoing
products are manufactured at our Plainsboro, New Jersey manufacturing facility.
Finally, our line of Sundt(R) carotid endarterectomy shunts is used to divert
blood to vital organs (such as the brain) during carotid artery surgical
procedures. Carotid shunts are manufactured at our medical-grade silicone
manufacturing facility in Anasco, Puerto Rico, and sold directly and through
distributors.
SALES AND MARKETING
Our sales and marketing strategy for our product lines differ based on the type
of market and our assessment of how we can maximize our resources and make the
greatest impact on the respective market. We market our Integra NeuroSciences
products to neurosurgeons and critical care units, which comprise a focused
group of hospital-based practitioners. As a result, we are able to access this
market through a cost-effective sales and marketing infrastructure. For the
majority of the products we manufacture under Integra LifeSciences, we partner
with market leaders, which we believe allows us to achieve our growth objectives
cost effectively while enabling us to focus our management efforts on developing
new products. The non-neurosurgical products represent large, diverse markets,
and we believe that they can be more cost effectively promoted through
leveraging leading marketing partners than through developing a sales
infrastructure ourselves. Our strategic alliances include Johnson & Johnson
Medical, a division of Ethicon, Inc., Sulzer Medica Ltd., the Linvatec division
of CONMED Corporation, Bionx Implants, Inc., the Genetics Institute division of
American Home Products Corporation, the Sofamor Danek division of Medtronic,
Inc. and Baxter Healthcare.
10
STRATEGIC ALLIANCES
We use distribution alliances to market the majority of our Integra LifeSciences
products. We have also entered into collaborative agreements relating to
research and development programs involving our technology. These arrangements
are described below.
In June 1999, Integra LifeSciences entered into a strategic alliance with
Johnson & Johnson Medical to distribute INTEGRA(R) Artificial Skin throughout
the world, except in Japan. Johnson & Johnson Medical is responsible for
marketing and selling the product, has agreed to make significant minimum
product purchases, and will provide $2 million annual funding for research,
development and certain clinical trials for the first five years of the alliance
and thereafter based on a percentage of net sales. In addition, Johnson &
Johnson Medical is obligated to make contingent payments to Integra LifeSciences
in the event of certain clinical developments and to assist in the expansion of
our manufacturing capacity as we achieve certain sales targets. Under the
agreement, we are obligated to manufacture the product and are responsible for
continued research and development.
In 1997, we signed an exclusive importation and sales agreement for INTEGRA(R)
Artificial Skin in Japan with Century Medical Inc., a subsidiary of ITOCHU
Corporation. Under this agreement, Century Medical, Inc. is conducting a
clinical trial in Japan at its own expense to obtain Japanese regulatory
approvals for the sale of INTEGRA(R) Artificial Skin in Japan.
In February 1998, we announced the signing of a strategic alliance with Johnson
& Johnson's DePuy division ("DePuy") to develop and market a new product to
regenerate joint cartilage. Integra LifeSciences has agreed to develop an
absorbable, collagen-based implant, designed in combination with its proprietary
RGD peptide technology, that will allow the body to repair and regenerate
articular cartilage found in the knee and other joints. DePuy will market the
product worldwide. Under the terms of the agreement, DePuy will make payments of
up to $13 million as Integra meets various milestones, and will fund all
necessary development costs beyond the pre-clinical phase. If a product is
successfully developed, we will be responsible for manufacturing the product and
for future product development.
In addition to the cartilage program, Integra LifeSciences has several other
programs oriented toward the orthopedic market. These programs include alliances
for the development of resorbable orthopedic implants made of our proprietary
tyrosine polycarbonate technology with Bionx Implants, Inc. and Linvatec and an
alliance with Genetics Institute for the development of collagen matrices to be
used in conjunction with Genetics Institute's recombinant human bone
morphogenetic protein-2 ("rhBMP-2"). If approved, rhBMP-2 is expected to be used
in conjunction with our matrices to regenerate bone. Genetics Institute is
developing products based on rhBMP-2 for applications in orthopedics, oral and
maxillofacial surgery and spine surgery. Spine applications are being developed
through a related collaboration with Medtronic Sofamor Danek in North America.
In September 1998, we announced two strategic alliances with Linvatec and Bionx
Implants, Inc. for developing fixation devices using Integra's polymer
technology. Under the agreements with Linvatec and Bionx Implants, those
companies have responsibility for clinical trials and any necessary regulatory
filings, as well as certain minimum annual purchase payments. Products covered
under the agreement with Linvatec include a resorbable line of interference
screws, as well as tacks and anchors used in reconstruction of the anterior
cruciate ligament and posterior cruciate ligament, fixation of ligaments and
tendons in the knee and shoulder, and bone-tendon-bone procedures. Linvatec also
intends to develop polymer implants for use in bladder neck suspension
procedures. Products covered under the agreement with Bionx Implants
11
include a resorbable line of screws, plates, pins, wedges and nails used for the
fixation and/or alignment of fractures or osteotomies in all areas of the
musculoskeletal system except in the spine and cranium.
Sulzer Medica's dental division, Sulzer Calcitek, has marketed and sold
BioMend(R) since 1995, BioMend Extend(TM) since 1999 and CollaCote(R),
CollaPlug(R) and CollaTape(R) since 1992.
RESEARCH STRATEGY
The Company has either acquired or secured the proprietary rights to several
important scientific platforms. These technologies provide support for the
Company's critical applications in neurosciences and tissue regeneration, and
additional opportunities for generating near-term and long-term revenues from
medical applications. The Company has been able to identify and bring together
critical platform technology components from which it works to develop solutions
for both tissue regeneration and neurosciences.
The Company spent approximately $8.7 million, $8.2 million and $6.2 million
during 1999, 1998 and 1997, respectively, on research and development
activities. Research and development activities funded by government grants and
contract development revenues amounted to $1.9 million, $1.8 million and
$490,000 during 1999, 1998 and 1997, respectively.
GOVERNMENT REGULATION
Our research and development activities and the manufacturing 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. The FDA product approval process has
different regulations for drugs, biologics, and medical devices. The FDA
currently classifies our proposed regenerative medicine products as medical
devices.
Review Process For Medical Devices
There are two types of FDA review/approval procedures for medical devices: a
Premarket Notification Section 510(k) ("510(k)") and a PMA application. A 510(k)
requires submission of sufficient data to demonstrate substantial equivalence to
a device marketed prior to May 28, 1976, or to a device marketed after that date
which has been classified into Class I or Class II which has received premarket
notification 510(k) clearance. Although the mandated period for FDA review is 90
days, actual review times can be substantially longer, and the sponsor cannot
market the device until FDA clearance is obtained. For those devices that
involve new technology and/or that present significant safety and effectiveness
issues, 510(k) submissions may require significantly more time for FDA review
and may require submission of more extensive safety and effectiveness data,
including clinical trial data.
Among the conditions for clearance to market of a 510(k) submission is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to the FDA's current Quality System
Regulations. In complying with standards set forth in these regulations,
manufacturers must expend time, money and effort for production and quality
control to ensure full technical compliance at all times. Manufacturing
establishments, both international and domestic, are also subject to inspections
by or under the authority of the FDA. Although, at present, the FDA generally
does not inspect such establishments prior to clearance of a 510(k) submission,
it is establishing a program of conducting Quality System inspections for new
devices in the future as a standard practice.
12
The Medical Device Amendments of 1976 amended the Federal Food, Drug and
Cosmetics Act to establish three regulatory classes for medical devices, based
on the level of control required to assure safety and effectiveness. Class III
Devices are defined as life-supporting and life-sustaining devices, devices of
substantial importance in preventing impairment of human health or devices that
present potentially unreasonable risk of illness or injury. Class III devices
are those for which there is insufficient information to show that Class I or
Class II controls can provide a reasonable assurance of safety or effectiveness.
The PMA application review process for Class III devices was established to
evaluate the safety and effectiveness of these devices on a product by product
basis. Manufacturers that wish to market Class III devices must submit and
receive approval of a PMA application from the FDA.
The FDA has substantial content and format requirements for PMA applications,
which include clinical and non-clinical safety and effectiveness data, labeling,
manufacturing processes and quality assurance programs. As part of the PMA
application process, the PMA application may be referred to an FDA Advisory
Panel for review. Additionally, final approval of the product is dependent on an
inspection of the manufacturing facility for compliance with FDA Quality System
Regulations.
All studies in the United States in humans for the purpose of investigating the
safety and effectiveness of an investigational significant risk medical device
must be conducted under the Investigational Device Exemption ("IDE")
regulations. An IDE application to the FDA includes all preclinical
biocompatibility testing, investigational protocols, patient informed consents,
reports of all prior investigations, manufacturing and quality control
information. It takes a number of years from initiation of the project until
submission of a PMA application to the FDA, and requires the expenditure of
substantial resources. If a PMA application is submitted, however, there can be
no assurance on the length of time for the review process at the FDA or that the
FDA will approve the PMA application.
Under either the 510(k) submission or PMA application process, manufacturing
establishments, foreign and domestic, are subject to periodic inspections by the
FDA for compliance with Quality System Regulations. The Company and each of its
operating subsidiaries are subject to such inspections. To gain approval for the
use of a product for clinical indications other than those for which the product
was initially evaluated or for significant changes to the product, further
studies, including clinical trials and FDA approvals, are required. In addition,
for products with an approved PMA application, the FDA requires postapproval
reporting and may require postapproval surveillance programs to monitor the
product's safety and effectiveness. Results of post-approval programs may limit
or expand the further marketing of the product.
International Regulatory Requirements
We are preparing for the changing international regulatory environment. "ISO
9000" is an international recognized set of guidelines that are aimed at
ensuring the manufacture and development of quality products. We were audited
under ISO standards in 1997 and received certification to ISO 9001, a full
quality system. In 1998, we underwent a surveillance audit and renewed our
certification to ISO 9001. We are required to be audited on an annual basis by a
recognized notified body to maintain certification. Companies that meet ISO
standards are internationally recognized as functioning under a quality system.
Approval of a product by regulatory authorities in international countries must
be obtained prior to the commencement of marketing of the product in such
countries. The requirements governing the conduct of clinical trials and product
approvals vary widely from country to country, and the time required for
approval may be longer or shorter than that required for FDA approval of the PMA
application. 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 involves a
comprehensive quality system program, and submission of data on a product to the
notified body in Europe.
13
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; 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 such materials and certain waste products. Although we believe that our
safety procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, we could be held liable for any damages that
result and any such liability could exceed our resources. Although we believe
that we are in compliance in all material respects with applicable environmental
laws and regulations, there can be no assurance that we will not incur
significant costs to comply with environmental laws and regulations in the
future, nor that our operations, business or assets will not 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 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. We rely upon
trade secrets and continuing technological innovations to develop and maintain
our competitive position. We continue to develop a substantial database of
information concerning our research and development. We have taken security
measures to protect our data and are in the process of exploring ways to enhance
further the security of our data. 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.
COMPETITION
The largest competitors of Integra NeuroSciences in the neurosurgery markets are
the PS Medical division of Medtronic, Inc., the Codman division of Johnson &
Johnson, the Valleylab division of Tyco International Ltd., and NMT
Neurosciences, a division of NMT Medical, Inc. 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. In addition, certain companies are known to be
competing particularly in the area of skin substitution or regeneration,
including Organogenesis and Advanced Tissue Sciences. Finally, in certain cases
competition consists primarily of current medical practice, rather than any
particular product (such as autograft tissue as a substitute for INTEGRA(R)
Artificial Skin). 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.
14
EMPLOYEES
At December 31, 1999, we had approximately 450 full-time 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 and administration
and finance. None of our current employees are subject to a collective
bargaining agreement.
RECENT DEVELOPMENTS
In March 2000, we agreed to acquire from NMT Medical, Inc. ("NMT") the
Selector(R) Ultrasonic Aspirator, Ruggles(TM) Surgical Instrumentation and
Spembly Medical Cryosurgery product lines, including certain assets and
liabilities, for an acquisition price of $12.0 million. The acquisition is
expected to close by April 15, 2000. One of our subsidiaries will acquire the
Selector(R) Ultrasonic Aspirator and Spembly Medical Cryosurgery product lines
through the purchase of the stock of certain of NMT's subsidiaries, each
organized under the laws of the United Kingdom. In addition, one of our
subsidiaries will acquire related assets located in the United States, as well
as the inventory, customer list and certain other assets of the Ruggles(TM)line
of instruments for the neurosurgeon.
The Selector(R) Ultrasonic Aspirator products and the Ruggles(TM) surgical
instruments will be sold through Integra NeuroSciences, and the Spembly Medical
Cryosurgery products will be sold through Integra LifeSciences. The Selector(R)
Ultrasonic Aspirator uses very high frequency sound waves to pulverize cancer
tumors, and allows the surgeon to remove the damaged tumor tissue by aspiration.
The Ruggles(TM) line of surgical instruments complements and supplements our
Redmond(TM) instruments line, but has historically had significantly higher
revenues. Finally, the Spembly Medical Cryosurgery products allow surgeons to
use low temperatures to more easily extract diseased tissue.
We also acquired the manufacturing facility in Andover, England that
manufactures the ultrasonic aspirator and cryosurgery products. The Andover
facility employs approximately 65 employees. The Ruggles(TM) instruments are
purchased from various manufacturers and resold under the Ruggles(TM) brand
name.
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 made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995 and are
subject to a number of risks, uncertainties and assumptions about Integra,
including, among other things:
o general economic and business conditions, both nationally and in our
international markets;
o our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
o anticipated trends in our business;
o existing and future regulations affecting our business;
o our ability to obtain additional debt and equity financing to fund capital
expenditures and working capital requirements;
o our ability to complete acquisitions and integrate and manage new
businesses; and
o other risk factors described below under "Risk Factors."
15
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
The Company believes that the following important factors, among others, have
affected, and in the future could affect, the Company's business and results of
operations and could cause the Company's future results to differ materially
from its historical results and those expressed in any forward-looking
statements made by the Company. Such factors are not meant to represent an
exhaustive list of the risks and uncertainties associated with the Company's
business. These factors as well as other factors may affect the Company's future
results and the Company's stock price, particularly on a quarterly basis.
We expect to continue to incur operating losses and may never achieve
profitability.
To date, we have experienced significant operating losses in funding the
research, development, manufacturing and marketing of our products and may
continue to incur operating losses. At December 31, 1999, we had a cumulative
deficit of $94.3 million. Our ability to achieve profitability depends in part
upon our ability, either independently or in collaboration with others, to
successfully manufacture and market our products and services. There can be no
assurance that we will ever achieve a profitable level of operations or that
profitability, if achieved, can be sustained on an ongoing basis.
We may be unable to raise necessary additional financing.
We may need to raise additional funds in the future in order to implement our
business plan, to conduct research and development, to fund marketing programs
or to acquire complementary businesses, technologies or services. Our committed
sources of capital are limited. Any required additional financing may be
unavailable on terms favorable to us, or at all. If we raise additional funds by
issuing equity securities, our stockholders may experience significant dilution
of their ownership interest and these securities may have rights senior to those
of the holders of our common stock. If additional financing is not available
when required or is not available on acceptable terms, we may be unable to fund
our expansion, develop or enhance our products and services, take advantage of
business opportunities or respond to competitive pressures.
Our operating results may fluctuate from time to time, which could affect the
value of our common stock.
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:
o the impact of acquisitions;
o the timing of significant customer orders;
o market acceptance of our existing products, as well as products in
development;
o the timing of regulatory approvals;
o the timing of payments received under collaborative arrangements and
strategic alliances;
o our ability to manufacture our products efficiently; and
o the timing of our research and development expenditures.
16
The industry and market segments in which we operate are highly competitive, and
we may not be able to compete effectively with other companies with greater
financial resources than we have.
In general, the medical technology industry is characterized by intense
competition. We compete with established pharmaceutical and medical technology
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. Our present or future products could be rendered
obsolete or uneconomical by technological advances by one or more of our current
or future competitors. Our future success will depend upon our ability to
compete effectively against current technology as well as to respond effectively
to technological advances. We can not assure you that competitive pressures will
not adversely affect our profitability.
Our current strategy involves growth through acquisitions, which require 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. There can be no assurance that we will be able to continue to
implement our growth strategy, or that this strategy will ultimately be
successful. A significant portion of our growth in net revenue 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. Acquisitions by us may result
in significant 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 be able to 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 further develop our resources to adapt
to the particulars of such 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. Any failure by us to integrate acquired
operations, manage the cost of providing our products or price our products
appropriately may have a material adverse effect on our operating results. 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 such acquired businesses for which we may not be
indemnified by the sellers of the acquired businesses. Future acquisitions may
also result in potentially dilutive issuances of equity 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. The FDA and
other regulatory authorities require that our products be manufactured according
to rigorous standards. These regulatory requirements may
17
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 we, or a third party manufacturer, change our approved manufacturing
process, the FDA will require a new approval before that process could 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.
Our products under development are subject to approval by the FDA prior to
marketing for commercial use. The process of obtaining necessary FDA approvals
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 may place substantial restrictions on the
indications for which the product may be marketed or to whom it may be marketed.
To gain approval for the use of a product for clinical indications other than
those for which the product was initially evaluated or for significant changes
to the product, further studies, including clinical trials and FDA approvals are
required. In addition, for products with an approved PMA application, the FDA
requires postapproval reporting and may require postapproval surveillance
programs to monitor the product's safety and effectiveness. Results of post
approval programs may limit or expand the further marketing of the product.
Approved products are subject to continuing FDA requirements relating to quality
control and quality assurance, maintenance of records and documentation and
labeling and promotion of medical devices. 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.
Medical device laws and regulations are also in effect in many countries outside
the United States. These range from comprehensive device approval requirements
for some or all of our medical device products to requests for product data or
certifications. The number and scope of these requirements are increasing. The
requirements governing the conduct of clinical trials and product approvals vary
widely from country to country. Failure to comply with applicable federal, state
and foreign medical device laws and regulations would result in fines or other
censures or preclude our ability to market products. Because approximately 25%
of our 1999 revenues are derived from international sales, any delay or
withdrawal of approval or change in international regulations could have an
adverse effect on our revenues and profitability. See "Business -- Government
Regulation."
Lack of market acceptance for our products or market preference for technologies
which compete with our products would reduce our revenues and profitability.
We cannot be certain that our current products, or any other products that we
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. Currently, the medical community widely accepts many
alternative treatments, and these other treatments have a long history of use.
We cannot be certain that our devices and procedures will be able to replace
such 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. 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. In addition, competitors may
develop products that are more effective, cost less, or are ready for commercial
introduction before our products. If we are unable to develop additional,
commercially viable products, our future prospects will be adversely affected.
18
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, manufacture products in sufficient
quantities and at an acceptable cost and place and service, directly, or through
our strategic alliances, sufficient quantities of our products. In addition, our
technology could be harmed by limited funding available for product and
technology acquisitions by our customers, as well as internal obstacles to
customer approvals of purchases 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 compete effectively or adjust our contemplated plan of development to
meet changing market conditions.
Our business depends significantly on key relationships with third parties which
we may not be able 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
ability to enter into agreements with collaborators depends in part on
convincing them that our technology can help achieve and accelerate their goals
and 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 they 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 commercially 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
alliances 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 do not effectively market our products or develop additional
products based on our technology, our revenues from sales and royalties will be
significantly reduced.
The intellectual property rights we rely upon to protect the technology
underlying our products may not be adequate, 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 will depend, 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. 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 which
are not covered by our patents. 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.
19
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 these 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 not be available to us on acceptable terms, or at all. In addition,
some licenses may be nonexclusive, and therefore, our competitors may have
access to the same technology licensed to us. If we fail to obtain a required
license or are unable to design around a patent, we may be unable to sell some
of our products, which could have a material adverse affect on our business,
financial condition and results of operations.
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 such 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.
Our competitive position is dependent in part upon unpatented trade secrets,
which we may not be able to protect.
Our competitive position is also dependent upon unpatented trade secrets. Trade
secrets are difficult to protect. We can not assure you that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, that such 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 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. There can be no assurance, 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.
We are exposed to a variety of risks relating to international sales, including
fluctuations in exchange rates, commercial unavailability of, and/or
governmental restrictions on access to, foreign exchange and delays in
collection of accounts receivable.
We generate significant sales outside the United States, a substantial portion
of which are 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 such customers do business may impact the demand for
our products in foreign countries where the U.S. dollar has increased 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.
As a result of the announced acquisition of the NMT businesses, we will generate
revenues and incur operating expenses in British pounds sterling. To the extent
that we are unable to pay all of such operating expenses with revenues generated
in British pounds sterling or are required to exchange revenues generated in
British pounds sterling into U.S. dollars, we will experience currency exchange
risk with respect to such British pounds sterling denominated revenues or
expenses.
20
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 which could adversely affect the sale
and/or the prices of our products. For example:
o major third-party payors of hospital services, including Medicare,
Medicaid and private health care insurers, have substantially revised
their payment methodologies during the last few years which has resulted
in stricter standards for reimbursement of hospital charges for certain
medical procedures;
o Medicare, Medicaid and private health care insurer cutbacks could create
downward price pressure in the cardiac resuscitation pre-hospital market;
o proposals were adopted recently that will change the reimbursement
procedures for the capital expenditure portion of the cost of providing
care to Medicare patients;
o 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;
o 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;
o there is economic pressure to contain health care costs in international
markets;
o there are proposed and existing laws and regulations in domestic and
international markets regulating pricing and profitability of companies in
the health care industry; and
o there have been recent initiatives by third party payors to challenge the
prices charged for medical products which could affect our ability to sell
products on a competitive basis.
Both the pressure 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, which could
have a material adverse effect on our business.
In addition, there are laws and regulations that regulate the means by which
companies in the health care industry may compete by discounting the prices of
their products. Although we exercise care in structuring our customer discount
arrangements to comply with such laws and regulations, there can be no assurance
that (1) government officials charged with responsibility for enforcing such
laws will not assert that such customer discount arrangements are in violation
of such laws or regulations, or (2) government regulators or courts will
interpret such laws or regulations in a manner consistent with our
interpretation.
Our dependence on suppliers for materials could impair our ability to
manufacture our products.
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 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.
21
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.
We may have significant product liability exposure and our insurance may not
cover all potential claims.
We face an inherent business risk of exposure 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 such 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, once
obtained, 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.
In addition to the regulatory framework for product approval, manufacturing and
marketing, we are and may be subject to regulation under federal and state laws,
including requirements 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. We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such materials and certain waste products. Although we believe that our
safety procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, we could be held liable for any damages that
result and any such 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.
Future sales of our common stock may depress our stock price.
Sales of our common stock, or the perception that such sales could occur, could
cause the market price of our common stock to decline and impair our ability to
raise additional capital in the future through the sale of equity securities.
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, President and Chief Executive Officer of
Integra. If we lose the services of key personnel, that loss could materially
harm our business. We maintain "key person" life insurance on Mr. Essig. In
addition, recruiting and retaining qualified personnel will be critical to our
success. There is a shortage in the industry of qualified management and
scientific personnel, and competition for these individuals is intense. There
can be no assurance that we will be able to attract additional and retain
existing personnel.
Our stock price may continue to be highly volatile and our stockholders may not
be able to resell their shares at or above the price they 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
companies. The market price of Integra common stock has fluctuated widely in the
past and is likely to continue to
22
fluctuate in the future. Factors that may have a significant impact on the
market price of Integra common stock include:
o shortfall in our revenues or earnings relative to the levels expected by
securities analysts;
o future announcements concerning Integra or its competitors, including the
announcement of acquisitions;
o changes in the prospects of our business partners or suppliers;
o developments regarding our patents or other proprietary rights or those of
our competitors;
o quality deficiencies in our products;
o competitive developments, including technological innovations by us or our
competitors;
o government regulation, including the FDA's review of our products and
developments;
o changes in recommendations of securities analysts and rumors that may be
circulated about Integra or our competitors;
o public perception of risks associated with our operations;
o conditions or trends in the medical device and biotechnology industries;
o additions or departures of key personnel; and
o sales of our common stock.
Any of these factors could immediately, significantly and adversely affect the
trading price of Integra common stock.
We do not intend to pay dividends in the foreseeable future.
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We intend to retain future earnings to fund our growth.
Accordingly, our stockholders will not receive a return on their investment in
our common stock through the payment of dividends in the foreseeable future and
may not realize a return on their investment even if they sell their shares. As
a result, our stockholders may not be able to resell their shares at or above
the price they paid for them. Any future payment of dividends to our
stockholders will depend on decisions that will be made by our board of
directors and will depend on then existing conditions, including our financial
condition, contractual restrictions, capital requirements and business
prospects.
Our major stockholders could make decisions adverse to the interests of other
stockholders.
The Company's directors and executive officers and affiliates of certain
directors own or control a majority of the outstanding voting securities of the
Company and are generally able to elect all directors, to determine the outcome
of corporate actions requiring stockholder approval and otherwise to control the
business. Such control 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.
Year 2000 related system failures or malfunctions could harm our business.
As of the date of this report, our systems have operated without any apparent
Year 2000 related problems and appear to be Year 2000 compliant. We are not
aware that any of our primary vendors or systems maintained by third parties
have experienced significant Year 2000 compliance problems. However, while no
such problem has been discovered as of the date of this report, Year 2000 issues
may not become apparent immediately and, therefore, Integra may be affected in
the future. We will continue to monitor the issue and work to remediate any Year
2000 issues that may arise.
23
ITEM 2. PROPERTIES
Our principal executive offices are located in Plainsboro, New Jersey. Principal
manufacturing and research facilities are located in Plainsboro, New Jersey, San
Diego, California and Anasco, Puerto Rico. In addition, we lease several smaller
facilities to support additional administrative and storage operations. Our
total manufacturing and research space approximates 82,000 square feet. Our
Integra LifeSciences products are manufactured in and distributed through the
Plainsboro facility. Our Integra NeuroSciences products are manufactured in the
Plainsboro, San Diego and Anasco facilities and are distributed through the
Plainsboro and San Diego facilities. In March 2000, we leased a warehouse
facility in Cranbury, New Jersey that will serve as the national distribution
center for all of our products in the United States. In connection with the
acquisition of the business, including certain assets and liabilities, of
Clinical Neuro Systems in January 2000, we assumed a lease for an FDA registered
and inspected manufacturing facility in Exton, Pennsylvania. All of our
facilities are leased.
All of our manufacturing and distribution facilities are FDA registered and
inspected. We believe that our manufacturing facilities are 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, the Company filed a patent infringement lawsuit in the United
States District Court in San Diego 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. David A. 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 (known as "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 verdict, finding that Merck KGaA had willfully
induced infringement of the Company's patents and awarded the Company $15.0
million in damages, which may be adjusted by the court. The Company expects that
post-trial motions will be filed, and that Merck KGaA will appeal various
decisions of the court and request a new trial, a reduction in damages, or a
judgment as a matter of law notwithstanding the verdict. We cannot accurately
predict the ultimate resolution of this matter and have not reflected the
verdict in our financial statements.
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
Camino NeuroCare, Inc. ("Camino") dated as of December 18, 1996, have alleged
that Camino breached the terms of the Letter Agreement prior to our acquisition
of the NeuroCare Group (Camino's prior parent company). The Letter Agreement
contains arbitration provisions and Integra and the Optex Claimants have agreed
to negotiate rather than seek arbitration for a limited time. While we believe
that Camino has valid legal and factual defenses, the Optex Claimants have
asserted unspecified significant damages, and we believe that the Optex
Claimants are likely to pursue arbitration under the Letter Agreement if the
matter is not settled otherwise. We cannot predict the outcome of such an
arbitration, were it to take place. In addition, we have asserted a
24
right to indemnification from the seller of the NeuroCare businesses, but there
can be no assurance that indemnification, if any, will be obtained.
The Company is also subject to other claims and lawsuits in the ordinary course
of its business. In the opinion of management, such other claims are either
adequately covered by insurance or otherwise indemnified, and are not expected,
individually or in the aggregate, to result in a material adverse effect on the
financial condition of the Company. The Company's financial statements do not
reflect any material amounts related to possible unfavorable outcomes of the
matters above or others. However, it is possible that the Company's results of
operations, financial position and cash flows in a particular period could be
materially affected by these contingencies.
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.
25
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 the Company serve at the discretion of the Board of
Directors. The only family relationship between any of the executive officers
and directors of the Company is that Mr. Holtz is the nephew of Richard E.
Caruso, Ph.D., who is Chairman of the Company's Board of Directors. The
following information indicates the position and age of the Company's executive
officers as of the date of this report and their previous business experience.
Name Age Position
- ---- --- --------
Stuart M. Essig, Ph.D. 38 President and Chief Executive Officer
George W. McKinney, III, Ph.D. 56 Executive Vice President and Chief
Operating Officer
John B. Henneman, III 38 Senior Vice President, Chief
Administrative Officer and General
Counsel
Judith E. O'Grady 49 Senior Vice President, Regulatory, Quality
Assurance and Clinical Affairs
Michael D. Pierschbacher, Ph.D. 48 Senior Vice President Research and
Development, General Manager, Corporate
Research Center
David B. Holtz 33 Vice President, Finance and Treasurer
Stuart M. Essig, Ph.D. has served as President and Chief Executive Officer and a
director of the Company since December 1997. Before joining the Company, 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
Vital Signs Incorporated and St. Jude Medical Corporation.
George W. McKinney, III, Ph.D. has served the Company as Vice Chairman,
Executive Vice President and Chief Operating Officer since May 1997 and as a
member of the Board of Directors since December 1992. Between 1990 and 1997, Dr.
McKinney was Managing Director of Beacon Venture Management Corporation, a
venture capital firm. Between 1992 and 1997, Dr. McKinney also served as
President and Chief Executive Officer of Gel Sciences, Inc. and GelMed, Inc., a
privately held specialty materials firm with development programs in both the
industrial and medical products fields. From 1983 to 1989, Dr. McKinney was a
Managing Director at American Research & Development, a venture capital firm.
Between 1986 and 1989, he also served as President and Chief Executive Officer
of American Superconductor, Inc., a development stage firm in the specialty
materials field. From 1965 to 1983, Dr.
26
McKinney worked for Corning Glass Works (now Corning, Inc.), a specialty
materials firm, in a variety of manufacturing, engineering, and financial
positions. At Corning, he served as President of Corning Designs, a subsidiary
which he founded, as Secretary to the Management Committee, as Director of
Business Development and Planning, as Treasurer, International, as Assistant
Treasurer, Domestic, and as Financial and Control Manager for the Engineering
Division. Dr. McKinney holds an S.B. in Management from MIT and a Ph.D. in
Strategic Planning from Stanford University.
John B. Henneman, III is the Company's Senior Vice President, Chief
Administrative Officer and General Counsel. Prior to joining the Company 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. From 1986 to 1994, Mr. Henneman practiced law in the
Corporate Department of Latham & Watkins (Chicago, Illinois). Mr. Henneman
received his A.B. (Politics) from Princeton University in 1983 and his J.D. from
the University of Michigan Law School in 1986.
Judith E. O'Grady, Senior Vice President of Regulatory Affairs, Quality
Assurance and Clinical Research, has served the Company since 1985. Ms. O'Grady
has worked in the areas of medical devices and collagen technology for over 20
years. Prior to joining the Company, Ms. O'Grady worked for Colla-Tec, Inc., a
Marion Merrell Dow Company. During her career Ms. O'Grady 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 obtained the FDA
approval for INTEGRA(R) Artificial Skin, the first regenerative product approved
by the FDA. She also has obtained approvals for several other product lines for
the Company. In addition, Ms. O'Grady obtained the CE Mark Certification for
approvals in the European Union as well as a multitude of other international
approvals. She has been pivotal in the ISO 9001 Certification of the Company.
She is a member of the NIST group on standards for clinical outcomes as well as
on the Board of Directors for the New Jersey League of Nursing. Ms. O'Grady has
presented professional programs and lectures, both nationally and
internationally. She received her BS degree from Marquette University and MSN in
Nursing from Boston University.
Michael D. Pierschbacher, Ph.D. joined the Company 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 was acquired by the
Company in connection with the reorganization of Telios under Chapter 11 of the
federal bankruptcy code. He was a co-founder of 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.
David B. Holtz joined the Company as Controller in 1993 and has served as Vice
President, Finance and Treasurer since March 1997. His responsibilities include
managing all accounting and information systems functions. Before joining the
Company, 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 in
1989 and has been certified as a public accountant.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq National Market under the symbol
"IART". The following table represents the high and low sales prices for the
Company's Common Stock for each quarter for the last two years. All outstanding
common share and per share amounts have been retroactively adjusted to reflect a
one-for-two reverse stock split of the Company's Common Stock on May 18, 1998.
HIGH LOW
---- ---
1999
----
First Quarter $5.188 $3.00
Second Quarter $7.50 $3.875
Third Quarter $10.375 $5.625
Fourth Quarter $6.4375 $5.375
1998
----
First Quarter $10.75 $8.125
Second Quarter $9.75 $6.125
Third Quarter $8.00 $4.375
Fourth Quarter $5.25 $3.25
The closing price for the Common Stock on March 24, 2000 was $14.75. For
purposes of calculating the aggregate market value of the shares of Common Stock
of the Company held by non-affiliates, as shown on the cover page of this
report, it has been assumed that all the outstanding shares were held by
non-affiliates except for the shares held by directors and executive officers of
the Company and stockholders owning 10% or more of outstanding shares. However,
this should not be deemed to constitute an admission that all such persons are,
in fact, affiliates of the Company. Further information concerning ownership of
the Company's Common Stock by executive officers, directors and principal
stockholders will be included in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission.
The Company does not currently pay any cash dividends on its Common Stock and
does not anticipate paying as such dividends in the foreseeable future.
The number of stockholders of record as of March 24, 2000 was approximately 850,
which includes stockholders whose shares were held in nominee name. The number
of beneficial stockholders at that date was over 6,700.
28
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth consolidated financial data with respect to the
Company for each of the five years in the period ended December 31, 1999. The
information set forth below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Company's consolidated financial statements and related notes included elsewhere
in this report.
Years Ended December 31,
----------------------------------------------------------
In thousands, except per share data 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Statement of Operations Data (1)
Product sales................................... $ 39,661 $ 14,076 $ 14,001 $ 11,210 $ 8,356
Other revenue................................... 2,829 3,379 745 1,938 1,873
-------- -------- -------- -------- --------
Total revenue............................... 42,490 17,455 14,746 13,148 10,229
Cost of product sales, including depreciation(2) 22,219 7,420 7,027 6,671 4,850
Research and development........................ 8,670 8,238 6,222 6,064 5,104
Selling and marketing........................... 9,481 5,953 5,458 4,304 2,455
General and administrative (3).................. 12,682 9,357 14,430 4,881 3,225
Amortization and other depreciation............. 1,818 667 520 675 504
Acquired in-process research and development (4) -- -- -- -- 19,593
-------- -------- -------- -------- --------
Total costs and expenses...................... 54,870 31,635 33,657 22,595 35,731
-------- -------- -------- -------- --------
Operating loss.................................. (12,380) (14,180) (18,911) (9,447) (25,502)
Interest income................................. 1,006 1,250 1,771 1,799 283
Interest expense................................ (712) -- -- -- (188)
Gain on disposition of product line............. 4,161 -- -- -- --
Other income.......... ......................... 141 588 176 120 5
-------- -------- -------- -------- --------
Net loss before income taxes.................... (7,784) (12,342) (16,964) (7,528) (25,402)
Income tax benefit (5).......................... 1,818 -- -- -- --
-------- -------- -------- -------- --------
Net loss........................................ $ (5,966) $(12,342) $(16,964) $ (7,528) $(25,402)
======== ======== ======== ======== ========
Basic and diluted net loss per share............ $ (.40) $ (.77) $ (1.15) $ (.54) $ (2.41)
======== ======== ======== ======== ========
Weighted average common shares outstanding...... 16,802 16,139 14,810 14,057 10,536
======== ======== ======== ======== ========
December 31,
----------------------------------------------------------
In thousands 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data (1)
Cash, cash equivalents and short-term investments $ 23,612 $ 20,187 $ 26,272 $ 34,276 $ 5,710
Working capital................................ 28,014 23,898 29,407 37,936 7,476
Total assets................................... 66,253 34,707 38,356 48,741 19,378
Long-term debt................................. 7,625 -- -- -- --
Accumulated deficit............................ (94,304) (88,287) (75,945) (58,981) (51,453)
Total stockholders' equity..................... 37,989 31,366 35,755 46,384 17,427
- ----------
(1) As the result of the Company's acquisitions of Telios Pharmaceuticals,
Inc. ("Telios") in August 1995, Rystan Company, Inc. ("Rystan") in
September 1998 and the NeuroCare group of companies ("NeuroCare") in March
1999, the consolidated financial results and balance sheet data for
certain of the periods presented above may not be directly comparable.
(2) The 1999 and 1998 cost of product sales include $2.4 million and $0.3
million, respectively, of fair value purchase accounting adjustments
related to inventory acquired in the NeuroCare and Rystan acquisitions.
(3) The 1997 general and administrative expense included the following two
non-cash charges: (i) $1.0 million related to an asset impairment charge;
and (ii) $5.9 million related to an equity-based signing bonus for the
Company's President and Chief Executive Officer.
(4) As a result of purchase accounting, the 1995 loss included $19.6 million
of acquired in-process research and development which was charged to
expense at the date of the Company's acquisition of Telios.
(5) The 1999 income tax benefit includes a non-cash benefit of $1.8 million
resulting 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.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements, the notes thereto and the other financial
information included elsewhere in this report.
General
The Company develops, manufactures and markets medical devices, implants and
biomaterials. The Company's operations consist of (1) Integra NeuroSciences,
which is a leading provider of implants, instruments, and monitors used in
neurosurgery, neurotrauma, and related critical care and (2) Integra
LifeSciences, which develops and manufactures a variety of medical products and
devices, including products based on our proprietary tissue regeneration
technology which are used to treat soft tissue and orthopedic conditions.
Integra NeuroSciences sells primarily through a direct sales organization and
Integra LifeSciences sells primarily through strategic alliances and
distributors.
In 1999, the Company initiated a repositioning of its business to selectively
focus on attractive niche markets. Implementation of this strategy included the
purchase of the NeuroCare Group of companies ("NeuroCare") in March 1999 and the
execution of an agreement (the "JJM Agreement") with Johnson & Johnson Medical,
Division of Ethicon, Inc. ("JJM") that provides JJM with exclusive marketing and
distribution rights to INTEGRA(R) Artificial Skin worldwide, excluding Japan. As
a result of these transactions, the Company formed its Integra NeuroSciences
segment and reorganized the remainder of the Company's products into its Integra
LifeSciences segment. The JJM Agreement allowed the Integra LifeSciences segment
to focus on strategic collaborative initiatives. A majority of the products in
the Integra NeuroSciences segment, which accounted for 54% of the Company's
total revenues in 1999, were acquired in the NeuroCare acquisition. The Integra
LifeSciences segment, which accounted for 46% of the Company's total revenues in
1999, now operates as a provider of innovative products and development
activities through strategic alliances with marketing partners and distributors.
As a result of these activities, the Company's segment financial results for
each of the years 1999, 1998 and 1997 may not be directly comparable.
The Company has incurred losses from operations since its inception and will
continue to incur such losses unless and until product sales and research and
collaborative arrangements generate sufficient revenue to fund continuing
operations. As of December 31, 1999, the Company had an accumulated deficit of
$94.3 million.
The Company's financial information discussed below should be considered in
light of the following transactions/events that occurred subsequent to December
31, 1999:
o The Company acquired the business, including certain assets and
liabilities, of Clinical Neuro Systems ("CNS") on January 17, 2000 for $6.8
million. CNS designs, manufactures and sells neurosurgical external
ventricular drainage systems including catheters and drainage bags, as well
as cranial access kits. The consideration for the CNS acquisition consisted
of $4.0 million in cash and a two-year $2.8 million note payable to the
seller.
o On March 21, 2000, the Company agreed to acquire the Selector(R) Ultrasonic
Aspirator, Ruggles(TM) hand-held neurosurgical instruments and cryosurgery
product lines, including certain assets and liabilities, from NMT Medical,
Inc. for $12.0 million in cash. The completion of this transaction is
subject to customary closing conditions and is expected to close early in
the second quarter of 2000.
o On March 29, 2000, the Company issued 54,000 shares of Series C 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, resulting in proceeds to the Company of $5.4 million. The
Series C Preferred is convertible into 600,000 shares of our common stock
and has a liquidation preference of $5.4 million with a 10% cumulative
dividend. The Series C Preferred was issued with a beneficial conversion
feature that resulted in a nonrecurring non-cash dividend of $4.2 million
that will be reflected in earnings (loss) per share applicable to common
stock in the first quarter of 2000.
30
See Note 20 to the Company's consolidated financial statements under Item 8 of
this report for additional information.
Results of Operations
1999 Compared to 1998
Overall, the Company's net loss decreased from $12.3 million in 1998 to $6.0
million in 1999. Operating results improved $1.8 million in 1999, with an
operating loss of $12.4 million in 1999 as compared to a $14.2 million operating
loss in 1998. The improvement in 1999 operating results resulted from the
successful integration of the NeuroCare acquisition and implementation of the
JJM Agreement, cost savings achieved in all business segments as compared to
1998 spending levels, and sales increases in the Company's Integra LifeSciences
product lines. The Company also recognized a non-operating gain of $4.2 million
from the sale of a product line in January 1999 and $1.8 million of non-cash
deferred tax benefits recorded in 1999 subsequent to the NeuroCare acquisition.
Total revenues increased $25.0 million from $17.5 million in 1998 to $42.5
million in 1999 primarily as a result of the NeuroCare acquisition. This
increase consists of a $25.6 million increase in product sales, offset by a $0.6
million decrease in other revenue. Product sales and cost of product sales were
as follows (in thousands):
1999
- ---- Integra Integra
NeuroSciences LifeSciences Consolidated
------------- ------------ ------------
Product sales $ 22,369 $ 17,292 $ 39,661
Cost of product sales 13,192 9,027 22,219
Gross margin on product sales 9,177 8,265 17,442
Gross margin percentage 41% 48% 44%
1998
- ---- Integra Integra
NeuroSciences LifeSciences Consolidated
------------- ------------ ------------
Product sales $ -- $ 14,076 $ 14,076
Cost of product sales -- 7,420 7,420
Gross margin on product sales -- 6,656 6,656
Gross margin percentage -- 47% 47%
Consolidated product sales increased $25.6 million to $39.7 million in 1999
primarily as a result of the sales of product lines acquired in 1999 and 1998
and increased sales of Integra LifeSciences products. Consolidated export sales
increased $6.8 million to $9.1 million in 1999, primarily as a result of the
NeuroCare acquisition.
Consolidated gross margin on product sales during 1999 decreased to 44% of
product sales primarily because of the lower gross margins on sales of
INTEGRA(R) Artificial Skin and $2.4 million of fair value inventory purchase
accounting adjustments related to business acquisitions. Cost of product sales
in 1998 included approximately $0.3 million of such fair value inventory
purchase accounting adjustments. Excluding these inventory purchase accounting
adjustments, consolidated gross margin on product sales would have been 50% and
49% in 1999 and 1998, respectively.
Integra NeuroSciences product sales and cost of product sales were generated
from the NeuroCare acquisition in March 1999 and $0.5 million of sales of the
DuraGen(TM) Dural Graft Matrix, which the Company launched in the third quarter
of 1999. Included in the cost of product sales is $1.9 million of fair value
inventory purchase accounting adjustments. Excluding these adjustments, gross
margin on Integra NeuroSciences product sales would have been 50% of product
sales in 1999.
31
Integra LifeSciences product sales increased $3.2 million to $17.3 million in
1999 primarily as a result of $3.6 million of sales increases attributable to
product lines acquired in connection with business acquisitions and a $1.5
million increase in sales of the Company's hemostasis, dental, and infection
control products. These increases were offset by a $2.1 million decrease in
sales of INTEGRA(R) Artificial Skin, primarily due to the transfer of all direct
sales and marketing efforts to JJM under the JJM Agreement in June 1999. The JJM
Agreement requires that JJM make non-refundable payments to the Company each
year based upon minimum purchases of INTEGRA(R) Artificial Skin.
Gross margin on Integra LifeSciences product sales increased to 48% of product
sales in 1999 primarily because of the higher gross margins associated with the
acquired product lines. Offsetting this increase are lower margins associated
with the distribution of INTEGRA(R) Artificial Skin through JJM in the second
half of 1999 and other INTEGRA(R) Artificial Skin manufacturing and inventory
related costs. Gross margin on Integra LifeSciences product sales included $0.5
million and $0.3 million of fair value purchase accounting adjustments in 1999
and 1998, respectively, related to acquired product line sales. Excluding these
purchase accounting adjustments, gross margin on Integra LifeSciences product
sales would have been 51% and 49% of Integra LifeSciences product sales in 1999
and 1998, respectively. The long-term impact on Integra LifeSciences product
sales and related gross margin will depend on required production volumes and
our strategic partners' ability to increase sales volume.
Total other revenue decreased $0.6 million in 1999 to $2.8 million. Other
revenue in the Integra NeuroSciences segment decreased $0.5 million from $1.0
million in 1998 to $0.5 million in 1999. In 1999, other revenue consisted of
$0.5 million of royalty income related to technology acquired in the NeuroCare
acquisition. In 1998, other revenue consisted of $1.0 million of revenue from
Century Medical, Inc. ("CMI") as partial reimbursement of research and
development costs previously expended by the Company. Other revenue in the
Integra LifeSciences segment decreased $0.1 million to $2.3 million in 1999. In
1999, other revenue consisted of $0.9 million of grant revenue, $0.9 million of
payments received in connection with Integra LifeSciences development programs,
$0.3 million of license revenue associated with the JJM Agreement and $0.2
million of royalty income. In 1998, other revenue consisted of $1.0 million of
development funding received from DePuy, a Johnson & Johnson Company ("DePuy"),
in connection with Integra LifeSciences articular cartilage regeneration
development program, $0.6 million of grant revenue, $0.3 million of royalty
income and $0.5 million of license revenue.
Research and development expenses were as follows (in thousands):
1999 1998
---- ----
Integra NeuroSciences $2,028 $ 924
Integra LifeSciences 6,642 7,314
------ ------
Total $8,670 $8,238
Research and development expense in the Integra NeuroSciences segment increased
$1.1 million to $2.0 million in 1999 primarily because of the NeuroCare
acquisition. Integra NeuroSciences research and development activities in 1998
consisted of programs involving the DuraGen(TM) Dural Graft Matrix, which was
launched in the third quarter of 1999, and the peripheral nerve guide, a
bioabsorbable collagen conduit designed to support guided regeneration of
severed nerve tissues. Significant ongoing research and development programs in
the Company's Integra NeuroSciences segment include the development of the next
generation of intra-cranial pressure monitors and shunting products and the
continuation of clinical trials involving the peripheral nerve guide.
Research and development activities within the Integra LifeSciences segment
decreased $0.7 million to $6.6 million in 1999 primarily because of the
elimination of several research programs in early 1999. Significant ongoing
research and development programs in the Company's Integra LifeSciences segment
include the Company's articular cartilage regeneration program with DePuy,
clinical and development activities related to INTEGRA(R) Artificial Skin,
additional applications for the Company's orthopedic technologies and
development work being conducted to support the Genetics Institute bone
regeneration program. The JJM Agreement will provide the Company with research
funding of $2.0 million per year for INTEGRA(R) Artificial Skin beginning in the
year 2000.
32
Approximately 22% of the Company's total research and development expenses in
1999 and 1998 were funded through external grants and development funding
programs.
During 1999, the Company began shifting the allocation of research and
development expenditures toward the NeuroSciences segment in line with the
repositioning of the Company. While the Company anticipates that expenditures
for research and development will remain at or above 1999 levels, the allocation
between segments and programs and the timing of expenditures will vary depending
on various factors, including the timing and outcome of pre-clinical and
clinical results, changing competitive conditions, continued program funding
levels, potential funding opportunities and determinations with respect to the
commercial potential of the Company's technologies.
Selling and marketing expenses were as follows (in thousands):
1999 1998
---- ----
Integra NeuroSciences $6,233 $ 627
Integra LifeSciences 3,248 5,326
------ ------
Total $9,481 $5,953
Integra NeuroSciences selling and marketing expense increased $5.6 million to
$6.2 million in 1999 primarily because of the NeuroCare acquisition. Additional
increases resulted from expenses related to the domestic and international
launch of the DuraGen(TM) Dural Graft Matrix in the third quarter of 1999. The
decrease of $2.1 million in Integra LifeSciences selling and marketing expenses
to $3.3 million is primarily the result of the transition of INTEGRA(R)
Artificial Skin selling and marketing activities to JJM, offset by a slight
increase in sales and marketing costs related to acquired product lines.
General and administrative expenses were as follows (in thousands):
1999 1998
---- ----
Integra NeuroSciences $ 4,499 $ 417
Integra LifeSciences 2,316 1,989
Corporate 5,867 6,951
------- -------
Total $12,682 $ 9,357
Integra NeuroSciences general and administrative expense increased $4.1 million
to $4.5 million in 1999 primarily because of the NeuroCare acquisition. Included
in this amount is $1.0 million of severance costs associated with the closure of
NeuroCare's corporate headquarters in July 1999. General and administrative
expense in the Integra LifeSciences segment increased $0.3 million to $2.3
million in 1999 primarily due to additional headcount. The decrease of $1.1
million in corporate general and administrative expenses to $5.9 million in 1999
resulted primarily from decreased legal fees and costs associated with
maintenance of the Company's intellectual property and the effects of a $0.2
million asset impairment charge recorded in 1998, offset by increases related to
additional headcount.
Amortization and other depreciation (excluding $1.2 million and $0.8 million of
depreciation included in cost of sales in 1999 and 1998, respectively) were as
follows (in thousands):
1999 1998
---- ----
Integra NeuroSciences $1,176 $ 42
Integra LifeSciences 345 288
Corporate 297 337
------ ------
Total $1,818 $ 667
33
Amortization and other depreciation in the Integra NeuroSciences segment
increased to $1.2 million in 1999 as a result of the NeuroCare acquisition.
Included in the 1999 amount is $0.8 million of amortization of goodwill and
other intangibles and $0.4 million of depreciation. Amortization and other
depreciation in the Integra LifeSciences segment consisted almost entirely of
depreciation.
Interest income decreased $0.3 million to $1.0 million in 1999 because of lower
average cash and investment balances during the year. Interest expense of $0.7
million in 1999 relates to a term loan and credit facility assumed in the
NeuroCare acquisition.
The $4.2 million gain on disposition of product line was recorded in connection
with the sale of a product line in January 1999.
Other income decreased $0.5 million to $0.1 million in 1999. This decrease was
the result of a $0.6 million favorable litigation settlement recorded in 1998.
The income tax benefit of $1.8 million in 1999 consists of a $1.8 million
non-cash benefit resulting 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 and a $0.6 million tax
benefit associated with the sale of certain state net operating losses in the
fourth quarter of 1999, both of which were offset by $0.6 million of current
income tax provisions. No additional income tax benefit is anticipated in
connection with the deferred tax liability recorded in the NeuroCare
acquisition.
1998 Compared to 1997
The Company's net loss decreased from $17.0 million in 1997 to $12.3 million in
1998. The 1997 loss included two non-cash charges totaling $6.9 million, which
were included in general and administrative expense.
Total revenues increased $2.8 million from $14.7 million in 1997 to $17.5
million in 1998, due largely to increases in other revenues. Product sales, all
of which were within the Integra LifeSciences segment, increased $0.1 million
from $14.0 million in 1997 to $14.1 million in 1998 and included $0.7 million in
sales of product lines acquired in the fourth quarter of 1998. Offsetting these
increases in sales was the elimination of $0.6 million of sales of discontinued
product lines manufactured at the Company's Westchester, Pennsylvania facility,
which was closed in January 1998. Consolidated export sales increased $0.3
million to $2.3 million in 1998, primarily as a result of increased
international distribution efforts for INTEGRA(R) Artificial Skin. INTEGRA(R)
Artificial Skin received CE Mark certification in March 1998, which included a
broader indication of use than currently granted in the United States. Gross
margin on Integra LifeSciences product sales decreased $0.3 million from $7.0
million in 1997 (50% of product sales) to $6.7 million in 1998 (47% of product
sales). In 1998, gross margin on product sales included $0.3 million of fair
value purchase accounting adjustments related to acquired product lines.
Excluding these purchase accounting adjustments, gross margin on Integra
LifeSciences product sales would have been 49% of product sales in 1998.
Total other revenue increased $2.6 million in 1998 to $3.4 million. Other
revenue in the Integra NeuroSciences segment increased $0.9 million from $0.1
million in 1997 to $1.0 million in 1998. In 1998, other revenue consisted of
$1.0 million of revenue as partial reimbursement of research and development
costs previously expended by the Company. Other revenue in the Integra
LifeSciences segment increased from $0.7 million in 1997 to $2.4 million in
1998. In 1998, other revenue consisted of $1.0 million of development funding
received from DePuy in connection with the Company's articular cartilage
regeneration development program, $0.8 million of grant revenue, $0.3 million of
royalty income and $0.3 million of license revenue. In 1997, other revenue in
the Integra LifeSciences segment consisted of grant revenue of $0.4 million and
$0.3 million of royalty income.
34
Research and development expenses were as follows (in thousands):
1998 1997
---- ----
Integra NeuroSciences $ 924 $ 334
Integra LifeSciences 7,314 5,888
------ ------
Total $8,238 $6,222
Research and development expense in the Integra NeuroSciences segment increased
$0.6 million to $0.9 million in 1998. Integra NeuroSciences research and
development activities in 1998 and 1997 consisted of programs involving the
DuraGen(TM) Dural Graft Matrix and the peripheral nerve guide.
Research and development activities within the Integra LifeSciences segment
increased $1.4 million to $7.3 million in 1998. This increase was primarily
related to research funding for the Company's articular cartilage regeneration,
with additional increases in the Company's INTEGRA(R) Artificial Skin and
orthopedic programs.
Approximately 22% and 8% of the Company's total research and development
expenses in 1998 and 1997, respectively, were funded through external grants and
development funding programs.
Selling and marketing expenses were as follows (in thousands):
1998 1997
---- ----
Integra NeuroSciences $ 627 $ --
Integra LifeSciences 5,326 5,458
------ ------
Total $5,953 $5,458
Integra NeuroSciences selling and marketing expense increased to $0.6 million in
1998 primarily because of pre-launch activities for the DuraGen(TM) Dural Graft
Matrix.
General and administrative expenses were as follows (in thousands):
1998 1997
---- ----
Integra NeuroSciences $ 417 $ 102
Integra LifeSciences 1,989 1,005
Corporate 6,951 13,323
------- -------
Total $ 9,357 $14,430
Integra NeuroSciences general and administrative expense increased $0.3 million
to $0.4 million in 1998. General and administrative expense in the Integra
LifeSciences segment increased $1.0 million to $2.0 million in 1998 primarily
due to acquisition related activities in the Integra LifeSciences segment and
additional headcount. The decrease of $6.4 million in corporate general and
administrative expenses to $7.0 million in 1998 resulted primarily from the
following two non-cash charges recorded in 1997: a $1.0 million asset impairment
charge associated with certain leasehold improvements due to the closure of the
West Chester facility, and a $5.9 million charge related to a fully restated
equity-based signing bonus for the Company's President and Chief Executive
Officer. Offsetting these decreases was a $0.2 million asset impairment charge
recorded in 1998 and increased costs associated with additional headcount and
continued litigation and intellectual property maintenance expenditures incurred
in 1998. The Company settled three litigation matters during 1998, but continued
to incur significant litigation costs associated with the patent infringement
lawsuit against Merck KGaA.
35
Amortization and other depreciation (excluding $0.8 million and $1.4 million of
depreciation included in cost of sales in 1998 and 1997, respectively) were as
follows (in thousands):
1998 1997
---- ----
Integra NeuroSciences $ 42 $ 14
Integra LifeSciences 288 221
Corporate 337 285
---- ----
Total $667 $520
Amortization and other depreciation in 1998 and 1997 consisted almost entirely
of depreciation.
Interest income decreased $0.5 million to $1.3 million in 1998 because of lower
average cash and investment balances during the year and lower interest rates.
Other income increased $0.4 million to $0.6 million in 1998 because of a $0.6
million favorable litigation settlement recorded in 1998.
Liquidity and Capital Resources
The Company has incurred losses from operations since its inception and will
continue to incur such losses unless and until product sales and research and
collaborative arrangements generate sufficient revenue to fund continuing
operations. As of December 31, 1999, the Company had an accumulated deficit of
$94.3 million.
The Company has funded its operations to date 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. At December
31, 1999, the Company had cash, cash equivalents and short-term investments of
approximately $23.6 million and $9.9 million in short and long-term bank loans.
The Company's principal uses of funds during 1999 were $14.9 million in the
acquisition of NeuroCare, $2.3 million in purchases of property and equipment
and $1.1 million in repayments of term loans. Net cash flows provided by
operations in 1999 were $2.5 million, which reflected $9.9 million received
under the JJM Agreement, of which $3.4 million and $5.0 million was recorded in
customer advances and deposits and deferred revenue, respectively, at December
31, 1999. During 1999, the Company also received $6.4 million in connection with
the sale of a product line, raised $10.0 million from the sale of Series B
Preferred Stock and warrants to affiliates of Soros Private Equity Partners LLC
and assumed $11.0 million of term debt from Fleet Capital Corporation ("Fleet")
in connection with the NeuroCare acquisition. As part of the assumption of the
term loan, the Company obtained a $4.0 million revolving credit facility from
Fleet, of which a de minimis amount was drawn down at December 31, 1999.
The term loan and the revolving credit facility from Fleet, as amended
(collectively, the "Fleet Credit Facility"), are collateralized by all the
assets and ownership interests of various subsidiaries of the Company including
Integra NeuroCare LLC, and NeuroCare Holding Corporation (the parent company of
Integra NeuroCare LLC) has guaranteed Integra NeuroCare LLC's obligations.
Integra NeuroCare LLC is subject to various financial and non-financial
covenants under the Fleet Credit Facility, including significant restrictions on
its ability to transfer funds to the Company or the Company's other
subsidiaries. The financial covenants specify minimum levels of interest and
fixed charge coverage and net worth, and also specify maximum levels of capital
expenditures and total indebtedness to operating cash flow, among others.
Effective September 29, 1999 and December 31, 1999, certain of these financial
covenants were amended. These amendments did not change any other terms of the
Fleet Credit Facility. While the Company anticipates that Integra NeuroCare LLC
will be able to satisfy the requirements of these amended financial covenants,
there can be no assurance that Integra NeuroCare LLC will generate sufficient
earnings before interest, taxes, depreciation and amortization to meet the
requirements of such covenants. The term loan is subject to mandatory prepayment
amounts if certain levels of cash flow are achieved. The majority of the
business acquired in the NeuroCare acquisition is reported in the Integra
NeuroSciences segment.
36
In the short-term, the Company believes that it has sufficient resources to fund
its operations. However, in the longer-term, there can be no assurance that the
Company will be able to generate sufficient revenues to obtain positive
operating cash flows or profitability.
Other Matters
Net Operating Losses
At December 31, 1999, the Company had net operating loss carryforwards ("NOL's")
of approximately $50 million and $28 million for federal and state income tax
purposes, respectively, to offset future taxable income, if any. The federal and
state NOL's expire through 2018 and 2005, respectively.
At December 31, 1999, several of the Company's subsidiaries had unused NOL and
tax credit carryforwards arising from periods prior to the Company's ownership.
Excluding the Company's Telios Pharmaceuticals, Inc. subsidiary ("Telios"),
approximately $9 million of these NOL's for federal income tax purposes expire
between 2001 and 2005. The Company's Telios subsidiary has approximately $84
million of net operating losses, which expire between 2002 and 2010. The amount
of Telios' net operating loss that is available and the Company's ability to
utilize such loss is dependent on the determined value of Telios at the date of
acquisition. The Company has a valuation allowance of $42 million against all
deferred tax assets, including the net operating losses, due to the uncertainty
of realization. The timing and manner in which these acquired net operating
losses may be utilized in any year by the Company are severely limited by the
Internal Revenue Code of 1986, as amended, Section 382 and other provisions of
the Internal Revenue Code and its applicable regulations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Investments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivatives and hedging activities and supercedes
several existing standards. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not expect that the adoption of SFAS No. 133 will have a
material impact on the consolidated financial statements.
In December 1999 (as amended in March 2000) the staff of the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin 101, Revenue
Recognition (the "SAB"). To the extent the guidance in the SAB differs from
generally accepted accounting principles previously utilized by an SEC
registrant, the SAB indicates that the SEC staff will not object to reporting
the cumulative effect of a change in accounting principle.
Prior to promulgation of the SAB, the Company had reported some non-refundable,
up-front and milestone fees received pursuant to distribution agreements in the
period earned, which was deemed to be the date when all related material
commitments had been satisfied and no future consideration was required. While
the Company believes the related supply arrangements entered into with its
distributors provides for arms-length pricing of product sales, the SAB requires
that the distribution agreement fees now be linked to the supply arrangements
and reported as additional revenue from product sales made pursuant to those
arrangements. As a result, up-front distribution agreement fees are initially
deferred and subsequently amortized on a straight-line basis over the
contractual period of the supply arrangements.
The Company is currently assessing the full impact that the SAB will have on its
financial statements. Once the final assessment is complete, the total financial
impact of the SAB will be recorded as a cumulative effect of a change in
accounting principle in the first quarter of 2000. The Company currently
anticipates that the cumulative effect as of January 1, 2000 of the change in
accounting principle (if measured at January 1, 2000) would be approximately
$1.3 million. Such amount had previously been reported as other revenue and
represents the amount of deferred revenue that would have remained unamortized
as of January 1, 2000 with respect to payments previously received and for which
the Company expects to record future other revenue under the related supply
agreements. The unamortized deferred revenue is determined as if the above noted
accounting principle required by the SAB had always been in place.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks arising from an increase in interest
rates payable on variable rate term loan. For example, based on the remaining
term loan outstanding at December 31, 1999, an annual interest rate increase of
100 basis points would increase interest expense by approximately $99,000.
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 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
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 16, 2000, 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. 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 Balance Sheets as of December 31, 1999 and 1998......................... F-2
Consolidated Statements of Operations and Statements of Comprehensive Loss
for the years ended December 31, 1999, 1998 and 1997................................ F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.............................................. F-5
Notes to Consolidated Financial Statements........................................... F-6
Report of Independent Accountants on Financial Statement Schedules................... F-25
Financial Statement Schedules........................................................ F-26
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.
39
2. Exhibits.
Number Description Location
2.1 Purchase Agreement dated January 5, 1999 (11) (Exh. 2)
among Integra LifeSciences Corporation,
Rystan Company, Inc. and Healthpoint, Ltd.**
2.2 Asset Purchase Agreement dated March 29, (12) (Exh. 2)
1999 among Heyer-Shulte NeuroCare, L.P.,
Neuro Navigational, L.L.C., Integra NeuroCare
LLC and Redmond NeuroCare LLC.**
3.1(a) Amended and Restated Certificate of (2) (Exh. 3.1)
Incorporation of the Company
3.1(b) Certificate of Amendment to Amended and Restated (3)(Exh.3.1(b)
Certificate of Incorporation dated May 23, 1998
3.2 Amended and Restated By-laws of the Company (8) (Exh. 3.3)
4.1 Certificate of Designation, Preferences and Rights (6) (Exh. 3)
of Series A Convertible Preferred Stock as filed with the
Delaware Secretary of State on April 14, 1998.
4.2 Certificate of Designation, Preferences and Rights of Series B (3) (Exh. 4.2)
Convertible Preferred Stock as filed with the Delaware Secretary of
State on March 12, 1999
4.3 Warrant to Purchase 60,000 shares of Common (12)(Exh. 4.2)
Stock of Integra LifeSciences Corporation issued
to SFM Domestic Investments LLC.
4.4 Warrant to Purchase 180,000 shares of Common (12)(Exh. 4.3)
Stock of Integra LifeSciences Corporation issued
to Quantum Industrial Partners LDC.
10.1 License Agreement between MIT and the Company dated as of December 29, (2) (Exh. 10.1)
1993
10.2 Exclusive License Agreement between the Company and Rutgers University (2) (Exh. 10.5)
dated as of December 31, 1994
10.3 License Agreement for Adhesion Peptides Technology between La Jolla (2) (Exh. 10.6)
Cancer Research Foundation and Telios dated as of June 24, 1987
10.4 Supply Agreement between Genetics Institute, Inc. and the Company dated (2) (Exh. 10.12)
as of April 1, 1994
10.5(a) Stockholder Rights Agreement between the Company and Union Carbide (2) (Exh. 10.27(a))
dated as of April 30, 1993 ("Carbide Agreement")
10.5(b) Amendment dated November 30, 1993 to Carbide Agreement (2) (Exh. 10.27(b))
10.6(a) Real Estate Lease & Usage Agreement between BHP Diagnostics, Inc., (2) (Exh. 10.28)
Medicus Technologies, Inc., Integra, Ltd. and the Company dated as of
May 1, 1994
10.6(b) Shared Facilities Usage Agreement Between BHP Diagnostics, Inc., (2) (Exh. 10.29)
Medicus Technologies, Inc., Integra, Ltd. and the Company dated as
of May 1, 1994
10.6(c) Agreement dated June 30, 1998 by and among BHP Diagnostics, Medicus (3) (Exh. 10.18(c))
Corporation, Integra Lifesciences I, Ltd. and Integra Lifesciences
Corporation
10.7 Lease between Plainsboro Associates and American Biomaterials (2) (Exh. 10.30)
Corporation dated as of April 16, 1985, as assigned to Colla-Tec, Inc.
on October 24, 1989 and as amended through November 1, 1992
10.8 Form of Indemnification Agreement between the Company and [ ] (4) (Exh.10.37)
dated August 16, 1995, including a schedule identifying the individuals
that are a party to such Indemnification Agreements
10.9 1992 Stock Option Plan* (2) (Exh. 10.31)
10.10 1993 Incentive Stock Option and Non-Qualified Stock Option Plan* (2) (Exh. 10.32)
10.11(a) 1996 Incentive Stock Option and Non-Qualified Stock Option Plan* (5) (Exh. 4.3)
10.11(b) Amendment to 1996 Incentive Stock Option and Non-Qualified Stock Option (8) (Exh. 10.4)
Plan*
40
10.12 1998 Stock Option Plan* (7) (Exh. 10.2)
10.13 1999 Stock Option Plan* (1)
10.14 Employee Stock Purchase Plan* (7) (Exh. 10.1)
10.15 Deferred Compensation Plan* (1)
10.16 Registration Rights Agreement dated as of April 30, 1998 by and between (6) (Exh. 10.2)
Integra Life Sciences Corporation and Century Medical, Inc.
10.17 Registration Rights Agreement dated September 28, 1998 between the (9) (Exh. 10.1)
Company and GWC Health, Inc.
10.18 Series B Convertible Preferred Stock and Warrant (12)(Exh. 10.1)
Purchase Agreement dated March 29, 1999 among Integra
LifeSciences Corporation, Quantum Industrial Partners
LDC and SFM Domestic Investments LLC
10.19 Registration Rights Agreement dated March 29, 1999 (12) (Exh. 10.2)
among Integra LifeSciences Corporation, Quantum
Industrial Partners LDC and SFM Domestic Investments LLC
10.20 Employment Agreement dated December 27, 1997 between the Company and (8) (Exh. 10.1)
Stuart M. Essig*
10.21 Stock Option Grant and Agreement dated December 27, 1997 between the (8) (Exh. 10.2)
Company and Stuart M. Essig*
10.22 Restricted Units Agreement dated December 27, 1997 between the Company (8) (Exh. 10.3)
and Stuart M. Essig*
10.23 Indemnity letter agreement dated December 27, 1997 from the Company to (8) (Exh. 10.5)
Stuart M. Essig*
10.24 Employment Agreement between John B. Henneman, III and the Company (10) (Exh. 10)
dated September 11, 1998*
10.25 Employment Agreement between George W. McKinney, III and the Company (3) (Exh. 10.36)
dated December 31, 1998*
10.26 Employment Agreement between Judith O'Grady and the Company dated (3) (Exh. 10.37)
December 31, 1998*
10.27 Employment Agreement between David B. Holtz and the Company dated (3) (Exh. 10.38)
December 31, 1998*
10.28 Manufacturing and Distribution Agreement dated (11) (Exh. 10)
January 5, 1999 among Integra LifeSciences
Corporation, Rystan Company, Inc., Healthpoint,
Ltd. and DPT Laboratories, Inc.
10.29(a) Amended and Restated Loan and Security Agreement (12) (Exh. 10.3)
dated March 29, 1999 among the Lenders named therein,
Fleet Capital Corporation, Integra NeuroCare LLC and
other Borrowers named therein.
10.29(b) Amendment No. 1, dated September 29, 1999, to (14) (Exh. 10.1)
the Amended and Restated Loan and Security
Agreement dated March 29, 1999 among the
Lenders named therein, Fleet Capital Corporation,
Integra NeuroCare LLC and other Borrowers
named therein.
10.30 Substituted and Amended Term Note dated March 29, (12) (Exh. 10.4)
1999 by Integra NeuroCare LLC, Redmond
NeuroCare LLC, Heyer-Schulte NeuroCare, Inc. and
Camino NeuroCare, Inc. to Fleet Capital Corporation.
10.31 Supply, Distribution and Collaboration Agreement (13) (Exh. 10.1)
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.
10.32 Lease Contract dated June 30, 1994 between (1)
41
the Puerto Rico Industrial Development Company and
Heyer-Schulte NeuroCare, Inc.
10.33 Industrial Real Estate Triple Net Sublease (1)
dated April 1, 1993 between GAP Portfolio Partners
and Camino Laboratories.
10.34 Industrial Real Estate Triple Net Sublease (1)
dated January 15, 1997 between Sorrento Montana, L.P. and
Camino NeuroCare, Inc.
21 Subsidiaries of the Company (1)
23 Consent of PricewaterhouseCoopers LLP (1)
27 Financial Data Schedule (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 Report
on Form 10-Q for the quarter ended March 31, 1998.
(7) 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.
(8) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on February 3, 1998.
(9) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on October 13, 1998.
(10) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended September 30, 1998.
(11) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on January 20, 1999.
(12) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on April 13, 1999.
(13) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended June 30, 1999.
(14) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended September 30, 1999.
(b) Reports on Form 8-K
None.
42
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 30th day of March,
2000.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
By: /s/ Stuart M. Essig
-----------------------------------------
Stuart M. Essig, Ph.D.
President
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 30th day of March, 2000.
Signature Title
--------- -----
/s/ Stuart M. Essig President, Chief Executive Officer
- --------------------------------- and Director
Stuart M. Essig, Ph.D. (Principal Executive Officer)
/s/ George W. McKinney, III Executive Vice President, Chief
- --------------------------------- Operating Officer and Director
George W. McKinney, III, Ph.D.
/s/ David B. Holtz 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/ Neal Moszkowski Director
- ---------------------------------
Neal Moszkowski
/s/ James M. Sullivan Director
- ---------------------------------
James M. Sullivan
43
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, comprehensive loss, 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, 1999 and 1998 and the results of operations, comprehensive loss and
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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, 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 the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 1, 2000, except for Note 20,
as to which the date is March 29, 2000
F-1
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In thousands
December 31,
----------------------------
1999 1998
---- ----
ASSETS
------
Current Assets:
Cash and cash equivalents.......................................... $ 19,301 $ 5,277
Short-term investments............................................. 4,311 14,910
Accounts receivable, net of allowances of $944 and $354............ 8,365 3,106
Inventories........................................................ 10,111 2,713
Prepaid expenses and other current assets.......................... 718 921
--------- ---------
Total current assets........................................ 42,806 26,927
Property and equipment, net......................................... 9,699 6,291
Goodwill and other intangible assets, net........................... 13,219 1,446
Other assets........................................................ 529 43
--------- ---------
Total assets......................................................... $ 66,253 $ 34,707
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Short-term loans and current maturities of long-term loans......... $ 2,254 $ --
Accounts payable, trade............................................ 994 573
Accrued expenses................................................... 5,540 2,207
Income taxes payable............................................... 643 --
Customer advances and deposits..................................... 3,901 249
Deferred revenue................................................... 1,460 --
--------- ---------
Total current liabilities................................... 14,792 3,029
Long-term loan...................................................... 7,625 --
Deferred revenue.................................................... 5,049 --
Other liabilities................................................... 798 312
--------- ---------
Total liabilities................................................ 28,264 3,341
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value (15,000 authorized shares; 500 Series A
Convertible shares issued and outstanding at December 31, 1999 and 1998,
$4,000 liquidation preference; 100 Series B Convertible shares issued and
outstanding at December 31, 1999, $10,000 with a 10% compounded annual
cumulative dividend liquidation preference)...................... 6 5
Common stock, $.01 par value (60,000 authorized shares; 16,131 and
15,783 issued and outstanding at December 31, 1999 and 1998,
respectively).................................................... 161 158
Additional paid-in capital......................................... 132,340 119,999
Treasury stock, at cost (1 and 52 shares at December 31, 1999 and
1998, respectively).............................................. (7) (286)
Unearned compensation related to stock options..................... (108) (148)
Notes receivable - related party................................... (35) (35)
Accumulated other comprehensive loss............................... (64) (40)
Accumulated deficit................................................ (94,304) (88,287)
--------- ---------
Total stockholders' equity...................................... 37,989 31,366
--------- ---------
Total liabilities and stockholders' equity.......................... $ 66,253 $ 34,707
========= =========
The accompanying notes are an integral part of these consolidated financial
statements
F-2
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts
Years Ended December 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
REVENUES
Product sales.................................... $ 39,661 $ 14,076 $ 14,001
Other revenue.................................... 2,829 3,379 745
--------- --------- ---------
Total revenue................................ 42,490 17,455 14,746
COSTS AND EXPENSES
Cost of product sales, including depreciation
of $1,286, $771 and $1,383..................... 22,219 7,420 7,027
Research and development......................... 8,670 8,238 6,222
Selling and marketing............................ 9,481 5,953 5,458
General and administrative....................... 12,682 9,357 14,430
Amortization and other depreciation.............. 1,818 667 520
--------- --------- ---------
Total costs and expenses..................... 54,870 31,635 33,657
Operating loss................................... (12,380) (14,180) (18,911)
Interest income.................................. 1,006 1,250 1,771
Interest expense................................. (712) -- --
Gain on disposition of product line.............. 4,161 -- --
Other income..................................... 141 588 176
--------- --------- ---------
Net loss before income taxes..................... (7,784) (12,342) (16,964)
Income tax benefit............................... 1,818 -- --
--------- --------- ---------
Net loss......................................... $ (5,966) $ (12,342) $ (16,964)
========= ========= =========
Basic and diluted net loss per share............. $ (0.40) $ (0.77) $ (1.15)
========= ========= =========
Weighted average common shares outstanding....... 16,802 16,139 14,810
========= ========= =========
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
In thousands
Years Ended December 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
Net loss......................................... $ (5,966) $ (12,342) $ (16,964)
OTHER COMPREHENSIVE LOSS
Unrealized loss on investments................... (24) (14) (22)
--------- --------- ---------
Comprehensive loss............................... $ (5,990) $ (12,356) $ (16,986)
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements
F-3
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands Years Ended December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES:
Net loss............................................................ $ (5,966) $ (12,342) $ (16,964)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization...................................... 3,104 1,438 1,903
Gain on sale of product line and other assets...................... (3,998) (64) (162)
Provision for impairment of assets................................. -- 145 1,021
Deferred tax benefit............................................... (1,807) -- --
Amortization of discount and interest on investments............... (291) (481) (126)
Amortization of deferred revenue................................... (610) -- --
Compensation associated with the issuance of stock options......... 370 319 123
Restricted units issued............................................ -- -- 5,875
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable.............................................. (510) (287) 122
Inventories...................................................... 2,829 527 285
Prepaid expenses and other current assets........................ 217 65 (62)
Non-current assets............................................... (80) 64 (81)
Accounts payable, accrued expenses and other current liabilities. (677) 802 187
Customer advances and deposits................................... 3,652 -- --
Deferred revenue................................................. 6,269 -- --
--------- --------- ---------
Net cash provided by (used in) operating activities................ 2,502 (9,814) (7,879)
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of product line and other assets................. 6,354 48 183
Proceeds from the sales/maturities of investments................... 26,000 33,020 35,500
Purchases of available for sale investments......................... (14,737) (23,274) (37,071)
Purchase of restricted equity securities............................ -- (500) --
Purchases of property and equipment................................. (2,309) (1,166) (770)
Cash acquired in a business acquisition............................. -- 1,118 --
Cash used in business acquisition, net of cash acquired............. (14,944) -- --
--------- --------- ---------
Net cash provided by (used in) investing activities................ 364 9,246 (2,158)
--------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from revolving credit facility......................... 4 -- --
Repayments of term loan............................................. (1,125) -- --
Proceeds from sales of preferred stock.............................. 9,942 4,000 --
Proceeds from exercise of common stock purchase warrants............ 1,950 -- --
Proceeds from stock issued under employee benefit plans............. 467 95 358
Purchases of treasury stock......................................... -- (286) --
Preferred dividends paid............................................ (80) (47) --
--------- --------- ---------
Net cash provided by financing activities.......................... 11,158 3,762 358
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................... 14,024 3,194 (9,679)
Cash and cash equivalents at beginning of period........................ 5,277 2,083 11,762
--------- --------- ---------
Cash and cash equivalents at end of period.............................. $ 19,301 $ 5,277 $ 2,083
========= ========= =========
Cash paid during the year for interest.................................. $ 654 $ -- $ --
Cash paid during the year for income taxes.............................. 124 -- --
Supplemental disclosure of non-cash investing and financing activities:
Assumption of term loan in connection with the acquisition of
the NeuroCare group of companies.................................. $ 11,000 $ -- $ --
Common stock and warrants issued in business acquisition............ -- 3,886 --
Common stock issued in settlement of obligations.................... 15 -- --
Stock purchase warrants issued in settlement of obligations......... -- 56 --
Issuance of Restricted Units........................................ -- -- 5,875
The accompanying notes are an integral part of these consolidated financial
statements
F-4
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
In thousands
Notes
Common Stock Preferred Stock Additional Receivable
------------ --------------- Treasury Paid-In Related
Shares Amount Shares Amount Stock Capital Parties
------ ------ ------ ------ ----- ------- -------
Balance, December 31, 1996............ 14,276 $ 143 -- $ -- $ -- $ 105,589 $ (35)
====== ====== == ===== ===== ========= ======
Net loss.............................. -- -- -- -- -- -- --
Other comprehensive loss.............. -- -- -- -- -- -- --
Issuance of common stock under
employee benefit plans ............. 676 7 -- -- -- 352 --
Unearned compensation related
to non-employee stock options ...... -- -- -- -- -- 61 --
Amortization of unearned compensation. -- -- -- -- -- -- --
Issuance of restricted units.......... -- -- -- -- -- 5,875 --
Balance, December 31, 1997............ 14,952 150 -- -- -- 111,877 (35)
Net loss.............................. -- -- -- -- -- -- --
Other comprehensive loss.............. -- -- -- -- -- -- --
Issuance of Series A Preferred Stock.. -- -- 500 5 -- 3,995 --
Issuance of common stock under
employee benefit plans ............. 31 -- -- -- -- 95 --
Common stock and warrants issued in
connection with a business
acquisition ........................ 800 8 -- -- -- 3,878 --
Unearned compensation related to
non-employee stock options ......... -- -- -- -- -- 145 --
Amortization of unearned compensation. -- -- -- -- -- -- --
Warrant issued for services rendered.. -- -- -- -- -- 56 --
Dividends paid on Series A
Preferred Stock ($0.09 per share) .. -- -- -- -- -- (47) --
Purchases of treasury stock........... -- -- -- -- (286) -- --
Balance, December 31, 1998............ 15,783 158 500 5 (286) 119,999 (35)
====== === === = ==== ======= ===
Net loss.............................. -- -- -- -- -- -- --
Other comprehensive loss.............. -- -- -- -- -- -- --
Issuance of Series B Preferred Stock.. -- -- 100 1 -- 9,941 --
Issuance of common stock under
employee benefit plans ............. 48 -- -- -- 264 203 --
Warrants exercised for common stock... 300 3 -- -- -- 1,947 --
Issuance of stock in settlement of
obligation ......................... -- -- -- -- 15 -- --
Unearned compensation related
to non-employee stock options ...... -- -- -- -- -- 241 --
Amortization of unearned compensation. -- -- -- -- -- -- --
Compensation recorded in connection
with stock options granted to
employees .......................... -- -- -- -- -- 89 --
Dividends paid on Series A
Preferred Stock ($0.16 per share) .. -- -- -- -- -- (80) --
Balance, December 31, 1999............ 16,131 $ 161 600 $ 6 $ (7) $132,340 $ (35)
====== ====== === ====== ====== ======== ======
In thousands Unearned
Compensation
Related to Accumulated
Stock Comprehensive Accumulated Total
Options Loss Deficit Equity
------- ---- ------- ------
Balance, December 31, 1996............ $ (328) $ (4) $ (58,981) $46,384
======= ===== ========= =======
Net loss.............................. -- -- (16,964) (16,964)
Other comprehensive loss.............. -- (22) -- (22)
Issuance of common stock under
employee benefit plans ............. -- -- -- 359
Unearned compensation related
to non-employee stock options ...... (61) -- -- --
Amortization of unearned compensation. 123 -- -- 123
Issuance of restricted units.......... -- -- -- 5,875
Balance, December 31, 1997............ (266) (26) (75,945) 35,755
Net loss.............................. -- -- (12,342) (12,342)
Other comprehensive loss.............. -- (14) -- (14)
Issuance of Series A Preferred Stock.. -- -- -- 4,000
Issuance of common stock under
employee benefit plans ............. -- -- -- 95
Common stock and warrants issued in
connection with a business
acquisition ........................ -- -- -- 3,886
Unearned compensation related to
non-employee stock options ......... (145) -- -- --
Amortization of unearned compensation. 263 -- -- 263
Warrant issued for services rendered.. -- -- -- 56
Dividends paid on Series A
Preferred Stock ($0.09 per share) .. -- -- -- (47)
Purchases of treasury stock........... -- -- -- (286)
Balance, December 31, 1998............ (148) (40) (88,287) 31,366
==== === ======= ======
Net loss.............................. -- -- (5,966) (5,966)
Other comprehensive loss.............. -- (24) -- (24)
Issuance of Series B Preferred Stock.. -- -- -- 9,942
Issuance of common stock under
employee benefit plans ............. -- -- (51) 416
Warrants exercised for common stock... -- -- -- 1,950
Issuance of stock in settlement of
obligation ......................... -- -- -- 15
Unearned compensation related
to non-employee stock options ...... (241) -- -- --
Amortization of unearned compensation. 281 -- -- 281
Compensation recorded in connection
with stock options granted to
employees .......................... -- -- -- 89
Dividends paid on Series A
Preferred Stock ($0.16 per share) .. -- -- -- (80)
Balance, December 31, 1999............ $ (108) $ (64) $ (94,304) $37,989
======== ====== ========= =======
The accompanying notes are an integral part of these consolidated financial
statements
F-5
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Integra LifeSciences Holdings Corporation (the "Company") develops, manufactures
and markets medical devices, implants and biomaterials. The Company's operations
consist of (1) Integra NeuroSciences, which is a leading provider of implants,
instruments, and monitors used in neurosurgery, neurotrauma, and related
critical care and (2) Integra LifeSciences, which develops and manufactures a
variety of medical products and devices, including products based on our
proprietary tissue regeneration technology which are used to treat soft tissue
and orthopedic conditions. Integra NeuroSciences sells primarily through a
direct sales organization and Integra LifeSciences sells primarily through
strategic alliances and distributors.
There are certain risks and uncertainties inherent in the Company's business. To
date, the Company has experienced significant operating losses in funding the
research, development, manufacturing and marketing of its products and may
continue to incur operating losses. The Company's ability to achieve
profitability depends in part upon its ability, either independently or in
collaboration with others, to successfully manufacture and market its products
and services. The industry and market segments in which the Company operates are
highly competitive, and the Company may not be able to compete effectively with
other companies with greater financial resources. In general, the medical
technology industry is characterized by intense competition, which comes from
established pharmaceutical and medical technology companies and early stage
companies that have alternative technological solutions for the Company's
primary clinical targets, as well as universities, research institutions and
other non-profit entities. The Company's competitive position and profitability
will depend on its ability to achieve market acceptance for its products,
implement production and marketing plans, secure regulatory approval for
products under development, obtain patent protection and secure adequate capital
resources.
The Company believes that current cash balances and funds available from
existing revenue sources will be sufficient to finance the Company's anticipated
operations for at least the next twelve months. The Company may in the future
seek to issue equity securities or enter into other financing arrangements with
strategic partners to raise funds in excess of its anticipated liquidity and
capital requirements.
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 and have virtually no risk of loss in value
to be cash equivalents.
Investments
The Company's current investment policy is to invest available cash balances in
high quality debt securities with maturities not to exceed 18 months. Realized
gains and losses are determined on the specific identification cost basis. All
investments are classified as available for sale, with unrealized gains and
losses reported in other comprehensive loss.
F-6
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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.
Property and Equipment
Property and equipment is stated at cost. The Company provides for depreciation
using the straight-line method over the estimated useful lives of the assets,
which are estimated to be between 3 and 15 years. Leasehold improvements are
amortized using the straight-line method over the minimum lease term or the life
of the asset whichever is shorter. The cost of major additions and improvements
is capitalized. Maintenance and repair costs that do not improve or extend the
lives of the respective assets are charged to operations as incurred. When
depreciable assets are retired or sold, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in operations.
Goodwill and Other Intangible Assets
Goodwill other intangible assets were recorded in connection with the
acquisition of the NeuroCare Group of companies in March 1999 and the Rystan
Company, Inc. in September 1998. Goodwill and other intangibles are being
amortized using a straight-line basis over periods ranging from two to fifteen
years.
Long-Lived Assets
Long-lived assets held and used by the Company, including goodwill and other
intangibles, 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.
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.
Research and Development
Research and development costs are expensed in the period in which they are
incurred.
Revenue Recognition
Product sales are recognized when delivery has occurred or title has passed to
the customer, there is a fixed or determinable sales price, and collectibility
of that sales price is reasonably assured. Research grant revenue and contract
product development revenue are 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. Product licensing revenue
is recognized ratably over the contract period. Royalty revenue is recognized
over the period the royalty products are sold.
F-7
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents and short-term
investments, which are held at major financial institutions, 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.
Net Loss per Share
Amounts used in the calculation of basic and diluted net loss per share were as
follows (in thousands, except per share data):
1999 1998 1997
---- ---- ----
Net loss ................................... $ (5,966) $(12,342) $(16,964)
Preferred stock dividends
Series A Convertible Preferred Stock .... (80) (47) --
Series B Convertible Preferred Stock .... (751) -- --
-------- -------- --------
Net loss applicable to common stock ........ $ (6,797) $(12,389) $(16,964)
======== ======== ========
Weighted average common shares outstanding . 16,802 16,139 14,810
======== ======== ========
Basic and diluted net loss per share ....... $ (0.40) $ (0.77) $ (1.15)
======== ======== ========
Basic loss per share is computed by dividing net loss applicable to common stock
by the weighted average number of common shares outstanding for the period.
Diluted per share amounts reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock. Options and
warrants to purchase 4,401,000, 3,095,000 and 3,778,000 shares of common stock
and preferred stock convertible into 2,868,000, 500,000 and 0 shares of common
stock at December 31, 1999, 1998 and 1997, respectively were not included in the
computation of diluted loss per share because their effect would be
antidilutive. The Restricted Units issued by the Company (see Note 11) are
included in the weighted average calculation because no further consideration is
due related to the issuance of the underlying common shares.
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". For disclosures purposes, pro forma net loss and loss per
share are presented as if the fair value method had been applied.
F-8
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, including disclosures of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Investments
and Hedging Activities", ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivatives and hedging activities and supercedes
several existing standards. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not expect that the adoption of SFAS No. 133 will have a
material impact on the consolidated financial statements.
In December-1999 (as amended in March 2000) the staff of the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin 101, Revenue
Recognition (the "SAB"). To the extent the guidance in the SAB differs from
generally accepted accounting principles previously utilized by an SEC
registrant, the SAB indicates that the SEC staff will not object to reporting
the cumulative effect of a change in accounting principle.
Prior to promulgation of the SAB, the Company had reported some non-refundable
up-front and milestone fees received pursuant to distribution agreements in the
period earned, which was deemed to be the date when all related material
commitments had been satisfied and no future consideration was required. While
the Company believes the pricing under related supply arrangements entered into
with its distributors provides for arms-length pricing of product sales, the SAB
requires that the distribution agreement fees now be linked to the supply
arrangements and reported as additional revenue from product sales made pursuant
to those arrangements. As a result, up-front distribution agreement fees are
initially deferred and subsequently amortized on a straight-line basis over the
contractual period of the supply arrangements.
The Company is currently assessing the full impact that the SAB will have on its
financial statements. Once the final assessment is complete, the total financial
impact of the SAB will be recorded as a cumulative effect of a change in
accounting principle in the first quarter of 2000. The Company currently
anticipates that the cumulative effect as of January 1, 2000 of the change in
accounting principle (if measured at January 1, 2000) would be approximately
$1.3 million. Such amount had previously been reported as other revenue and
represents the amount of deferred revenue that would have remained unamortized
as of January 1, 2000 with respect to payments previously received and for which
the Company expects to record future other revenue under the related supply
agreements. The unamortized deferred revenue is determined as if the above noted
accounting principle required by the SAB had always been in place.
3. BUSINESS ACQUISITIONS AND DISPOSITIONS
On March 29, 1999 the Company acquired the business, including certain assets
and liabilities, of the NeuroCare group of companies ("NeuroCare"), a leading
provider of neurosurgical products. The $25.4 million acquisition price was
comprised of $14.4 million of cash and $11.0 million of assumed indebtedness
under a term loan from Fleet Capital Corporation ("Fleet"). The cash portion of
the purchase price was financed in part by affiliates of Soros Private Equity
Partners LLC, through the sale of $10.0 million of Series B Convertible
Preferred Stock and warrants. The convertible preferred shares are convertible
into 2,617,801 shares of the Company's common stock, have a liquidation
preference of $10.0 million with a 10% compounded cumulative annual return,
which is payable only upon the Company's conditional redemption of the preferred
shares or in the event of a liquidation or change in control, and are senior to
all other equity securities of the Company. The warrants issued are for the
right to acquire 240,000 shares of the Company's common stock at an exercise
price of $3.82 per share.
F-9
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS ACQUISITIONS AND DISPOSITIONS, continued
The acquisition has been accounted for under the purchase method of accounting
and the results of the acquisition are included in the consolidated financial
statements since the acquisition date. The purchase price has been preliminarily
allocated based on estimated fair values at the date of acquisition. This
preliminary allocation has resulted in acquired intangibles and goodwill of
approximately $13.7 million, which is being amortized on a straight-line basis
over periods ranging from 2 to 15 years. The following is a summary of the
preliminary allocation (in thousands):
Cash ........................................................ $ 285
Accounts receivable ......................................... 4,899
Inventory ................................................... 10,553
Property and equipment ...................................... 3,601
Other assets ................................................ 582
Intangibles and goodwill .................................... 13,701
Accrued expenses and other liabilities ...................... (8,218)
Term loan ................................................... (11,000)
--------
$ 14,403
========
We do not expect the preliminary allocation to change significantly.
On September 28, 1998, the Company acquired Rystan Company, Inc. ("Rystan") for
800,000 shares of common stock of the Company and two warrants each having the
right to purchase 150,000 shares of the Company's common stock. The total
purchase price was valued at $4.0 million, which exceeded the Company's
assessment of the fair value of net assets acquired by approximately $1.5
million. This excess of purchase price over the fair value of net assets
acquired was recorded as goodwill and is being amortized on a straight-line
basis over 15 years. The acquisition was accounted for using the purchase method
of accounting and the results of the acquisition are included in the
consolidated financial statements since the acquisition date. In January 1999,
the Company subsequently sold a Rystan product line, including the brand name
and related production equipment, to Healthpoint, Ltd. for $6.4 million in cash
and recognized a pre-tax gain of $4.2 million after adjusting for the net cost
of the assets sold and for expenses associated with the divestiture, including
the closing of the Rystan facility.
The following unaudited pro forma financial information assumes that these
acquisitions had occurred as of the beginning of each period (in thousands):
(Unaudited)
Year ended December 31,
1999 1998 1997
---- ---- ----
Total revenue ................................... $ 50,412 $ 53,161 $ 51,122
Net loss ....................................... $ (8,666) $ (9,964) $(15,531)
Basic and diluted loss per share ................ $ (0.58) $ (0.66) $ (1.06)
Excluded from the pro forma results for the year ended December 31, 1999 is the
$3.7 million gain, net of tax, ($0.22 per share) from the sale of a Rystan
product line. Included in the historical and pro forma amounts for the year
ended December 31, 1999 are inventory fair value purchase accounting adjustments
of $2.2 million, severance costs of $1.1 million and $1.8 million of deferred
tax benefits relating to the NeuroCare acquisition. The pro forma amounts for
the years ended December 31, 1998 and 1997 include $2.2 million of fair value
inventory purchase accounting adjustments and $1.8 million of deferred tax
benefits related to the NeuroCare acquisition and $0.3 million of fair value
purchase accounting inventory adjustments related to the Rystan acquisition,
respectively. These pro forma amounts are based upon certain assumptions and
estimates. The 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.
F-10
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. STRATEGIC ALLIANCE
On June 3, 1999, the Company and Johnson & Johnson Medical, Division of Ethicon,
Inc. ("JJM"), signed an agreement (the "JJM Agreement") providing JJM with
exclusive marketing and distribution rights to INTEGRA(R) Artificial Skin
worldwide, excluding Japan.Under the JJM Agreement, the Company will continue to
manufacture INTEGRA(R) Artificial Skin and will collaborate with JJM 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 JJM Agreement, the Company received a payment from JJM of $5.3
million for the exclusive use of the Company's trademarks and regulatory filings
related to INTEGRA(R) Artificial Skin and certain other rights. This amount has
been recorded as deferred revenue and is being amortized over the ten-year term
of the JJM Agreement. The unamortized balance of $5.0 million at December 31,
1999 is recorded in deferred revenue, of which $0.5 million is classified as
short-term. Additionally, the JJM Agreement requires JJM to make non-refundable
payments to the Company each year based upon minimum purchases of INTEGRA(R)
Artificial Skin. As a result, the Company received a $1.2 million prepayment
upon signing the JJM Agreement for minimum purchases in 1999 and a $3.4 million
payment in December 1999 for minimum purchases in 2000. The entire $1.2 million
initial payment was recorded as product sales in 1999, as JJM's sales to end
customers satisfied its 1999 minimum purchase commitment, and the $3.4 million
payment is recorded in current liabilities as customer advances and deposits at
December 31, 1999.
The JJM Agreement also provides for annual research funding of $2.0 million for
the years 2000 through 2004, after which such funding amounts will be determined
based upon net sales of INTEGRA(R) Artifical Skin. Additional funding will be
received upon the occurrence of certain clinical and regulatory events and for
funding expansion of the Company's INTEGRA(R) Artificial Skin production
capacity as certain sales targets are achieved.
5. INVESTMENTS
The Company's current investment balances are classified as available for sale
and all debt securities have maturities within one year. Investment balances as
of December 31, 1999 and 1998 were as follows:
In thousands Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1999:
U.S. Government agency securities $ 3,975 $ -- $ -- $ 3,975
Equity securities ............... 400 -- (64) 336
------- --------- ------- -------
Total ........................ $ 4,375 $ -- $ (64) $ 4,311
======= ========= ======= =======
1998:
U.S. Government agency securities $14,950 $ 4 $ (44) $14,910
======= ========= ======= =======
F-11
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
---------------------------------
1999 1998
---- ----
Finished goods............................................. $ 3,786 $ 1,433
Work-in-process............................................ 2,224 802
Raw materials.............................................. 4,101 478
--------- ---------
$ 10,111 $ 2,713
========= =========
7. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following (in thousands):
December 31,
-------------------------------
1999 1998
---- ----
Machinery and equipment.................................... $ 8,923 $ 4,952
Furniture and fixtures..................................... 559 319
Leasehold improvements..................................... 7,805 6,840
Construction in progress................................... 390 24
--------- ---------
17,677 12,135
Less: Accumulated depreciation and amortization............ (7,978) (5,844)
--------- ----------
$ 9,699 $ 6,291
========= =========
Depreciation and amortization expense associated with property and equipment for
the years ended December 31, 1999, 1998 and 1997 was $2,229,000, $1,413,000 and
$1,903,000, respectively.
8. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles, net, consists primarily of identifiable
intangible assets and residual goodwill related to the NeuroCare acquisition.
The following is a summary of goodwill and other intangible balances (in
thousands):
December 31,
-------------------------------
1999 1998
---- ----
Technology................................................. $ 3,730 --
Customer base.............................................. 1,810 --
Trademarks................................................. 1,570 --
Other identifiable intangible assets....................... 2,661 --
Goodwill................................................... 4,348 1,495
--------- ---------
14,119 1,495
Less: Accumulated amortization............................. (900) (49)
--------- ---------
$ 13,219 $ 1,446
========= =========
F-12
8. GOODWILL AND OTHER INTANGIBLES, continued
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assets sold in the disposition of the Rystan product line in January 1999
included approximately $1,031,000 of goodwill related to the product line.
Amortization expense associated with goodwill and other intangibles for the
years ended December 31, 1999, 1998 and 1997 was $875,000, $49,000 and $0,
respectively.
9. CURRENT LIABILITIES
Accrued expenses consist of the following (in thousands):
December 31,
-------------------------------
1999 1998
---- ----
Acquisition related costs................................... $ 658 $ --
Vacation.................................................... 533 260
Legal fees.................................................. 526 591
Contract research........................................... 378 401
Other....................................................... 3,445 955
--------- ---------
$ 5,540 $ 2,207
========= =========
10. DEBT
The NeuroCare acquisition was partially funded through an $11.0 million term
loan provided by Fleet. Fleet has also provided a $4.0 million revolving credit
facility to fund working capital requirements, of which $4,000 was drawn down as
of December 31, 1999. The term loan and revolving credit facility (collectively,
the "Fleet Credit Facility") generally bear interest at a variable rate that is
based upon the prime lending rate charged for commercial loans in the United
States. At December 31, 1999, the weighted average and year-end interest rate on
the Company's debt was 9.5%. An option is available to the Company to borrow
certain portions of the Fleet Credit Facility at variable rates based upon the
London Interbank Overnight Rate ("LIBOR"), subject to certain limitations and
restrictions.
The Fleet Credit Facility is collateralized by all the assets and ownership
interests of various subsidiaries of the company including Integra NeuroCare LLC
and NeuroCare Holding Corporation (the parent company of Integra NeuroCare LLC)
has guaranteed Integra NeuroCare LLC's obligations. Integra NeuroCare LLC is
subject to various financial and non-financial covenants under the Fleet Credit
Facility, including significant restrictions on its ability to transfer funds to
the Company or the Company's other subsidiaries. At December 31, 1999,
approximately $15.6 million of Integra NeuroCare LLC's net assets were
restricted under the provisions of the Fleet Credit Facility. The financial
covenants specify minimum levels of interest and fixed charge coverage and net
worth, and also specify maximum levels of capital expenditures and total
indebtedness to operating cash flow, among others. Effective September 29, 1999
and December 31, 1999, certain of these financial covenants were amended. These
amendments did not change any other terms of the Fleet Credit Facility. While
the Company anticipates that Integra NeuroCare LLC will be able to satisfy the
requirements of these amended financial covenants, there can be no assurance
that Integra NeuroCare LLC will generate sufficient earnings before interest,
taxes, depreciation and amortization to meet the requirements of such covenants.
The majority of the business acquired in the NeuroCare acquisition is reported
in the Integra NeuroSciences segment.
F-13
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. DEBT, continued
At December 31, 1999, $9,875,000 remained outstanding on the term loan, of which
$2,250,000 is classified as short-term. The term loan is repayable as follows:
$2,250,000 in 2000, $2,500,000 in 2001, $3,250,000 in 2002 and $1,875,000 in
2003. Notwithstanding these payments, the term loan is subject to mandatory
prepayment amounts if certain levels of cash flow are achieved.
11. STOCKHOLDERS' EQUITY
Preferred Stock Transactions
In connection with the NeuroCare acquisition, the Company sold $10.0 million of
Series B Preferred Stock to affiliates of Soros Private Equity Partners LLC (see
Note 3).
During the second quarter of 1998, the Company sold 500,000 shares of Series A
Preferred Stock ("Series A Preferred") for $4.0 million to Century Medical, Inc.
("CMI"). The Preferred Stock pays an annual dividend of $0.16 per share, payable
quarterly, and has a liquidation preference of $4.0 million. Each share of
Preferred Stock is convertible at any time into one-half share of Company common
stock and is redeemable at the option of the Company after December 31, 2007.
Common Stock Transactions
In September 1998, the Company issued 800,000 shares of Company common stock and
two warrants each having the right to purchase 150,000 shares of the Company's
common stock to GWC Health, Inc., a subsidiary of Elan Corporation, plc., as
consideration for the acquisition of Rystan (See "Common Stock Warrants" below
and Note 3).
Stock Split
The Company's shareholders approved a one-for-two reverse split of the Company's
common stock at the annual shareholders meeting held on May 18, 1998. All
outstanding common share and per share amounts have been retroactively adjusted
to reflect the reverse split.
Restricted Units
In December 1997, the Company issued one million restricted units ("Restricted
Units") as a fully vested equity based signing bonus to the Company's new
President and Chief Executive Officer ("Executive"). Each Restricted Unit
represents the right to receive one share of the Company's common stock. In
connection with the Restricted Units, the Company incurred a non-cash
compensation charge of $5.9 million in the fourth quarter of 1997, which is
included in general and administrative expenses.
Common Stock Warrants
In connection with the NeuroCare acquisition, the Company issued two warrants to
affiliates of Soros Private Equity Partners LLC having the right to purchase an
aggregate of 240,000 shares of the Company's common stock at $3.82 per share.
These warrants expire on March 28, 2001.
In connection with the acquisition of Rystan, the Company issued two warrants,
each having the right to purchase 150,000 shares of the Company's common stock
at $6.00 and $7.00, respectively. Both of these warrants were exercised in
October 1999.
In conjunction with a 1993 private placement of 347,947 shares of the Company's
common stock to Boston Scientific Corporation the Company sold for additional
consideration and issued to BSC a warrant (the "BSC Warrant") to purchase
347,947 shares of the Company's common stock at an exercise price of $14.37 per
share. The BSC Warrant expired on January 31, 2000.
F-14
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY , continued
Stockholders' Rights
As stockholders of the Company, Union Carbide Corporation, CMI and GWC Health
are entitled to certain registration rights. The Executive also has demand
registration rights under the Restricted Units agreement.
12. STOCK OPTIONS
As of December 31, 1999, the Company had stock options outstanding under five
stock option plans, the 1992 Stock Option Plan (the "1992 Plan"), 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") and the 1999 Stock Option
Plan (the "1999 Plan"). As of June 30, 1997, no additional options can be
granted out of the 1992 Plan and 175,000 shares reserved under the 1992 Plan
were cancelled.
The Company has reserved 750,000 shares of common stock for issuance under each
of the 1993 and 1996 Plans, 1,000,000 shares under the 1998 Plan, and 2,000,000
shares under the 1999 Plan. The 1993 Plan, 1996 Plan, 1998 Plan and the 1999
Plan (together, "the Plans") permit the Company to grant both incentive and
non-qualified stock options 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.
In May 1997, the Company's Stock Option Committee and Board of Directors
approved an option exchange program pursuant to which employees with options
having an exercise price in excess of $8.00 per share under the Company's Stock
Option Plans could elect to exchange such options for new stock options with an
exercise price of $8.00. Under the exchange program, (i) the number of
replacement options issued in exchange for the original options was determined
by the utilization of a formula based on the percentage decrease in exercise
price from the original grant (not to exceed 25% of the original options and
excluding the first 500 options), (ii) the replacement options expiration dates
were adjusted to one year later than the original options expiration dates, and
(iii) the vesting terms of the replacement options were adjusted to
proportionately reflect the decrease in options, when applicable. Under the
exchange program, 542,242 options with exercise prices ranging from $8.50 to
$25.00 were exchanged for 445,811 options granted with an exercise price of
$8.00, which was in excess of the closing market price at the date of exchange.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock Based Compensation" ("SFAS 123") and accordingly no
compensation cost has been recognized for the fair value of stock option grants
except the amortization of unearned compensation related to options granted to
non-employees which amounted to $281,000, $263,000 and $123,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Had the compensation cost
for the Company's stock option plans been determined based on the fair value at
the grant date for awards in grant since 1995 consistent with the provisions of
SFAS No. 123, the Company's net loss and basic and diluted net loss per share
would have increased to the pro forma amounts indicated below:
(In thousands) 1999 1998 1997
---- ---- ----
Net loss applicable to common stock................... $ (6,797) $ (12,389) $ (16,964)
Pro forma net loss applicable to common stock......... (9,991) (15,070) (17,777)
Basic and diluted net loss per share.................. $ (0.40) $ (0.77) $ (1.15)
Pro forma basic and diluted net loss per share........ (0.59) (0.93) (1.20)
F-15
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTIONS, continued
As options vest over a varying number of years and awards are generally made
each year, the pro forma impacts shown here 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:
1999 1998 1997
---- ---- ----
Dividend yield..................... -0- -0- -0-
Expected volatility................ 90% 80% 80%
Risk free interest rate............ 5.4% 5.2% 6.2%
Expected option lives.............. 4 years 4 years 6 years
For the three years ended December 31, 1999, option activity for all the Plans
(including the 1992 Plan) was as follows:
Weighted-Average
Exercise Price Shares
(Shares in thousands) --------------- --------
December 31, 1996, Outstanding ..................... $ 8.68 1,405
=====
December 31, 1996, Exercisable ..................... $ 5.64 950
=====
Granted ..................................... $ 7.10 1,493
Exercised ................................... $ 0.53 (676)
Canceled .................................... $ 15.52 (681)
----
December 31, 1997, Outstanding ..................... $ 7.68 1,541
=====
December 31, 1997, Exercisable ..................... $ 9.36 393
Granted ..................................... $ 4.35 1,045
Exercised ................................... $ 8.00 (1)
Canceled .................................... $ 8.21 (138)
----
December 31, 1998, Outstanding ..................... $ 6.26 2,447
=====
December 31, 1998, Exercisable ..................... $ 8.45 730
Granted ..................................... $ 5.10 1,757
Exercised ................................... $ 4.24 (61)
Canceled .................................... $ 5.56 (352)
----
December 31, 1999, Outstanding ..................... $ 5.82 3,791
=====
December 31, 1999, Exercisable ..................... $ 6.76 1,422
December 31, 1999, Available for Grant ............. 772
F-16
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTIONS, continued
In June 1999, the Company granted fully vested non-qualified stock options with
an intrinsic value of $90,000 on the grant date to certain employees for which a
corresponding charge was recorded to general and administrative expense.
Otherwise, the exercise price of all other stock options granted under the 1992
Plan and the Plans was equal to or greater than the fair market value of the
common stock on dates of grant. The weighted average exercise price and fair
market value of options granted in 1999, 1998 and 1997 were as follows:
Less Than Market Price Equal to Market Price In Excess of Market Price
---------------------- --------------------- --------------------------
Exercise Price Fair Value Exercise Price Fair Value Exercise Price Fair Value
-------------- ---------- -------------- ---------- -------------- -----------
1999 $ 3.46 $ 3.46 $ 5.11 $ 3.77 $ 7.61 $ 0.06
1998 -- -- $ 4.19 $ 2.59 $ 8.00 $ 1.98
1997 -- -- $ 6.44 $ 4.96 $ 8.08 $ 4.56
The following table summarizes information about the outstanding and exercisable
stock options at December 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Options in thousands Weighted Weighted Weighted
Average Average Average
Range of As of Remaining Exercise As of Exercise
Exercise Prices 12/31/99 Contractual Life Price 12/31/99 Price
--------------- -------- ---------------- ----- -------- -----
$3.375 - $5.500 1,467 4.7 years $ 3.78 433 $ 3.83
$5.75 - $8.00 2,126 4.1 years $ 6.56 895 $ 7.13
$8.125 - $23.00 198 3.2 years $ 12.94 94 $ 16.72
----- -----
3,791 1,422
===== =====
13. FINANCIAL INSTRUMENTS
Fair value of the Company's financial instruments are estimated as follows (in
thousands):
December 31, 1999 December 31, 1998
Fair Carrying Fair Carrying
Value Amount Value Amount
---- -------- ---- --------
Nonderivatives
Cash and cash equivalents $19,301 $19,301 $ 5,277 $ 5,277
Short-term investments 4,311 4,311 14,910 14,910
Term loans and revolving credit facility 9,879 9,879 -- --
Fair values were estimated based on market prices, where available. The interest
rate on the Company's term loan and borrowings under its revolving credit
facility are reset periodically to reflect current market rates.
F-17
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. LEASES
The Company leases all of its facilities through noncancelable operating lease
agreements. In November 1992, a corporation whose shareholders are trusts whose
beneficiaries include beneficiaries of a significant shareholder acquired from
independent third parties a 50% interest in the general partnership from which
the Company leases its manufacturing, research and principal warehouse facility
in Plainsboro, New Jersey. The lease provides for rent escalations of 10.1% and
8.5% in the years 2002 and 2007, respectively, and expires in October 2012. The
total amount of the minimum lease payments related to the New Jersey facility is
being charged to expense on a straight-line basis over the term of the lease.
The Company also leases manufacturing, administrative and laboratory space in
San Diego, California, Anasco, Puerto Rico and Irvington, New Jersey under
various leases agreements expiring through 2004 that are accounted for as
operating leases. The lease agreement related to the Company's research facility
in San Diego provides for annual escalations, for which the minimum lease
payments are being charged to expense on a straight-line basis over the term of
the lease. The Company also leases facilities additional space for
administrative support activities and storage under short-term agreements in New
Jersey and California.
In May 1994, the Company entered into a 5 year lease agreement with a related
party of a significant shareholder for a facility in West Chester, Pennsylvania.
In January 1998, the Company decided to suspend its operations at this facility
and in June 1998, entered into a lease termination agreement related to the
facility that required the Company to pay $330,000 for the facility's
maintenance, certain operating costs and other commitments through April 1999.
Additionally, the Company recorded asset impairment charges of $1,021,000 in
1997 and $145,000 in 1998, respectively, related to certain leasehold
improvements made at the West Chester facility. These charges were expensed in
general and administrative expense.
Future minimum lease payments under operating leases at December 31, 1999 were
as follows:
In thousands
Related Third
Parties Parties Total
------- ------- -----
2000 $210 $1,051 $1,261
2001 210 807 1,017
2002 213 600 813
2003 231 534 765
2004 231 458 689
Thereafter 1,909 -- 1,909
------ ------ ------
Total minimum lease payments $3,004 $3,450 $6,454
====== ====== ======
Total rental expense for the years ended December 31, 1999, 1998 and 1997 was
$958,000, $780,000 and $640,000, respectively, and included $219,000, $267,000
and $390,000 in related party expense, respectively.
F-18
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES
The income tax benefit (provision) consisted of the following (in thousands):
1999 1998 1997
------------- ------------- -------------
Current:
Federal $ (100) $ -- $ --
State 113 -- --
------------- ------------- -------------
Total current 13 -- --
Deferred:
Federal 1,671 -- --
State 136 -- --
------------- ------------- -------------
Total deferred 1,807 -- --
------------- ------------- -------------
Income tax benefit $ 1,818 $ -- $ --
============= ============= =============
The temporary differences which give rise to deferred tax assets and
(liabilities) are presented below:
In thousands December 31,
-----------------------------
1999 1998
----------- -----------
Net operating loss and tax credit carryforwards $ 36,800 $ 36,679
Inventory reserves and capitalization 1,021 1,312
Other 2,615 3,086
Depreciation and amortization -- 767
Deferred revenue 2,560 --
----------- -----------
Total deferred tax assets before valuation allowance 42,995 41,844
Valuation allowance (41,465) (41,844)
Depreciation and amortization (1,562) --
Other (392) --
----------- -----------
Net deferred tax liabilities $ (392) $ --
=========== ============
The Company's valuation allowance was provided against the deferred tax assets
due to the uncertainty of realization. The net change in the Company's valuation
allowance was $18,000, $4,380,000 and $8,511,000 in 1999, 1998 and 1997,
respectively. The net deferred tax liability of $392,000 at December 31, 1999 is
recorded in Other liabilities.
A reconciliation of the United States Federal statutory rate to the Company's
effective tax rate for the years ended December 31, 1999, 1998 and 1997 is as
follows:
1999 1998 1997
-------------- ------------- -------------
Federal statutory rate (34.0%) (34.0%) (34.0%)
Increase (reduction) in income taxes resulting from:
State income taxes 6.9% -- --
Benefit from sale of state net operating loss, net
of federal effect (5.5%) -- --
Alternative minimum tax, net of state benefit 1.3% -- --
Amortization of goodwill 0.8% -- --
Other nondeductible items 7.4% 1.8% 1.4%
Change in valuation allowance (0.2%) 32.2% 32.6%
-------------- ------------- ------------
Effective tax rate (23.3%) -- --
============== ============= ============
F-19
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES, continued
The 1999 change in valuation allowance includes a non-cash benefit of $1.8
million resulting from the deferred tax liabilities recorded in the NeuroCare
acquisition to the extent that consolidated deferred tax assets were generated
subsequent to the acquisition.
At December 31, 1999, the Company had net operating loss carryforwards ("NOL's")
of approximately $50 million and $28 million for federal and state income tax
purposes, respectively, to offset future taxable income, if any. The federal and
state NOL's expire through 2018 and 2005, respectively. During 1999, the Company
recognized a tax benefit of $645,000 for the sale of certain state net operating
loss carryforwards through a special program offered by the State of New Jersey.
At December 31, 1999, several of the Company's subsidiaries had unused NOL and
tax credit carryforwards arising from periods prior to the Company's ownership.
Excluding the Company's Telios Pharmaceuticals, Inc. subsidiary ("Telios")),
approximately $9 million of these NOL's for federal income tax purposes expire
between 2001 and 2005. The Company's Telios subsidiary has approximately $84
million of net operating losses, which expire between 2002 and 2010. The amount
of Telios' net operating loss that is available and the Company's ability to
utilize such loss is dependent on the determined value of Telios at the date of
acquisition. The Company's has valuation allowance of $42 million against all
deferred tax assets, including the net operating losses, due to the uncertainty
of realization. The timing and manner in which these acquired net operating
losses may be utilized in any year by the Company are severely limited by the
Internal Revenue Code of 1986, as amended, Section 382 and other provisions of
the Internal Revenue Code and its applicable regulations.
16. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Profit Sharing Plan and Trust ("401(k) Plan") for
eligible employees and their beneficiaries. The 401(k) Plan provides for
employee contributions through a salary reduction election. Employer matching
and discretionary profit sharing contributions, which are determined annually by
the Company, vest over a six-year period of service. For the years ended
December 31, 1999, 1998 and 1997, the Company's matching was based on a
percentage of salary reduction elections per eligible participant and totaled
$85,000, $48,000 and $35,000, respectively. No discretionary profit sharing
contribution was made in any year.
The Company received shareholder approval for its Employee Stock Purchase Plan
("ESPP") in May 1998. The purpose of the ESPP is to provide eligible employees
of the Company and certain of its subsidiary corporations 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.
17. DEVELOPMENT, LICENSE AND ROYALTY AGREEMENTS
The Company has various development funding agreements and grant awards under
which it receives payments to support research and development activities.
Significant development funding and grant awards include;
A strategic alliance with Johnson & Johnson Medical, Inc. that provides for
annual research funding for INTEGRA(R) Artificial Skin beginning in 2000 and
additional payments upon the occurrence of certain clinical and regulatory
events and for funding expansion of the Company's INTEGRA(R) Artificial Skin
production capacity as certain sales targets are achieved (See Note 4).
A strategic alliance with Johnson & Johnson Professional, Inc. (now known as
"DePuy") to develop and market a new product to regenerate articular cartilage.
The Company will develop an absorbable, collagen-based implant designed in
combination with a proprietary RGD peptide. DePuy will develop the arthroscopic
instrumentation used in the surgery and will market the combined products
worldwide. Under the terms of the agreement, DePuy will make payments up to $13
million as the Company meets various milestones, and will fund all necessary
development costs beyond the pre-clinical phase. Following successful
development, the Company will be responsible for manufacturing the product and
for future new product development. The Company received $300,000 and $1,000,000
in development funding for research and development expenditures under the
agreement in 1999 and 1998, respectively which were recorded as Other revenue.
F-20
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. DEVELOPMENT, LICENSE AND ROYALTY AGREEMENTS, continued
A three-year, $2 million Department of Commerce award under the National
Institute of Standards and Technology ("NIST") program for continued work on a
class of biodegradable polymers licensed from Rutgers University. This second
award began in April 1998 and the Company received $727,000 and $337,000 of
funding for research and development expenditures under it in 1999 and 1998,
respectively.
In connection with an agreement with Genetics Institute, Inc. ("GI"), the
Company receives development support payments from GI to support development of
specialized delivery matrices for the release of GI's recombinant human bone
morphogenic protein (rhBMP-2) to simulate bone growth. The Company received
$300,000 and $64,000 of funding for research and development expenditures under
the agreement in 1999 and 1998, respectively, which were recorded as Other
revenue.
In March 1998, the Company entered into a series of agreements with Century
Medical, Inc ("CMI"), a wholly-owned subsidiary of ITOCHU Corporation, under
which CMI will distribute the Company's identified neurosurgical products in
Japan. CMI made an up-front non-refundable payment as partial reimbursement of
research and development costs previously expended by the Company of $1.0
million in the first quarter of 1998, which was recorded in Other revenue, and
agreed to underwrite the costs of the Japanese clinical trials and regulatory
approval processes.
In January 1996, the Company and Cambridge Antibody Technology Limited ("CAT")
entered into an agreement consisting of a license to CAT of certain rights to
use anti-TGF-(beta) antibodies for the treatment of fibrotic diseases and the
granting of a right of first refusal to CAT for certain rights relating to
decorin, a molecule believed to mediate the production of TGF-(beta) in humans
and animals. The Company will receive royalties upon the sale by CAT of licensed
products other than those directed at dermal applications.
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.
18. LEGAL MATTERS
Various lawsuits claims and proceedings are pending or have been settled by the
Company. The most significant of those are described below.
In 1997, the Company and the Massachusetts Institute of Technology ("MIT") filed
a patent infringement lawsuit against LifeCell Corporation ("LifeCell").
LifeCell filed various counterclaims and a complaint against the Company and MIT
claiming tortious interference, business and product disparagement, unfair
competition among other charges. In 1998, the Company and LifeCell entered into
a settlement agreement under the terms of which the Company agreed not to assert
certain patents against LifeCell's current technology or reasonable equivalents
thereof and LifeCell acknowledged the validity of these patents. As part of the
settlement agreement, the Company purchased LifeCell common stock for $500,000,
and LifeCell agreed to a royalty-bearing license for any possible future
biomaterials-based matrix products developed by LifeCell that may be covered by
the patents.
In 1995, the Company's subsidiary filed a complaint against a distributor
claiming the distributor breached a distribution agreement by, among other
things, not paying the Company's subsidiary for certain products delivered. In
1998, the Company and the distributor entered into a settlement agreement in
which the distributor agreed to pay an aggregate of $550,000 in installments
over the remainder of 1998. The Company recorded a net gain in other income in
1998 of $550,000 as a result of the settlement.
F-21
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. LEGAL MATTERS, continued
In July 1996, the Company filed a patent infringement lawsuit in the United
States District Court in San Diego 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. David A. 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 (known as "RGD") peptide
sequence found in many extracellular matrix proteins. The defendants filed a
countersuit asking for an award of defendants' reasonable attorney fees.
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
Camino NeuroCare, Inc. ("Camino") dated as of December 18, 1996, have alleged
that Camino breached the terms of the Letter Agreement prior to our acquisition
of the NeuroCare Group (Camino's prior parent company). The Letter Agreement
contains arbitration provisions and Integra and the Optex Claimants have agreed
to negotiate rather than seek arbitration for a limited time. While we believe
that Camino has valid legal and factual defenses, the Optex Claimants have
asserted unspecified significant damages, and we believe that the Optex
Claimants are likely to pursue arbitration under the Letter Agreement if the
matter is not settled otherwise. We cannot predict the outcome of such an
arbitration, were it to take place. In addition, we have asserted a right to
indemnification from the seller of the NeuroCare businesses, but there can be no
assurance that indemnification, if any, will be obtained.
The Company is also subject to other claims and lawsuits in the ordinary course
of its business. In the opinion of management, such other claims are either
adequately covered by insurance or otherwise indemnified, and are not expected,
individually or in the aggregate, to result in a material adverse effect on the
financial condition of the Company. The Company's financial statements do not
reflect any material amounts related to possible unfavorable outcomes of the
matters above or others. However, it is possible that the Company's results of
operations, financial position and cash flows in a particular period could be
materially affected by these contingencies.
19. SEGMENT INFORMATION AND MAJOR CUSTOMER DATA
Integra develops, manufactures and markets medical devices, implants and
biomaterials. Our operations consist of (1) Integra NeuroSciences, which is a
leading provider of implants, instruments, and monitors used in neurosurgery,
neurotrauma, and related critical care and (2) Integra LifeSciences, which
develops and manufactures a variety of medical products and devices, including
products based on our proprietary tissue regeneration technology which are used
to treat soft tissue and orthopedic conditions. Integra NeuroSciences sells
primarily through a direct sales organization and Integra LifeSciences sells
primarily through strategic alliances and distributors.
In 1998, the Company's operations were comprised of two reportable business
segments, (1) medical products and (2) skin defects and burns. As a result of a
repositioning of the Company's business in 1999, including the sale of a product
line, the NeuroCare acquisition, and the transfer of all INTEGRA(R) Artificial
Skin sales and marketing activities to JJM, the Company has reorganized its
reportable segments into two segments, Integra NeuroSciences and Integra
LifeSciences. A majority of the products in the Integra NeuroSciences segment
were acquired in the NeuroCare acquisition. Prior to the reorganization, the
Company's Integra NeuroSciences business was included in the former medical
products segment. The non-neurosurgical business of the former medical products
segment and the products sold under the former skin defects and burns segment
are now reported in the Integra LifeSciences segment, as the majority of this
segment's products are sold under marketing or distribution arrangements.
F-22
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SEGMENT INFORMATION AND MAJOR CUSTOMER DATA, continued
Selected financial information on the Company's business segments is reported
below (in thousands):
Total
Integra Integra Reportable
LifeSciences NeuroSciences Segments Corporate Total
- ------------------------------------------------------------------------------------------------------------------------------------
1999
- ----
Sales $ 17,292 $ 22,369 $ 39,661 $ -- $ 39,661
Total revenue 19,671 22,819 42,490 -- 42,490
Operating costs 21,578 27,128 48,706 6,164 54,870
Operating loss (1,907) (4,309) (6,216) (6,164) (12,380)
1998
- ----
Sales 14,076 -- 14,076 -- 14,076
Total revenue 16,428 1,027 17,455 -- 17,455
Operating costs 22,337 2,010 24,347 7,288 31,635
Operating loss (5,909) (983) (6,892) (7,288) (14,180)
1997
- ----
Sales 14,001 -- 14,001 -- 14,001
Total revenue 14,696 50 14,746 -- 14,746
Operating costs 19,599 450 20,049 13,608 33,657
Operating loss (4,903) (400) (5,303) (13,608) (18,911)
Product sales and the related cost of product sales between segments are
eliminated into computing segment operating results. Research and development
expense is allocated to segments based on a specific identification of program
costs within each segment. The Company allocates specifically identifiable
general and administrative expenses such as regulatory and legal expense items
to the segments, with the remaining activities reflected as corporate
activities. The Company does not disaggregate nonoperating revenues and expenses
nor identifiable assets on a segment basis.
Two customers accounted each for 15% and 12% of product sales in 1998 and 13%
and 11% of product sales in 1997, respectively.
For the years ended December 31, 1999, 1998 and 1997, the Company's foreign
export sales, primarily to Europe and the Asia Pacific regions, were 23%, 16%
and 14% of total product sales, respectively. Substantially all of the Company's
long-lived assets are located in the United States and Puerto Rico.
The Company's product sales consists of several products that make up a large
percentage of the total, including the Company's INTEGRA(R) Artificial Skin
product which accounted for 9%, 41% and 43% of product sales for the years ended
December 31, 1999, 1998 and 1997, respectively.
F-23
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SUBSEQUENT EVENTS
The Company purchased the business, including certain assets and liabilities, of
Clinical Neuro Systems ("CNS") on January 17, 2000 for $6.8 million. CNS
designs, manufactures and sells neurosurgical external ventricular drainage
systems including catheters and drainage bags, as well as cranial access kits.
The CNS acquisition was financed with $4.0 million in cash and a two-year $2.8
million note payable to the seller.
In connection with the Company's patent infringement lawsuit brought against
Merck KgaA and other parties, the Company was awarded $15.0 million in damages
on March 17, 2000 by the jury, which found that Merck KgaA had willfully induced
infringement of the Company's patents. This award may be adjusted by the court.
The Company expects that post-trial motions will be filed, and that Merck KgaA
will appeal various decisions of the court and request a new trial, a reduction
in damages, or a judgment as a matter of law notwithstanding the verdict. No
amounts for this verdict have been reflected in the Company's financial
statements.
On March 21, 2000, the Company agreed to purchase the Selector(R) Ultrasonic
Aspirator, Ruggles(TM) hand-held neurosurgical instruments and cryosurgery
product lines, including certain assets and liabilities, from NMT Medical, Inc.
for $12.0 million in cash. The completion of this transaction is subject to
customary closing conditions and is expected to close early in the second
quarter of 2000.
On March 29, 2000, the Company issued 54,000 shares of Series C 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 for $5.4
million. The Series C Preferred is convertible into 600,000 shares of common
stock and has a liquidation preference of $5.4 million with a 10% cumulative
dividend. The Series C Preferred was issued with a beneficial conversion feature
that resulted in a nonrecurring non-cash dividend of $4.2 million that will be
reflected in earnings (loss) per share applicable to common stock in the first
quarter of 2000.
F-24
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
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 March 1, 2000, (except for Note 20, as to which the date is March 29,
2000) appearing in the 1999 Annual Report on Form 10-K of Integra LifeSciences
Holdings Corporation and Subsidiaries (the "Company") also included an audit of
the financial statement schedules listed in the index in Item 14 of this Form
10-K. In our opinion, this financial statement schedules presents fairly, in all
material respects, the information required to be included therein when read in
conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 1, 2000
F-25
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE I
BALANCE SHEETS
December 31, December 31,
1999 1998
------------ ------------
(in thousands)
ASSETS
Investments in and advances to
consolidated Subsidiaries.......... $ 37,989 $ 31,366
--------- ---------
Total assets.......................... $ 37,989 $ 31,366
========= =========
STOCKHOLDERS' EQUITY
Preferred stock, Preferred stock,
$.01 par value (15,000 authorized
shares; 500 Series A Convertible
shares issued and outstanding at
December 31, 1999 and 1998,
$4,000 liquidation preference;
100 Series B Convertible shares
issued and outstanding at December
31, 1999, $10,000 with a 10%
compounded annual cumulative
dividend liquidation preference)... 6 5
Common stock, $.01 par value (60,000
authorized shares; 16,131 and
15,783 issued and outstanding at
December 31, 1999 and 1998,
respectively).................... 161 158
Additional paid-in capital............ 132,340 119,999
Treasury stock, at cost (1 and
52 shares at December 31, 1999 and
1998, respectively)................ (7) (286)
Unearned compensation related to
stock options...................... (108) (148)
Notes receivable - related party...... (35) (35)
Accumulated other comprehensive loss.. (64) (40)
Accumulated deficit................ (94,304) (88,287)
--------- ---------
Total stockholders' equity............ $ 37,989 $ 31,366
========= =========
See notes to consolidated financial statements
F-26
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
For the years ended December 31,
1999 1998 1997
----------- ------------ ------------
(in thousands)
Equity in loss of consolidated subsidiaries.. $ (5,966) $ (12,342) $ (16,964)
--------- --------- ---------
Net loss..................................... $ (5,966) $ (12,342) $ (16,964)
========= ========= =========
Basic and diluted loss per share............. $ (0.40) $ (0.77) $ (1.15)
========= ========= =========
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
For the years ended December 31,
1999 1998 1997
----------- ------------ ------------
(in thousands)
INVESTING ACTIVITIES:
Proceeds from sales of product line and
Other assets.............................. $ 6,354 $ -- $ --
Capital contribution to consolidated
subsidiary................................ (16,153) -- --
Other investing activities................... (2,480) (3,762) (358)
--------- --------- ---------
Cash flows used in investing activities...... (12,279) (3,762) (358)
FINANCING ACTIVITIES:
Proceeds from sales of preferred stock....... 9,942 4,000 --
Other financing activities, net.............. 2,337 (238) 358
--------- --------- ---------
Cash flows provided by financing activities.. 12,279 3,762 358
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................... -- -- --
Cash and cash equivalents at beginning of
period.................................... -- -- --
--------- --------- ---------
Cash and cash equivalents at end of period... $ -- $ -- $ --
========= ========= =========
See notes to consolidated financial statements
Notes to Financial Statement Schedule
1. The Company did not receive any cash dividends from its consolidated
subsidiaries in any period presented.
2. The Company's investments in and advances to subsidiaries are recorded
using the equity method of accounting.
F-27
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Column A Column B Column C Column D Column E
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description Of Period Expenses Accounts Deductions Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
- ----------------------------
Allowance for doubtful
Accounts............ $ 354 $ 406 $ 216 $ (32) $ 944
Obsolete inventory
Reserves............ 525 2,159 1,614 (1,161) 3,137
Year ended December 31, 1998
- ----------------------------
Allowance for doubtful
Accounts............ $ 390 $ 76 $ 15 $ (127) $ 354
Obsolete inventory
Reserves............ 1,126 522 29 (1,152) 525
Year ended December 31, 1997
- ----------------------------
Allowance for doubtful
Accounts............ $ 228 $ 315 $ -- $ (156) $ 390
Obsolete inventory
Reserves............ 548 1,413 -- (835) 1,126
F-26