<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 0-26224
INTEGRA LIFESCIENCES 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)
(609) 275-0500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] - Yes [ ] - No
As of August 8, 1998 the registrant had outstanding 14,952,523 shares of
Common Stock, $.01 par value.
<PAGE>
INTEGRA LIFESCIENCES CORPORATION
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 (Unaudited) 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
Exhibits 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 4,710 $ 2,083
Short-term investments ............................. 19,687 24,189
Accounts receivable, net ........................... 3,173 2,780
Inventories ........................................ 2,629 2,350
Prepaid expenses and other current assets .......... 902 400
--------- ---------
Total current assets ........................... 31,101 31,802
Property and equipment, net ............................ 6,165 6,414
Other assets ........................................... 108 140
--------- ---------
Total assets ................................... $ 37,374 $ 38,356
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade .............................. $ 442 $ 541
Accrued expenses and other current liabilities ....... 3,376 1,854
--------- ---------
Total current liabilities ...................... 3,818 2,395
Other liabilities ...................................... 288 206
--------- ---------
Total liabilities .............................. 4,106 2,601
--------- ---------
Stockholders' Equity:
Preferred stock, $.01 par value (15,000
authorized shares; 500 Series A Convertible
shares issued and outstanding at June 30,
1998, $4,000 liquidation preference) ................. 5 --
Common stock, $.01 par value (60,000 authorized
shares; 14,953 and 14,952 issued and
outstanding at June 30, 1998 and December 31,
1997, respectively) .................................. 150 150
Additional paid-in capital .............................. 116,026 111,877
Unearned compensation related to stock options .......... (248) (266)
Notes receivable - related parties ...................... (35) (35)
Accumulated other comprehensive income .................. (71) (26)
Treasury stock at cost (16 shares at June 30, ........... (89) --
1998)
Accumulated deficit ..................................... (82,470) (75,945)
--------- ---------
Total stockholders' equity ..................... 33,268 35,755
--------- ---------
Total liabilities and stockholders' equity ............. $ 37,374 $ 38,356
========= =========
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial statements
3
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE
Product sales .............................. $ 3,367 $ 4,120 $ 6,530 $ 7,090
Product license fees ....................... -- 5 1,015 5
Contract product development ............... 250 -- 500 --
Research grants ............................ 140 144 209 298
Royalties .................................. 70 38 133 102
-------- -------- -------- --------
Total revenue .......................... 3,827 4,307 8,387 7,495
COSTS AND EXPENSES
Cost of product sales ...................... 1,604 2,287 3,330 3,843
Research and development ................... 2,074 1,669 4,216 3,086
Selling and marketing ...................... 1,519 1,202 3,079 2,320
Selling, general and administrative ........ 2,744 1,712 5,566 3,127
-------- -------- -------- --------
Total costs and expenses ............... 7,941 6,870 16,191 12,376
-------- -------- -------- --------
Operating loss ............................. (4,114) (2,563) (7,804) (4,881)
Other income ............................... 889 524 1,279 1,012
-------- -------- -------- --------
Net loss ................................... $ (3,225) $ (2,039) $ (6,525) $ (3,869)
======== ======== ======== ========
Basic and diluted net loss per share ....... $ (0.20) $ (0.14) $ (0.41) $ (0.26)
======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding .......... 15,944 14,896 15,948 14,683
======== ======== ======== ========
</TABLE>
The accompany notes are an integral part
of the condensed consolidated financial statements
4
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Six Months Ended June 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ..................................................... $ (6,525) $ (3,869)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................. 678 950
Gain on sale of assets and litigation settlement .......... (266) (86)
Provision for impairment of assets ........................ 145 --
Amortization of discount and interest on investments ...... (14) (36)
Amortization of unearned compensation ..................... 164 61
Changes in assets and liabilities:
Accounts receivable .................................... (393) 133
Inventories ............................................ (279) 642
Prepaid expenses and other current assets .............. 124 (27)
Deferred revenue ....................................... 250 --
Accounts payable, accrued expenses and other liabilities 1,413 (23)
-------- --------
Net cash used in operating activities ..................... (4,703) (2,255)
-------- --------
INVESTING ACTIVITIES:
Proceeds from sale of assets ................................. 47 94
Purchase of restricted securities ............................ (500) --
Purchases of available-for-sale investments .................. (16,450) (19,422)
Proceeds from sale/maturity of investments ................... 20,920 14,000
Purchases of property and equipment .......................... (606) (237)
-------- --------
Net cash provided by (used in) investing activities ....... 3,411 (5,565)
-------- --------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options ...................... 8 330
Purchase of treasury stock ................................... (89) --
Proceeds from sale of preferred stock ........................ 4,000 --
-------- --------
Net cash provided by financing activities ................. 3,919 330
-------- --------
Net increase (decrease) in cash and cash equivalents ............ 2,627 (7,490)
Cash and cash equivalents at beginning of period ................. 2,083 11,762
-------- --------
Cash and cash equivalents at end of period ....................... $ 4,710 $ 4,272
======== ========
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial statements
5
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the June 30 unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) which the Company considers necessary for a fair
presentation of the financial position and results of operations of the
Company. Operating results for the periods ended June 30, 1998 are not
necessarily indicative of the results to be expected for the entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. 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. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements for the year ended December 31, 1997 included in the
Company's Annual Report on Form 10-K.
2. Inventory
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Finished goods............................. $ 657 $ 773
Work-in-process............................ 1,532 1,251
Raw materials.............................. 440 326
---------- ---------
$ 2,629 $ 2,350
========== =========
</TABLE>
3. Current Liabilities
Accrued expenses and other liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Legal fees................................. $ 1,271 $ 471
Lease termination provision................ 330 --
Contract research.......................... 437 252
Vacation .................................. 271 214
Deferred revenue........................... 250 --
Other ..................................... 817 917
---------- ---------
$ 3,376 $ 1,854
========== =========
</TABLE>
4. Net loss and loss per share
Since the Company incurred net losses in all periods presented, outstanding
options, preferred stock and warrants to purchase an aggregate of 2,275,000 and
1,088,000 shares of common stock at June 30, 1998 and June 30, 1997,
respectively, were not included in the diluted per share calculations, as their
effect would be antidilutive.
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards
for reporting and display an alternative income measurement and its components
(revenue, expenses, gains and losses) in a full set of general-purpose financial
statements. The total comprehensive loss for the three and six months ended June
30, 1998 was $3,219,000 and $6,570,000, respectively, compared to $2,009,000 and
$3,870,000 for the three and six-month periods ending June 30, 1997. Total
comprehensive income includes the net loss and the net unrealized gains and
losses on securities.
6
<PAGE>
5. Stockholders' Equity
The Company's shareholders approved a one-for-two reverse split of the Company's
common stock at the annual meeting on May 18, 1998. All outstanding share
amounts have been retroactively adjusted to reflect the reverse split.
During the second quarter of 1998, the Company sold 500,000 shares of Series A
Preferred Stock ("Preferred Stock") for $4 million to Century Medical, Inc. The
Preferred Stock pays an annual dividend of $0.16 per share, payable quarterly,
and has a liquidation preference of $4 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.
6. Leases
In June 1998, the Company entered into a Lease Termination Agreement (the
"Agreement") related to the closing of the Company's facility in West Chester,
Pennsylvania. The Agreement requires an aggregate payment of $330,000 related to
the facility's maintenance, certain operating costs and other commitments and is
payable through April 1999. As result of the Agreement, the Company incurred an
additional asset impairment charge of $145,000 related to the West Chester
facility, which charge was included in general and administrative expense in the
second quarter of 1998. The West Chester facility is owned by a company
controlled by a related party of an officer of the Company.
7. Legal Matters
On or about November 4, 1997, Integra (Artificial Skin) Corporation ("IASC"), a
wholly-owned subsidiary of the Company, and the Massachusetts Institute of
Technology ("MIT") filed a patent infringement lawsuit against LifeCell
Corporation ("LifeCell"). LifeCell filed counterclaims seeking declaratory
judgments of non-infringement and patent invalidity and filed a complaint
against MIT and IASC in Texas state court claiming tortious interference,
business and product disparagement, unfair competition amoung other charges.
LifeCell was seeking unspecified actual monetary damages in an amount not less
than $12 million together with treble damages, unspecified punitive damages, and
other relief. On April 9, 1998, the Company and LifeCell agreed to settle all
litigation pending between the parties. Under the terms of the settlement, the
Company has agreed not to assert certain patents against LifeCell's current
technology or reasonable equivalents thereof and LifeCell has acknowledged the
validity of these patents. As part of the settlement agreement, the Company
agreed to purchase $500,000 of LifeCell common stock, 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 January 1994, ABS LifeSciences, Inc., a wholly-owned subsidiary of the
Company, entered into a five-year distribution agreement with the distributor of
the Company's Chronicure product pursuant to which the distributor is obligated
to purchase certain minimum quantities of wound care products. In October 1995,
the Company's subsidiary filed a complaint in the United States District Court
for the District of New Jersey claiming the distributor breached the
distribution agreement by, among other things, not paying the subsidiary for
certain products delivered. In November 1995, the distributor filed an
affirmative defense and counterclaim alleging, among other things, fraudulent
misrepresentation and breach of contract and seeking damages of approximately
$1.2 million plus unspecified punitive damages. In June 1998, the Company's
subsidiary 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 in other income a net gain of $545,000
as a result of the settlement.
In July 1996, Telios Pharmaceuticals, Inc. ("Telios") filed a patent
infringement lawsuit against three parties: Merck KGaA, a German corporation,
Scripps Research Institute, a California nonprofit corporation, and David A.
Cheresh, Ph.D., a research scientist with Scripps. The lawsuit was filed in the
U.S. District Court for the Southern District of California. The complaint
charges, among other things, that the defendant Merck KGaA "willfully and
deliberately induced, and continues to willfully and deliberately
7
<PAGE>
induce, defendants Scripps Research Institute and Dr. David A. Cheresh to
infringe United States Letters Patent No. 4,729,255." This patent is one of a
group of five patents granted to The Burnham Institute and licensed by Telios
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 Company is pursuing
numerous medical applications of the RGD technology in the fields of
anti-thrombic agents, cancer, osteoporosis, and a cell adhesive coating designed
to improve the performance of implantable devices and their acceptance by the
body. The defendants have filed a countersuit asking for an award of defendants'
reasonable attorney fees. The Company's financial statements do not reflect any
significant amounts related to a possible unfavorable outcome of this matter.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion contains trend information and other
forward-looking statements related to the future use and revenues of INTEGRA(TM)
Artificial Skin and anticipated expenditure levels and are made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995. Such
statements involve risks and uncertainties which may cause the results to differ
materially from those set forth in these statements. In addition, the economic,
competitive, governmental, technological and other factors identified in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission could affect such results.
General
The Company develops, manufactures and markets medical devices, implants
and biomaterials primarily used in the treatment of burns and skin defects,
spinal and cranial disorders, orthopedics and other surgical applications. The
Company seeks to be the world's leading company specializing in implantable
medical and biopharmaceutical therapies to target and control cell behavior, and
to build shareholder value by acquiring, discovering and developing
cost-effective, off-the-shelf products that satisfy unmet medical needs.
Results of Operations
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Total revenues declined to approximately $3.8 million for the three months
ended June 30, 1998 from $4.3 million for the three months ended June 30,1997,
primarily due to a decrease in product sales that was partially offset by an
increase in product development revenues and royalties. Product sales declined
to $3.4 million for the three months ended June 30, 1998 from $4.1 million for
the three months ended June 30, 1997. Sales of INTEGRA(TM) Artificial Skin
("INTEGRA") declined to $1.5 million for the three months ended June 30, 1998
compared to $1.7 million in the second quarter of 1997. In the second quarter of
1998, international INTEGRA sales represented 38% of total INTEGRA product sales
compared to 31% in the same period of 1997. The Company has clinical data on the
use of INTEGRA in reconstructive and wound healing procedures and believes that
growth in the use and sale of INTEGRA will depend on its ability to market the
product for reconstructive and other additional indications. In March 1998 the
Company received CE Mark approval in the European Community to market INTEGRA
for use in burns and reconstructive surgery. These additional indications
require approval by the FDA before the product can be marketed in the United
States, and there can be no assurance the Company will receive any additional
indication approval in the United States or any other international markets. The
Company plans on submitting a pre-approval market amendment to the FDA seeking
the additional indications in the United States.
Sales of the Company's other medical devices were approximately $1.9
million for the three months ended June 30, 1998 down from $2.4 million for the
three months ended June 30, 1997. Approximately $200,000 of the decline was
related to discontinued products with the remaining decrease related to the
timing of orders for the Company's infection control products. Sales of the
Company's other medical products can vary significantly on a quarter to quarter
basis depending on the timing of shipments to private label customers and
contract distributors. Export sales for the three months ended June 30, 1998
were even with sales for the three months ended June 30, 1997 at $660,000 and
included a slight increase in international INTEGRA sales.
9
<PAGE>
Other revenue, which includes grant revenue, license fees, contract
development revenue and royalties, was approximately $460,000 for the three
months ended June 30, 1998 compared to $190,000 for the three months ended June
30, 1997. The Company's product development revenue increased by $250,000 as a
result of funding received under the Company's development and marketing
agreement with Johnson & Johnson Professional, Inc. The Company continues to
seek research grants, licensing arrangements and development funding for several
of its technologies, although the timing and amount of such revenue, if any, can
not be predicted.
Cost of product sales declined to approximately $1.6 million (48% of
product sales) for the three months ended June 30, 1998 from $2.3 million (56%
of product sales) for the three months ended June 30, 1997. The decrease in cost
of product sales as a percentage of product sales is partially attributable to
an inventory write-off of $210,000 in the prior year. In addition, the Company's
INTEGRA manufacturing unit operated at a higher utilization compared to the
prior year. Due to the high fixed costs of the manufacturing facility for
INTEGRA, the Company is anticipating higher unit costs until there is a
requirement for higher production volume. The Company believes its current
capacity to produce INTEGRA and its other medical products is sufficient to
support significant growth, and the utilization of this capacity will affect its
gross margin on product sales.
Research and development expense increased to approximately $2.1 million
for the three-month period ended June 30, 1998 from $1.7 million for the
three-month period ended June 30, 1997. Increases included the addition of
development personnel and the funding of several development programs for the
skin and orthopedic business lines as well as other business ventures. The
Company expects that the level of research and development expenditures in 1998
will continue to exceed 1997 levels as the Company continues to expand its
development programs. The amount and allocation of resources to fund research
and development will vary depending upon a number of factors, including the
progress of development of the Company's technologies, the timing and outcome of
pre-clinical and clinical results, changing competitive conditions, potential
funding opportunities and determinations with respect to the commercial
potential of the Company's technologies.
Selling and marketing expense increased to approximately $1.5 million for
the three-month period ended June 30, 1998 from $1.2 million for the three-month
period ended June 30, 1997. Increases in international selling and marketing
expenses were associated with the launch of INTEGRA in the European Community
following its CE mark approval in March 1998. Additional costs included
technical personnel and consultants involved in training and promotional
activities, international marketing and training materials and domestic costs
associated with the Company's cost reimbursement training programs.
General and administrative expense increased to approximately $2.7 million
for the three-month period ended June 30, 1998 from $1.7 million for the
three-month period ended June 30, 1997 due primarily to costs related to the
closing of the West Chester, Pennsylvania facility, severance costs, costs
associated with the hiring of management personnel during the latter part of
1997 (including the Company's Chief Executive Officer and Chief Operating
Officer) and additional legal and other professional costs. These costs are
expected to continue to represent an increase over the comparable 1997 periods
for the remainder of 1998. The Company settled its litigation with LifeCell
Corporation, University of Utah Research Foundation and Derma Sciences, Inc.
during the second quarter of 1998, but significant litigation costs are expected
to continue due to the Company's patent infringement lawsuit against Merck KGaA.
10
<PAGE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Total revenues increased to approximately $8.4 million for the six months
ended June 30, 1998 from $7.5 million for the six months ended June 30,1997, as
a decline in product sales was offset by increases in product license fees and
product development revenue. Product sales decreased to $6.5 million for the six
months ended June 30, 1998 from $7.1 million for the six months ended June 30,
1997. Sales of INTEGRA declined to $2.9 million for the six months ended June
30, 1998 compared to $3.0 million for the six months ended June 30, 1997, as
international sales increases partially offset a decline in North American
sales. Product sales of the Company's other medical products were $3.6 million
for the six months ended June 30, 1998 down from $4.1 million for the six months
ended June 30, 1997. Approximately $430,000 of the decline is related to
discontinued products. Export sales, including INTEGRA, for the six months ended
June 30, 1998 increased to $1.3 million from $950,000 for the six months ended
June 30, 1997.
Other revenue was approximately $1.9 million for the six months ended June
30, 1998 compared to $410,000 for the six months ended June 30, 1997. The
largest increase was in product license fees due to a $1 million non-refundable
licensing fee from Century Medical, Inc. related to the Company's neurosurgical
products. The Company's product development revenue increased by $500,000 as a
result of funding received under the Company's development and marketing
agreement with Johnson & Johnson Professional, Inc.
Cost of product sales declined to approximately $3.3 million (51% of
product sales) for the six months ended June 30, 1998 from $3.8 million (54% of
product sales) for the six months ended June 30, 1997. The decrease in cost of
product sales as a percentage of product sales is attributable to lower
inventory write-offs and higher manufacturing utilization compared to the prior
year.
Research and development expense increased to approximately $4.2 million
for the six months ended June 30, 1998 compared to $3.1 million for the six
months ended June 30, 1997 due to additional development personnel and the
funding of several contract development programs for the skin, orthopedic and
ventures business lines.
Selling and marketing expense increased to approximately $3.1 million for
the six-month period ended June 30, 1998 from $2.3 million for the six-month
period ended June 30, 1997. Increases included international sales and marketing
expenses associated with the addition of technical personnel and consultants
involved in training and promotional activities, marketing materials and costs
associated with the Company's cost reimbursement training programs.
General and administrative expense increased to approximately $5.6 million
for the six-month period ended June 30, 1998 from $3.1 million for the six-month
period ended June 30, 1997 due primarily to costs related to the closing of the
West Chester, Pennsylvania facility, severance costs, costs associated with the
hiring of management personnel during the latter part of 1997 (including the
Company's Chief Executive Officer and Chief Operating Officer) and additional
legal and other professional costs. These costs are expected to continue to
represent an increase over the comparable 1997 periods for the remainder of
1998. The Company settled its litigation with LifeCell Corporation, University
of Utah Research Foundation and Derma Sciences, Inc. during the current year.
11
<PAGE>
Liquidity and Capital Resources
At June 30, 1998, the Company had cash, cash equivalents and short-term
investments of approximately $24.4 million and no long-term debt. The Company's
principal uses of funds during the six-month period ended June 30, 1998 were
$4.7 million for operations and $610,000 in purchases of property and equipment.
The Company received $4.0 million in funds from the issuance of series A
preferred stock during the second quarter of 1998. The Company anticipates that
it will continue to use its liquid assets to fund operations until sufficient
revenues can be generated through product sales and collaborative arrangements.
There can be no assurance that the Company will be able to generate sufficient
revenues to obtain positive operating cash flows or profitability.
Year 2000 Disclosure
Currently, there is significant uncertainty regarding the impact of the
Year 2000 on information systems, such as those used by the Company. The Company
does not currently believe that the effects of any Year 2000 non-compliance on
the Company's information systems should have any material adverse impact on the
Company's business or results of operations; however, there can be no assurance
that the Company will not incur expenses or experience business disruption as a
result of system problems associated with the century change.
12
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 18, 1998 and
in connection therewith, proxies were solicited by management pursuant to
Regulation 14 under the Securities Exchange Act of 1934. An aggregate of
29,905,097 shares of the Company's common stock ("Shares") were outstanding and
entitled to a vote at the meeting. At the meeting the following matters (not
including ordinary procedural matters) were submitted to a vote to the holders
of Shares, with the results indicated below:
1. Reserve Split of Common Stock. The approval and adoption of a one-for-two
reverse stock split of the Company's common stock. The reverse split was
effected by an amendment to the Company's Amended and Restated Certificate
of Incorporation. The tabulation of votes was as follows:
For Against Abstentions
--- ------- -----------
23,848,470 317,856 20,081
2. Approval of the Company's 1998 Stock Option Plan. The Company's 1998 Stock
Option Plan was approved. The tabulation of votes was as follows:
For Against Abstentions
--- ------- -----------
19,878,329 739,988 35,631
3. Approval of the Company's Employee Stock Purchase Plan. The Company's
Employee Stock Purchase Plan was approved. The tabulation of votes was as
follows:
For Against Abstentions
--- ------- -----------
20,511,703 114,628 27,617
4. Election of directors to serve until the 1998 Annual Meeting. The following
persons, all of whom were serving as directors and were management's
nominees for reelection, were reelected. There was no solicitation in
opposition to such nominees. The tabulation of votes was as follows:
Nominee For Withheld
------- --- --------
Keith Bradley 24,142,646 43,761
Richard E. Caruso 24,142,646 43,761
Stuart M. Essig 24,143,518 42,889
George W. McKinney, III 24,144,546 41,861
James M. Sullivan 24,141,846 44,561
Edmund L. Zalinski 24,136,016 50,391
5. Ratification of independent auditors. The appointment of
PricewaterhouseCoopers L.L.P. as the Company's independent auditors for
the current fiscal year was ratified. The tabulation of votes was as
follows:
For Against Abstentions
--- ------- -----------
24,131,964 38,160 16,283
13
<PAGE>
Item 5. Other Information
The Securities and Exchange Commission recently amended certain rules under
the Securities Exchange Act of 1934 regarding the use of a company's
discretionary proxy voting authority with respect to stockholder proposals
submitted to the company for consideration at the company's next annual meeting.
Pursuant to amended Rules 14a-5(e)(2) and 14a-4(c)(1), stockholder
proposals submitted to the Company outside the processes of Rule 14a-8 (i.e.,
procedures for placing a stockholder's proposal in the Company's proxy
materials) with respect to the Company's 1999 annual meeting of stockholders
will be considered untimely if received by the Company after March 3, 1999.
Accordingly, the proxy with respect to the Company's 1999 annual meeting of
shareholders will confer discretionary authority to vote on any stockholder
proposals received by the Company after such date.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Lease Termination Agreement dated as of June 22, 1998 by and
among BHP Diagnostics, Inc, Medicus Corporation, Integra
LifeSciences I, Ltd. and Integra LifeSciences Corporation
27 Financial Data Schedule
(b) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRA LIFESCIENCES CORPORATION
Date: August 14, 1998 By: /s/ Stuart M. Essig
--------------------------------------
Stuart M. Essig
President and Chief Executive Officer
Date: August 14, 1998 By: /s/ David B. Holtz
--------------------------------------
David B. Holtz
Vice President, Finance and Treasurer
15
<PAGE>
AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of this __ day of June, 1998
by and among BHP Diagnostics, Inc. ("BHP"), Medicus Corporation (formerly known
as Medicus Technologies, Inc.) ("Medicus" and, together with BHP,
"BHP/Medicus"), Integra LifeSciences I Ltd. (formerly known as Integra Ltd.)
("ILTD") and Integra LifeSciences Corporation ("ILC" and, together with ILTD,
"Integra").
Background
BHP, Medicus, ILTD and ILC are parties to a Real Estate Lease and Usage
Agreement (the "Lease") and a Shared Facilities Usage Agreement (the "Facilities
Agreement"), each dated as of May 1, 1994, relating to that certain facility
located in West Chester, Pennsylvania that is leased by Medicus to Integra (the
"Facility").
The parties desire to terminate the Lease and the Facilities Agreement and
to enter into certain agreements relating to the Facility, all upon the terms
and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Termination of Agreements.
1.1 Effective as of June 30, 1998, the Lease and the Facilities Agreement
shall be terminated, without further action, and shall be of no further force or
effect.
1.2 ILC shall be responsible for all costs and expenses incurred in
connection with the operation and maintenance of the Facility on and prior to
June 30, 1998, and Medicus shall be responsible for all costs and expenses
incurred in connection with the operation of the Facility on and after July 1,
1998.
1.3 On July 1, 1998, ILC shall pay Medicus for the repair and restoration
items set forth on Exhibit A (items (1), (2), (3) and (4)) hereto. Before and
after June 30, 1998, ILC shall at its expense use its personnel or independent
contractors to complete the item set forth on Exhibit A (item (5)) as
expeditiously as reasonably possible.
2. Covenants and Agreements of ILC and ILTD.
2.1 On the last business day of each month commencing July 31, 1998 and
ending on April 30, 1999, Integra shall pay Medicus an amount equal to $29,030.
2.2 ILC hereby grants to Medicus all of its right, title and interest in
and to the name "Medicus Technologies, Inc.," and forever relinquishes all
rights it may have with respect thereto. Integra shall promptly take all
necessary and other appropriate action, to transfer all the stock of its
inactive subsidiary, Medicus Technologies, Inc., to Medicus. ILC represents that
as of the date hereof, such inactive subsidiary never had a bank account,
transacted business through its accounts or made any commitments or contracts
with Integra or any other party. Further, to its knowledge, there are not claims
or threats of claims outstanding with respect to Medicus Technologies, Inc.
<PAGE>
2.3 Upon the execution of this Agreement, ILC shall instruct electric,
telephone, gas and other utilities, taxing authorities and the like, to read
appropriate meters as of June 30, 1998 and send the bill for such utilities and
taxes to ILC, and commencing July 1, 1998 to bill in the name of Medicus
Technologies, Inc. for such utilities, taxes and the like and to send the bill
to Medicus Technologies, Inc. for such charges at 515 West Franklin Street, West
Chester, Pennsylvania.
2.4 To the extent required during a transition period not beyond April 30,
1999, in the event Medicus Technologies, Inc. is prior to July 1, 1998 unable to
obtain its own utility accounts and/or insurance coverage on terms acceptable to
Medicus, ILC shall at the written instruction of Medicus continue such insurance
and/or utility account on behalf of Medicus Technologies, Inc. and be entitled
to charge and withhold payment to Medicus Technologies, Inc. for the actual
costs thereof incurred commencing July 1, 1998.
3. Covenants and Agreements of Medicus.
3.1 Promptly following April 30, 1999, Medicus shall deliver a report to
Integra detailing the operating costs (operating costs do not include capital
expenditures made by Medicus) and revenues of the freeze-drying operation
conducted by Medicus at the Facility for the period from July 1, 1998 through
April 30, 1999. Along with such report, Medicus shall deliver to Integra by wire
transfer pursuant to instructions previously provided by Integra the amount by
which the revenues of the freeze-drying operation exceeds the costs thereof,
less $140,300.
3.2 For seven years following the date hereof, if Medicus is conducting a
freeze-drying operation at the Facility, Medicus shall provide freeze-drying
services to Integra at prices equal to the lowest prices charged by Medicus to
third parties for such services and shall make available service capacity for
Integra at the Facility to at least 20% of the current freeze-drying capacity of
the Facility based on a 5 day, 40 hour work week.
3.3 Medicus shall not (a) for a period of seven years following the date
hereof, sell or lease the Facility, either directly or indirectly, to any of the
entities set forth on Exhibit B hereto, or (b) for a period of two years
following the date hereof, compete directly with Integra in any non-human,
collagen-based, medical products business, provided that Medicus shall be
permitted to manufacture such products at the request of bona fide third parties
pursuant to arms' length manufacturing agreements. During the seven-year period
in (a) above, Medicus shall promptly notify Integra in writing of its intentions
to sublease the Facility to a third party. Upon receiving such notice, Integra
shall have thirty (30) days to exercise its right to lease the Facility, as
currently configured, from Medicus for $15,000 per month, plus an annual cost of
living increase calculated from May 1, 1999. If from July 1, 1998 Medicus makes
substantial modifications or improvements to the Facility, such modifications or
improvements shall warrant additional fair rent. If Integra does not exercise
such right within the thirty-day period, Medicus shall be permitted to sublease
the Facility to a third party, subject to the restrictions contained in the
first sentence of this Section 3.3; provided, however, that the provisions of
this Section 3.3 relating to notice and rights of Integra shall again become
applicable if Medicus does not sublease the Facility to a third party within
sixty (60) days after the initial thirty-day period expires.
3.4 Medicus agrees to employ John O'Donnell for a period of at least ten
(10) months ending April 30, 1999.
<PAGE>
4. Entire Agreement. This Agreement sets forth the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior arrangements or understandings with respect thereto.
5. Assignment. This Agreement and the rights or obligations of any party
hereunder may not be assigned or delegated without the written consent of each
other party hereto.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
BHP DIAGNOSTICS, INC. INTEGRA LIFESCIENCES CORPORATION
By:____________________ By:___________________________
Name: Name:
Title: Title:
MEDICUS CORPORATION INTEGRA LIFESCIENCES I LTD.
By:_____________________ By:___________________________
Name: Name:
Title: Title:
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,210
<SECURITIES> 19,687
<RECEIVABLES> 3,173
<ALLOWANCES> 0
<INVENTORY> 2,629
<CURRENT-ASSETS> 31,101
<PP&E> 11,302
<DEPRECIATION> 5,137
<TOTAL-ASSETS> 37,374
<CURRENT-LIABILITIES> 3,818
<BONDS> 0
0
0
<COMMON> 150
<OTHER-SE> 115,588
<TOTAL-LIABILITY-AND-EQUITY> 33,268
<SALES> 6,530
<TOTAL-REVENUES> 8,387
<CGS> 3,330
<TOTAL-COSTS> 3,330
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,525)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,525)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,525)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
