<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 March 31, 1999
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Commission file number 0-26224
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INTEGRA LIFESCIENCES CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0317849
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Morgan Lane
Plainsboro, New Jersey 08536
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(Address of principal executive offices) (Zip code)
(609) 275-0500
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(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 May 11, 1999 the registrant had outstanding 15,730,988 shares of
Common Stock, $.01 par value.
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INTEGRA LIFESCIENCES CORPORATION
INDEX
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 (Unaudited) 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 (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 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
Exhibits 15
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................ $ 7,643 $ 5,277
Short-term investments........................................... 11,996 14,910
Accounts receivable, net......................................... 8,776 3,106
Inventories...................................................... 13,101 2,713
Prepaid expenses and other current assets........................ 1,348 921
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Total current assets......................................... 42,864 26,927
Property and equipment, net.......................................... 10,067 6,291
Intangible assets, net............................................... 13,177 1,446
Other assets......................................................... 575 43
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Total assets...................................................... $ 66,683 $ 34,707
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade............................................ $ 2,397 $ 573
Accrued expenses and other current liabilities..................... 7,206 2,456
Income taxes payable............................................... 663 --
Current portion of term loan....................................... 1,500 --
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Total current liabilities.................................... 11,766 3,029
Long-term loan....................................................... 9,500 --
Deferred revenue..................................................... 669 --
Deferred tax liability............................................... 2,562 --
Other liabilities.................................................... 442 312
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Total liabilities............................................ 24,939 3,341
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Stockholders' Equity:
Preferred stock, $.01 par value (15,000 authorized shares; 500 Series
A Convertible shares issued and outstanding at March 31, 1999 and
December 31, 1998, $4,000 liquidation preference; 100 Series
B Convertible shares issued and outstanding at March 31, 1999,
$10,000 with a 10% compounded annual divided liquidation preference). 6 5
Common stock, $.01 par value (60,000 authorized shares; 15,783 shares
issued at March 31, 1999 and December 31, 1998) .................... 158 158
Additional paid-in capital............................................ 129,952 120,046
Treasury stock, cost (46 shares at March 31, 1999 and December 31,
1998)............................................................ (286) (286)
Accumulated other comprehensive income................................ (24) (40)
Other................................................................. (134) (183)
Accumulated deficit................................................... (87,928) (88,334)
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Total stockholders' equity................................... 41,744 31,366
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Total liabilities and stockholders' equity........................... $ 66,683 $ 34,707
============ ==========
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial statements
3
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INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended March 31,
----------------------------
1999 1998
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REVENUE
Product sales........................................$ 4,605 $ 3,163
Product license fees................................. -- 1,015
Product development.................................. 112 250
Research grants...................................... 192 69
Royalties............................................ 59 63
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Total revenue.................................... 4,968 4,560
COSTS AND EXPENSES
Cost of product sales................................ 2,694 1,726
Research and development............................. 1,997 2,142
Selling and marketing................................ 1,579 1,560
General and administrative........................... 2,226 2,822
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Total costs and expenses......................... 8,496 8,250
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Operating loss....................................... (3,528) (3,690)
Gain on disposition of product line.................. 4,161 --
Other income......................................... 253 390
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Income (loss) before income taxes.................... 886 (3,300)
Provision for income taxes........................... 460 --
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Net income (loss).................................... 426 (3,300)
========= ==========
Basic net income (loss) per share.................... $ 0.02 $ (0.21)
========= ==========
Average number of basic common shares
outstanding...................................... 16,731 15,952
========== ==========
Diluted net income (loss) per share.................. $ 0.02 $ (0.21)
========= ==========
Average number of diluted common shares
outstanding...................................... 17,256 15,952
========== ==========
The accompany notes are an integral part
of the condensed consolidated financial statements
4
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INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................................................... $ 426 $ (3,300)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization....................................... 443 336
Gain on sale of product line and other assets....................... (4,161) (40)
Amortization of discount and interest on investments................ (104) 249
Amortization of unearned compensation............................... 50 34
Changes in assets and liabilities:
Accounts receivable.............................................. (712) (359)
Inventories...................................................... 452 (40)
Prepaid expenses and other current assets........................ (51) (121)
Non-current assets............................................... (21) (7)
Accounts payable, accrued expenses and other liabilities......... 999 1,108
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Net cash used in operating activities............................... (2,679) (2,140)
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INVESTING ACTIVITIES:
Proceeds from sale of product line and other assets.................... 6,354 47
Purchases of available-for-sale investments............................ (2,966) (8,662)
Proceeds from sale/maturity of investments............................. 6,000 14,920
Cash used in a business acquisition.................................... (13,935) --
Purchases of property and equipment.................................... (388) (330)
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Net cash provided by (used in) investing activities................. (4,935) 5,975
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FINANCING ACTIVITIES:
Treasury stock purchases............................................... -- (4)
Proceeds from exercised stock options.................................. -- 8
Preferred dividends paid............................................... (20) --
Proceeds from sale of preferred stock.................................. 10,000 --
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Net cash provided by financing activities........................... 9,980 4
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Net increase in cash and cash equivalents.................................. 2,366 3,839
Cash and cash equivalents at beginning of period........................... 5,277 2,083
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Cash and cash equivalents at end of period................................. $ 7,643 $ 5,922
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial statements
5
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INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
In the opinion of management, the March 31 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 three-month period ended March 31, 1999
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, 1998
included in the Company's Annual Report on Form 10-K.
2. Acquisition
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 million acquisition
price was comprised of $14 million of cash and $11 million of assumed
indebtedness under a term loan from Fleet Capital Corporation. Fleet is
also providing a $4 million revolving credit facility to fund working
capital requirements, which was not drawn down as of March 31, 1999. The
cash portion of the purchase price was financed in part by affiliates of
Soros Private Equity Partners LLC, through the sale of $10 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 million with a 10%
compounded annual return 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. The acquisition has been accounted for under the purchase method of
accounting. The purchase price has been preliminarily allocated based on
estimated fair values at the date of acquisition and is pending final
determination of certain acquired balances. This preliminary allocation has
resulted in acquired goodwill and other intangible assets of approximately
$12.8 million, which is being amortized on a straight-line basis over 15
years. The following is a summary of the preliminary allocation (in
thousands):
Cash.......................................... $ 285
Accounts receivable........................... 4,958
Inventory..................................... 10,905
Property and equipment........................ 4,056
Other assets.................................. 877
Intangible assets and goodwill................ 12,815
Accrued expenses and other liabilities........ (8,896)
Term loan..................................... (11,000)
========
$ 14,000
========
6
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INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma financial information assumes that the
acquisition had occurred on January 1st of each period (in thousands):
For the Three Months ended
March 31,
1999 1998
---- ----
Total revenue...................... $ 12,198 $ 13,380
Net loss........................... (2,932) (3,155)
Basic and diluted net loss per
share............................ (0.18) (0.19)
The above amounts include pre-acquisition financial results for the three
months ended March 31, 1998 and the pre-acquisition results of NeuroCare
through March 25, 1999. Excluded from the net loss and net loss per share
results is the gain from the sale of the Panafil(R) product line (See Note
3). The pro forma amounts are based upon certain assumptions and estimates,
and do not reflect any activities that might have occurred as a result of
the acquisition. The pro forma results do not necessarily represent results
which 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.
3. Panafil(R) Product Line Disposition
In January 1999 the Company sold the Rystan Panafil(R) product line,
including the brand name and related production equipment, to Healthpoint,
Ltd. for $6.4 million in cash. The Company 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.
4. Income (loss) per share and comprehensive income (loss)
Basic and diluted net income (loss) per share and comprehensive income
(loss) for the three months ended March 31 were as follows:
(In thousands) 1999 1998
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Basic per share computation:
Net income (loss).............................. $ 426 $ (3,300)
Dividends on Series A preferred stock.......... (20) --
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Net income (loss) available to common stock.... 406 $ (3,300)
Average number of shares outstanding........... 16,731 15,952
Basic net income (loss) per share.............. $ 0.02 $ (0.21)
======= ========
Diluted per share computation:
Net income (loss).............................. $ 426 $ (3,300)
Average number of shares outstanding........... 16,731 15,952
Effect of dilutive stock options............... 187 --
Effect of preferred stock and dilutive
warrants .................................... 338 --
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Average dilutive number of shares outstanding.. 17,256 15,952
Diluted net income (loss) per share............ $ 0.02 $ (0.21)
======= ========
Comprehensive income (loss):
Net income (loss).............................. $ 426 $ (3,300)
Unrealized gain (loss) on investments.......... 16 (51)
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Comprehensive income (loss).................... $ 442 $ (3,351)
======= ========
Option and warrants to purchase additional shares of common stock of
2,539,068 (at a price range of $4.31 to $23.00) and 1,888,008 (at a price
range of $3.55 - $23.00) were outstanding at March 31, 1999 and 1998,
respectively, but were not included in the computation of diluted income
(loss) per share because the exercise prices were greater than the average
market price of the common stock for those periods.
5. Inventories
Inventories consist of the following:
(In thousands) March 31, 1999 December 31, 1998
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Finished goods........ $ 5,131 $ 1,433
Work-in-process....... 4,197 802
Raw materials......... 3,773 478
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$ 13,101 $ 2,713
========== =========
7
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INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Current Liabilities
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
(In thousands) March 31, 1999 December 31, 1998
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<S> <C> <C>
Legal fees................................. $ 451 $ 591
Contract research.......................... 441 401
Deferred revenue and other advances........ 493 249
Vacation .................................. 602 260
Provision for facility closing............. 574 96
NeuroCare acquisition costs................ 1,164 --
Other ..................................... 3,481 899
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$ 7,206 $ 2,456
========== =========
</TABLE>
7. Segment Reporting
The Company's reportable business segments are outlined in the Company's
1998 audited financial statements. As a result of the NeuroCare
acquisition, the Company operates the Company's neurosurgical business
activities as a separate business segment. The majority of the Company's
neurosurgical activity was previously included in the medical products
business segment. The sale of the Panafil(R) product line in the first
quarter of 1999 is included in the Skin Repairs and Burns net income.
<TABLE>
<CAPTION>
In thousands Reportable Corporate
Neuro-surgical Medical Skin Repair Segments and All
Business Segment Products and Burns Sub-total Other Total
- --------------------- -------------- ------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter
1999
Sales $ 522 $ 2,473 $ 1,610 $ 3,163 $ -- $ 3,163
Total revenue 522 2,726 1,610 4,858 110 4,968
Operating costs 940 2,637 2,711 6,288 2,208 8,496
Net income (loss) (418) 89 2,600 2,271 (1,845) 426
First Quarter
1998
Sales $ -- $ 1,813 $ 1,350 $ 3,163 $ -- $ 3,163
Total revenue 1,023 2,141 1,350 4,514 46 4,560
Operating costs 490 2,194 3,015 5,699 2,551 8,250
Net income (loss) 533 (53) (1,665) (1,185) (2,115) (3,300)
</TABLE>
For the three months ended March 31, 1999 and 1998, the Company's foreign sales,
primarily to Europe and the Asia Pacific regions, were 18% and 20% of total
product sales, respectively.
8. Legal Matters
In July 1996, the Company 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 complaint charges, 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 on one of the Company's patents. This
patent is one of a group of five 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
8
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INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
proteins. The defendants have filed a countersuit asking for an award of
defendants' reasonable attorney fees.
The ultimate liability of any case for which a settlement agreement has not
been reached cannot be determined because of the considerable uncertainties
that exist. The Company's financial statements do not reflect any
significant amounts related to possible unfavorable outcomes of the matter
above or any other matters. 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 2. 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 has developed principally by combining existing businesses,
acquiring synergistic technologies and forming strategic business and
technological alliances. As a result of the Company's acquisition of Rystan
Company, Inc. ("Rystan") in September 1998 and the acquisition of the NeuroCare
Group of companies ("NeuroCare") in March 1999, the Company's consolidated
financial results for the three months ended March 31, 1999 and 1998 may not be
directly comparable. In addition, the Company's financial information discussed
below should be considered in light of the Company's sale of the Panafil(R)
product line on January 5, 1999.
Results of Operations
In January 1999 the Company recognized a $4.2 million gain ($3.7 million
net of taxes) related to the sale of the Panafil(R) product line along with
certain other assets related to the product.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Total revenues increased to approximately $5.0 million for the three months
ended March 31, 1999 from $4.6 million for the three months ended March 31,1998
with increases in product sales offset by a decline in licensing fees. Product
sales increased to $4.6 million for the three months ended March 31, 1999 from
$3.2 million for the three months ended March 31, 1998. Excluding product sales
of Rystan and NeuroCare in the current quarter, sales increased $400,000 with
medical product sales increasing $540,000 and INTEGRA(TM) Artificial Skin
("INTEGRA") sales declining $140,000 compared to the first quarter of 1998.
Medical product sales increases were across three private label products and the
Company's Helistat(R) product line. Because significant portions of the
Company's medical products segment sales are made to marketing partners and
distributors, quarter-to-quarter sales in the segment can vary significantly.
Product sales from NeuroCare and Rystan each added $520,000 in the current
quarter, with $380,000 from the Panafil(R) product line prior to its disposition
in January 1999. Although under the terms of the Panafil(R) disposition
agreement the Company is entitled to revenue based on identified sales into the
podiatry and burn care markets (less certain fees), the Company currently
anticipates a decline in revenue compared to historical Panafil(R) revenue
levels. NeuroCare product sales were included as of March 26, 1999 under the
terms of the acquisition agreement.
Export sales for the three months ended March 31, 1999 increased to
$740,000 from $640,000 for the three months ended March 31, 1998 and included
$364,000 of INTEGRA sales in the current quarter.
Other revenue, which includes grant revenue, licensing fees, product
development revenue and royalties, declined approximately $1.0 million to
$360,000 for the three months ended March 31, 1999 from $1.4 million for the
three months ended March 31, 1998. The decline was due to a $1.0 million
non-refundable licensing fee from Century Medical, Inc. in the first quarter of
1998. The Company's product development revenue also declined slightly and was
offset by higher grant funding. The Company's development and marketing
agreement with DePuy, a Johnson & Johnson Company, does not include quarterly
development funding payments in 1999. 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.
9
<PAGE>
Cost of product sales increased to approximately $2.7 million (59% of
product sales) for the three months ended March 31, 1999 from $1.7 million (55%
of product sales) for the three months ended March 31, 1998. Included in the
1999 cost of product sales is $210,000 related to the fair value purchase
accounting adjustment for Rystan and NeuroCare's inventory. Excluding the
purchase accounting adjustments, the cost of product sales for the three months
ended March 31, 1999 was 54% of product sales. The Company continues to
experience a higher cost of product sales as a percentage of product sales
because of the high fixed costs and low utilization of the Company's INTEGRA
manufacturing facility. The Company currently anticipates that its overall gross
margin will decline for the next two quarters due to the fair value purchase
accounting adjustment related to the NeuroCare acquisition. The Company
continues to believe that its current capacity to produce its 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 declined to approximately $2.0 million for
the three-month period ended March 31, 1999 from $2.1 million for the
three-month period ended March 31, 1998. Increases associated with additional
development personnel for the Company's medical products orthopedic development
programs were offset by a decline in expenditures for contract development
programs in the skin repair and burn and other developing business segments. The
Company expects that the level of research and development expenditures in 1999
will exceed 1998 levels due to the acquisition of NeuroCare. The Company
anticipates adjusting the allocation of research and development resources as
the Company combines NeuroCare's development activities. The amount of resources
and the allocation of those 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, continued program funding levels,
potential funding opportunities and determinations with respect to the
commercial potential of the Company's technologies.
Selling and marketing expense was approximately $1.6 million for the
three-month periods ended March 31, 1999 and 1998. The current period included
$320,000 in increases from Rystan and NeuroCare activities with the significant
portion coming from Rystan's telemarketing activities. There were also increases
in expenditures related to the Company's DuraGen product pre-launch activities.
The Company currently anticipates a European launch in the second quarter.
DuraGen is pending 510(k) clearance from the FDA in the United States. Cost
increases were offset by a decline in marketing activities and personnel in the
skin repair and burn segment. The Company anticipates a significant increase in
overall selling and marketing costs in the neurosurgical segment as result of
the NeuroCare acquisition.
General and administrative expense declined to approximately $2.2 million
for the three-month period ended March 31, 1999 from $2.8 million for the
three-month period ended March 31, 1998. The decline included a significant
reduction in legal fees as the Company resolved various litigation matters in
the first half of 1998. The Company also took a $200,000 charge in 1998 related
to an asset impairment provision. The Company has announced that it will be
closing NeuroCare's corporate headquarters and distribution center in Pleasant
Prairie, Wisconsin during the third quarter of 1999. While the Company believes
that the consolidation of the Company's corporate and distribution facilities
will result in an overall cost reduction, it is anticipating higher operating
costs over the next two quarters as a result of the NeuroCare acquisition,
including costs associated with a short term retention program for key Wisconsin
personnel, the transfer and installation of distribution and telecommunication
equipment and other transition and training costs required as a result of the
facility closing.
10
<PAGE>
Liquidity and Capital Resources
The Company has funded its operations to date primarily through private and
public offerings of equity securities, revenues from sales of products, research
grants from government agencies, development and licensing agreements with major
industrial companies, borrowings under a revolving credit line and cash acquired
in connection with business acquisitions. At March 31, 1999, the Company had
cash, cash equivalents and short-term investments of approximately $19.6
million. The Company's principal uses of funds during the three-month period
ended March 31, 1999 were $2.7 million for operations, $13.9 million in the
acquisition of NeuroCare and $390,000 in purchases of property and equipment.
The Company raised $10 million with the sale of Series B Preferred Stock and
warrants to affiliates of Soros Private Equity Partners LLC and assumed $11
million of term debt with the NeuroCare acquisition.
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. With the acquisition of NeuroCare, the Company has
approximately $2.1 million in liabilities related to the acquisition which will
need to be funded over the remainder of 1999. As part of the assumption of the
NeuroCare term loan, Integra NeuroCare obtained a $4 million revolving credit
facility that it intends to utilize to fund its working capital needs. 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
As is true for most companies, the potential for problems involving
existing information systems as we approach and pass January 1, 2000 creates a
risk for the Company. These potential problems are the result of the inability
of certain date-sensitive computer programs and embedded controls to recognize a
two-digit date field designated as "00" as the year 2000 instead of the year
1900, the consequences of which could lead to system failures or miscalculations
causing disruptions to operations and normal business activities. This is a
significant issue with far reaching implications, some of which cannot be
anticipated or predicted with any degree of certainty as is commonly referred to
as a Year 2000 (Y2K) compliance issue.
Integra Life Sciences Businesses
The Company has completed its initial assessment of the magnitude of
the impact of Y2K on the businesses of the Company prior to the acquisition of
NeuroCare (the "Integra businesses") and is currently in the process of
developing, implementing and monitoring a Y2K correction plan in all areas
identified as potentially compromised by the advent of the Y2K. This correction
plan includes (i) the assessment of information technology systems ("IT
systems") and non-IT systems for Y2K compliance, (ii) the modification and/or
replacement of non-compliant systems, (iii) the testing of modified and/or
replaced systems, and (iv) the deployment of Y2K compliant systems. In most
cases, the Company anticipates that the Y2K correction plan will include
upgrading current hardware and software or purchasing additional hardware and
software to enhance its current IT systems. Since January 1, 1997, the Integra
businesses have spent approximately $460,000 upgrading and/or replacing certain
components of its information systems. The Company anticipates spending an
additional $50,000 on such IT system upgrades and purchases through December 31,
1999. The majority of the capital expenditures and operating costs associated
with these upgrades and purchases would have occurred in the normal course of
business regardless of the Y2K issue, although a portion of such expenditures
and costs is attributable to the Company's Y2K correction plan. The Company
expects that the upgrades and purchases will be implemented and tested by June
1999 and that, in any event, its IT systems will be Y2K compliant before
December 31, 1999. The Company is currently on track with its planned upgrades.
11
<PAGE>
The Company has been reviewing and has requested assurances on the
status of Y2K readiness of its critical suppliers. Many of these suppliers
however, have limited assurances on their status on the Y2K readiness. The
Company plans to continue to monitor critical suppliers during 1999. The Company
has reviewed information regarding its major customers to assess their readiness
for Y2K. If a significant number of suppliers and customers experience
disruptions as a result of the Y2K issue, this could have a material adverse
effect on the financial position and results of operations of the Company.
Although the Company is formulating contingency plans to deal with Y2K problems
on critical suppliers and major customers, there can be no assurance that these
plans will address all Y2K problems or that the implementation of these plans
will be successful.
The products of the Integra businesses do not contain any materials
that would make such products susceptible to disruptions relating to the Y2K.
Given the information available at this time, the Company currently anticipates
that the amount that the Integra businesses will spend to complete their Y2K
correction plan should not have a material adverse impact on the Company's
business, results of operations, financial position and cash flow beyond the
amounts discussed previously. Furthermore, Integra does not currently expect
that the effects of any Y2K non-compliance on Integra's information systems will
have any material adverse impact on Integra's business, results of operations,
financial positions or cash flows. However, there can be no assurance that
Integra will not incur additional expenses or experience business disruption as
a result of the IT system problems associated with the century change, including
system and equipment problems with third parties with whom Integra does
business.
Integra NeuroCare Businesses
The Company is currently assessing the magnitude of the impact of Y2K issues on
the NeuroCare business. Although the Company evaluated NeuroCare's exposure to
Y2K issues during its due diligence process, it was unable to obtain a thorough
review of information related to the systems within the company. The Company is
now in the process of performing a review of the NeuroCare systems in order to
develop a correction plan. The Company anticipates that it will have its initial
assessment complete by August 1999. The Company has already identified several
critical systems and confirmed that they are within compliance specifications of
the Company. However, there can be no assurance that other critical systems
will be found to be Y2K compliant, or that the expenditures necessary to make
such systems compliant will not have a material adverse effect on the Company's
financial position.
The NeuroCare businesses make and sell certain products that contain computer
processors. The Company has determined that the Camino line of intracranial
pressure monitors does not include a dating function, and therefore will not be
affected by Y2K considerations. The Neuro Navigational line of neuroendoscopy
products does contain certain dating functions that will be affected by Y2K
considerations, but the substantive performance of the devices will not be
affected. The Company is providing its customers with instructions for resetting
the dating function to overcome effects of the Y2K considerations.
Suppliers
The Company has been reviewing and has requested assurances on the status of Y2K
readiness of its critical suppliers. Many of these suppliers however, have
limited assurances on their status on the Y2K readiness. The Company plans to
continue to monitor critical suppliers during 1999. The Company has reviewed
information regarding its major customers to assess their readiness for Y2K. If
a significant number of suppliers and customers experience disruptions as a
result of the Y2K issue, this could have a material adverse effect on the
financial position and results of operations of the Company. Although the
Company is formulating contingency plans to deal with Y2K problems on critical
suppliers and major customers, there can be no assurance that these plans will
address all Y2K problems or that the implementation of these plans will be
successful.
12
<PAGE>
Given the information available at this time, Integra currently anticipates that
the amount that Integra will spend to complete its Y2K correction plan should
not have a material adverse impact on Integra's business, results of operations,
financial position and cash flow beyond the amounts discuss previously.
Furthermore, Integra does not currently believe that the effects of any Y2K
non-compliance on Integra's information systems should have any material adverse
impact on Integra's business, results of operations, financial position or cash
flows. However, there can be no assurance that Integra will not incur additional
expenses or experience business disruption as a result of information system
problems associated with the century change, including system and equipment
problems of third parties with whom Integra does business.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On March 29, 1999, the Company issued and sold to affiliates
of Soros Private Equity Partners LLC 100,000 shares of Series B Preferred Stock
and warrants to purchase 240,000 shares of common stock of the Company at an
exercise price of $3.82 per share. The aggregate purchase paid by the purchasers
was $10 million. The shares of Series B Preferred Stock are currently
convertible into 2,617,801 shares of common stock of the Company. The foregoing
securities were issued by the Company in reliance upon Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 thereunder.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
- --------------- ----------------------
2 Asset Purchase Agreement dated March 29, 1999 among
Heyer-Schulte NeuroCare, L.P., Neuro Navigational,
L.L.C., Integra NeuroCare, LLC and Redmond
NeuroCare, LLC.*
4.1 Certificate of Designation, Preferences and Rights
of Series B Convertible Preferred Stock of Integra
LifeSciences Corporation dated March 12, 1999.
4.2 Warrant to Purchase 60,000 Shares of Common Stock
of Integra LifeSciences Corporation issued to SFM
Domestic Investments LLC.
4.3 Warrant to Purchase 180,000 Shares of Common Stock
of Integra LifeSciences Corporation issued to
Quantum Industrial Partners LDC.
10.1 Series B Convertible Preferred Stock and Warrant
Purchase Agreement dated March 29, 1999 among
Integra LifeSciences Corporation, Quantum Industrial
Partners LDC and SFM Domestic Investments LLC.*
10.2 Registration Rights Agreement dated March 29, 1999
among Integra LifeSciences Corporation, Quantum
Industrial Partners LDC and SFM Domestic
Investments LLC.*
10.3 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.*
10.4 Substituted and Amended Term Note dated March 29,
1999 by Integra NeuroCare LLC, Redmond NeuroCare
LLC, Heyer-Schulte NeuroCare, Inc. and Camino
NeuroCare, Inc. to Fleet Capital Corporation.
27 Financial Data Schedule
- --------------
* Schedules and other attachments to the indicated exhibit have been omitted.
The Company agrees to furnish supplementally to the Commission upon request
a copy of any omitted schedules or attachments.
(b) Reports on Form 8-K
None
13
<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: May 17, 1999 /s/ Stuart M. Essig
--------------------------------
Stuart M. Essig, Ph.D.
President and Chief Executive Officer
Date: May 17, 1999 /s/ David B. Holtz
---------------------------------
David B. Holtz
Vice President, Treasurer
14
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Location
<S> <C>
2 Asset Purchase Agreement dated March 29, 1999 (1) (Exh. 2)
among Heyer-Schulte NeuroCare, L.P., Neuro
Navigational, L.L.C., Integra NeuroCare, LLC and
Redmond NeuroCare, LLC.*
4.1 Certificate of Designation, Preferences and Rights of (1) (Exh. 4.1)
Series B Convertible Preferred Stock of Integra
LifeSciences Corporation dated March 12, 1999.
4.2 Warrant to Purchase 60,000 Shares of Common Stock (1) (Exh. 4.2)
of Integra LifeSciences Corporation issued to SFM
Domestic Investment LLC.
4.3 Warrant to Purchase 180,000 Shares of Common Stock (1) (Exh. 4.3)
of Integra LifeSciences Corporation issued to Quantum
Industrial Partners LDC.
10.1 Series B Convertible Preferred Stock and Warrant (1) (Exh. 10.1)
Purchase Agreement dated March 29, 1999 among
Integra LifeSciences Corporation, Quantum Industrial
partners LDC and SFM Domestic Investments LLC.*
10.2 Registration Rights Agreement dated March 29, 1999 (1) (Exh. 10.2)
among Integra LifeSciences Corporation, Quantum
Industrial partners LCD and SFM Domestic Investments LLC.
10.3 Amended and Restated Loan and Security Agreement (1) (Exh. 10.3)
dated March 29, 1999 among the Lenders named therein,
Fleet Capital Corporation, Integra NeuroCare LLC and
other Borrowers named therein.*
10.4 Substituted and Amended Term Note dated March 29, 1999 (1) (Exh. 10.4)
by Integra NeuroCare LLC, Redmond NeuroCare LLC,
Heyer-Schulte NeuroCare, Inc. and Camino NeuroCare, Inc.
to Fleet Capital Corporation.
27 Financial Data Schedule Page 16
</TABLE>
(1) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on March 29, 1999.
* Schedules and other attachments to the indicated exhibit have been omitted.
The Company agrees to furnish supplementally to the Commission upon request
a copy of any omitted schedules or attachments.
15
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<SECURITIES> 11,996
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0
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<COMMON> 158
<OTHER-SE> 41,580
<TOTAL-LIABILITY-AND-EQUITY> 64,121
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