<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 September 30, 1999
Commission file number 0-26224
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0317849
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 November 10, 1999 the registrant had outstanding 16,142,976 shares of
Common Stock, $.01 par value.
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998 (Unaudited) 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 1998
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
Exhibits 21
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
----------------- -------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................ $ 12,888 $ 5,277
Short-term investments ........................... 7,912 14,910
Accounts receivable, net ......................... 7,820 3,106
Inventories ...................................... 10,815 2,713
Prepaid expenses and other current assets ........ 683 921
-------- --------
Total current assets ....................... 40,118 26,927
Property and equipment, net ................................ 9,566 6,291
Intangible assets and goodwill, net......................... 13,376 1,446
Other assets ............................................... 917 43
-------- --------
Total assets ............................... $ 63,977 $ 34,707
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term loans (including current maturities on
long-term loan)................................ $ 2,021 --
Accounts payable, trade........................... 1,330 573
Income taxes payable.............................. 560 --
Accrued expenses and other current liabilities.... 5,455 2,303
Customer advances and deposits.................... 1,658 153
-------- -------
Total current liabilities................... 11,024 3,029
Long-term loan.............................................. 8,250 --
Deferred revenue............................................ 6,957 --
Deferred tax liability...................................... 777 --
Other liabilities........................................... 402 312
-------- -------
Total liabilities........................... 27,410 3,341
-------- -------
Stockholders' Equity:
Preferred stock, $.01 par value (15,000 authorized shares;
500 Series A Convertible shares issued and outstanding
at September 30, 1999 and December 31, 1998, $4,000
liquidation preference; 100 Series B Convertible shares
issued and outstanding at September 30, 1999, $10,000
with a 10% compounded annual cumulative dividend
liquidation preference)................................. 6 5
Common stock, $.01 par value (60,000 authorized shares;
15,833 shares issued and outstanding at September 30,
1999 and 15,785 shares issued and outstanding at
December 31, 1998)...................................... 158 158
Additional paid-in capital.................................. 130,207 120,046
Other....................................................... (130) (183)
Accumulated other comprehensive loss........................ (31) (40)
Treasury stock at cost (2 shares at September 30, 1999 and
52 shares at December 31, 1998)......................... (10) (286)
Accumulated deficit......................................... (93,633) (88,334)
-------- -------
Total stockholders' equity.................................. 36,567 31,366
-------- -------
Total liabilities and stockholders' equity.................. $ 63,977 $ 34,707
======== ========
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial statements
3
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE
Product sales .................................... $11,464 $ 3,704 $28,202 $10,234
Other revenue .................................... 663 586 1,443 2,444
------- ------- ------- -------
Total revenue ........................... 12,127 4,290 29,645 12,678
COSTS AND EXPENSES
Cost of product sales ............................ 6,051 1,706 16,434 5,036
Research and development ......................... 2,249 2,220 6,553 6,437
Selling and marketing ............................ 2,421 1,201 6,927 4,280
General and administrative ....................... 4,103 2,383 10,788 7,949
------- ------- ------- -------
Total costs and expenses ................ 14,824 7,510 40,702 23,702
Operating loss ................................... (2,697) (3,220) (11,057) (11,024)
Gain on disposition of product line .............. -- -- 4,161 --
Interest income................................... 270 324 781 996
Interest expense.................................. (215) -- (452) --
Other income (expense), net....................... 72 (14) 60 593
-------- ------- ------- ------
Loss before income taxes ......................... (2,570) (2,910) (6,507) (9,435)
Income tax benefit ............................... 541 -- 1,322 --
------- ------- ------- -------
Net loss ......................................... $(2,029) $(2,910) $(5,185) $(9,435)
Basic and diluted net loss per share ............. $ (0.14) $ (0.18) $ (0.34) $ (0.59)
Weighted average number of common and common share
equivalents outstanding ...................... 16,810 15,952 16,792 15,950
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial statements
4
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................................ $ (5,185) $ (9,435)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization......................................... 2,128 1,010
Gain on sale of product line and other assets......................... (4,158) --
Gain on litigation settlement......................................... -- (264)
Provision for impairment of assets.................................... -- 145
Deferred tax benefit.................................................. (1,807) --
Amortization of discount and interest on investments.................. (266) (327)
Amortization of deferred revenue...................................... (210) --
Amortization of unearned compensation................................. 308 214
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable................................................ 186 51
Inventories........................................................ 2,450 (151)
Prepaid expenses and other current assets.......................... 203 90
Non-current assets................................................. (27) 49
Accounts payable, accrued expenses and other current liabilities... (505) 1,524
Customer advances and deposits..................................... 1,505 --
Deferred revenues.................................................. 6,404 250
-------- --------
Net cash provided by (used in) operating activities................. 1,026 (6,844)
INVESTING ACTIVITIES:
Proceeds from sale of product line and other assets ..................... 6,354 48
Purchase of restricted securities ....................................... -- (500)
Purchases of available-for-sale investments ............................. (12,768) (23,274)
Proceeds from sale/maturity of investments .............................. 20,000 27,020
Cash acquired in a business acquisition.................................. -- 1,224
Cash used in a business acquisition, net of cash acquired ............... (14,794) --
Purchases of property and equipment ..................................... (1,553) (939)
-------- --------
Net cash (used in) provided by investing activities ............... (2,761) 3,579
-------- --------
FINANCING ACTIVITIES:
Net proceeds from revolving credit facility ............................. 21 --
Repayments of term loan ................................................. (750) --
Proceeds from exercise of stock options ................................. 211 8
Treasury stock purchases ................................................ -- (259)
Proceeds from sale of preferred stock ................................... 9,924 4,000
Preferred stock dividends paid .......................................... (60) (7)
-------- --------
Net cash provided by financing activities ......................... 9,346 3,742
-------- --------
Net increase in cash and cash equivalents ........................................ 7,611 477
Cash and cash equivalents at beginning of period ................................. 5,277 2,083
-------- --------
Cash and cash equivalents at end of period ....................................... $ 12,888 $ 2,560
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Assumption of term loan in connection with the acquisition of
NeuroCare ........................................................... $ 11,000 $ --
Common stock and warrants issued in business acquisition................. -- 3,886
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial statements
5
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
In the opinion of management, the September 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 September 30, 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. 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(Registered) Artificial Skin worldwide, excluding Japan and subject
to transitional arrangements in certain countries, for a minimum of ten
years. JJM may extend the JJM Agreement for successive ten-year periods
solely at its discretion. Under the JJM Agreement, the Company will
continue to manufacture INTEGRA(Registered) 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(Registered) Artificial Skin and
certain other rights. This amount has been recorded as deferred revenue
and is being amortized over the initial ten-year term of the JJM
Agreement. Additionally, the JJM Agreement requires JJM to make
non-refundable payments to the Company each year based upon minimum
purchases of INTEGRA(Registered) Artificial Skin. As a result, the Company
received a $1.2 million prepayment upon signing the JJM Agreement for
minimum purchases in 1999, which was recorded in current liabilities as
customer advances and deposits.
The JJM Agreement also provides for annual research funding beginning in
2000 and additional payments upon the occurrence of certain clinical and
regulatory events and for funding expansion of the Company's Integra
Artificial Skin(Registered) production capacity as certain sales targets
are achieved.
6
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
3. 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 $25.4 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"). Fleet is also providing a $4.0 million revolving credit
facility to fund working capital requirements, of which $21,000 was drawn
down as of September 30, 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 $10.0 million with a 10% compounded annual return, 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.
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. This preliminary
allocation has resulted in acquired intangibles and goodwill of
approximately $13.5 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 ............................ 10,803
Property and equipment ............... 3,641
Other assets ......................... 572
Intangibles and goodwill ............. 13,454
Accrued expenses and other liabilities (8,251)
Term loan ............................ (11,000)
--------
$ 14,403
========
The following unaudited pro forma financial information assumes that the
acquisition had occurred as of the beginning of each period (in
thousands):
For the Nine Months
Ended September 30,
-------------------
1999 1998
-------- --------
Total revenue .................. $ 36,817 $ 36,355
Net loss ....................... (8,642) (10,825)
Basic and diluted loss per share $ (0.56) $ (0.73)
Excluded from the pro forma results for the nine months ended September
30, 1999 is the $3.7 million gain, net of tax, ($0.22 per share) from the
sale of the Panafil(Registered) product line (see Note 4). Included in the
historical and pro forma amounts for the nine months ended September 30,
1999 are inventory purchase accounting adjustments of $2.2 million and
severance costs of $1.1 million relating to the NeuroCare acquisition. The
pro forma amounts for the nine months ended September 30, 1998 also
include the $2.2 million fair value inventory purchase accounting
adjustments related to the NeuroCare acquisition. These 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 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.
7
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Panafil(Registered) Product Line Disposition
In January 1999, the Company sold the Rystan Panafil(Registered) 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.
5. Loss per share and comprehensive loss
Basic and diluted net loss per share and comprehensive loss for the three
and nine months ended September 30 were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic and diluted loss per share:
Net loss .......................................... $ (2,029) $ (2,910) $ (5,185) $ (9,435)
Dividends on Series A preferred stock ............. (20) (7) (68) (14)
Dividends on Series B preferred stock ............. (250) -- (500) --
-------- -------- -------- --------
Net loss applicable to common
stock ......................................... $ (2,299) $ (2,917) $ (5,753) $ (9,449)
Average number of shares outstanding .............. 16,810 15,952 16,792 15,950
Basic and diluted loss per share .................. $ (0.14) $ (0.18) $ (0.34) $ (0.59)
======== ======== ======== ========
Comprehensive loss:
Net loss .......................................... $ (2,029) $ (2,910) $ (5,185) $ (9,435)
Unrealized gain (loss) on investments ............. 101 (33) 9 (78)
-------- -------- -------- --------
Comprehensive loss ................................ $ (1,928) $ (2,943) $ (5,176) $ (9,513)
======== ======== ======== ========
</TABLE>
Options and warrants to purchase 4,071,197 and 2,445,000 shares of common
stock and preferred stock convertible into 2,867,801 and 250,000 shares of
common stock at September 30, 1999 and 1998, respectively, were not
included in the computation of diluted loss per share because their effect
would be antidilutive.
6. Inventory
Inventories consist of the following (in thousands):
September 30, 1999 December 31, 1998
------------------ -----------------
Finished goods ............. $ 3,700 $ 1,433
Work-in-process ............ 2,870 802
Raw materials .............. 4,245 478
------- -------
$10,815 $ 2,713
======= =======
8
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Current Liabilities
Accrued expenses and other liabilities consist of the following (in
thousands):
September 30, 1999 December 31, 1998
------------------ -----------------
Acquisition costs ................. $ 785 $ --
Legal fees ........................ 914 591
Provision for facility closing .... 404 96
Contract research ................. 526 401
Vacation .......................... 554 260
Royalties ......................... 244 101
Commissions ....................... 189 105
Interest .......................... 179 --
Other ............................. 1,660 749
------ ------
$5,455 $2,303
====== ======
8. Segment Reporting
As outlined in Note 15 of the 1998 audited financial statements, the
Company's operations were comprised of two reportable business segments,
(1) medical products and (2) skin defects and burns. As a result of
certain transactions occurring in 1999, including the sale of the
Panafil(Registered) product line, the NeuroCare acquisition, and the
transfer of all INTEGRA(Registered) Artificial Skin sales and marketing
activities to JJM, the Company has reorganized its reportable segments
into two new business units, (1) neurosurgical and (2) surgical products.
Prior to the NeuroCare acquisition, the Company's neurosurgical 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
surgical products segment, as the majority of this segment's products are
sold under OEM or distribution arrangements.
<TABLE>
<CAPTION>
(In thousands) Reportable Corporate
Surgical Segments and All
Business Segment Neurosurgical Products Sub-total Other Total
-----------------------------------------------------------------------------------------------------------------------
Three months ended September 30,
<S> <C> <C> <C> <C> <C>
1999
----
Product sales.................. $ 7,920 $ 3,544 $ 11,464 $ -- $ 11,464
Total revenue ................. 7,920 4,197 12,117 10 12,127
Operating costs ............... 8,725 4,364 13,089 1,735 14,824
Operating income (loss) ....... (805) (167) (972) (1,725) (2,697)
1998
----
Product sales.................. $ -- $ 3,704 $ 3,704 $ -- $ 3,704
Total revenue ................. -- 4,198 4,198 92 4,290
Operating costs ............... 476 4,853 5,329 2,181 7,510
Operating income (loss) ....... (476) (655) (1,131) (2,089) (3,220)
Nine months ended September 30,
1999
----
Product sales.................. $ 16,706 $ 11,496 $ 28,202 $ -- $ 28,202
Total revenue ................. 16,706 12,789 29,495 150 29,645
Operating costs ............... 19,929 15,549 35,478 5,224 40,702
Operating income (loss) ....... (3,223) (2,760) (5,983) (5,074) (11,057)
1998
----
Product sales.................. $ -- $ 10,234 $ 10,234 $ -- $ 10,234
Total revenue ................. 1,000 11,478 12,478 200 12,678
Operating costs ............... 1,503 14,678 16,181 7,521 23,702
Operating income (loss) ....... (503) (3,200) (3,703) (7,321) (11,024)
</TABLE>
9
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. 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 proteins. The defendants have
filed a countersuit asking for an award of defendants' reasonable attorney
fees. The case is currently expected to go to trial during 2000.
The ultimate liability of any litigation matter 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. 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 an
unfavorable outcome of the above matter.
10
<PAGE>
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 and in the Company's 1998 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
GENERAL
The Company has developed principally by combining existing businesses,
acquiring synergistic technologies and forming strategic business and
technological alliances. The Company's operations consist of 1) the
neurosurgical business segment, which sells a comprehensive portfolio of
implants, instruments and monitors used in neurosurgical operations and by
intensive care units, primarily for the treatment of hydrocephalus and
neurotrauma, and 2) the surgical products business segment, which manufactures
INTEGRA(Registered) Artificial Skin ("INTEGRA Skin"), which is used for
treatment of skin defects and burns, and various biomaterials-based medical
products and devices for infection control and general and dental surgery and as
components for other implantation devices. Through its surgical products
segment, the Company also supplies technology and products to the
biomaterials-based orthopedic market. The majority of the products manufactured
by the surgical products segment are sold to customers under the terms of
multiple-year marketing and distribution agreements that provide for purchase
and supply commitments on the part of the customer and the Company,
respectively. In many cases, marketing and distribution partners have paid
license fees for the marketing and distribution rights or development funding
for the products.
As a result of the following transactions which occurred in 1999 and 1998, the
Company's segment financial results for the three and nine months ended
September 30, 1999 and 1998 may not be directly comparable:
o The Company acquired the Rystan Company, Inc. ("Rystan") in September
1998, and subsequently sold the Rystan Panafil(Registered) product line in
January 1999;
o The Company acquired the NeuroCare Group of companies ("NeuroCare" or
"Integra NeuroCare") in March 1999; and
o 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 Skin worldwide,
excluding Japan, for a minimum of ten years. Under the JJM Agreement, the
Company will continue to manufacture INTEGRA 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.
11
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Product sales and cost of product sales were as follows (in thousands):
1999
- ----
Neurosurgical Surgical Products Consolidated
------------- ----------------- ------------
Products sales $ 7,920 $ 3,544 $11,464
Cost of product sales 4,090 1,961 6,051
------- ------- -------
Gross margin on product sales 3,830 1,583 5,413
Gross margin percentage 48% 45% 47%
1998
- ----
Neurosurgical Surgical Products Consolidated
------------- ----------------- ------------
Products sales $ -- $3,704 $3,704
Cost of product sales -- 1,706 1,706
------- ------ ------
Gross margin on product sales -- 1,998 1,998
Gross margin percentage -- 54% 54%
Consolidated product sales increased $7.8 million to $11.5 million for the three
months ended September 30, 1999 primarily as a result of the NeuroCare
acquisition in March 1999, offset by the lower sales prices for INTEGRA Skin
sold under the JJM Agreement. Consolidated export sales increased $1.8 million
to $2.5 million in the third quarter of 1999, primarily as a result of the
NeuroCare acquisition. Consolidated gross margin on product sales during
such period decreased to 47% of product sales primarily because of the lower
gross margins associated with the distribution of INTEGRA Skin through JJM and
$493,000 of fair value inventory purchase accounting adjustments included in the
neurosurgical segment cost of product sales. Excluding the effects of the
inventory purchase accounting adjustments, consolidated gross margin on product
sales would have been 52% for the third quarter of 1999.
Neurosurgical product sales and cost of product sales were generated primarily
as a result of the NeuroCare acquisition in March 1999. Included in the cost of
neurosurgical product sales is $493,000 of fair value inventory purchase
accounting adjustments. Excluding these adjustments, gross margin on
neurosurgical product sales would have been 55% of product sales for the third
quarter of 1999.
Surgical Products sales decreased $160,000 to $3.5 million for the three months
ended September 30, 1999 primarily as a result of an $815,000 decrease in sales
of INTEGRA Skin, which was offset by an increase of $354,000 in sales of dental
products and an increase of $357,000 in sales of Rystan's Panafil(Registered)
and Derifil(Registered) products. The decrease in INTEGRA Skin sales was
primarily due to lower sales prices to JJM associated with the transfer of all
INTEGRA Skin direct sales and marketing efforts to JJM under the JJM Agreement
in June 1999. The increase in sales of dental products was led by the
introduction of the Company's second generation BioMend(Registered) Extend
Absorbable Collagen Membrane product in the third quarter of 1999. There were no
sales of Panafil(Registered) and Derifil(Registered) in the third quarter of
1998, as Rystan was acquired at the end of September 1998. Although the Company
is entitled to revenue based on identified sales into the podiatry and burn care
markets (less certain fees) under the terms of the Panafil(Registered)
disposition agreement, the Company anticipates a decline in Panafil(Registered)
revenue in future periods. There were no other significant increases in product
sales attributable to the acquired Rystan product lines. Because significant
portions of the Company's surgical products segment sales are made to marketing
partners and distributors, quarter-to-quarter sales in the segment can vary
significantly depending on the timing of shipments to these partners and
distributors. During the third quarter of 1999, gross margin on surgical product
sales decreased to 45% of product sales primarily because of the lower margins
associated with the distribution of INTEGRA Skin through JJM. Growth in product
sales and gross margin on product sales is expected to be lower than historical
levels because INTEGRA Skin is being distributed under the JJM Agreement. The
long-term impact on product sales and related gross margin will depend on
required production volumes and JJM's ability to market INTEGRA Skin for
reconstructive and other additional indications.
12
<PAGE>
Other revenue includes grant revenue, distribution and license fees, product
development revenue and royalties. Other revenue in the surgical products
segment increased $159,000 to $653,000 for the three months ended September 30,
1999. This increase is primarily related to $132,000 of amortization of deferred
revenue associated with the $5.3 million initial payment from JJM for the
exclusive use of the Company's trademarks and regulatory filings related to
INTEGRA Skin. This deferred revenue is being amortized over the initial ten-year
term of the JJM Agreement. 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.
Research and development expenses were as follows (in thousands):
1999 1998
------ ------
Neurosurgical $ 794 $ 213
Surgical products 1,294 1,593
Corporate and other 161 414
------ ------
Total $2,249 $2,220
Research and development expense in the neurosurgical segment increased $581,000
to $794,000 in the third quarter of 1999 primarily because of the Integra
NeuroCare acquisition. Neurosurgical research and development activities in the
third quarter of 1998 consisted of programs involving the Company's
DuraGen(Trademark) dural graft matrix ("DuraGen"), which was launched in the
third quarter of 1999, and the peripheral nerve guide, a bioabsorbable collagen
tube that acts as a conduit to support guided regeneration of severed nerve
tissues. Significant ongoing research and development programs relating to the
neurosurgical segment include clinical trials involving the peripheral nerve
guide, and the development of the next generation of inter-cranial pressure
monitors and shunting products.
Research and development activities within the surgical products segment
decreased $299,000 to $1.3 million and other research and development activities
decreased $253,000 to $161,000 in the third quarter of 1999 because of the
elimination of several research programs in 1999. The Company anticipates
adjusting the allocation of research and development resources between the
neurosurgical and surgical products segments as it continues to integrate
Integra NeuroCare's development activities. The JJM Agreement will provide the
Company with research funding for INTEGRA Skin beginning in the year 2000.
Additional funding to support the Company's research and development programs
will be available if certain clinical and regulatory events related to INTEGRA
Skin occur. 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, 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
------ ------
Neurosurgical $2,034 $ 141
Surgical products 387 1,060
------ ------
Total $2,421 $1,201
Neurosurgical selling and marketing expense increased $1.9 million to $2.0
million in the third quarter of 1999 primarily because of the Integra NeuroCare
acquisition. Additional increases resulted from expenses related to the domestic
and international launch of DuraGen in the third quarter of 1999. The decrease
of $673,000 in surgical products selling and marketing expenses is primarily the
result of the transition of INTEGRA Skin selling and marketing activities to
JJM.
13
<PAGE>
General and administrative expenses were as follows (in thousands):
1999 1998
------ ------
Neurosurgical $1,807 $ 122
Surgical products 722 494
Corporate and other 1,574 1,767
------ ------
Total $4,103 $2,383
Neurosurgical general and administrative expense increased $1.7 million to $1.8
million in the third quarter of 1999 primarily because of the Integra NeuroCare
acquisition. Included in this amount is $244,000 of severance costs associated
with the closure of the Integra NeuroCare's Wisconsin facility in July 1999 and
$266,000 of intangibles amortization associated with the Integra NeuroCare
acquisition. Intangible amortization is expected to increase by approximately
$150,000 over each of the next eight quarterly periods, as the amortization
period for certain intangibles has been reduced to two years. General and
administrative expense in the surgical products segment increased $228,000 in
the third quarter of 1999 primarily due to additional headcount. The decrease of
$193,000 in other general and administrative expenses to $1.6 million resulted
from decreased legal fees in the third quarter 1999, offset by slight increases
related to additional headcount.
Interest income decreased $54,000 to $270,000 in the third quarter of 1999
because of lower average cash and investment balances during such quarter.
Interest expense of $215,000 in the third quarter of 1999 relates to the Fleet
term loan and credit facility assumed in the Integra NeuroCare acquisition.
The income tax benefit of $541,000 for the third quarter of 1999 is due to the
reduction of the deferred tax liability recorded in the acquisition of Integra
NeuroCare to the extent that consolidated deferred tax assets were generated
subsequent to the NeuroCare acquisition. No additional income tax benefit is
expected in 1999.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Product sales and cost of product sales were as follows (in thousands):
1999
- ----
Neurosurgical Surgical Products Consolidated
------------- ----------------- ------------
Products sales $16,706 $11,496 $28,202
Cost of product sales 10,055 6,379 16,434
------- ------- -------
Gross margin on product sales 6,651 5,117 11,768
Gross margin percentage 40% 45% 42%
1998
- ----
Neurosurgical Surgical Products Consolidated
------------- ----------------- ------------
Products sales $ -- $10,234 $10,234
Cost of product sales -- 5,036 5,036
------- ------- -------
Gross margin on product sales -- 5,198 5,198
Gross margin percentage -- 51% 51%
Consolidated product sales increased $18.0 million to $28.2 million for the
nine months ended September 30, 1999 primarily as a result of the NeuroCare
acquisition in March 1999, increased sales of surgical products and sales of the
acquired Rystan Panafil(Registered) and Derifil(Registered) products, offset by
the lower sales prices for INTEGRA Skin associated with the JJM Agreement.
Consolidated export sales increased $4.7 million to $6.7 million for the nine
months ended September 30, 1999, primarily as a result of the NeuroCare
acquisition. Consolidated gross margin on product sales during such period
decreased to 42% of product sales primarily because of the lower gross margins
associated with the distribution of INTEGRA Skin through JJM during the third
quarter of 1999 and approximately $2.4 million of fair value inventory purchase
accounting adjustments related to the Rystan and NeuroCare acquisitions.
Excluding the inventory purchase accounting adjustments, consolidated gross
margin on product sales would have been 50% for the nine months ended September
30, 1999.
14
<PAGE>
Neurosurgical product sales and cost of product sales were generated primarily
as a result of the NeuroCare acquisition in March 1999. Included in the cost of
product sales is $2.2 million of fair value inventory purchase accounting
adjustments. Excluding these adjustments, gross margin on neurosurgical product
sales would have been 53% of product sales for the nine months ended September
30, 1999. Additionally, approximately $500,000 of inventory reserves related to
certain slow-moving products were recorded in the nine months ended September
30, 1999.
Surgical Products revenue increased $1.3 million to $11.5 million for the nine
months ended September 30, 1999 primarily as a result of a $695,000 increase in
sales of dental products, a $292,000 increase in sales of the Company's
Helistat(Registered) Absorbable Collagen Hemostatic Sponge and
Helitene(Registered) Absorbable Collagen Hemostatic Agent products, and $1.6
million in sales of Rystan's Panafil(Registered) and Derifil(Registered)
products, all of which were offset by a $1.4 million decrease in sales of
INTEGRA Skin. The significant decrease in INTEGRA Skin sales was partially due
to the transfer of all direct sales and marketing efforts to JJM under the JJM
Agreement in June 1999. The increase in sales of dental products was lead by the
introduction of the Company's second generation BioMend(Registered) Extend
product in the third quarter of 1999. There were no sales of Panafil(Registered)
and Derifil(Registered) in the nine months ended September 1998, as Rystan was
acquired at the end of September 1998. Although the Company is entitled to
revenue based on identified sales into the podiatry and burn care markets (less
certain fees) under the terms of the Panafil(Registered) disposition agreement,
the Company anticipates a decline in Panafil(Registered) revenue in future
periods. There were no other significant increases in surgical product sales
attributable to the acquired Rystan product lines. Gross margin on surgical
product sales decreased to 45% of product sales primarily because of the lower
margins associated with the distribution of INTEGRA Skin through JJM in the
third quarter of 1999 and lower utilization of the INTEGRA Skin manufacturing
capacity in the first quarter of 1999 and approximately $200,000 of fair value
purchase accounting adjustments related to Rystan product sales.
Other revenue in the neurosurgical segment decreased $1.0 million to $0 for the
nine months ended September 30, 1999 because of a $1.0 million non-refundable
licensing fee from Century Medical, Inc. in the first quarter of 1998 related to
the acquisition of distribution rights to certain of the Company's
neurosurgical products.
Research and development expenses were as follows (in thousands):
1999 1998
------ ------
Neurosurgical $1,566 $ 722
Surgical products 4,503 4,193
Corporate and other 484 1,522
------ ------
Total $6,553 $6,437
Research and development expense in the neurosurgical segment increased $844,000
to $1.6 million for the nine months ended September 30, 1999 primarily because
of the Integra NeuroCare acquisition. Neurosurgical research and development
activities during 1998 consisted of programs involving the DuraGen(Trademark)
dural graft matrix, which was launched in the third quarter of 1999, and the
peripheral nerve guide, a bioabsorbable collagen tube that acts as a conduit to
support guided regeneration of severed nerve tissues. Significant ongoing
research and development programs relating to the neurosurgical segment include
clinical trials involving the peripheral nerve guide, and the development of the
next generation of inter-cranial pressure monitors and shunting products.
Research and development activities within the surgical products segment
increased $310,000 to $4.5 million for the nine months ended September 30, 1999
because of increased personnel costs for the orthopedic development programs in
1999, offset by the elimination of several research programs in 1999. Other
research and development activities decreased $1.0 million to $484,000 for the
nine months ended September 30, 1999 because of the elimination of several
collaborative research programs in non-core development programs.
15
<PAGE>
Selling and marketing expenses were as follows (in thousands):
1999 1998
------ ------
Neurosurgical $4,054 $ 451
Surgical products 2,873 3,829
------ ------
Total $6,927 $4,280
Neurosurgical selling and marketing expense increased $3.6 million to $4.1
million for the nine months ended September 30, 1999 primarily because of the
Integra NeuroCare acquisition. Additional increases resulted from expenses
related to the domestic and international launch of DuraGen in the third quarter
of 1999. The decrease of $956,000 in surgical products selling and marketing
expenses is primarily the result of the transition of INTEGRA Skin selling and
marketing activities to JJM.
General and administrative expenses were as follows (in thousands):
1999 1998
------- ------
Neurosurgical $ 4,254 $ 330
Surgical products 1,794 1,620
Corporate and other 4,740 5,999
------- ------
Total $10,788 $7,949
Neurosurgical general and administrative expense increased $3.9 million to $4.3
million for the nine months ended September 30, 1999 primarily because of the
Integra NeuroCare acquisition. Included in this amount is $1.1 million of
severance costs associated with the closure of the Integra NeuroCare's Wisconsin
facility in July 1999 and $470,000 of intangibles amortization associated with
the Integra NeuroCare acquisition. General and administrative expense in the
surgical products segment increased $174,000 to $1.8 million for the nine months
ended September 30, 1999 primarily because of additional headcount. The
decrease of $1.3 million in other general and administrative expenses to $4.7
million resulted from a significant decrease in legal fees in 1999, as the
Company resolved various litigation matters in 1998, and a the effects of a
$200,000 asset impairment charge recorded in the first quarter of 1998.
The $4.2 million gain on disposition of product line recorded in 1999 relates
to the sale of the Panafil(Registered) product line in January 1999.
Interest income decreased $215,000 to $781,000 for the nine months ended
September 30, 1999 because of lower average cash and investment balances during
such period. Interest expense of $452,000 for the nine months ended September
30,1999 relates to the Fleet term loan and revolving credit facility assumed in
the Integra NeuroCare acquisition.
Other income, net decreased $533,000 to $60,000 for the nine months ended
September 30, 1999 primarily as a result of the effect of a $545,000 litigation
settlement gain recorded in the second quarter of 1998.
The income tax benefit of $1.3 million for the nine months ended September 30,
1999 is due to a $1.8 million reduction of the deferred tax liability recorded
in the acquisition of Integra NeuroCare to the extent that consolidated deferred
tax assets were generated subsequent to the NeuroCare acquisition, offset by
approximately $460,000 of taxes associated with the gain on the sale of the
Panafil(Registered) product line in the first quarter 1999. No additional income
tax benefit is expected in 1999.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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 September
30, 1999, the Company had cash, cash equivalents and short-term investments of
approximately $20.8 million and $10.3 million in short and long-term debt. The
Company's principal uses of funds during the nine-month period ended September
30, 1999 were $14.8 million in the acquisition of Integra NeuroCare, $1.6
million in purchases of property and equipment and $750,000 in repayments of
term loans. Cash flows provided by operations for the nine months ended
September 30, 1999 were $1.0 million, which included $6.5 million received
under the JJM Agreement. During the nine months ended September 30, 1999, the
Company also raised $10.0 million from the sale of Series B Preferred Stock and
warrants to Soros Private Equity Partners LLC, assumed $11.0 million of term
debt in connection with the Integra NeuroCare acquisition and received $6.4
million in connection with the sale of the Panafil(Registered) product line.
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. As part of the assumption of the Integra NeuroCare
term loan, the Company obtained a $4.0 million revolving credit facility from
Fleet Capital Corporation ("Fleet") to fund the working capital needs of
Integra NeuroCare, of which $21,000 was drawn down at September 30, 1999.
The Company anticipates that Integra NeuroCare will utilize the revolving credit
facility from Fleet Capital Corporation to fund its capital needs. 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.
In addition to the $4.0 million revolving credit facility, the Company assumed
an $11.0 million term loan from Fleet in connection with the NeuroCare
acquisition. The term loan and the revolving credit facility, as amended,
(collectively, the "Fleet Credit Facility") are secured by all the assets and
ownership interests of Integra NeuroCare, and NeuroCare Holding Corporation (the
parent company of Integra NeuroCare) has guaranteed Integra NeuroCare's
obligations. Integra NeuroCare is subject to various financial and non-financial
covenants under the Fleet Credit Facility, including 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. While the Company anticipates
that it will be able to satisfy the requirements of its financial covenants,
there can be no assurance that Integra NeuroCare will generate sufficient
earnings before interest, taxes, depreciation and amortization to meet the
requirements of such covenants.
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 and is commonly referred to as a Year
2000 (Y2K) compliance issue.
The Company's Businesses
The Company has completed its initial assessment as well as its correction plan
for all areas previously identified as potentially compromised by the advent of
Y2K. This correction plan was comprised of (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. Actions taken to achieve Y2K compliance included upgrading current
hardware and software as well as purchasing additional hardware and software to
enhance current IT systems. 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's upgrades and purchases for all critical systems have been
implemented and tested. We have tested and confirmed that all critical systems
are fully Y2K compliant or only require a simple manual update on the first of
the new year to be compliant. The few remaining non-critical systems will be
made Y2K compliant before December 31, 1999 as part of regularly scheduled
system upgrades.
The only business division of the Company that makes and sells products that
contain computer processors is Integra NeuroCare. 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 based on testing of
such products, the Company does not believe that the substantive performance of
the devices will be affected. The Company is providing its Neuro Navigational
customers with instructions for resetting the dating function to overcome any
effects of the Y2K considerations. No other products manufactured by the Company
contain any materials that would make such products susceptible to disruptions
relating to Y2K.
17
<PAGE>
Suppliers
The Company has been reviewing and has requested assurances on the status of the
Y2K readiness of its critical suppliers. Many of these suppliers, however, have
provided limited assurances regarding the status on their Y2K readiness. The
Company plans to continue to monitor critical suppliers during 1999. As a
precaution, the Company has been compiling additional inventories of both raw
materials and finished goods so that temporary shortages or an increase in
product demand will not negatively effect the Company's operations. The Company
has also 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
of key business partners 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.
Given the information available at this time, the Company currently anticipates
that the amount that will be spent to complete its Y2K correction plan will not
have a material adverse impact on the Company's business, results of operations,
financial position and cash flow. Furthermore, Integra does not expect that the
effects of any Y2K non-compliance on its systems will have any material adverse
impact on the Company's business, results of operations, financial positions or
cash flows. However, there can be no assurance that the Company will not incur
additional expenses or experience business disruption as a result of systems
problems associated with the century change, including system and equipment
problems with third parties with which the Company does business.
18
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
On October 20, 1999, Carnrick Laboratories, Inc. a New Jersey corporation
(formerly named GWC Health, Inc., "Carnrick"), exercised its rights under two
separate warrants to purchase an aggregate of 300,000 shares of common stock of
the Company for an aggregate purchase price of $1,950,000, in cash. Carnrick
acquired such warrants from the Company in connection with the Company's
acquisition by merger of Rystan Company, Inc. from Carnrick in September 19998.
The issuance of these shares of common stock of the Company to Carnrick upon
exercise of the aforementioned warrants was exempt from the registration
provisions of the Securities Act of 1933, as amended (the "Act") pursuant to
Section 4(2) of the Act from transactions not involving a public offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 1, dated September 29, 1999, to 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.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
19
<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 HOLDINGS CORPORATION
Date: November 15, 1999 By: /s/ Stuart M. Essig
-------------------------------------
Stuart M. Essig
President and Chief Executive Officer
Date: November 15, 1999 By: /s/ David B. Holtz
-------------------------------------
David B. Holtz
Vice President, Finance and Treasurer
20
<PAGE>
Exhibit Index
Exhibit No.
10.1 Amendment No. 1, dated September 29, 1999, to 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.
27 Financial Data Schedule
21
<PAGE>
Exhibit 10.1
AMENDMENT NO. 1
TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
("Amendment") is dated as of September 29, 1999, by and among FLEET CAPITAL
CORPORATION ("Fleet"), a Rhode Island corporation with an office at One South
Wacker Drive, Suite 1400, Chicago, Illinois 60606, individually as a lender
hereunder and in its capacity as agent (in such capacity, the "Agent") for
itself and any other financial institution that is or becomes a lender hereunder
(Fleet, in its individual capacity as a lender, and each such other financial
institution are sometimes referred to herein individually as a "Lender" and
collectively as the "Lenders"); the Lenders; INTEGRA NEUROCARE LLC ("Integra"),
a Delaware limited liability company, REDMOND NEUROCARE LLC ("Redmond"), a
Delaware limited liability company, HEYER-SCHULTE NEUROCARE, INC. ("Neurocare
Inc."), a Delaware corporation, and CAMINO NEUROCARE, INC. ("Camino"), a
Delaware corporation (Integra, Redmond, Neurocare Inc. and Camino are sometimes
referred to herein individually as a "Borrower" and collectively as
"Borrowers"), and Integra, in its capacity as borrowing agent (in such capacity,
"Borrowing Agent") for itself and the other Borrowers. Capitalized terms used
herein but not otherwise defined herein shall have the respective meanings
assigned to such terms in the Loan Agreement referred to herein below.
WITNESSETH:
WHEREAS, the Borrowers, the Borrowing Agent, the Agent and the Lenders
have entered into that certain Amended and Restated Loan and Security Agreement
dated as of March 29, 1999 (the "Loan Agreement"), pursuant to which the Lenders
have agreed to make certain loans and other financial accommodations to or for
the account of the Borrowers;
WHEREAS, the respective Borrowers have requested that the Agent and the
Lenders amend the Loan Agreement; and
WHEREAS, the Agent and the Lenders have agreed to amend the Loan Agreement
on the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
respective parties hereto hereby agree as follows:
1 Amendment to Loan Agreement. Effective as of the date hereof, upon
satisfaction of the conditions precedent set forth in Section 2 below, and in
reliance upon the representations and warranties of the respective Borrowers and
the Borrowing Agent set forth herein, the Loan Agreement is hereby amended as
follows:
22
<PAGE>
1.1 Section 4 of Exhibit C (Financial Covenants) to the Loan Agreement is
hereby deleted in its entirety and the following language is hereby substituted
therefor:
4. Adjusted Tangible Net Worth. The Borrowers shall not permit Adjusted
Tangible Net Worth at any time during the periods set forth below to be
less than the amount set forth below for such period:
Period Amount
------ ------
March 31, 1999 through
June 29, 1999 $ 2,500,000
June 30, 1999 through
September 29, 1999 $ 3,000,000
September 30, 1999 through
December 30, 1999 $ 2,350,000
December 31, 1999 through
March 30, 2000 $ 4,350,000
March 31, 2000 through
June 29, 2000 $ 4,350,000
June 30, 2000 through
September 29, 2000 $ 5,350,000
September 30, 2000 through
December 30, 2000 $ 6,350,000
December 31, 2000 through
March 30, 2001 $ 8,350,000
March 31, 2001 through
June 29, 2001 $ 8,600,000
June 30, 2001 through
September 29, 2001 $ 9,850,000
September 30, 2001 through
December 30, 2001 $11,100,000
December 31, 2001 through
March 30, 2002 $14,100,000
March 31, 2002 through
June 29, 2002 $14,100,000
June 30, 2002 through
23
<PAGE>
December 30, 2002 $16,100,000
December 31, 2002 through
December 30, 2003 $19,100,000
At any time thereafter $24,100,000
"Adjusted Tangible Net Worth" will be calculated in the manner set forth
in Exhibit B.
2 Conditions Precedent. This Amendment shall become effective as of the
date hereof, upon receipt by the Agent of four (4) copies of this Amendment,
duly executed by each of the Lenders, each of the Borrowers and the Borrowing
Agent and acknowledged by Holding.
3 Representations, Warranties and Covenants.
3.1 Each of the Borrowers and the Borrowing Agent hereby represents
and warrants to the Agent and each of the Lenders that, after giving
effect to this Amendment:
(a) All representations and warranties contained in the Loan
Agreement and the other Loan Documents are true and correct in all
material respects on and as of the date of this Amendment, in each
case as if then made, other than representations and warranties that
expressly relate solely to an earlier date (in which case such
representations and warranties remain true and accurate on and as of
such earlier date);
(b) No Default or Event of Default has occurred which is
continuing;
(c) This Amendment, and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of the Borrowers and
the Borrowing Agent, respectively, and are enforceable against each
of the Borrowers and the Borrowing Agent in accordance with their
respective terms; and
(d) The execution and delivery by the Borrowers and the
Borrowing Agent of this Amendment does not require the consent or
approval of any Person, except such consents and approvals as have
been obtained.
4 Reference to and Effect on the Loan Agreement and the Other Loan
Documents.
4.1 Upon the effectiveness of this Amendment, each reference in the
Loan Agreement to "this Agreement", "hereunder", "hereof", "herein" or
words of like import, and each reference in each of the other Loan
Documents to the "Loan Agreement" shall in each case mean and be a
reference to the Loan Agreement as amended hereby.
4.2 Except as expressly set forth herein, (i) the execution and
delivery of this Amendment shall in no way affect any of the respective
rights, powers or remedies of the Agent or any of the Lenders with respect
to any Event of Default nor constitute a waiver of any provision of the
Loan Agreement or any of the other Loan Documents and (ii) all of the
respective terms and provisions of the Loan Agreement, the other Loan
Documents and all other documents, instruments, amendments and agreements
executed and/or delivered by any of the Borrowers and/or the Borrowing
Agent pursuant thereto or in connection therewith shall
24
<PAGE>
remain in full force and effect and are hereby ratified and confirmed in
all respects. The execution and delivery of this Amendment by the Agent
and each of the Lenders shall in no way obligate the Agent or any of the
Lenders, at any time hereafter, to consent to any other amendment or
modification of any term or provision of the Loan Agreement or any of the
other Loan Documents, whether of a similar or different nature.
5 Governing Law. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL
LAWS AND DECISIONS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS
PRINCIPLES.
6 Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
7 Counterparts. This Amendment may be executed in any number of
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. Any such counterpart
which may be delivered by facsimile transmission shall be deemed the equivalent
of an originally signed counterpart and shall be fully admissible in any
enforcement proceedings regarding this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW]
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their proper and duly authorized officers as of
the date first set forth above.
FLEET CAPITAL CORPORATION, in its
individual capacity as a
Lender and in its capacity as Agent
By:_____________________________
Name:___________________________
Title:______________________
26
<PAGE>
INTEGRA NEUROCARE LLC
By: NEUROCARE HOLDING CORPORATION, its
sole Member
By:___________________________________
Name:_________________________________
Title:_____________________________
REDMOND NEUROCARE LLC
By: INTEGRA NEUROCARE LLC, its
sole Member
By: NEUROCARE HOLDING CORPORATION,
its sole Member
By:____________________________
Name:__________________________
Title:______________________
HEYER-SCHULTE NEUROCARE, INC.
By:___________________________________
Name:_________________________________
Title:_____________________________
CAMINO NEUROCARE, INC.
By:___________________________________
Name:_________________________________
Title:_____________________________
27
<PAGE>
ACKNOWLEDGMENT AND CONSENT
Reference is hereby made to that certain Guaranty dated as of March
29, 1999, executed by the undersigned, NEUROCARE HOLDING CORPORATION, a Delaware
corporation ("Guarantor"), in favor of FLEET CAPITAL CORPORATION, a Rhode Island
corporation, acting in its capacity as Agent for the Lenders from time to time
under the Loan and Security Credit Agreement referred to in the foregoing
Amendment No. 1 to Amended and Restated Loan and Security Credit Agreement (the
"Amendment").
Guarantor hereby (i) acknowledges receipt of a copy of the Amendment
and (ii) agrees that the terms and provisions thereof shall not affect in any
way the obligations and liabilities of Guarantor under the Guaranty or any of
the other Loan Documents, all of which obligations and liabilities shall remain
in full force and effect and each of which are hereby reaffirmed.
NEUROCARE HOLDING CORPORATION, a
Delaware corporation
By:__________________________
Name:________________________
Title:____________________
Dated as of September 29, 1999
28
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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0
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