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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No. 0-26224
December 31, 1998
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)
Registrant's telephone number, including area code: (609) 275-0500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 25, 1999 was approximately $18.8
million. (Reference is made to page 25 herein for a statement of the
assumptions upon which this calculation is based).
The number of shares of the registrant's Common Stock outstanding as
of March 25, 1999 was 15,782,678.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement
relating to its scheduled May 17, 1999 Annual Meeting of Stockholders are
incorporated by reference in Part III of this report.
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PART I
ITEM 1. BUSINESS
Integra LifeSciences Corporation (hereinafter referred to as "Integra" or the
"Company") was incorporated in Delaware in June 1989. Integra develops,
manufactures and markets medical devices, implants and biomaterials primarily
used in the treatment of burns and skin defects, spinal and cranial disorders,
orthopedics and other surgical applications. Integra seeks to be the world's
leading company specializing in implantable medical and biopharmaceutical
therapies to target and control cell behavior, and to build shareholder value
by acquiring, discovering, and developing cost-effective, off-the-shelf
products that satisfy unmet medical needs.
Headquartered in Plainsboro, New Jersey, Integra markets its products directly
as well as through marketing partners and distributors both domestically and
internationally in more than 29 countries. The Company's customers include
burn, trauma, plastic and reconstructive surgeons, neurosurgeons, orthopedic
surgeons, operating room nurses, private label purchasers, and hospital
administrators. Integra products include Helistat(R), DuraGen(TM),
VitaCuff(TM), BioPatch(TM), BioMend(R), and INTEGRA(R) Artificial Skin, Dermal
Regeneration Template(TM) ("INTEGRA(R) Artificial Skin").
The Company's business strategy has been to selectively acquire and further
develop several platforms of synergistic biomaterials and technologies. The
Company uses the technologies and proprietary processes it owns and licenses to
fabricate devices manufactured from collagen and other components. Once
surgically implanted, these devices serve as temporary structures intended to
support regeneration of functional tissues. These products are engineered
precisely for specific tissues and are resorbed into the body during the
regeneration process. INTEGRA(R) Artificial Skin and DuraGen(TM) are the first
in a series of products that the Company is developing to regenerate a variety
of body tissues, including skin, dura, peripheral nerve, bone, articular
cartilage and cardiovascular graft.
The Company also develops, sells and has substantial manufacturing experience
with FDA-regulated medical products that serve a broad range of applications,
including drug delivery, surgical hemostasis (the control of bleeding),
infection control, dental surgery and wound care. These products are sold
primarily through marketing relationships with a number of established medical
companies, including Arrow International, Inc., Bard Access Systems, Inc., the
Sulzer Calcitek Division of Sulzermedica ("Sulzer Calcitek"), Johnson & Johnson
Medical, Inc. ("J&J Medical"), and Johnson & Johnson Professional, Inc. ("J&J
Professional"). The Company's commercial products use many of the same
biomaterials, manufacturing processes, and materials engineering techniques.
The Company believes its management and scientific team, development and
manufacturing experience, proprietary technological position and relationships
with established medical and scientific institutions position it to achieve its
objectives. The Company's research implementation has been to maintain a
relatively small core of scientists and researchers within the Company and to
conduct a large portion of its research and product development through
arrangements with independent medical research centers. The Company believes
this provides a cost-effective approach to managing its research and product
development efforts, while maintaining the ability to respond quickly and
effectively to technological changes.
The Company is actively engaged in the following three business areas, each of
which is described in detail below: (1) Skin Defects and Burns; (2) Medical
Products; and (3) Developing Businesses and Ventures.
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Skin Defects and Burns Business: Current Products
The repair of skin defects and burns business encompasses INTEGRA(R) Artificial
Skin, the Company's leading commercial product, Panafil(R) debriding and wound
healing agent, and a pipeline of new products including the development of a
second generation of INTEGRA(R) Artificial Skin utilizing a peptide/collagen
matrix for enhanced healing, as well as a number of wound care products under
development.
The Company believes the annual severe burn market is approximately $75 million
worldwide, and that the annual market for all burns and scar revision
procedures is estimated to be $350 million worldwide. Additional indications
for plastic surgery and acute wound procedures increase the estimated market to
over $1 billion worldwide.
INTEGRA(R) Artificial Skin
INTEGRA(R) Artificial Skin is designed to enable the human body to regenerate
functional dermal tissue. Human skin consists of the epidermis (the thin, outer
layer that serves as a protective seal for the body) and the dermis (the
thicker layer underneath that provides structural strength and flexibility).
The dermis also supports the viability of the epidermis through a vascular
network.
The body normally responds to severe damage to the dermis by producing scar
tissue in the wound area. This scar tissue is accompanied by contraction that
pulls the edges of the wound closer which, while closing the wound, often
permanently reduces flexibility. In severe cases, this contraction leads to a
reduction in the range of motion for the patient, who subsequently requires
extensive physical rehabilitation or reconstructive surgery. Physicians
treating severe wounds, such as full-thickness burns, seek to minimize scarring
and contraction. INTEGRA(R) Artificial Skin was designed to minimize scar
formation and wound contracture in full thickness skin defects.
INTEGRA(R) Artificial Skin consists of two layers, a thin
collagen-glycosaminoglycan ("GAG") sponge and a silicone membrane. The product
is applied with the sponge layer in contact with the excised wound. The
collagen-GAG sponge material serves as a template for the growth of new
functional dermal tissue. The outer membrane layer acts as a temporary
substitute for the epidermis to control water vapor transmission, prevent
re-injury and minimize bacterial contamination.
INTEGRA(R) Artificial Skin was approved by the FDA under a premarket approval
application ("PMA") for the post-excisional treatment of life-threatening
full-thickness or deep partial-thickness thermal injury where sufficient
autograft is not available at the time of excision or not desirable due to the
physiological condition of the patient. The FDA's approval order includes
requirements to provide a comprehensive practitioner training program and to
conduct a post approval study at multiple clinical sites. The Company currently
has contracted with 12 burn centers in the United States to participate in the
post approval study, and has approximately 154 patients enrolled. The Company
offers its training program to all surgeons specializing in burns throughout
the world, and has trained over 750 surgeons worldwide. The Company also offers
programs to the entire hospital team, including operating room personnel, burn
unit support staff, and hospital reimbursement specialists.
Sales of INTEGRA(R) Artificial Skin have been largely for the treatment of
patients with life-threatening full-thickness or deep partial-thickness burns
where conventional autograft is not available or not desirable due to the
physiological condition of the patient. While the Company believes that burns
are an important market for INTEGRA(R) Artificial Skin, the Company is seeking
to expand the approved indications for INTEGRA(R) Artificial Skin in
reconstructive surgery, acute wounds, closure following
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excision of skin cancers, and chronic wounds. In March 1998, the Company
received CE Mark certification for INTEGRA(R) Artificial Skin in Europe, which
included an indication for reconstructive surgery and full thickness injuries.
The broader reconstructive surgery indications include scar revision
procedures, tumor and skin cancer resection, release of post-burn contractures,
congenital skin defects and revision of hypertrophic and keloid scars.
With the CE mark certification, the Company markets INTEGRA(R) Artificial Skin
in 29 countries, including Canada and the United States. The Company sells
INTEGRA(R) Artificial Skin through a direct technical sales organization in the
United States, Canada, Ireland and the United Kingdom and through distributors
in other international markets. Through its direct sales force and by working
closely with its specialized international distributors, the Company maintains
a continuous working relationship with clinicians in the field of burn care and
reconstructive surgery. Integra believes these relationships are critical to
the long-term success of any new generation product.
In 1997, the Company signed an exclusive importation and sales agreement for
INTEGRA(R) Artificial Skin in Japan with Century Medical Inc. ("CMI"), a
subsidiary of ITOCHU Corporation. CMI is headquartered in Tokyo, with sales
offices in Sapporo, Sendai, Nagoya, Osaka and Fukuoka. Over the past two
decades, CMI has steadily expanded its medical products distribution business
in Japan. Under this agreement, CMI is conducting a clinical trial in Japan at
its own expense to obtain Japanese regulatory approvals for the sale of
INTEGRA(R) Artificial Skin in Japan.
Debridement Agents
In September 1998, the Company announced the acquisition of Rystan Company,
Inc. in Little Falls, New Jersey ("Rystan"). Rystan's primary products are
Panafil(R). Panafil(R) is an enzymatic debridement agent used to remove
necrotic tissue in acute and chronic wounds, including diabetic ulcers, burns,
and postoperative and infected wounds, and provides both debriding and healing
functions. In January 1999, Integra and Rystan sold the Panafil(R) product line,
including the brand name and related equipment, to Healthpoint, Ltd. for $6.4
million in cash. Integra also is entitled to receive the first $3 million of
Panafil(R) sales specifically to the podiatry market and certain hospitals with
burn centers. Simultaneous with the sale, Integra and Healthpoint entered into a
series of co-marketing agreements under which Integra will continue to market
Panafil(R) and add Healthpoint's debriding agent, Accuzyme(R), to its sales call
points in the podiatry market. Integra will receive sales commissions for
marketing Panafil(R) and Accuzyme(R) once specified levels of product sales have
been obtained, in accordance with the agreement.
Product sales for the skin defects and burns segment were $6.3 million, $6.0
million and $3.1 million during 1998, 1997 and 1996, respectively. Sales of
INTEGRA(R) Artificial Skin accounted for 41%, 43% and 28% of the Company's total
product sales for the years ended December 31, 1998, 1997 and 1996,
respectively.
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Skin Defects and Burns Business: Product Development
The Company has begun development of a number of new products for its Skin
Defects and Burns Business. The most important of these is a second generation
INTEGRA(R) Artificial Skin which incorporates the proprietary
(arginine-glycine-aspartic) amino acid peptide sequence ("RGD") which is part
of the Company's CRC technology base. The Company expects this product to
reduce significantly the healing time for full thickness skin repair.
In addition to the effort to expand indications for INTEGRA(R) Artificial Skin,
the Company is aggressively developing adjunctive products with value added
strategies of particular significance to the wound care business. Additionally,
as data is acquired on the clinical performance of INTEGRA(R) Artificial Skin,
that feedback is being utilized to generate potential product improvements
necessary to provide the best regenerative dermal matrix product to Integra's
customers.
Medical Products Business: Current Products
The Company develops and sells, primarily through licensing and distribution
arrangements, a number of biomaterials-based medical products and devices for
infection control, neurosurgery, general and dental surgery and other medical
service providers. These products accounted for approximately $7.8 million,
$8.0 million, $8.1 million of revenue for the Company during 1998, 1997 and
1996, respectively, representing approximately 55%, 57% and 72%, respectively,
of the Company's product sales during such years.
The Company has pursued a strategy of developing new products, obtaining
regulatory approval for these products, and then distributing these products
through marketing and distribution partnerships. Typically, these partnerships
are with leading medical device companies that assist in developing the
commercial potential of the Company's medical products. A substantial portion of
the Company's medical products is sold to customers under the terms of
multiple-year marketing and distribution agreements that provide for purchase
and supply commitments. In many cases, marketing customers have paid license
fees to the Company for the marketing and distribution rights. The Company sells
certain of its Hemostasis products in the United States through a national
network of specialized distributors.
Customers accounting for over 10% of total product sales included two customers
accounting for 27% of product sales in 1998, two customers accounting for 24% of
product sales in 1997 and three customers accounting for 42% of product sales in
1996.
Infection Control Products
The Company's patented VitaCuff(TM) product provides protection against
infection arising from long-term catheters. VitaCuff(TM) consists of a silver
nitrate impregnated collagen matrix ring, which is positioned on the catheter
before placement. Once in place the collagen forms a seal at the point of
entry, mechanically preventing microbial invasion along the catheter while at
the same time releasing silver nitrate into the surrounding area. In this
application, silver nitrate functions as a highly effective, broad-spectrum
anti-microbial agent. VitaCuff(TM) and related products are manufactured by the
Company and marketed through Arrow International, Inc., Bard Access Systems,
Inc. and Quinton Instruments.
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The Company manufactures a patented wound dressing composed of a synthetic and
biopolymer composite foam impregnated with an anti-microbial compound, which is
marketed under the trade name BioPatch(TM) by Johnson & Johnson Medical Inc., a
Johnson & Johnson subsidiary. The product is applied over the entry point of a
percutaneous device, such as orthopedic traction pins and epidural catheters,
and serves to protect the area from bacterial growth for an extended period. In
1997, the Company extended its licensing and distribution agreement with
Johnson & Johnson for BioPatch(TM) and agreed to provide them with an exclusive
license to its patents in this field. In 1998, the United States Patent and
Trademark Office issued U.S. Patent Number 5,833,665, which covers BioPatch(TM)
Antimicrobial Dressing. The Company has also developed a silver impregnated
foam wound dressing which provides anti-microbial protection to prevent
bacterial colonization leading to infection. The Company is evaluating
potential marketing partners for this device.
Dental Surgery Products
The Company's dental surgery products are extensions of the Company's
absorbable collagen technology. Each of the three products, CollaCote(R),
CollaPlug(R) and CollaTape(R), has a unique dimension, shape and density and
provides most of the hemostasis requirements encountered in dental surgery.
Sulzer Calcitek markets the Company's dental surgery products.
The Company has also developed BioMend(R) Absorbable Collagen Membrane
("BioMend(R)") for use in guided tissue regeneration in periodontal surgery.
BioMend(R) is inserted between the gum and the tooth after surgical treatment
of periodontal disease. BioMend(R) prevents the gum tissue from interfering
with the regeneration of the periodontal ligament that holds the tooth in
place. BioMend(R) is intended to be absorbed after approximately four to seven
weeks, avoiding the requirement for additional surgical procedures to remove a
non-absorbable membrane. Sulzer Calcitek also markets BioMend(R). In addition
to sales in the U.S., BioMend(R) has the CE Mark Certification for sales in the
European Union, and Sulzer Calcitek is pursuing marketing approval in Japan.
In the fourth quarter of 1998, Integra extended its agreement with Sulzer
Calcitek for an additional five years, and the two companies agreed upon a new
product development alliance. Sulzer Calcitek will be funding Integra's
development work on the next generation of BioMend(R), which is expected to
have a longer absorption time and favorable healing characteristics
attributable to separating the bone from soft tissue.
Surgical and Hemostasis Products
The Company's hemostasis products are used in surgical procedures to help
control bleeding. The Company's absorbable collagen hemostatic sponge products
consist of Helistat(R) (Absorbable Collagen Hemostatic Sponge), Helitene(R)
(Absorbable Collagen Hemostatic Agent - Fibrillar Form), Collastat(TM) and
related products. The Company's products have been manufactured for more than
15 years and are estimated to have been used in several hundred thousand
patients. These products are manufactured by Integra and marketed in the United
States through a network of specialized distributors. Outside of the United
States, various international distributors sell the products. In January 1998,
the Company announced that it had signed an agreement with CMI for supply and
distribution of the Company's Helistat(R) and Helitene(R) products in Japan. In
early 1999, the Company announced that Helistat(R) and Helitene(R) had received
the CE Mark Certification, which allows the Company to market both products
throughout the European Union.
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Neurosurgical Products
The dura mater is the tough connective tissue that surrounds the brain and
spinal cord and contains the cerebrospinal fluid (CSF). There is frequently a
need for dural grafts to cover defects in the dura mater resulting from
neurosurgical procedures or other trauma. DuraGen(TM) Dural Graft Matrix
("DuraGen(TM)") is a collagen matrix for the repair and restoration of the
dural membrane. DuraGen(TM) provides a simple, safe and effective method of
dural closure in neurosurgical procedures. DuraGen(TM) is indicated as an onlay
graft and readily conforms to the surface of the brain and overlying tissues.
It may be used to close dural defects following traumatic injury, excision,
retraction or shrinkage.
In an extensive clinical study involving over 1,000 patients, DuraGen(TM) has
been shown to be a safe and effective method of dural closure. This study
reflects one of the most extensive clinical evaluations of a dural replacement
graft to date. DuraGen(TM) allows restoration of the dural membrane by a
process of cell migration into the scaffold like structure of the collagen
matrix. These cells (fibroblasts) deposit new collagen and completely resorb
the implanted matrix. The clinical evaluation demonstrated that DuraGen(TM)
provides excellent protection against cerebrospinal fluid leakage, does not
promote a foreign body reaction and is resorbed completely.
There are approximately 325,000 procedures performed worldwide annually where a
dural graft is required. In 50% of these procedures, neurosurgeons use
autologous (patient derived) grafts; the remainder use processed tissues or
synthetic grafting materials. The Company believes that the annual dural graft
market size is potentially $40 million. Additionally, the dural graft material
is being assessed clinically for the prevention of fibrosis (adhesions) in
spinal surgery. The potential anti-fibrotic market in the U.S. comprises
approximately 600,000 spinal and cranial procedures per year. The Company
believes that the annual market size for this indication is potentially $200
million worldwide.
In March 1998, Integra and CMI announced a strategic alliance for the export to
Japan of the Company's identified neurosurgical products. This represents the
third agreement under which CMI has rights to distribute Integra's proprietary
medical devices in Japan. Under the terms of this agreement, CMI paid a
licensing fee of $1 million in the first quarter of 1998 and invested $4
million for 500,000 shares of Integra preferred stock in the second quarter of
1998. CMI is also underwriting all costs of the Japanese clinical trials and
regulatory approval processes. This seven-year distribution contract begins on
the date of regulatory approval in Japan.
In early 1999, DuraGen(TM) received CE Mark Certification, which allows the
Company to market this new neurosurgical implant throughout the member
countries of the European Union. The Company filed a 510(k) premarket
notification with the FDA for marketing approval in the U.S. in 1998.
DuraGen(TM) broadens the Company's product offerings of selected medical
devices and positions the Company in a segment of the market that has growth
potential.
Other Products
With the acquisition of Rystan, the Company added the Derifil(R) product line
to the medical product segment. Derifil(R) is a high potency chlorophyll tablet
for use by incontinent patients for odor control and personal hygiene in
enterostomy management.
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Medical Products Business: Product Development
Peripheral Nerve Conduit Program
Although peripheral nerves are one of the few tissues of the body that
spontaneously regenerate, they fail, in the majority of cases, to make useful,
functional connections. Consequently, peripheral nerve injuries often result in
permanent loss of function. At present, there is no product on the market that
regenerates peripheral nerves. Injuries to limbs and other parts of the body
that sever peripheral nerves result in permanent loss of sensation and motor
control. The only method of treatment for a severed peripheral nerve is
microsurgical repair. Integra's peripheral nerve regeneration device is a
collagen tube designed to facilitate regeneration of the severed nerve and to
act as a bridge between the severed nerve ends. The collagen conduit supports
nerve regeneration and is then absorbed into the body. Some 20,000 procedures
are performed in the U.S. annually, and the Company estimates that the annual
worldwide market is approximately $80 million.
Scar formation at the nerve repair site is the leading cause of failure in
conventional nerve grafting techniques. The Company's collagen tube prevents
scar formation and provides guided peripheral nerve regeneration. The Company's
pre-clinical studies have demonstrated the closure of 5-cm gaps in peripheral
nerves in non-human primates with restored nerve function. The Company
initiated Phase I clinical trials in 1996 in Copenhagen, Denmark. Phase II
clinical trials are planned for the third quarter of 1999.
Orthopedic Products
The Company has a number of projects under way to develop products that support
the regeneration of bone, cartilage and connective tissue. Collaborative
projects include those being undertaken with DePuy, a Johnson & Johnson company
("DePuy"), Genetics Institute, Inc. ("GI"), a subsidiary of American Home
Products Corporation, Sofamor/Danek Group, Inc. ("SDG"), a subsidiary of
Medtronic Corporation, Bionx Implants, Inc.("Bionx"), the Linvatec division of
CONMED Corporation ("Linvatec"), and the National Institute for Standards and
Technology ("NIST"). The Company is a supplier of technology and products to
the biomaterials-related orthopedic market. The Company's strategy is to
leverage its expertise in matrices, materials and the control of cellular
behavior to provide advanced products to its customers. These areas include
regeneration of orthopedic tissues by delivering active materials using natural
or synthetic polymer systems and regeneration and augmentation of bone after
stabilization through the osteoconductive properties of the synthetic polymer
system.
Bone Regeneration Program
The Company supplies GI with absorbable collagen sponges for use in developing
bone regeneration implants. Since 1994, the Company has supplied absorbable
collagen sponges for GI's recombinant human bone morphogenetic protein-2
(rhBMP-2). Recombinant human BMP-2 is a manufactured version of human protein
naturally present in very small quantities in the body. GI was first to clone
the human gene for BMP-2 and is currently manufacturing rhBMP-2 for clinical
evaluation in several areas of bone repair and augmentation.
Under this alliance, the Company will continue to supply collagen-based sponges
for rhBMP-2 to GI for a minimum of five years, for bone repair and
augmentation. The Company also collaborates with GI in development efforts for
second-generation collagen sponges for use with rhBMP-2 in these applications.
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GI is developing products based on its rhBMP-2 technology and Integra's
collagen technology for applications in orthopedics, oral and maxillofacial
surgery and spine surgery. Spine applications are being developed through a
collaboration with SDG in North America.
Articular Cartilage Program
More than 500,000 surgical procedures are performed annually for the treatment
of traumatized articular cartilage. Damaged articular cartilage, which connects
the skeletal joints, is associated with the onset of progressive pain,
degeneration and, ultimately, long-term osteoarthritis. Conventional procedures
for treating traumatic cartilage damage, such as debridement and drilling, do
not stop joint surface degeneration and often require two or more surgeries.
The Company is developing a new device to allow in vivo regeneration of the
patient's own articular cartilage. This technology will allow the patient's
body to regenerate a smooth, weight-bearing surface. Conventional approaches
result in the formation of fibrocartilage, which is rough and non-weight
bearing over prolonged periods. Normal articular cartilage is not highly
vascularized, and although it is metabolically active tissue, damaged cartilage
generally does not effectively heal. The conventional procedure for treating
traumatic damage to cartilage involves smoothing damaged portions of the tissue
and removing free-floating material from the joint using arthroscopic surgery.
While the objective of this procedure is to reduce pain and restore mobility,
the long-term result of this procedure often is permanent reduction of joint
mobility and an increased risk of developing osteoarthritis. The Company's
objective in developing its cartilage-specific technology is to produce a
product that provides the proper matrix system to allow the natural
regeneration of the patient's cartilage, with full restoration of function and
diminished risk of osteoarthritis.
The product under development would use the Company's peptide technology to
create an enhanced template that would encourage cells to grow into the
template once implanted into the patient. The Company's peptide portfolio
includes bioactive agents designed to mimic natural proteins to promote
chondrocyte cell adhesion, cell survival and other important cellular
functions. The product under development will use this peptide technology to
create an enhanced template that would recruit chondrocyte cells to the
template once implanted. The template itself would employ proprietary designs
based on multiple layers of collagen material of varying but tightly controlled
densities and pore sizes to provide a scaffold for chondrocyte proliferation
and hyaline cartilage formation. Simultaneously it would prevent the in-growth
of unwanted cells that could lead to scar tissue formation. The Company
anticipates that the device will be absorbed into the body over a period of
several weeks. Pre-clinical studies involving several variations of the above
protocols are in progress. In February 1998, the Company announced the signing
of a strategic alliance with Johnson & Johnson Professional, Inc., now DePuy, to
develop and market a new product to regenerate joint cartilage. Integra has
agreed to develop an absorbable, collagen-based implant, designed in combination
with its proprietary RGD peptide technology, which will allow the body to repair
and regenerate articular cartilage found in the knee and other joints. DePuy
will market the product worldwide. Under the terms of the agreement, DePuy will
make payments up to $13 million as Integra meets various milestones, and will
fund all necessary development costs beyond the pre-clinical phase. Following
successful development, Integra will be responsible for manufacturing the
product and for future product development. The Company received $1 million
under this agreement in 1998.
The Company believes the potential sales of the product, combined with the
commitment from DePuy's worldwide marketing and sales force, is a strong
validation of Integra's RGD peptides. The device is being designed to help
overcome the body's inherent deficiencies in regenerating articular cartilage
by promoting the adhesion and function of cells in a manner that will have much
wider clinical use. The
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Company believes that the combination of its collagen matrix technology with
the proprietary RGD peptide technology gives the Company a unique approach to
accelerated cartilage repair. The product's acellular technique does not
require cell cultures. The Company expects these features to prove
substantially more cost-effective than current options.
Tyrosine Polycarbonates Program
The Company is continuing the development of additional biomaterial
technologies. The goal is to enhance the rate and quality of healing and tissue
regeneration with synthetic biodegradable scaffolds to support cell attachment
and growth. To this end, the Company is developing a new class of resorbable
polycarbonates created through the polymerization of tyrosine, a naturally
occurring amino acid. A well-defined and commercially scaleable manufacturing
process prepares these materials. Device fabrication by traditional techniques
such as compression molding and extrusion is readily achieved. The Company
believes that this new biomaterial will be useful in promoting full bone
healing when implanted in damaged sites. The Company has licensed this patented
technology from Rutgers University for all applications, and continues to work
in collaboration with the technology's inventor, Joachim Kohn, Ph.D. This
material is currently being developed for orthopedic and tissue engineering
applications where strength and bone compatibility are critical issues for
success of healing. The polymer when implanted in bone appears to conduct bone
onto and through the polymer implant.
In March 1998 Integra was awarded its second NIST grant of over $2 million. The
focus of this grant is the development of a totally synthetic matrix for the
regeneration of cartilage. In this instance, a copolymer of the tyrosine
polycarbonate ethyl ester and tyrosine polycarbonate free acid is used. The
co-polymer's unique combination of properties allows for faster resorption
times and a site at which to affix an RGD peptide. The NIST program is being
conducted at both the Company's Corporate Research Center (CRC) in San Diego,
California and at Integra's headquarters in Plainsboro, New Jersey.
In September 1998, the Company announced two strategic alliances with Linvatec
and Bionx for developing fixation devices using Integra's polymer technology.
Under the agreements with Linvatec and Bionx, those companies have
responsibility for clinical trials and any necessary regulatory filings, as
well as certain minimum annual purchase payments. Products covered under the
agreement with Linvatec include a resorbable line of interference screws, as
well as tacks and anchors used in reconstruction of the anterior cruciate
ligament and posterior cruciate ligament, fixation of ligaments and tendons in
the knee and shoulder, and bone-tendon-bone procedures. Linvatec also intends
to develop polymer implants for use in bladder neck suspension procedures.
Products covered under the agreement with Bionx Implants include a resorbable
line of screws, plates, pins, wedges and nails used for the fixation and/or
alignment of fractures or osteotomies in all areas of the musculoskeletal
system except in the spine and cranium.
Recent Acquisition of the NeuroCare Group
On March 29, 1999 the Company acquired certain assets and stock held by
Heyer-Schulte NeuroCare, L.P. and its subsidiaries, Heyer-Schulte NeuroCare,
Inc., Camino NeuroCare, Inc. and Neuro Navigational, LLC (collectively, the
"NeuroCare Group"), through the Company's wholly-owned subsidiaries, NeuroCare
Holding Corporation, Integra NeuroCare LLC and Redmond NeuroCare LLC
(collectively, "Integra NeuroCare"). The purchase price for the NeuroCare Group
consisted of $14 million in cash and approximately $11 million of assumed
indebtedness under a term loan from Fleet Credit Corporation. The NeuroCare
Group's assets include a manufacturing, packaging and
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distribution facility in San Diego, California and a manufacturing facility in
Anasco, Puerto Rico, as well as a corporate headquarters in Pleasant Prairie,
Wisconsin which Integra intends to close by August 1, 1999.
Integra NeuroCare designs, manufactures and sells products used by
neurosurgeons in operating rooms and intensive care units for the treatment of
hydrocephalus and head injuries caused by trauma. Hydrocephalus is an incurable
condition resulting from an imbalance between the amount of cerebrospinal fluid
("CSF") produced by the body and the rate at which CSF is absorbed by the
brain. This condition causes the ventricles to enlarge and the pressure inside
the head to increase. Hydrocephalus often is present at birth, but may also
result from head trauma, spina bifida, intraventricular hemorrage, intracranial
tumors and cysts. Integra NeuroCare addresses the market need created by trauma
cases and hydrocephalus through its established market positions in
intracranial pressure monitoring ("ICP"), neurosurgical shunting,
neuroendoscopy and specialty neurosurgical instrumentation.
ICP monitors are used by neurosurgeons in diagnosing and treating cases of
severe head trauma and other diseases. There are approximately 400,000 cases of
head trauma each year in the United States and the Company believes that the
annual worldwide market size for ICP monitors and related drainage technology
is approximately could amount to $45 million. Integra NeuroCare is currently
the ICP monitoring market leader. Its product line includes the MPM-1
multi-parameter monitor, the V420 direct pressure monitor, the OLM fiber optic
pressure monitoring catheter and accessories, a post craniotomy subdural
pressure monitoring kit, a microventricular bolt pressure monitoring kit,
temperature and pressure monitoring catheters, cranial access kits and external
drainage systems. Integra NeuroCare currently has approximately 5,600 ICP
monitors installed worldwide. Gross revenues generated by the NeuroCare Group
from ICP monitoring and related drainage technology were approximately $17.2
million and $16.9 million during 1998 and 1997, respectively. Integra
NeuroCare's ICP monitoring research, development and manufacturing operations
are located in the San Diego, California facility.
Currently, the most effective method of treatment of hydrocephalus is the
insertion of a shunt into the ventricular system of the brain to divert the
flow of CSF out of the brain. A pressure valve then maintains the CSF at normal
levels within the ventricles. According to the Hydrocephalus Association,
hydrocephalus affects approximately one in 500 children born in the United
States. Approximately 80% of total shunt sales address birth-related
hydrocephalus with the remaining 20% addressing surgical procedures involving
excess CSF due to head trauma. The Company believes that the annual worldwide
market size for hydrocephalus shunts is approximately $65 million. Integra
NeuroCare offers a broad line of hydrocephalus shunts and related products,
including the Novus, LPV and Pudenz shunts, ventricular, peritoneal and cardiac
catheters, physician-specified hydrocephalic shunt kits, Ommaya CSF resevoirs,
Spetzler lumbar and syringo-peritoneal shunts and external drainage systems, in
addition to a line of carotid shunt products used in endarterectomy surgical
procedures. Gross revenues generated by the NeuroCare Group from hydrocephalus
shunts were approximately $10.7 million and $10.9 million during 1998 and 1997,
respectively. Integra NeuroCare's hydrocephalus shunt operations are located in
the Anasco, Puerto Rico facility.
Intregra NeuroCare designs, manufactures and produces minimally invasive
neuroendoscopy products and is actively working with leading neurosurgery
centers to develop new diagnostic and therapeutic neurosurgical products. The
Company believes that there is substantial growth potential in the
neuroendoscopy market resulting from an increasing number of neurosurgeons
embracing minimally invasive surgical techniques. The Company anticipates that
the annual worldwide market size for
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neuroendoscopy products is approximately $14 million. Its products include the
NeuroView 100 and 500 imaging systems, both completely integrated digital
imaging systems for neuroendoscopy offering a wide range of single-use
disposable devices for neuroendoscopy procedures. Gross revenues generated by
the NeuroCare Group from neuroendoscopy products were approximately $1.4
million and $1.0 million during 1998 and 1997, respectively. Integra
NeuroCare's neuroendoscopy operations are located in the San Diego, California
facility.
Integra NeuroCare offers a broad line of neurosurgery and spinal
instrumentation products and is a market leader in hand-held spinal and
neurosurgery instruments, such as retractors, kerrisons, dissectors and
curettes. The Company believes that the worldwide market size for neurosurgical
instruments is $50 million. Gross revenues generated by the NeuroCare Group
from neurosurgical instruments were approximately $1.6 million during 1998 and
1997, respectively. Integra NeuroCare's neurosurgical instrument operations are
currently in the Pleasant Prairie, Wisconsin facility, which serves as the hub
for the import and distribution of Integra NeuroCare's specially-designed
surgical instruments. Integra NeuroCare's neurosurgical instrument operations
are expected to be moved to Plainsboro, New Jersey by August 1, 1999 with the
closing of the Pleasant Prairie facility.
From 1995 to 1998, the NeuroCare Group increased revenue by a compound annual
growth rate of approximately 12% and in 1998 generated revenues of $31 million
and earnings before interest, depreciation, taxes and amortization of $5.8
million. Historically, over 90% of the NeuroCare Group's revenues have come
from ICP monitoring and hydrocephalus shunting businesses. Integra NeuroCare
has close working relationships with neurosurgeons worldwide through its sales
force of 18 direct sales representatives and three clinical specialists in the
United States combined with a network of approximately 60 distributors
worldwide. Integra NeuroCare operates in 52 countries worldwide.
Developing Businesses and Ventures
The Integra Corporate Research Center
Integra acquired Telios Pharmaceuticals in 1995 to commercialize its
technologies relating to extracellular matrices and integrin-mediated activity
and, in particular, their applications to tissue regeneration. Integra is
developing these findings and methodologies to enhance and accelerate
development and commercialization of its products. The Company's Telios
Pharmaceuticals operation is now referred to as the Integra Corporate Research
Center ("CRC").
Integra's RGD peptide technology is a direct result of the pioneering work
begun in the early 1980s by co-inventors Michael D. Pierschbacher, Ph.D.,
Integra's Senior Vice President and General Manager of CRC, and Erkki
Ruoslahti, MD, President and CEO of The Burnham Institute. The patented RGD
technology has been shown to have potential utility in a number of important
and rapidly growing medical therapies. These include tissue regeneration,
thrombosis (blood clotting), cancer treatment, immune system regulation,
inflammation, and control of angiogenesis.
Peptides are small synthetic chains of amino acids that are designed to perform
specific functions on cells. Peptides can be engineered to mimic very large
natural matrix proteins that are found within tissues of the body. Peptides
bind integrin receptors found on the surface of virtually all cells of the
body. There are more than 20 such integrin types within this family of cell
receptors. Integrins control cell attachment, growth, migration and
differentiation. Cells present within tissues rely on specific integrin types
during tissue regeneration. Small synthetic peptides can be designed to
interact selectively with certain integrins to achieve differing outcomes by
enhancing certain interactions between cells and matrix. When used in
combination with a collagen scaffold, these peptides signal the
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appropriate cell-matrix functions through integrins and promote the formation
of new tissue by guiding the attachment and growth of cells.
The Company's technologies are based on the interaction between a family of
cell surface proteins called integrins and the RGD peptide sequence found in
the majority of extracellular matrix proteins, including structural molecules
and adhesion molecules that provide binding sites, structural support, and
physiological information for the maintenance of normal cell function in the
body. In 1997 additional significant patents that strengthen the Company's
proprietary position in this technology were issued to The Burnham Institute.
These patents are exclusively licensed to Integra through its CRC.
The Company has in development new pharmacological products based on the
interaction between the extracellular matrix and the integrin family of
receptors that are present on virtually all cells in the body. The Company
believes that many major diseases and disorders throughout the body, including
many that are debilitating, life-threatening, costly and difficult or
impossible to treat satisfactorily with existing therapies, involve the
disruption or abnormality of the interaction of cells with the extracellular
matrix. The Company's technologies are intended to modify the interaction of
cells with the matrix in such a way as to provide new treatment strategies for
a range of disorders. The Company is pursuing a strategy to identify clinical
and market leaders in pharmacological areas to co-develop and license the
Company's proprietary technologies and applications. The Company believes that
such development and marketing relationships could result in a greater
likelihood of commercialization of these opportunities by utilizing the skills
of partners to complete clinical trials and market introduction, while allowing
the Company to focus on pre-clinical development. Many of the Company's
technologies are in the early stages of development and will require the
commitment of substantial additional resources by the Company and its potential
strategic partners prior to commercialization. There can be no assurance that
the Company will be able to form strategic alliances or successfully develop
commercial products.
Research Strategy
The Company has either acquired or secured the proprietary rights to several
important scientific platforms. These technologies provide support for the
Company's critical applications in tissue regeneration, developing
pharmacological applications, and additional opportunities for generating
near-term and mid-term revenues from medical applications. The Company has been
able to identify and bring together critical platform technology components
from which it works to develop solutions to the problem of targeting and
controlling selected cell behavior in the patients' body for both tissue
regeneration and pharmacological application.
Integra focuses on the commercial and clinical utility of its products by
encouraging early and close collaboration with clinicians. As an example,
INTEGRA(R) Artificial Skin is the result of a close collaboration between a
surgeon and a materials scientist. The surgeon's ability to define the critical
specifications of the product were essential prerequisites to the product
development and demonstration of clinical utility in human clinical trials.
Particularly critical were that the product be readily available "off the
shelf" at the time of early wound excision for patients with life-threatening
injury and that it be a permanent wound cover.
The Company's research implementation is to supplement a relatively small group
of in-house scientists and researchers with a network of various hospitals and
medical organizations, which are centers for research. To assist the Company in
achieving its objectives, Integra has entered into collaborations, research
and/or licensing arrangements with the following institutions: (a) Brigham &
Women's Hospital, Inc., Boston, MA for INTEGRA(R) Artificial Skin; (b)
Cambridge Antibody Technology
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Limited, Cambridge, England, for product development of human TGF-[beta]
antibodies; (c) Eastern Virginia Medical School, Norfolk, VA for pre-clinical
studies on polymers; (d) Agency for Contraceptive Research and Development,
Norfolk, VA for topical fertility and sexually transmitted disease control; (e)
Hospital for Joint Diseases Orthopedic Institute, New York, NY for pre-clinical
studies on cartilage regeneration; (f) National Institute of Standards and
Technology for resorbable polymers for orthopedic indications and tissue
engineering; (g) The Burnham Institute, La Jolla, CA (formerly La Jolla Cancer
Research Foundation) for basic research on integrin signaling pathways; (h)
Massachusetts General Hospital, Boston, MA for INTEGRA(R) Artificial Skin
studies; (i) Massachusetts Institute of Technology, Cambridge, MA for
INTEGRA(R) Artificial Skin studies; (j) Robert Wood Johnson Medical School,
Piscataway, NJ for quality control methodology; (k) Rutgers University,
Piscataway, NJ for tyrosine polycarbonate polymers for orthopedic applications
and tissue engineering; (l) University Hospital Copenhagen, Denmark for
clinical studies of collagen nerve graft tubes and resorbable polymers for
tissue engineering; (m) DePuy for articular cartilage regeneration; (n) Century
Medical Inc., Japan for INTEGRA(R) Artificial Skin and neurosurgical product
clinical trials in Japan; (o) The Scripps Research Institute in the areas of
regenerating pancreases and stroke; and (p) University of Washington EB for
bioengineering.
The Company spent approximately $8.4 million, $6.4 million and $6.3 million
during 1998, 1997 and 1996, respectively, on research and development
activities. Research and development activities funded by government grants and
contract development revenues amounted to $1.8 million, $490,000 and $1.1
million during 1998, 1997 and 1996, respectively.
Patents and Proprietary Rights
The Company's ability to compete effectively will depend, in part, on the
clinical and commercial success of its development efforts and its ability to
maintain the proprietary nature of its technologies and manufacturing
processes. The Company pursues a policy of seeking patent protection of its
technology, products and product improvements both in the United States and in
selected foreign countries. When determined appropriate, the Company has and
plans to continue to enforce and defend its patent rights. The Company also
relies upon trade secrets, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position.
As of December 31, 1998, the Company owned or had exclusive license rights to
146 issued or allowed United States patents and 163 issued foreign patents,
with pending United States patent applications and related foreign patent
applications describing approximately 167 additional inventions. These patents
and patent applications contain composition of matter, process and method of
use claims for various fields of use, primarily involving regenerative medicine
and related technologies. The Company files patent applications both in the
United States and in foreign countries in order to protect both its products
and technologies. In addition, the Company has various licenses to technologies
patented by others. The patent position of biotechnology and pharmaceutical
firms is highly uncertain, involves many complex legal, factual and technical
issues and has recently been the subject of much litigation. There is no clear
policy involving the breadth of claims allowed in such cases or the degree of
protection afforded under such patents. As a result, there can be no assurance
that patent applications relating to the Company's products or technologies
will result in patents being issued, that patents issued or licensed to the
Company will provide protection against competitors or that the Company will
enjoy patent protection for any significant period of time. It is possible that
patents issued or licensed to the Company will be successfully challenged, or
that patents issued to others may preclude the Company from commercializing its
products under development.
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Certain of the patents licensed by the Company for specific uses are licensed
to other parties for use in certain fields or are sublicensed to other parties.
Litigation to establish the validity of patents, to defend against infringement
claims or to assert infringement claims against others, if required, can be
lengthy and expensive. There can be no assurance that the products currently
marketed or under development by the Company will not be found to infringe
patents issued or licensed to others.
The Company's competitive position is also dependent upon unpatented trade
secrets. The Company continues to develop a substantial database of information
concerning its research and development. The Company has taken security
measures to protect its data and is in the process of exploring ways to enhance
further the security of its data. However, trade secrets are difficult to
protect. There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets, that such trade secrets will not be
disclosed, or that the Company can effectively protect its rights to unpatented
trade secrets.
In an effort to protect its trade secrets, the Company has a policy of
requiring its employees, consultants and advisors to execute proprietary
information and invention assignment agreements upon commencement of employment
or consulting relationships with the Company. These agreements provide that all
confidential information developed or made known to the individual during the
course of their relationship with the Company must be kept confidential, except
in specified circumstances. There can be no assurance, however, that these
agreements will provide meaningful protection for the Company's trade secrets
or other proprietary information in the event of the unauthorized use or
disclosure of confidential information.
Government Regulation
The Company's research and development activities and the manufacturing and
marketing of the Company's existing and future products are subject to
regulation by numerous governmental agencies in the United States and in other
countries. The FDA and comparable agencies in other countries impose mandatory
procedures and standards for the conduct of clinical trials and the production
and marketing of products for diagnostic and human therapeutic use. The FDA
product approval process has different regulations for drugs, biologics, and
medical devices. The FDA currently classifies the Company's proposed
regenerative medicine products as medical devices.
Review Process for Medical Devices
There are two types of FDA review/approval procedures for medical devices: a
Premarket Notification Section 510(k) ("510(k)") and a Premarket Approval
("PMA") application. A 510(k) requires submission of sufficient data to
demonstrate substantial equivalence to a device marketed prior to May 28, 1976,
or to a device marketed after that date which has been classified into Class I
or Class II which has received premarket notification 510(k) clearance.
Although the mandated period for FDA review is 90 days, actual review times can
be substantially longer, and the sponsor cannot market the device until FDA
clearance is obtained. For those devices that involve new technology and/or
that present significant safety and effectiveness issues, 510(k) submissions
may require significantly more time for FDA review and may require submission
of more extensive safety and effectiveness data, including clinical trial data.
Among the conditions for clearance to market of a 510(k) submission is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to the FDA's current Quality System
Regulations. In complying with standards set forth in these regulations,
manufacturers must expend time, money and effort for production and quality
control to ensure full technical compliance
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at all times. Manufacturing establishments, both international and domestic,
are also subject to inspections by or under the authority of the FDA. Although,
at present, the FDA generally does not inspect such establishments prior to
clearance of a 510(k) submission, it is establishing a program of conducting
Quality System inspections for new devices in the future as a standard
practice.
The Medical Device Amendments of 1976 amended the Federal Food, Drug and
Cosmetics Act to establish three regulatory classes for medical devices, based
on the level of control required to assure safety and effectiveness. Class III
Devices are defined as life-supporting and life-sustaining devices, devices of
substantial importance in preventing impairment of human health or devices that
present potentially unreasonable risk of illness or injury. Class III devices
are those for which there is insufficient information to show that Class I or
Class II controls can provide a reasonable assurance of safety or
effectiveness. The PMA application review process for Class III devices was
established to evaluate the safety and effectiveness of these devices on a
product by product basis. Manufacturers that wish to market Class III devices
must submit and receive approval of a PMA application from the FDA.
The FDA has substantial content and format requirements for PMA applications,
which include clinical and non-clinical safety and effectiveness data,
labeling, manufacturing processes and quality assurance programs. As part of
the PMA application process, the PMA application may be referred to an FDA
Advisory Panel for review. Additionally, final approval of the product is
dependent on an inspection of the manufacturing facility for compliance with
FDA Quality System Regulations.
All studies in humans for the purpose of investigating the safety and
effectiveness of an investigational significant risk medical device must be
conducted under the Investigational Device Exemption ("IDE") regulations. An
IDE application to the FDA includes all preclinical biocompatibility testing,
investigational protocols, patient informed consents, reports of all prior
investigations, manufacturing and quality control information. It takes a
number of years from initiation of the project until submission of a PMA
application to the FDA, and requires the expenditure of substantial resources.
If a PMA application is submitted, however, there can be no assurance on the
length of time for the review process at the FDA or that the FDA will approve
the PMA application.
Under either the 510(k) submission or PMA application process, manufacturing
establishments, foreign and domestic, are subject to periodic inspections by
the FDA for compliance with Quality System Regulations. The Company and each of
its operating subsidiaries are subject to such inspections.
To gain approval for the use of a product for clinical indications other than
those for which the product was initially evaluated or for significant changes
to the product, further studies, including clinical trials and FDA approvals
are required. In addition, for products with an approved PMA application, the
FDA requires postapproval reporting and may require postapproval surveillance
programs to monitor the product's safety and effectiveness. Results of post
approval programs may limit or expand the further marketing of the product.
International Regulatory Requirements
The Company is preparing for the changing international regulatory environment.
"ISO 9000" is an international recognized set of guidelines that are aimed at
ensuring the manufacture and development of quality products. The Company was
audited under ISO standards in 1997 and received certification to ISO 9001, a
full quality system. In 1998, the Company underwent a surveillance audit and
renewed its certification to ISO 9001. The Company is required to be audited on
an annual basis by a recognized notified body to maintain certification.
Companies that meet ISO standards are internationally recognized as functioning
under a quality system. Approval of a product by regulatory authorities in
international
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countries must be obtained prior to the commencement of marketing of the
product in such countries. The requirements governing the conduct of clinical
trials and product approvals vary widely from country to country, and the time
required for approval may be longer or shorter than that required for FDA
approval of the PMA application. In June 1998, the European Union Medical
Device Directive became effective, and all medical devices must meet the
Medical Device Directive standards and receive CE mark certification. CE mark
certification involves a comprehensive quality system program, and submission
of data on a product to the notified body in Europe.
Other United States Regulatory Requirements
In addition to the regulatory framework for product approvals, the Company is
and may be subject to regulation under federal and state laws, including
requirements regarding occupational health and safety; laboratory practices;
and the use, handling and disposal of toxic or hazardous substances. The
Company may also be subject to other present and possible future local, state,
federal and foreign regulations.
The Company's research, development and manufacturing processes involve the
controlled use of certain hazardous materials. The Company is subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials and certain waste products.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by such laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company. Although the Company
believes that it is in compliance in all material respects with applicable
environmental laws and regulations, there can be no assurance that the Company
will not incur significant costs to comply with environmental laws and
regulations in the future, nor that the operations, business or assets of the
Company will not be materially adversely affected by current or future
environmental laws or regulations.
Manufacturing
The Company's primary manufacturing facility is located in Plainsboro, New
Jersey. The Company manufactures the majority of its medical products at this
approximately 35,000 square foot FDA-registered and inspected facility which
also serves as the Company's executive offices. The Company's commercial-scale
manufacturing facility for INTEGRA(R) Artificial Skin is at this location.
The basic material for many of the Company's medical and regenerative medicine
products is principally purified collagen prepared from bovine tendon in a
four-step process: (i) the raw material is processed with various enzymes and
solvents to purify and render it non-immunogenic; (ii) the purified material is
dispersed into suspensions appropriate for the manufacture of the different
forms of collagen material and then dried using freeze drying techniques; (iii)
the fibrous material yielded from the drying step is "cross-linked" through
chemical bonding of overlying fibers, with different types and degrees of
cross-linking being used for different products; and (iv) the bonded material
is sized and packaged. The Company has installed equipment for the manufacture
of bovine collagen-based products at its Plainsboro facility.
In 1998, the Company shut down its West Chester, Pennsylvania facility and
consolidated the operations into the Plainsboro, New Jersey facility. As a
result of the Rystan acquisition, the Company acquired the lease of a facility
in Little Falls, New Jersey. With the sale of Rystan's Panafil product line in
January 1999, the Company is currently planning to consolidate the remaining
Rystan activities into the Plainsboro, New Jersey facility by the end of 1999.
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Competition
In general, the medical technology industry is subject to rapid, unpredictable
and significant technological change. Competition from established
pharmaceutical and medical technology companies is intense. Competition also
comes from early stage companies that have alternative technological solutions
for the Company's primary clinical targets. New technologies are constantly
being developed at universities and research institutions.
The Company's competitive position will depend on its ability to secure
regulatory approval for its products, implement production and marketing plans,
obtain patent protection and secure adequate capital resources. The Company is
aware of several companies seeking to develop dermal replacement and other
products that could, if successfully developed, potentially compete with the
regenerative medicine technologies under development by the Company. A number
of biotechnology, pharmaceutical and chemical companies are developing various
types of wound healing treatments which are alternatives to tissue regeneration
for some conditions, including chronic skin ulcers. These treatments employ a
variety of approaches such as growth factors, tripeptides and wound dressings.
The Company believes that some of these alternatives could be used in
conjunction with the Company's products.
The Company competes primarily on the uniqueness of its technology and product
features and on the quality and cost-effectiveness of its products. Many
competitors or potential competitors have greater financial resources, research
and development capabilities, and marketing and manufacturing experience than
the Company. The Company is aware of several companies seeking to develop
products that could, if successful and approved, compete with the regenerative
medicine technologies under development by the Company. Several of these
companies have products that may compete with INTEGRA(R) Artificial Skin,
including LifeCell Corporation, Genzyme Tissue Repair (a division of Genzyme
Corporation), Advanced Tissue Sciences, Inc., Organogenesis, Inc. and Ortec
International, Inc. LifeCell Corporation and Genzyme Tissue Repair are currently
not subject to FDA regulation because they involve the processing of human cells
and tissues and, therefore, are not currently subject to the costs and expenses
and the potential delays associated with the FDA approval process.
The Company believes that expansion of its markets will be enhanced by the
entry of additional competitors. During the last year several new products have
been approved by the FDA or have moved closer to final approval. These include
products by Johnson & Johnson (Regranex) and Organogenesis, Inc. (Apligraf).
Regranex is a growth factor-based wound healing compound which competes with
the Company's technologies at CRC. Apligraf is a dermal replacement product
targeted primarily at chronic wounds. The Company believes that success
of these products in the market will offer an opportunity for Integra's
technologies in the future. Ultimately, therefore, the Company's competitive
position will depend both on the size of the market for its products and on the
sales and marketing strength established by the Company and its corporate
partners. The breadth of the Company's technologies allows it to compete in a
wide range of possible solutions to the problem of repair of damaged tissue.
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Employees
At December 31, 1998, the Company employed 178 full-time people (including
temporary and part-time employees) of which 63 are engaged in production and
production support (including warehouse, engineering, and facilities
personnel), 17 in quality assurance/quality control, 37 in research and
development, 8 in regulatory and clincial affairs, 20 in sales/marketing and 33
in administration and finance. None of the Company's employees is subject to a
collective bargaining agreement.
Forward Looking Statements
This report contains trend information and other forward-looking statements
related to the future use and sales of the Company's products, potential
markets for the Company's products, anticipated expenditure levels compared to
historical amounts and the Company's plans for its research and development
efforts. Such statements are made pursuant to the safe harbor provisions of the
Securities Litigation Reform Act of 1995 and involve risks and uncertainties
which may cause results to differ materially from those set forth in these
statements. Potential risks and uncertainties include, without limitation,
those mentioned in this report and, in particular, those mentioned under "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Results of Operations".
ITEM 2. PROPERTIES
The Company has a lease for approximately 35,000 square feet for its principal
administrative, marketing, manufacturing and product development activities in
Plainsboro, New Jersey that expires in October 2012. The Company's CRC facility
is approximately 18,600 square feet of leased administrative and laboratory
space located in San Diego, California. This lease expires in October 2004. As
a result of the Rystan acquisition, the Company also leases 12,000 square feet
of manufacturing and administrative space in Little Falls, New Jersey. This
lease expires in October 2004. In connection with the acquisition of the
NeuroCare Group, Integra NeuroCare assumed a lease (expiring in January 2000)
for a 31,000 square foot manufacturing, packaging and distribution facility in
San Diego, California, a lease (expiring in July 2004) for a 23,000 square foot
manufacturing facility in Anasco, Puerto Rico and a lease for a 14,000 square
foot corporate headquarters facility in Pleasant Prairie, Wisconsin that the
Company has scheduled to be closed by August 1, 1999. In addition, the Company
leases several smaller facilities to support additional administrative and
storage operations.
ITEM 3. LEGAL PROCEEDINGS
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In July 1996, the Company filed a patent infringement lawsuit in the United
States District Court in San Diego against Merck KGaA, a German corporation,
Scripps Research Institute, a California nonprofit corporation, and David A.
Cheresh, Ph.D., a research scientist with Scripps seeking damages and injunctive
relief. The complaint 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 several of the Company's patents. These patents are part of a group of
patents granted to The Burnham Institute and licensed by the Company that are
based on the interaction between a family of cell surface proteins called
integrins and the arginine-glycine-aspartic acid (known as "RGD") peptide
sequence found in many extracellular matrix proteins. The defendants have filed
a countersuit asking for an award of defendants' reasonable attorney fees. The
Company anticipates this case will be tried during 1999.
The Company is also subject to other claims and lawsuits in the ordinary course
of its business. In the opinion of management, such other claims are either
adequately covered by insurance or otherwise indemnified, and are not expected,
individually or in the aggregate, to result in a material adverse effect on the
financial condition of the Company. The Company's financial statements do not
reflect any significant amounts related to possible unfavorable outcomes of the
matters above or others. However, it is possible that the Company's results of
operations, financial position and cash flows in a particular period could be
materially affected by these contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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Additional Information
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K.
Executive Officers
The executive officers of the Company serve at the discretion of the Board of
Directors. The only family relationship between any of the executive officers
and directors of the Company is that Mr. Holtz is the nephew of Dr. Caruso. The
following information indicates the position and age of the Company's executive
officers as of the date of this report and their previous business experience.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Richard E. Caruso, Ph.D. 55 Chairman
Stuart M. Essig, Ph.D. 37 President and Chief Executive Officer
George W. McKinney, III, Ph.D. 55 Executive Vice President and Chief Operating Officer
John B. Henneman, III 37 Senior Vice President, Chief Administrative Officer and
General Counsel
Judith E. O'Grady 48 Senior Vice President, Regulatory, Quality Assurance and
Clinical Affairs
Michael D. Pierschbacher, Ph.D. 47 Senior Vice President Research and Development,
General Manager, Corporate Research Center
David B. Holtz 32 Vice President, Finance and Treasurer
</TABLE>
Richard E. Caruso, Ph.D. founded the Company and has been the Chairman of the
Board of Directors since inception. Until December 1997, Mr. Caruso also served
as President and Chief Executive Officer. From 1969 to 1992, Dr. Caruso was a
principal of LFC Financial Corporation, a major entrepreneurial financing
company located in Radnor, Pennsylvania. When he left LFC Financial in 1992, he
was a director and Executive Vice President. He has 25 years experience in
finance and entrepreneurial ventures. Before joining LFC Financial, Dr. Caruso
was associated with Price Waterhouse & Co. in Philadelphia, Pa. Dr. Caruso has
served as a director or trustee of the following organizations: American
Capital Open End Mutual Funds, LFC Financial Corporation, 202 Data Systems,
Tenley Enterprises, Inc., and London School of Economics Business Performance
Group. He is currently a director of Susquehanna University, The Baum School of
Art, Uncommon Individual Foundation (Founder) and the Company. He received a BS
degree from Susquehanna University, an MSBA degree from Bucknell University,
and a Ph.D. degree from the London School of Economics, University of London
(UK). Dr. Caruso is also a certified public accountant.
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<PAGE>
Stuart M. Essig, Ph.D. has served as President and Chief Executive Officer and
a director of the Company since December 1997. Before joining the Company, Mr.
Essig supervised the medical technology practice at Goldman, Sachs & Co. as a
managing director. Mr. Essig had ten years of broad health care experience at
Goldman Sachs serving as a senior merger and acquisitions advisor to a broad
range of domestic and international medical technology, pharmaceutical and
biotechnology clients. Mr. Essig received an A.B. degree from the Woodrow
Wilson School of Public and International Affairs at Princeton University and
an MBA and a Ph.D. degree in Financial Economics from the University of
Chicago, Graduate School of Business. Mr. Essig also serves on the Board of
Directors of Vital Signs, Inc., St. Jude Medical Corporation and Neuromedical
Systems, Inc.
George W. McKinney, III, Ph.D. has served the Company as Vice Chairman,
Executive Vice President and Chief Operating Officer since May 1997 and as a
member of the Board of Directors since December 1992. Between 1990 and 1997,
Dr. McKinney was Managing Director of Beacon Venture Management Corporation, a
venture capital firm. Between 1992 and 1997, Dr. McKinney also served as
President and Chief Executive Officer of Gel Sciences, Inc. and GelMed, Inc., a
privately held specialty materials firm with development programs in both the
industrial and medical products fields. From 1983 to 1989, Dr. McKinney was a
Managing Director at American Research & Development, a venture capital firm.
Between 1986 and 1989, he also served as President and Chief Executive Officer
of American Superconductor, Inc. (NASDAQ: AMSC), a development stage firm in
the specialty materials field. From 1965 to 1983, Dr. McKinney worked for
Corning Glass Works (now Corning, Inc.), a specialty materials firm, in a
variety of manufacturing, engineering, and financial positions. At Corning, he
served as President of Corning Designs, a subsidiary which he founded, as
Secretary to the Management Committee, as Director of Business Development and
Planning, as Treasurer, International, as Assistant Treasurer, Domestic, and as
Financial and Control Manager for the Engineering Division. Dr. McKinney holds
a S.B. from MIT in Management and a Ph.D. from Stanford University in Strategic
Planning.
John B. Henneman, III is the Company's Senior Vice President, Chief
Administrative Officer and General Counsel. Prior to joining the Company in
August 1998, Mr. Henneman served Neuromedical Systems, Inc., a public company
developer and manufacturer of in vitro diagnostic equipment, in various
capacities for more than four years. From 1994 until June 1997, Mr. Henneman was
Vice President of Corporate Development, General Counsel and Secretary. From
June 1997 through November 1997, he served in the additional capacity of interim
Co-Chief Executive Officer and after December 1997 Mr. Henneman was Executive
Vice President, US Operations, and Chief Legal Officer. In March 1999,
Neuromedical Systems, Inc. filed a petition under Chapter 11of the federal
bankruptcy laws. From 1986 to 1994, Mr. Henneman practiced law in the Corporate
Department of Latham & Watkins (Chicago, Illinois). Mr. Henneman received his
A.B. (Politics) from Princeton University in 1983, and his J.D. from the
University of Michigan Law School in 1986.
Judith E. O'Grady, Senior Vice President of Regulatory Affairs, Quality
Assurance and Clinical Research, has served the Company since 1985. Ms. O'Grady
has worked in the areas of medical devices and collagen technology for over 20
years. Prior to joining the Company, Ms. O'Grady worked for Colla-Tec, Inc., a
Marion Merrell Dow Company. During her career Ms. she has held positions with
Surgikos, a Johnson & Johnson company, and was on the faculty of Boston
University College of Nursing and Medical School. Ms. O'Grady obtained the FDA
approval for INTEGRA(R)
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<PAGE>
Artificial Skin, the first regenerative product approved by the FDA. She also
has obtained approvals for several other product lines for the Company. In
addition, Ms. O'Grady obtained the CE Mark Certification for approvals in the
European Union as well as a multitude of other international approvals. She has
been pivotal in the ISO 9001 Certification of the Company. She is a member of
the NIST group on standards for clinical outcomes as well as on the Board of
Directors for the New Jersey League of Nursing. Ms. O'Grady has presented
professional programs and lectures, both nationally and internationally, on
INTEGRA(R) Artificial Skin. She received her BS degree from Marquette
University and MSN in Nursing from Boston University.
Michael D. Pierschbacher, Ph.D. joined the Company in October 1995 as Senior
Vice President, Research and Development. In May 1998 he was named Senior Vice
President and Director of the Corporate Research Center. From June 1987 to
September 1995, Dr. Pierschbacher served as Senior Vice President and
Scientific Director of Telios Pharmaceuticals, Inc., which was acquired by the
Company in connection with the reorganization of Telios under Chapter 11 of the
Bankruptcy Code. He was a co-founder of Telios in May 1987 and is the
co-discoverer and developer of Telios' matrix peptide technology. Before
joining Telios as a full-time employee in October 1988, he was a staff
scientist at the Burnham Institute for five years and remained on staff there
in an adjunct capacity until the end of 1997. He received his post-doctoral
training at Scripps Clinical and Research Foundation and at the Burnham
Institute. Dr. Pierschbacher received his Ph.D. in Biochemistry from the
University of Missouri.
David B. Holtz joined the Company as Controller in 1993 and has served as Vice
President, Finance and Treasurer since March 1997. His responsibilities include
managing all accounting and information systems functions. He is also
responsible for the preparation of the Company's Securities and Exchange
Commission filings and federal and state tax returns. Before joining the
Company, Mr. Holtz was an associate with Coopers & Lybrand, L.L.P. in
Philadelphia and Cono Leasing Corporation, a private leasing company. He
received a BS degree in Business Administration from Susquehanna University in
1989 and is a certified public accountant.
-23-
<PAGE>
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<PAGE>
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on The Nasdaq National Market under the
symbol "IART". The following table represents the high and low sales prices for
the Company's Common Stock for each quarter for the last two years. All
outstanding common share and per share amounts have been retroactively adjusted
to reflect a one-for-two reverse stock split of the Company's common stock on
May 18, 1998.
1998 HIGH LOW
---- ---- ---
First Quarter $10.75 $8.125
Second Quarter $9.75 $6.125
Third Quarter $8.00 $4.375
Fourth Quarter $5.25 $3.25
1997
----
First Quarter $27.00 $12.75
Second Quarter $26.00 $17.50
Third Quarter $23.50 $8.25
Fourth Quarter $14.00 $8.50
The closing price for the Common Stock on March 25, 1999 was $4.00. For
purposes of calculating the aggregate market value of the shares of Common
Stock of the Company held by non-affiliates, as shown on the cover page of this
report, it has been assumed that all the outstanding shares were held by
non-affiliates except for the shares held by directors and executive officers
of the Company and stockholders owning 10% or more of outstanding shares.
However, this should not be deemed to constitute an admission that all such
persons are, in fact, affiliates of the Company. Further information concerning
ownership of the Company's Common Stock by executive officers, directors and
principal stockholders will be included in the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission.
The Company does not currently pay any cash dividends on its Common Stock and
does not anticipate paying as such dividends in the foreseeable future.
The number of stockholders of record as of March 25, 1999 was approximately
800, which includes stockholders whose shares were held in nominee name. The
number of beneficial stockholders at that date was over 6,700.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following data has been selected by the Company and derived from
consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants. The information set forth
below is not necessarily indicative of the results of future operations and
should be read in conjunction with the Company's consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing elsewhere in this
report.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data (1)
Product sales................................... $ 14,076 $ 14,001 $11,210 $ 8,356 $ 6,958
Other revenue................................... 3,379 745 1,938 1,873 1,703
-------- -------- ------- -------- -------
Total revenue............................... 17,455 14,746 13,148 10,229 8,661
Cost of product sales........................... 7,420 7,027 6,671 4,850 4,402
Research and development........................ 8,424 6,406 6,294 5,191 3,085
Selling and marketing........................... 5,955 5,460 4,310 2,455 1,335
General and administrative (2).................. 9,836 14,764 5,320 3,642 2,170
Acquired in-process research and development (3) ---- ---- ---- 19,593 (275)
-------- -------- ------- -------- --------
Total costs and expenses...................... 31,635 33,657 22,595 35,731 10,717
-------- -------- ------- -------- -------
Operating loss.................................. (14,180) (18,911) (9,447) (25,502) (2,056)
Interest income................................. 1,250 1,771 1,799 283 221
Interest expense................................ ---- ---- ---- (188) (64)
Other income (expense) ......................... 588 176 120 5 (1)
-------- -------- ------- -------- --------
Net loss........................................ $(12,342) $(16,964) $(7,528) $(25,402) $(1,900)
======== ======== ======= ======== =======
Basis and diluted net loss per share............ $ (.76) $ (1.15) $ (.54) $ (2.41) $ (.20)
======== ======== ======= ======== =======
Weighted average number of common shares
Outstanding................................... 16,139 14,810 14,057 10,536 9,517
======== ======== ======== ======== ========
<CAPTION>
December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance Sheet Data (1) (In thousands)
Cash, cash equivalents and short-term investments $ 20,187 $ 26,272 $ 34,276 $ 5,710 $ 3,331
Working capital................................ 23,898 29,407 37,936 7,476 3,610
Total assets................................... 34,707 38,356 48,741 19,378 13,703
Long-term debt................................. ---- ---- ---- ---- 1,754
Accumulated deficit............................ (88,334) (75,945) (58,981) (51,453) (26,051)
Total stockholders' equity..................... 31,366 35,755 46,384 17,427 9,275
</TABLE>
-----------------------------
(1) As the result of the Company's acquisitions of Telios
Pharmaceuticals, Inc. in August 1995 and Rystan Company, Inc. in
September 1998, the consolidated financial results for certain of the
periods presented above may not be directly comparable.
(2) The 1997 general and administrative expense included the following
two non-cash charges: (i) $1.0 million related to an asset impairment
charge; and (ii) $5.9 million related to an equity-based signing
bonus for the Company's President and Chief Executive Officer.
(3) As a result of purchase accounting, the 1995 loss included $19.6
million of acquired in-process research and development which was
charged to expense at the date of the Company's acquisition of Telios
Pharmaceuticals, Inc.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements, the notes thereto and the other financial
information included elsewhere in this report.
General
The Company 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, the Company's consolidated
financial results for 1998 and 1997 may not be directly comparable. The
Company's financial information discussed below should be considered in light
of (i) the Company's sale of the Panafil(R) product line on January 5, 1999
and (ii) the Company's acquisition of the NeuroCare group of companies on March
29, 1999 (see Notes 3 and 17 to the Company's consolidated financial statements
under Item 8 of this report).
Results of Operations
1998 Compared to 1997
The Company's net loss decreased from $17.0 million in 1997 to $12.3 million in
1998. The 1997 loss included two non-cash charges totaling $6.9 million, which
are included in general and administrative expense.
Total revenues increased 18% from $14.7 million in 1997 to $17.5 million in
1998, due largely to increases in other revenues. Product sales increased 1%
from $14.0 million to $14.1 million and included $670,000 in sales from Rystan
in the fourth quarter of 1998. Sales of INTEGRA(R) Artificial Skin ("INTEGRA")
declined slightly from $6.0 million in 1997 to $5.8 million in 1998. INTEGRA
sales in North America declined by $560,000 as the Company reduced its selling
and marketing efforts in North America. In 1998, the number of North American
burn centers and hospitals that used INTEGRA declined from 114 to 94 as the
Company's selling and marketing efforts were focused on the largest burn
centers which handle the majority of severe burn cases. The Company's export
sales increased 30% to $2.3 million (18% of total sales) as INTEGRA export
sales increased by $400,000 due to increased international distribution
efforts. INTEGRA received CE Mark certification in March 1998, which included a
broader indication of use than currently granted in the United States. The
Company's international sales include INTEGRA sales to over 25 countries
throughout the world.
The primary application of INTEGRA in North America has been for patients with
severe life-threatening burns. The Company is in the process of collecting
clinical results on INTEGRA's application in reconstructive and wound healing
procedures and is continuing to focus its strategy on expanding the approved
indications for use of INTEGRA in the United States. The Company believes these
results demonstrate that INTEGRA can offer improved clinical results compared
to existing treatments for relief of painful scars, wound contractures and
hypertrophic scarring. The Company believes that its ability to increase the
use of the product will require an increase in marketing and selling effort for
the product, as well as the receipt of regulatory approvals for broader
indiciations of use.
Sales in the Company's medical products segment decreased from $8.0 million in
1997 to $7.8 million in 1997 due largely to discontinued product lines. The
Company ceased production and sale of its private label ophthalmic product line
in 1997 and suspended operations at its leased West Chester, Pennsylvania
facility in January 1998, which resulted in an elimination of production for
its avian collagen wound care product line and its contract manufacturing
activities. The Company's ophthalmic, avian collagen and contract manufacturing
revenues accounted for $630,000 in 1997 compared to minimal amounts in 1998.
This decline was offset by increases in the Company's infection control and
surgical and hemostasis product lines.
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<PAGE>
Customers representing greater than 10% of sales included two customers with
aggregate sales of 27% and 24% in 1998 and 1997, respectively. Because
significant portions of the Company's medical products segment sales are made
to marketing partners and distributors, quarter-to-quarter sales in medical
products can vary significantly.
Other revenue, which includes grant revenue, license fees, contract development
revenue and royalties, increased from $745,000 in 1997 to $3.4 million in 1998.
Licensing revenue and development funding had the greatest increases with each
increasing by $1 million due to the Company's licensing and development
agreements with Century Medical, Inc. and DePuy, a Johnson & Johnson Company
("DePuy"), respectively. Grant revenue also increased by $200,000 as the Company
initiated work under its second three-year $2.0 million National Institute of
Science and Technology ("NIST") grant. The Company expects to continue to focus
its efforts to obtain additional funding through research grants, licensing
arrangements and development alliances, although the timing and amount of such
revenue, if any, can not be predicted. In addition, the second phase of the
development agreement with DePuy requires that a specific milestone be achieved
before additional funding is received.
Cost of product sales increased 6% from $7.0 million (50% of product sales) in
1997 to $7.4 million (53% of product sales) in 1998 and included $300,000
related to the fair value purchase accounting adjustment for Rystan's inventory
in 1998. Excluding the Rystan purchase adjustment, the Company's cost of
product sales in 1998 was 51% of product sales. Lower operating costs due to
the closing of the Company's West Chester, Pennsylvania production facility
were largely offset by higher unit costs and royalty expense for INTEGRA. Due
to the relatively high fixed costs of the manufacturing facility for INTEGRA,
the Company is anticipating higher unit costs until there is higher production
volume. The Company believes its current capacity to produce INTEGRA and its
other medical products is sufficient to support significant growth, and the
utilization of this capacity will affect its gross margin on product sales. The
Company is anticipating a continued temporary decline in gross margins for the
first quarter of 1999 primarily related to the fair value inventory purchase
accounting adjustment associated with the Rystan acquisition.
Research and development expense increased from $6.4 million in 1997 to $8.4
million in 1998. Increases in research and development expenditures associated
with funding levels for the Company's cartilage research programs with
J&J/DePuy and NIST represented the largest increases. In addition, the Company
increased expenditures related to its clinical efforts for its DuraGen(TM) and
INTEGRA products as well as pre-clinical costs associated the Company's
absorbable biocompatible polymer program. Continuing expenditures include costs
associated with efforts focusing on combining the Company's biomaterials
technologies with its integrin-mediated technologies acquired in the Telios
acquisition. The Company expects the level of research and development
expenditures in 1999 to be at or higher than 1998 levels depending on the
Company's ability to obtain outside funding for its programs. The amount of
resources allocated to fund particular research and development efforts will
vary depending upon a number of factors, including the progress of development
of the Company's technologies, changing competitive conditions and
determinations with respect to the commercial potential of the Company's
technologies.
Selling and marketing expense increased 9% from $5.5 million in 1997 to $6.0
million in 1998 and included $270,000 in selling and marketing costs in the
fourth quarter with the addition of Rystan. Excluding the Rystan increase,
sales and marketing costs were up only 4% as the Company shifted efforts from
domestic INTEGRA activities to international INTEGRA activities and pre-launch
marketing activities for the Company's DuraGen(TM) product.
General and administrative expense declined from $14.8 million in 1997 to $9.8
million in 1998. The 1997 amount included two non-cash charges; a $1.0 million
asset impairment charge associated with certain leasehold improvements at its
leased West Chester, Pennsylvania, and a $5.9 million charge related to an
equity-based signing bonus for the Company's President and Chief Executive
Officer. The 1998 amount also included an additional asset impairment charge of
$145,000. Excluding these charges, general and administrative expense increased
23% from $7.9 million in 1997 to $9.7 million in 1998. Significant increases
included the addition of several senior executives and costs related to the
continued maintenance of the Company's intellectual property and patent
infringement litigation. The Company settled three litigation matters during
1998, but significant litigation costs associated with the patent infringement
lawsuit against Merck KGaA are expected to continue with the case scheduled for
trail sometime during the second half of 1999.
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<PAGE>
Other income, net, which primarily included interest income and a litigation
settlement gain of $550,000 in 1998, was $1.8 million in 1998 compared to $1.9
million in 1997. The litigation gain offset a decline in interest income due to
lower investment balances and lower short-term interest rates.
1997 Compared to 1996
The Company's net loss increased from $7.5 million in 1996 to $17.0 million in
1997. The 1997 loss included two non-cash charges totaling $6.9 million, which
are included in general and administrative expense.
Total revenues increased 12% from $13.1 million in 1996 to $14.7 million in
1997 as increases in product sales offset decreases in other revenues. Product
sales increased 25% from $11.2 million to $14.0 million due to $6.0 million in
sales of INTEGRA in 1997 compared to $3.1 in 1996. The Company's export sales
increased 17% from $1.7 million to $2.0 million as INTEGRA export sales
increased by $860,000. Approximately 72% of INTEGRA sales in 1996 were in North
America compared to 71% in 1996, following the product's marketing approval
from the FDA in March 1996. In 1997, 114 burn centers and hospitals throughout
North America purchased INTEGRA compared to 65 burn centers and hospitals in
1996. The Company's international sales included INTEGRA sales to 20 countries
throughout the world.
Sales in the Company's medical products segment decreased from $8.1 million in
1996 to $8.0 million in 1997. Decreases in the Company's infection control and
surgical and hemostasis product lines were partially offset by increases in its
dental product line and other contract manufacturing. The dental product line
increase was the result of increased orders from the Company's marketing
partner for the BioMend product, which was introduced in August 1995. The
decrease in the surgical and hemostasis product line, which includes products
sold to marketing partners and products marketed directly, was due to lower
unit volume from international distributors and customers.
During 1997, the Company's distribution agreement for its ophthalmic products
was terminated, and the Company has discontinued the product line. In January
1998, the Company decided to suspend operations at its leased West Chester,
Pennsylvania facility, and as a result discontinued its avian collagen wound
care product line and its contract manufacturing activities. The Company's
ophthalmic, avian collagen and contract manufacturing revenues accounted for
less than 5% of product sales in 1997 and 1996. Customers representing greater
than 10% of sales included two customers with aggregate sales of 24% in 1997
and three customers with aggregate sales of 42% in 1996. Because significant
portions of the Company's medical products segment sales are sold to marketing
partners and distributors, quarter-to-quarter sales can vary significantly.
Other revenue, which includes grant revenue, license fees, contract development
revenue and royalties, declined from $1.9 million in 1996 to $745,000 in 1997.
Grant revenue declined by $590,000 as a large portion of 1996 revenue came from
a three-year $2.0 million NIST grant which was completed in 1996. Licensing
revenue also declined as the Company received a $500,000 license fee in 1996 in
an agreement with Cambridge Antibody Technology Limited involving a human
antibody development program.
Cost of product sales increased 5% from $6.7 million (60% of product sales) in
1996 to $7.0 million (50% of product sales) in 1997. The dollar increase in
cost of product sales is due to higher product sales. Cost of product sales as
a percentage of sales decreased due to lower inventory write-offs related to
certain medical product production difficulties in 1996, improved capacity
utilization for INTEGRA, and increased sales in higher margin products.
Research and development expense increased from $6.3 million in 1996 to $6.4
million in 1997. Increases in research and development expenditures associated
with clinical costs for the Company's post-approval study of INTEGRA offset
declines in pre-clinical costs associated the Company's absorbable
biocompatible polymer program.
Selling and marketing expense increased 27% from $4.3 million in 1996 to $5.5
million in 1997 as the Company continued to focus its efforts on the domestic
and international market introduction of INTEGRA. During 1997, the Company
expanded its network of domestic and international regional managers for the
sales of INTEGRA.
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<PAGE>
General and administrative expense was $14.8 million in 1997 and included two
non-cash charges in the fourth quarter. The Company incurred a $1.0 million
asset impairment charge associated with certain leasehold improvements at its
leased West Chester, Pennsylvania, and a $5.9 million charge related to an
equity-based signing bonus for the Company's President and Chief Executive
Officer. Excluding these charges, general and administrative expense increased
48% from $5.3 million in 1996 to $7.9 million in 1997. Significant increases
include the addition of several senior executives and costs related to the
continued maintenance of the Company's intellectual property and patent
infringement litigation.
Other income, net, which primarily included interest income, was $1.9 million
in 1996 and 1997 as the decline in interest income from lower investment
balances was offset by income from other items.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through private and
public offerings of its common stock, revenues from sales of existing 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 the business acquisitions.
At December 31, 1998, the Company had cash, cash equivalents and short-term
investments of $20.2 million representing a $6.1 million decrease from December
31, 1997. The principal uses of funds during 1998 were $9.9 million for
operations and $1.2 million in purchases of property and equipment. The Company
issued 500,000 shares of Series A Preferred Stock ("Series A Preferred") for
$4.0 million during the second quarter of 1998. The Series A Preferred shares
carry an annual dividend of 2% and are each convertible into one-half of one
share of the Company's common stock. In addition, the Company acquired $1.1
million in cash in connection with the acquisition of Rystan in September 1998.
In January 1999, the Company sold its Panafil(R) product line, including the
brand name and related equipment, to Healthpoint, Ltd. for $6.4 million in
cash. Integra also is entitled to receive the first $3 million of Panafil(R)
sales specifically to the podiatry market and certain hospitals with burn
centers. The Company intends to move Rystan's remaining operations to its
Plainsboro, New Jersey facility by July 1999.
On March 29, 1999, the Company acquired the business, including certain assets
and liabilities, of the NeuroCare group of companies, a leading provider of
neurosurgical products, for $25 million, comprised of $14 million of cash and
$11 million of assumed indebtedness under a term loan from Fleet Capital
Corporation ("Fleet"). Fleet is also providing a $4 million revolving credit
facility (together with the term loan, the "Credit Agreement") to fund working
capital for the business. Revenue of the acquired business was $32.5 million in
1998 and earnings before interest, taxes, depreciation, amortization and a
goodwill impairment charge was $5.8 million. Of the cash portion of the
purchase price, $10 million was financed by affiliates of Soros Private Equity
Partners LLC, through the sale 100,000 shares of Integra Series B Preferred
Stock ("Series B Preferred") and related warrants to purchase 240,000 shares of
common stock. The Series B 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% cumulative dividend and are senior to all other equity
securities of the Company. The balance of the cash portion of the purchase
price was provided by Integra's indirect wholly-owed subsidiary, Integra
NeuroCare LLC ("Integra NeuroCare"). The Credit Agreement was entered into by
Integra NeuroCare and its subsidiaries, and all the assets as well as the
ownership interests of Integra NeuroCare and its subsidiaries have been pledged
as collateral under the Credit Agreement. NeuroCare Holding Corporation, a
wholly-owned subsidiary of Integra and the sole
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<PAGE>
member of Integra NeuroCare, has guaranteed the borrowers' obligations under
the Credit Agreement. The term loan portion of the Credit Agreement is at prime
plus 1.5%, and interest on the revolving credit facility is at prime plus 1%.
All interest is payable monthly. Principal payments under the term loan are
payable on a quarterly basis through January 8, 2003. In addition, a commitment
fee at an annual rate of 1/2 of 1% is payable monthly on the average unused
portion of the revolving credit facility.
The Company anticipates it will continue to use its liquid assets to fund
operations until sufficient revenues can be generated through product sales and
collaborative arrangements. The Company believes that current cash balances and
funds available from the fleet revolving credit facility and existing revenue
sources will be sufficient to finance the Company's anticipated operations for
at least the next twelve months. The Company may in the future seek to issue
equity securities or enter into other financing arrangements with strategic
partners to raise funds in excess of its anticipated liquidity and capital
requirements. There can be no assurance that the Company will be able to
generate sufficient revenues to obtain profitability or raise additional
funding in equity or debt transactions.
Factors That May Affect Future Results of Operations
The Company believes that the following important factors, among others, have
affected, and in the future could affect, the Company's results of operations
and could cause the Company's future results to differ materially from its
historical results and those expressed in any forward-looking statements made
by the Company.
o The Company has developed by acquiring or securing a number of companies
and technologies. There are certain risks associated with business and
technology acquisitions, including incorrectly assessing the value of
assets and future prospects, the extent of possible liabilities and the
anticipated costs of incorporating acquired businesses into the Company.
Although the Company is frequently in discussions with others relating to
possible technology acquisitions and related matters, it does not currently
have any agreement with respect to any acquisitions or any material
technology transfers other than those described in this Annual Report.
Because these types of transactions involve risks and could involve the
issuance of the Company's equity, any business or technology acquisition
could have a material affect on the Company's business. The Company's
recent acquisition of the NeuroCare group of companies represents a
significant acquisition, and the Company's ability to integrate and manage
the business will probably have a significant impact on the future results
of the Company.
o The ability of Integra NeuroCare to fund its debt service obligations
under the Credit Agreement will depend upon its future operating
performance, which is subject to the success of its business strategy,
prevailing economic conditions, regulatory matters, levels of interest
rates and financial, business and other factors, many of which are beyond
its control. Although the Company is not a guarantor of such indebtedness,
the current debt service obligations of Integra NeuroCare could have
important consequences for both Integra NeuroCare and the Company,
including: (i) the ability of the Company or Integra NeuroCare to obtain
additional financing for future working capital needs, for possible future
acquisitions or other purposes may be limited; (ii) a substantial portion
of Integra NeuroCare's cash flow from operations will be dedicated to the
payment of the principal and interest on its indebtedness, thereby reducing
funds available for other purposes; and (iii) Integra NeuroCare and the
Company will be more vulnerable to adverse economic conditions than some of
its competitiors and may be limited in its ability to withstand competitive
pressures. If Integra NeuroCare's cash flow and capital resources are
insufficient to fund its debt service obligations, it may be forced to
reduce or delay planned expansion and capital expenditures, sell assets, or
restructure its debt. There can be no assurance that Integra NeuroCare's
operating results, cash flow and capital resources will be sufficient to
repay its indebtedness. In the absence of such operating results and
resources, Integra NeuroCare could face substantial liquidity problems and
might be required to dispose of material assets or operations to meet its
debt service and other obligations, and there can be no assurance as to the
timing of such sales or the proceeds that Integra NeuroCare could realize
therefrom. In addition, should any of the above conditions arise for
Integra NeuroCare, the Company could be negatively impacted by such events.
o The Company believes that its INTEGRA product represents a relatively new
method of treatment, and as such, it is difficult to estimate the
potential market and potential revenue growth for the product. The Company
also believes that INTEGRA provides a substantial enhancement over
existing treatment alternatives for its current indication, which is the
treatment of severe burns. The Company believes that INTEGRA provides
longer-term financial savings and other health benefits by reducing the
number of required procedures and the patient's length of hospital stay.
However, the cost of the product does require the healthcare provider to
incur a higher initial cost than is customary under most treatment
options. In addition, the health care industry in general is under
continued cost containment pressures from government health administration
authorities, private health insurers and other organizations. Should the
Company be unable to demonstrate these savings to the healthcare provider
market and others, the Company may experience lower than anticipated
revenue growth and a resulting adverse effect on its business, financial
condition and results of operations.
o Because a significant portion of the Company's historical medical product
sales have been to a small number of marketing partners, the loss of one
of these customers could have a negative impact on revenues. The Company
also depends on third party distributors for several products domestically
and internationally. The Company's revenues and gross profit margins for
these products are dependent on the continuing efforts of these marketing
partners and third party distributors. The Company believes that its
current relationships with customers regarding these products is
satisfactory. The Company is also limited in its marketing and selling
resources, which may or could make it ineffective in any direct marketing
efforts.
o There can be no assurance that the Company's planned research and
development efforts will lead to commercially successful products. Many of
the Company's technologies are in the early stages of development and will
require the commitment of substantial additional resources by the Company
and its potential strategic partners prior to commercialization. Their can
be no assurance that any such potential products will be successfully
developed on a timely basis, if at all, be safe and effective in clinical
trials, meet applicable regulatory standards and receive necessary
regulatory approvals, be produced in commercial quantities at acceptable
costs, or be successfully marketed and achieve customer acceptance. There
can also be no assurance that the Company's current plans for clinical
trials to expand the indication of use for INTEGRA will result in an
expanded indication or achieve a greater market acceptance. Costs due to
regulatory delays or demands, unexpected adverse side effects or
insufficient therapeutic
-31-
<PAGE>
effectiveness would prevent or significantly slow development and
commercialization efforts and could have a material adverse effect on the
Company. In addition, the Company has filed a 510k premarket notification
for its DuraGen(TM) product with the FDA for marketing approval in the
U.S. The Company currently anticipates a U.S. launch of DuraGen(TM) by the
third quarter of 1999 and any delays in this launch could have a negative
effect on the Company's operating results.
o The Company depends substantially on its ability to obtain patents (by
license or otherwise), maintain trade secrets and operate without
infringing on the intellectual property rights of third parties. The
patent position of biotechnology and pharmaceutical firms is highly
uncertain, involves many complex legal, factual and technical issues and
has recently been the subject of much litigation. There can be no
assurance that patent applications relating to the Company's products and
technologies will result in patents being issued, that patents issued or
licensed by the Company will provide protection against competitors or
that the Company will enjoy patent protection for any significant period
of time. The Company is currently involved in a patent infringement
lawsuit. This litigation, as well as any possible future litigation, can
be lengthy and expensive, and there can be no assurance as to the timing,
cost or eventual outcome of such litigation. The Company's business may be
adversely affected if it is unsuccessful in protecting its patents and
proprietary rights. In addition, the Company is involved in a lawsuit in
which the defendant has made a counterclaim for damages that, if decided
against the Company, could have a material adverse effect on the financial
position of the Company. The Company believes this counterclaim is without
merit and will continue its defense against this counterclaim. See "Item
3. Legal Proceedings" of this report.
o The markets for the Company's actual and proposed products and their
intended use are characterized by rapidly changing technology. Competition
in the general area of medical technology is intense and is expected to
increase. There are many companies in the medical field that have
substantially greater capital resources, research and development staffs
and facilities than the Company. There is a risk that technological
developments will render actual and proposed products or technologies of
the Company non-competitive, uneconomical or obsolete. As a result, the
Company's growth and future financial performance depend in part upon its
ability to introduce new products and enhance existing products to meet
the latest technological advances. Failure by the Company to anticipate or
respond adequately to changes in technology and market factors could have
a material adverse effect on the Company's business.
The above factors are not meant to represent an exhaustive list of the risks
and uncertainties associated with the Company's business. These factors as well
as other factors may affect the Company's future results and the Company's
-32-
<PAGE>
stock price, particularly on a quarterly basis. Finally, because the Company
participates in a highly dynamic industry, its stock price is often subject to
significant volatility.
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.
The Company has completed its initial assessment of the magnitude of the impact
of Y2K on itself 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, Integra has spent approximately $425,000
upgrading and/or replacing certain components of its information systems.
Integra anticipates spending an additional $75,000 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.
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 Company's products do not contain any materials that would make such
products susceptible to disruptions relating to the Y2K. 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 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 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 ITsystem problems
associated with the century change, including system and equipment problems of
third parties with whom Integra does business.
Other Matters
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $48 million and $35 million for federal and state income tax
purposes, respectively, to offset future taxable income, if any, which expire
through 2018 and 2005, respectively. At December 31, 1998, several of the
Company's subsidiaries had unused net operating loss and
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<PAGE>
tax credit carryforwards arising from periods prior to the Company's ownership.
The net operating loss carryforwards (excluding Telios) of approximately $10
million for federal income tax purposes expire between 2000 and 2005. The
Company's Telios subsidiary has approximately $84 million of net operating
losses, which expire between 2002 and 2010. The amount of Telios' net operating
loss that is available and the Company's ability to utilize such loss is
dependent on the determined value of Telios at the date of acquisition. The
Company's has valuation allowance of $42 million against all deferred tax
assets, including the net operating losses, due to the uncertainty of
realization. The timing and manner in which these net operating losses may be
utilized in any year by the Company are severely limited by the Internal
Revenue Code of 1986, as amended, Section 382 and other provisions of the
Internal Revenue Code and its applicable regulations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements specified by this Item, together with the report thereon
of PricewaterhouseCoopers LLP, are presented following Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-34-
<PAGE>
PART III
INCORPORATED BY REFERENCE
The information called for by Item 10 "Directors and Executive Officers of the
Registrant" (other than the information concerning executive officers set forth
after Item 4 herein), Item 11 "Executive Compensation", Item 12 "Security
Ownership of Certain Beneficial Owners and Management" and Item 13 "Certain
Relationships and Related Transactions" is incorporated herein by reference to
the Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on May 17, 1999, which definitive proxy statement is
expected to be filed with the Commission not later than 120 days after the end
of the fiscal year to which this report relates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report.
1. Financial Statements. The following financial statements are filed as a part
of this report. All schedules are omitted because they are not applicable or
the required information is included in the consolidated financial statements
or notes thereto.
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants.................................................... F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997......................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.................................................... F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996.............................................. F-5
Notes to Consolidated Financial Statements........................................... F-6
</TABLE>
2. Exhibits.
<TABLE>
<CAPTION>
Number Description Location
------ ----------- --------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated September 28, 1998 among the (9) (Exh. 2)
Company, RC Acquisition Corporation, Rystan Company, Inc., and GWC
Health, Inc.
3.1(a) Amended and Restated Certificate of Incorporation of the Company (2) (Exh. 3.1)
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Location
------ ----------- --------
<S> <C> <C>
3.1(b) Certificate of Amendment to Amended and Restated Certificate of (1)
Incorporation dated May 23, 1998
3.2 Amended and Restated By-laws of the Company (8) (Exh. 3.3)
4.1 Certificate of Designation, Preferences and Rights of Series A (6) (Exh. 3)
Convertible Preferred Stock as filed with the
Delaware Secretary of State on April 14, 1998.
4.2 Certificate of Designation, Preferences and Rights of Series B (1)
Convertible Preferred Stock as filed with the Delaware Secretary of
State on March 12, 1999
4.3 Warrant to Purchase 150,000 shares of the Company's Common Stock at an (9) (Exh. 4.1)
exercise price of $7.00 per share issued to GWC Health, Inc.
4.4 Warrant to Purchase 150,000 shares of the Company's Common Stock at an (9) (Exh. 4.2)
exercise price of $6.00 per share issued to GWC Health, Inc.
10.1 License Agreement between MIT and the Company dated as of December 29, (2) (Exh. 10.1)
1993
10.2 License & Research Agreement between ABS LifeSciences, Inc. and (2) (Exh. 10.2)
Hospital for Joint Diseases Orthopaedic Institute dated as of December
26, 1990, as amended on May 9, 1992 and January 12, 1995
10.3 License Agreement between Smith & Nephew Consolidated Inc. and (2) (Exh. 10.3)
Vitaphore Corporation dated as of December 31, 1993
10.4 Research and License Agreement between the Brigham and Women's (2) (Exh. 10.4)
Hospital, Inc. and the Company dated as of January 1, 1995
10.5 Exclusive License Agreement between the Company and Rutgers University (2) (Exh. 10.5)
dated as of December 31, 1994
10.6 License Agreement for Adhesion Peptides Technology between La Jolla (2) (Exh. 10.6)
Cancer Research Foundation and Telios dated as of June 24, 1987
10.7(a) Letter of Intent among Cambridge Antibody Technology Limited ("CAT"), (2) (Exh. 10.7(a))
Telios and the Company dated May 10, 1995
10.7(b) Strategic Alliance and Technology Agreement dated as of June 23, 1995 (2) (Exh. 10.7(b))
between CAT and Telios and consented to by the Company
10.8 Technology Development and License Agreement between Union Carbide and (2) (Exh. 10.8)
the Company dated as of April 30, 1993
10.9 Supply Agreement between Genetics Institute, Inc. and the Company dated (2) (Exh. 10.12)
as of April 1, 1994
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Location
------ ----------- --------
<S> <C> <C>
10.10 Letter Agreement between the Company and Ioannis V. Yannas, Ph.D. dated (2) (Exh. 10.17)
as of December 31, 1992 regarding the provision of Consulting and
Technology Services
10.11 Registration Rights Agreement between the Company and Edmund L. (2) (Exh. 10.19)
Zalinski dated as of August 31, 1994
10.12 Registration Rights Agreement between the Company and Edmund L. (2) (Exh. 10.20)
Zalinski Company dated as of August 31, 1994
10.13 Registration Rights Agreement between the Company and Elliot-Lewis (2) (Exh. 10.21)
Corporation dated as of August 31, 1994
10.14 Registration Rights Agreement between the Company and Steven Dadio (2) (Exh. 10.22)
dated as of August 31, 1994
10.15 Registration Rights Agreement between the Company and William R. (2) (Exh. 10.23)
Sautter dated as of August 31, 1994
10.16 Registration Rights Agreement between the Company and Boston Scientific (2) (Exh. 10.26)
Corporation dated as of December 29, 1993
10.17(a) Stockholder Rights Agreement between the Company and Union Carbide (2) (Exh. 10.27(a))
dated as of April 30, 1993 ("Carbide Agreement")
10.17(b) Amendment dated November 30, 1993 to Carbide Agreement (2) (Exh. 10.27(b))
10.18(a) Real Estate Lease & Usage Agreement between BHP Diagnostics, Inc., (2) (Exh. 10.28)
Medicus Technologies, Inc., Integra, Ltd. and the Company dated as of
May 1, 1994
10.18(b) Shared Facilities Usage Agreement Between BHP Diagnostics, Inc., (2) (Exh. 10.29)
Medicus Technologies, Inc. and Integra, Ltd. and the Company dated as
of May 1, 1994
10.18(c) Agreement dated June 30, 1998 by and among BHP Diagnostics, Medicus (1)
Corporation, Integra Lifesciences I, LTD and Integra Lifesciences
Corporation
10.19 Lease between Plainsboro Associates and American Biomaterials (2) (Exh. 10.30)
Corporation dated as of April 16, 1985, as assigned to Colla-Tec, Inc.
on October 24, 1989 and as amended through November 1, 1992
10.20 1992 Stock Option Plan* (2) (Exh. 10.31)
10.21 1993 Incentive Stock Option and Non-Qualified Stock Option Plan* (2) (Exh. 10.32)
10.22 Warrant Agreement between the Company and Boston Scientific Corporation (2) (Exh. 10.35)
dated as of December 29, 1993
10.23 Registration Rights Agreement between the Company and Provco Leasing (2) (Exh. 10.37)
Corporation dated as of April 30, 1995
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Location
------ ----------- --------
<S> <C> <C>
10.24 Form of Indemnification Agreement between the Company and [ ] (4)
dated August 16, 1995, including a schedule identifying the individuals
that are a party to such Indemnification Agreements
10.25 Amendment to 1996 Incentive Stock Option and Non-Qualified Stock Option (8) (Exh. 10.4)
Plan*
10.26 Stock Purchase Agreement dated as of February 26, 1998 by and between (6) (Exh. 10.1)
Integra LifeSciences Corporation and Century Medical, Inc.
10.27 Registration Rights Agreement dated as of April 30, 1998 by and between (6) (Exh. 10.2)
Integra Lifesciences Corporation and Century Medical, Inc.
10.28 1996 Incentive Stock Option and Non-Qualified Stock Option Plan* (5)
10.29 Employment Agreement dated December 27, 1997 between the Company and (8) (Exh. 10.1)
Stuart M. Essig*
10.30 Stock Option Grant and Agreement dated December 27, 1997 between the (8) (Exh. 10.2)
Company and Stuart M. Essig*
10.31 Restricted Units Agreement dated December 27, 1997 between the Company (8) (Exh. 10.3)
and Stuart M. Essig*
10.32 Indemnity letter agreement dated December 27, 1997 from the Company to (8) (Exh. 10.5)
Stuart M. Essig*
10.33 Employment Agreement between John B. Henneman, III and the Company (10) (Exh. 10)
dated September 11, 1998*
10.34 Registration Rights Agreement dated September 28, 1998 between the (9) (Exh. 10.1)
Company and GWC Health, Inc.
10.35 Lease dated September 28, 1998 between Rystan Company, Inc. and GWC (9) (Exh. 10.2)
Health, Inc.
10.36 Employment Agreement between George W. McKinney, III and the Company (1)
dated December 31, 1998*
10.37 Employment Agreement between Judith O'Grady and the Company dated (1)
December 31, 1998*
10.38 Employment Agreement between David B. Holtz and the Company dated (1)
December 31, 1998*
10.39 Employee Stock Purchase Plan* (7) (Exh. 10.1)
10.40 1998 Stock Option Plan* (7) (Exh. 10.2)
21 Subsidiaries of the Company (1)
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Location
------ ----------- --------
<S> <C> <C>
23 Consent of PricewaterhouseCoopers LLP (1)
27 Financial Data Schedule (1)
- ---------
* Indicates a management contract or compensatory plan or arrangement.
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form 10/A (File No. 0-26224) which became
effective on August 8, 1995.
(3) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended June 30, 1995.
(4) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-98698) which became
effective on January 24, 1996.
(5) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-8 (File No. 333-06577) which became
effective on June 22, 1996.
(6) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended March 31, 1998.
(7) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-8 (File No. 333-58235) which became
effective on June 30, 1998.
(8) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on February 3, 1998.
(9) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on October 13, 1998.
(10) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended September 30, 1998.
(b) Reports on Form 8-K
On October 13, 1998, the Company filed a Report on Form 8-K reporting that
it had acquired Rystan Company, Inc. on September 28, 1998.
</TABLE>
-39-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, as of the 31st day of
March, 1999.
INTEGRA LIFESCIENCES CORPORATION
By: /s/ Stuart M. Essig
-----------------------------
Stuart M. Essig, Ph.D.
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf of the
registrant in the capacities indicated, on the 31st day of March, 1999.
Signature Title
--------- -----
/s/ Richard E. Caruso Chairman of the Board
- ---------------------------------
Richard E. Caruso, Ph.D.
/s/ Stuart M. Essig President, Chief Executive Officer
- --------------------------------- and Director
Stuart M. Essig, Ph.D. (Principal Executive Officer)
/s/ George W. McKinney, III Executive Vice President, Chief
- --------------------------------- Operating Officer and Director
George W. McKinney, III, Ph.D.
/s/ David B. Holtz Vice President, Finance and Treasurer
- --------------------------------- (Principal Financial and Accounting
David B. Holtz Officer)
/s/ Keith Bradley Director
- ---------------------------------
Keith Bradley, Ph.D.
/s/ Neal Moszkowski Director
- ---------------------------------
Neal Moszkowski
/s/ Edmund L. Zalinski Director
- ---------------------------------
Edmund L. Zalinski, Ph.D.
-40-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Integra LifeSciences
Corporation and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Integra
LifeSciences Corporation and Subsidiaries (the "Company") at December 31, 1998
and 1997 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 2, 1999, except as to Note 17, which is as of March 29, 1999
F-1
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands
December 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents.......................................... $ 5,277 $ 2,083
Short-term investments............................................. 14,910 24,189
Accounts receivable, net of allowances of $354 and $390............ 3,106 2,780
Inventories........................................................ 2,713 2,350
Prepaid expenses and other current assets.......................... 921 400
--------- ---------
Total current assets........................................ 26,927 31,802
Property and equipment, net......................................... 6,291 6,414
Intangibles assets, net............................................. 1,446 ---
Other assets........................................................ 43 140
--------- ---------
Total assets......................................................... $ 34,707 $ 38,356
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable, trade............................................ $ 573 $ 541
Accrued expenses and other current liabilities..................... 2,456 1,854
--------- ---------
Total current liabilities................................... 3,029 2,395
Other liabilities................................................... 312 206
--------- ---------
Total liabilities................................................ 3,341 2,601
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value (15,000 authorized shares;
500 Series A Convertible shares issued and outstanding, $4,000
liquidation preference and no shares issued or outstanding at
December 31, 1998 and 1997, respectively)........................ 5 ---
Common stock, $.01 par value (60,000 authorized shares; 15,783
and 14,952 issued and outstanding at December 31,
1998 and 1997, respectively)..................................... 158 150
Additional paid-in capital......................................... 120,046 111,877
Treasury stock at cost (46 shares at December 31, 1998) (286) ---
Unearned compensation related to stock options..................... (148) (266)
Notes receivable - related party................................... (35) (35)
Accumulated other comprehensive loss............................... (40) (26)
Accumulated deficit................................................ (88,334) (75,945)
--------- ---------
Total stockholders' equity...................................... 31,366 35,755
--------- ---------
Total liabilities and stockholders' equity.......................... $ 34,707 $ 38,356
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-2
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
In thousands
Years Ended December 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE
- -------
Product sales.................................... $ 14,076 $ 14,001 $ 11,210
Product license fees............................. 1,290 14 500
Contract product development..................... 1,114 --- 76
Research grants.................................. 687 485 1,072
Royalties........................................ 288 246 290
---------- ---------- --------
Total revenue................................ 17,455 14,746 13,148
========== ========== =========
COSTS AND EXPENSES
- ------------------
Cost of product sales............................ 7,420 7,027 6,671
Research and development......................... 8,424 6,406 6,294
Selling and marketing............................ 5,955 5,460 4,310
General and administrative....................... 9,836 14,764 5,320
---------- ---------- ----------
Total costs and expenses..................... 31,635 33,657 22,595
Operating loss................................... (14,180) (18,911) (9,447)
Interest income.................................. 1,250 1,771 1,799
Other income.................................... 588 176 120
---------- ---------- ----------
Net loss......................................... $ (12,342) $ (16,964) $ (7,528)
========== ========== ==========
Basic and diluted net loss per share............. $ (0.76) $ (1.15) $ (0.54)
========== ========== ==========
Weighted average number of shares outstanding.... 16,139 14,810 14,057
========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-3
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands
Years Ended December 31,
----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................ $ (12,342) $ (16,964) $ (7,528)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 1,438 1,903 2,059
Gain on sale of assets............................................. (64) (162) (136)
Amortization of discount and interest on investments............... (481) (126) (955)
Restricted units issued............................................ --- 5,875 ---
Amortization of unearned compensation.............................. 319 123 83
Provision for impairment of leasehold improvements................. 145 1,021 ---
Other.............................................................. --- --- 16
Changes in operating assets and liabilities:
Accounts receivable.............................................. (287) 122 (1,134)
Inventories...................................................... 527 285 (1,263)
Prepaid and other current assets................................. 65 (62) 130
Non-current assets............................................... 64 (81) 159
Accounts payable, accrued expenses and other liabilities......... 802 187 602
--------- --------- ---------
Net cash used in operating activities.............................. (9,814) (7,879) (7,967)
---------- ---------- ----------
INVESTING ACTIVITIES:
Proceeds from the sales/maturities of investments................... 33,020 35,500 21,138
Purchases of investments............................................ (23,274) (37,071) (41,530)
Purchases of property and equipment................................. (1,166) (770) (1,172)
Proceeds from sale of assets and other.............................. 48 183 294
Cash acquired in business acquisitions.............................. 1,118 --- ---
Purchase of equity securities....................................... (500) --- ---
---------- --------- ---------
Net cash provided by (used in) investing activities................ 9,246 (2,158) (21,270)
---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from sales of preferred and common stock................... 4,000 --- 35,662
Proceeds from exercised stock options and employee stock purchase
plan ............................................................... 95 358 785
Purchase of treasury stock.......................................... (286) --- ---
Preferred dividends paid............................................ (47) --- ---
Other financing activities.......................................... --- --- 40
--------- --------- ---------
Net cash provided by financing activities.......................... 3,762 358 36,487
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................... 3,194 (9,679) 7,250
Cash and cash equivalents at beginning of period........................ 2,083 11,762 4,512
--------- --------- ---------
Cash and cash equivalents at end of period.............................. $ 5,277 $ 2,083 $ 11,762
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-4
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
In thousands Notes Unearned
Series A Additional Receivable- Compensation
Common Stock Preferred Stock Treasury Paid-In Related Related to
Shares Amount Shares Amount Stock Capital Parties Stock Options
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 .......... 11,747 $ 118 -- $ -- $ -- $ 68,847 $ (85) $ --
Net loss ............................ -- -- -- -- -- -- -- --
Unrealized loss on investments ...... -- -- -- -- -- -- -- --
Total comprehensive loss ........
Public offering of common stock ..... 2,336 23 -- -- -- 35,548 -- --
Issuance of common stock under stock
option plans ................... 193 2 -- -- -- 783 -- --
Unearned compensation related to
non-employee stock options ..... -- -- -- -- -- 411 -- (411)
Amortization of unearned compensation -- -- -- -- -- -- -- 83
Decrease in notes receivable ........ -- -- -- -- -- -- 50 --
--------- --------- -------- ------- -------- --------- --------- ---------
Balance, December 31, 1996 .......... 14,276 143 -- -- -- 105,589 (35) (328)
========= ========= ======== ======= ======== ========= ========= =========
Net loss ............................ -- -- -- -- -- -- -- --
Unrealized loss on investments ...... -- -- -- -- -- -- -- --
Total comprehensive loss .......
Issuance of common stock under stock
option plans ................... 676 7 -- -- -- 352 -- --
Unearned compensation related to
non-employee stock options ..... -- -- -- -- -- 61 -- (61)
Amortization of unearned compensation -- -- -- -- -- -- -- 123
Issuance of restricted units ........ -- -- -- -- -- 5,875 -- --
--------- --------- -------- ------- -------- --------- --------- ---------
Balance, December 31, 1997 .......... 14,952 150 -- -- -- 111,877 (35) (266)
========= ========= ======== ======= ======== ========= ========= =========
Net loss ............................ -- -- -- -- -- -- -- --
Unrealized loss on investments ...... -- -- -- -- -- -- -- --
Total comprehensive loss .......
Issuance of common stock under stock
option and employee stock
purchase plans ................. 31 -- -- -- -- 95 -- --
Issuance of Series A preferred stock -- -- 500 5 -- 3,995 -- --
Dividends paid on Series A preferred
stock .......................... -- -- -- -- -- -- -- --
Common stock and warrants issued in
connection with a business
acquisition .................... 800 8 -- -- -- 3,878 -- --
Unearned compensation related to
non-employee stock options ..... -- -- -- -- -- 145 -- 145
Amortization of unearned compensation -- -- -- -- -- -- -- 263
Warrant issued for services rendered -- -- -- -- -- 56 -- --
Purchase of treasury stock .......... -- -- -- -- (286) -- -- --
--------- --------- -------- ------- -------- --------- --------- ---------
Balance, December 31, 1998 .......... 15,783 $ 158 500 $ 5 $ (286) $ 120,046 $ (35) $ (148)
========= ========= ======== ======= ======== ========= ========= =========
<CAPTION>
Accumulated
Comprehensive Comprehensive Stockholders' Total
Loss Loss Deficit Equity
<S> <C> <C> <C> <C>
Balance, December 31, 1995 .......... $ -- $ -- $(51,453) $17,427
Net loss ............................ $ (7,528) -- (7,528) (7,528)
Unrealized loss on investments ...... (4) (4) -- (4)
---------
Total comprehensive loss ........ $ (7,532)
=========
Public offering of common stock ..... -- -- 35,571
Issuance of common stock under stock
option plans ................... -- -- 785
Unearned compensation related to
non-employee stock options ..... -- -- --
Amortization of unearned compensation -- -- 83
Decrease in notes receivable ........ -- -- 50
--------- -------- -------
Balance, December 31, 1996 .......... (4) (58,981) 46,384
========= ======== =======
Net loss ............................ $ (16,964) -- (16,964) (16,964)
Unrealized loss on investments ...... (22) (22) -- (22)
---------
Total comprehensive loss ....... $ (16,986)
=========
Issuance of common stock under stock
option plans ................... -- -- 359
Unearned compensation related to
non-employee stock options .... -- -- --
Amortization of unearned compensation -- -- 123
Issuance of restricted units ........ -- -- 5,875
--------- -------- -------
Balance, December 31, 1997 .......... (26) (75,945) 35,755
========= ======== =======
Net loss ............................ $ (12,342) -- (12,342) (12,342)
Unrealized loss on investments ...... (14) (14) -- (14)
---------
Total comprehensive loss ....... $ (12,356)
=========
Issuance of common stock under stock
option and employee stock
purchase plans ................. -- -- 95
Issuance of Series A preferred stock -- -- 4,000
Dividends paid on Series A preferred
stock .......................... -- (47) (47)
Common stock and warrants issued in
connection with a business
acquisition .................... -- -- 3,886
Unearned compensation related to
non-employee stock options ..... -- -- --
Amortization of unearned compensation -- -- 263
Warrant issued for services rendered -- -- 56
Purchase of treasury stock .......... -- -- (286)
--------- -------- -------
Balance, December 31, 1998 .......... $ (40) $(88,334) $31,366
========= ======== =======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-5
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
--------
Integra LifeSciences Corporation and subsidiaries (the "Company") develops,
manufactures and markets medical devices, implants and biomaterials primarily
used in the treatment of burns and skin defects, spinal and cranial disorders,
orthopedics, private label medical products, and other surgical applications.
The Company seeks to be the world's leading company specializing in implantable
medical and biopharmaceutical therapies to target and control cell behavior.
There are certain risks and uncertainties inherent in the Company's business.
The Company has incurred net operating losses since inception and expects to
continue to incur such losses unless and until product sales and collaborative
arrangements generate sufficient revenue to fund continuing operations. There
can be no assurance that the Company's research and development efforts will
result in commercially successful products or that the Company will be granted
regulatory approvals for its products. The Company's business is characterized
by rapidly changing technology and intense competition. There is a risk that
technological developments will render actual and proposed products or
technologies of the Company non-competitive, uneconomical or obsolete. There are
certain risks associated with the Company's product sales being comprised of a
few significant products. In addition, the Company is subject to various other
risks and uncertainties common within its industry which could have a material
adverse effect on its business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All inter-company accounts and
transactions are eliminated in consolidation. Certain prior year amounts have
been reclassified to conform with the current year presentation.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments purchased with original
maturities of three months or less and have virtually no risk of loss in value
to be cash equivalents. Cash and cash equivalents are primarily composed of
money market mutual funds, repurchase agreements and U.S. Government securities.
The carrying values of these instruments reflect their approximate fair values.
Investments
- -----------
The Company's current investment policy is to invest available cash balances in
high quality debt securities with maturities not to exceed 18 months. Realized
gains and losses are determined on the specific identification cost basis. All
investments are classified as available for sale, with unrealized gains and
losses reported as a separate component of stockholder's equity.
F-6
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liquidity
- ---------
The Company believes that current cash balances and funds available from
existing revenue sources will be sufficient to finance the Company's anticipated
operations for at least the next twelve months. The Company may in the future
seek to issue equity securities or enter into other financing arrangements with
strategic partners to raise funds in excess of its anticipated liquidity and
capital requirements.
Inventories
- -----------
Inventories, consisting of purchased materials, direct labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in, first-out
method) or market.
Property and Equipment
- ----------------------
Purchases of property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the estimated useful lives of
the assets, which are estimated to be between 3 and 15 years. Leasehold
improvements are amortized using the straight-line method over the minimum lease
term or the life of the asset whichever is shorter. The cost of major additions
and improvements is capitalized. Maintenance and repair costs that do not
improve or extend the lives of the respective assets are charged to operations
as incurred. When depreciable assets are retired or sold, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations.
Intangible Assets
- -----------------
Intangible assets include the goodwill recorded in connection with the
acquisition of Rystan Company, Inc. ("Rystan") on September 28, 1998. The
goodwill is being amortized using a straight-line basis over fifteen years.
Amortization expense for 1998 was $24,000. The Company assesses whether its
intangible assets are impaired based on an evaluation of undiscounted projected
cash flows through the remaining amortization period. If an impairment exists,
the amount of such impairment is calculated based on the estimated fair value of
the asset.
Income Taxes
- ------------
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the statement of operations in the period that includes
the enactment date.
Research and Development
- ------------------------
Research and development costs are expensed in the period in which they are
incurred.
Revenue Recognition
- -------------------
The Company's product revenue is recognized at the time that products are
shipped or when title has passed to the customer. Research grant revenue and
contract product development revenue are recognized when the related expenses
are incurred. Under the terms of current research grants, the Company is
reimbursed for allowable direct and indirect research expenses. Product
licensing fees are recognized when earned, which is when all related commitments
have been satisfied. Royalty revenue is recognized when the Company's marketing
and distribution partners sell royalty products.
F-7
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit Risk
- ----------------------------
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents and short-term
investments, which are held at major financial institutions and trade
receivables. The Company's products are sold on an uncollateralized basis and on
credit terms based upon a credit risk assessment of each customer. The Company's
provisions for doubtful accounts receivable for the years ended December 31,
1998, 1997 and 1996 were $91,000, $318,000 and $205,000, respectively. Amounts
written off for the years ended December 31, 1998, 1997 and 1996 were $127,000,
$156,000 and $231,000, respectively.
Net Loss and Loss per Share
- ---------------------------
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
net income by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then share in
the earnings of the entity. The Company has not included 3,095,000 options and
warrants to purchase common stock at $2.9375 to $11.50 per share and 500,000
shares of preferred stock in the diluted per share computation as the result is
antidilutive. The Restricted Units issued by the Company (see Note 8) are
included in the weighted average calculation because no further consideration is
due related to the issuance of the underlying common shares.
Stock Based Compensation
- ------------------------
The Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation". In
conjunction with the adoption, the Company will continue to apply the intrinsic
value based method of accounting prescribed by Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees", with pro-forma
disclosure of net income and earnings per share affect of the fair value method
prescribed by SFAS No. 123.
Recent Accounting Pronouncements
- --------------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for the Company
on January 1, 2000. The Company will adopt SFAS 133 by the first quarter of
2000. SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. The Company has not yet determined the impact
that the adoption of SFAS 133 will have on its earnings, comprehensive income or
statement of financial position.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, including disclosures of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
F-8
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS ACQUISITIONS AND DISPOSITIONS
--------------------------------------
Rystan Acquisition
- ------------------
On September 28, 1998, the Company acquired Rystan Company, Inc. ("Rystan") for
800,000 shares of common stock of the Company and two warrants each having the
right to purchase 150,000 shares of the Company's common stock. The purchase
price was valued at $4.0 million. The purchase price exceeded the Company's
assessment of the fair value of net assets acquired by approximately $1.5
million, which will be amortized on a straight-line basis over 15 years. The
acquisition has been accounted for using the purchase method of accounting. The
assets and liabilities acquired were as follows (in thousands):
Cash and cash equivalents $ 1,224
Accounts receivable 225
Inventory 889
Property & equipment 357
Residual goodwill 1,495
Liabilities (183)
-----
$ 4,007
=======
The following summarized unaudited pro forma financial information assumes the
acquisition had occurred on January 1 of each year (in thousands):
For the Year Ended
-----------------------
1998 1997
------- -------
Total revenue $19,414 $17,697
Net loss (11,995) (16,367)
Basic and diluted loss per share (0.72) (1.05)
The above amounts include Rystan's pre-acquisition financial results for the
first nine months of 1998 and all of 1997. 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.
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 also agreed to a ten-year non-competition
provision regarding any papain-urea debridement products and granted Healthpoint
a seven-year right of first refusal regarding any new debridement agent product
developed by the Company. The December 31, 1998 balance sheet includes $1.1
million in goodwill and $250,000 in fixed assets that were sold under the
agreement. The Company anticipates an estimated pre-tax gain of $4.0 million,
subject to the valuation of certain intangibles. The Company is also entitled to
receive the first $3 million of Panafil(Registered) sales specifically to the
podiatry market and certain hospitals with burn centers. The Company
announced in the first quarter of 1999 its intention to move Rystan's
operations to its Plainsboro, New Jersey facility by July 1999.
F-9
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Simultaneous with the sale, the Company and Healthpoint entered into a series of
co-marketing agreements under which Integra will continue to market
Panafil(Registered) and add Healthpoint's debridement agent,
Accuzyme(Registered), to its sales call points in the podiatry market and
certain hospitals with burn centers. The Company will receive sales commissions
for marketing Panafil(Registered) and Accyzyme(Registered) once specified levels
of products sales have been obtained.
4. INVESTMENTS
-----------
The Company's current investment balances are classified as available for sale
and have maturities within one year. The Company held all securities until
maturity (or call) during the twelve months ended December 31, 1998 and 1997.
For the twelve months ended December 31, 1996, securities were sold for proceeds
of $3,938,000 and a net loss of $26,000. Investment balances as of December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
In thousands Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1998:
U.S. Government agency securities........... $ 14,950 $ 4 $ (44) $ 14,910
=========== ========= ========= =========
1997:
U.S. Government agency securities........... $ 24,215 $ --- $ (26) $ 24,189
=========== ========= ========= =========
</TABLE>
5. INVENTORIES
-----------
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Finished goods............................................. $ 1,433 $ 773
Work-in-process............................................ 802 1,251
Raw materials.............................................. 478 326
--------- ---------
$ 2,713 $ 2,350
========= =========
</TABLE>
6. PROPERTY AND EQUIPMENT
----------------------
Property and equipment, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Machinery and equipment.................................... $ 4,952 $ 4,107
Furniture and fixtures..................................... 340 221
Leasehold improvements..................................... 6,843 6,550
--------- ---------
12,135 10,878
Less: Accumulated depreciation and amortization............ (5,844) (4,464)
---------- ----------
$ 6,291 $ 6,414
========= =========
</TABLE>
Depreciation and amortization expense associated with property and equipment for
the years ended December 31, 1998, 1997 and 1996 was $1,413,000, $1,903,000 and
$1,959,000, respectively.
F-10
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT LIABILITIES
-------------------
Accrued expenses and other current liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Legal fees.................................................. $ 591 $ 471
Contract research........................................... 401 252
Customer advances........................................... 249 12
Vacation.................................................... 260 214
Other....................................................... 955 905
--------- ---------
$ 2,456 $ 1,854
========= =========
</TABLE>
8. STOCKHOLDERS' EQUITY
--------------------
Stock Split
- -----------
The Company's shareholders approved a one-for-two reverse split of the Company's
common stock at the annual shareholders meeting held on May 18, 1998. All
outstanding common share and per share amounts have been retroactively adjusted
to reflect the reverse split.
Preferred Stock Transaction
- ---------------------------
During the second quarter of 1998, the Company sold 500,000 shares of Series A
Preferred Stock ("Preferred Stock") for $4 million to Century Medical, Inc.
("CMI"). The Preferred Stock pays an annual dividend of $0.16 per share, payable
quarterly, and has a liquidation preference of $4 million. Each share of
Preferred Stock is convertible at any time into one-half share of Company common
stock and is redeemable at the option of the Company after December 31, 2007.
Common Stock Transactions
- -------------------------
In September 1998, the Company issued 800,000 shares of Company common stock and
two warrants each having the right to purchase 150,000 shares of the Company's
common stock to GWC Health, Inc., a subsidiary of Elan Corporation, plc., as
consideration for the acquisition of Rystan (See "Common Stock Warrants" below
and Note 3).
On February 1, 1996, the Company completed the issuance of 2,335,625 shares of
its common stock through a public offering, resulting in net proceeds of
approximately $35.6 million.
Restricted Units
- ----------------
In December 1997, the Company issued one million restricted units ("Restricted
Units") as a fully vested equity based signing bonus to the Company's new
President and Chief Executive Officer ("Executive"). Each Restricted Unit
represents the right to receive one share of the Company's common stock. The
shares of common stock underlying the restricted units ("Unit Shares") shall be
delivered to Executive on January 1, 2002 if Executive is employed by the
Company on December 31, 2001. If, prior to December 31, 2001, (a) Executive's
employment with the Company is terminated for cause or (b) he voluntarily leaves
his employment with the Company (other than for good reason or due to
disability), the Unit Shares shall be distributed to Executive on January 1,
2018. In connection with the Restricted Units, the Company incurred a non-cash
compensation charge of $5.9 million in the fourth quarter of 1997,which is
included in general and administrative expenses.
F-11
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock Warrants
- ---------------------
In connection with the acquisition of Rystan, the Company issued two warrants
each having the right to purchase 150,000 shares of the Company's common stock.
Each of the warrants may be exercised for shares of common stock at any time
after September 28, 1998, for a purchase price per share of $6.00 and $7.00,
respectively, subject to customary antidilution adjustments. The $6.00 warrant
expires on January 31, 2000, provided that if the average closing price on the
Nasdaq National Market of the Company's common stock for the thirty trading days
ending on the fifth day immediately preceding the then-current expiration date
is less than $8.00 per share, then the expiration date shall be extended for one
year, but in no event shall be extended beyond January 31, 2003. The $7.00
warrant expires on December 31, 2002.
In conjunction with a 1993 private placement of 347,947 shares of the Company's
common stock to Boston Scientific Corporation ("BSC"), the Company sold for
additional consideration and issued to BSC a warrant (the "BSC Warrant") to
purchase 347,947 shares of the Company's common stock at an exercise price of
$14.37 per share. The BSC Warrant is exercisable through January 31, 2000.
Stockholders' Rights
- --------------------
As stockholders of the Company, Union Carbide Corporation, BSC, CMI and GWC
Health are entitled to certain registration rights. Executive also has demand
registration rights under the Restricted Units agreement.
Notes Receivable - Related Parties
- ----------------------------------
Notes receivable - related party at December 31, 1998 is a recourse note due
from a former officer of the Company and is collateralized by shares of the
Company.
Stock Repurchase Program
- ------------------------
In February 1998, the Company announced that its Board of Directors authorized a
common stock repurchase program. The share repurchase program of up to 500,000
shares was effective immediately. The share repurchase plan allows the Company
to make repurchases from time to time in the open market or through privately
negotiated transactions. Through December 31, 1998 the Company acquired 51,745
shares in open market transactions. Repurchased common shares were added to the
Company's treasury shares at cost.
9. STOCK OPTIONS
-------------
As of December 31, 1998, the Company had four stock option plans, the 1992 Stock
Option Plan (the "1992 Plan"), the 1993 Incentive Stock Option and Non-Qualified
Stock Option Plan (the "1993 Plan"), the 1996 Incentive Stock Option and
Non-Qualified Stock Option Plan (the "1996 Plan") and the 1998 Stock Option Plan
(the "1998 Plan").
As of June 30, 1997, no additional options can be granted out of the 1992 Plan
and 175,000 shares reserved under the 1992 Plan were cancelled.
F-12
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has reserved 750,000 shares of common stock for issuance under each
of the 1993 and 1996 Plans and 1,000,000 shares under the 1998 Plan. The 1993
Plan, 1996 Plan and 1998 Plans (together, "the Plans") permit the Company to
grant both incentive and non-qualified stock options to designated directors,
officers, employees and associates of the Company. Options issued under the
Plans become exercisable over specified periods, generally within five years
from the date of grant.
In May 1997, the Company's Stock Option Committee and Board of Directors
approved an option exchange program pursuant to which employees with options
having an exercise price in excess of $8.00 per share under the Company's Stock
Option Plans could elect to exchange such options for new stock options with an
exercise price of $8.00. Under the exchange program, (i) the number of
replacement options issued in exchange for the original options was determined
by the utilization of a formula based on the percentage decrease in exercise
price from the original grant (not to exceed 25% of the original options and
excluding the first 500 options), (ii) the replacement options expiration dates
were adjusted to one year later than the original options expiration dates, and
(iii) the vesting terms of the replacement options were adjusted to
proportionately reflect the decrease in options, when applicable. Under the
exchange program, 542,242 options with exercise prices ranging from $8.50 to
$25.00 were exchanged for 445,811 options granted with an exercise price of
$8.00, which was in excess of the closing market price at the date of exchange.
The Company has adopted the disclosure-only provisions of SFAS No. 123, and
accordingly no compensation cost has been recognized for the stock option plans
except the amortization of unearned compensation related to options granted to
outside consultants and non-employee directors which amounted to $264,000,
$123,000 and $83,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Had the compensation cost for the Company's stock option plans
been determined based on the fair value at the grant date for awards in grant
since 1995 consistent with the provisions of SFAS No. 123, the Company's net
loss and basic and diluted net loss per share would have increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss.............................................. $ (12,342) $ (16,964) $ (7,528)
Proforma net loss..................................... (15,023) (17,777) (8,259)
Basic and diluted net loss per share.................. $ (0.76) $ (1.15) $ (0.54)
Proforma basic and diluted net loss per share......... (0.93) (1.20) (0.59)
</TABLE>
As options vest over a varying number of years and awards are generally made
each year, the proforma impacts shown here may not be representative of future
proforma expense amounts. The proforma additional compensation expense was
calculated based on the fair value of each option grant using the Black-Scholes
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield..................... -0- -0- -0-
Expected volatility................ 80% 80% 60%
Risk free interest rate............ 5.2% 6.2% 6.1%
Expected option lives.............. 4 years 6 years 3 years
</TABLE>
F-13
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three years ended December 31, 1998, option activity for all the Plans
(including the 1992 Plan) was as follows:
Weighted-Average
Exercise Price Shares
(Shares in thousands) -------------- ------
December 31, 1995, Outstanding..................... $ 8.32 1,667
======
December 31, 1995, Exercisable..................... $ 4.12 842
======
Granted............................................ $ 19.54 105
Exercised.......................................... $ 4.06 (193)
Canceled........................................... $ 16.76 (174)
------
December 31, 1996, Outstanding..................... $ 8.68 1,405
======
December 31, 1996, Exercisable..................... $ 5.64 950
======
Granted............................................ $ 7.10 1,493
Exercised.......................................... $ 0.53 (676)
Canceled........................................... $ 15.52 (681)
------
December 31, 1997, Outstanding..................... $ 7.68 1,541
======
December 31, 1997, Exercisable..................... $ 9.36 393
Granted............................................ $ 4.35 1,045
Exercised.......................................... $ 8.00 (1)
Canceled........................................... $ 8.21 (138)
------
December 31, 1998, Outstanding..................... $ 6.26 2,447
December 31, 1998, Exercisable..................... $ 8.45 730
December 31, 1998, Available for Grant............. 179
The exercise price of all options granted under the 1992 Plan and the Plans was
equal to or greater than the fair market value of the common stock on dates of
grant. The weighted average exercise price and fair market value of options
granted in 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
In Excess of Market Price Equal to Market Price
------------------------- ---------------------
Exercise Price Fair Value Exercise Price Fair Value
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
1998 $ 8.00 $ 1.98 $ 4.19 $ 2.59
1997 $ 8.08 $ 4.56 $ 6.44 $ 4.96
1996 $ 17.10 $ 6.48 $ 21.36 $ 9.04
</TABLE>
The following table summarizes information about the outstanding and exercisable
stock options at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Options in thousands Weighted Weighted Weighted
Average Average Average
Range of As of Remaining Exercise As of Exercise
Exercise Prices 12/31/98 Contractual Life Price 12/31/98 Price
--------------- -------- ---------------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$3.375 - $3.875 577 6.0 years $ 3.375 --- $ ---
$4.3125 - $8.00 1,738 5.4 years $ 6.55 645 $ 7.33
$8.13 - $23.00 132 2.5 years $ 15.13 85 $ 16.93
------ -----
2,447 730
====== =====
</TABLE>
F-14
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LEASES
------
The Company leases all of its facilities through noncancelable operating lease
agreements. In November 1992, a corporation whose shareholders are trusts whose
beneficiaries include beneficiaries of a significant shareholder acquired from
independent third parties a 50% interest in the general partnership from which
the Company leases its approximately 35,000 square foot administrative,
manufacturing, research and principal warehouse facility in Plainsboro, New
Jersey. The lease provides for rent escalations of 10.1% and 8.5% in the years
2002 and 2007, respectively, and expires in October 2012. The total amount of
the minimum lease payments related to the New Jersey facility is being charged
to expense on the straight-line method over the term of the lease.
In 1994, the Company leased a 25,000 square foot medical facility in West
Chester, Pennsylvania. The facilities were acquired in April 1994 by a related
party of a significant shareholder and were leased and otherwise made available
for use by the Company as of May 1, 1994. The lease agreement provides that the
Company was obligated to pay monthly non-escalating fixed amounts for the
facility for a period of five years, with three five-year options to extend the
lease. The intent of the lease agreement was to make available to the Company
additional freeze drying facilities and other production assets as well as
warehouse and administrative space. In January 1998, the Company decided to
suspend its operations at its leased facility in West Chester, Pennsylvania and
in June 1998, entered into a Lease Termination Agreement (the "Termination
Agreement") related to the leased facility. Under SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", the Company is required to review their long-lived assets and certain
identifiable intangibles (collectively, "Long-Lived Assets") for impairment
whenever events or changes in circumstances indicate that the future cash flows
do not recover the carrying value of the Long-Lived Assets. The Company incurred
asset impairment charges of $1,021,000 in 1997 and $145,000 in 1998,
respectively, related to certain leasehold improvements made at the West Chester
facility. In addition, the Termination Agreement requires an aggregate payment
of $330,000 related to the facility's maintenance, certain operating costs and
other commitments and is payable through April 1999. This Termination Agreement
was expensed in general and administrative expense.
The Company also leases 18,600 square feet of administrative and laboratory
space in San Diego, California under a five-year lease agreement that provides
for monthly payments with annual escalations.
As a result of the Rystan acquisition, the Company also leases 12,000 square
feet of manufacturing and administrative space in Little Falls, New Jersey. The
lease is a three-year lease with fixed monthly payments and no renewal options.
The Company is required to pay for utilities, taxes, insurance and maintenance
at its principal leased facilities. The Company also leases facilities
additional space for administrative support activities and storage under
short-term agreements in New Jersey and California.
F-15
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments under operating leases at December 31, 1998 were
as follows:
In thousands Related Third
Parties Parties Total
----------- ----------- ------------
1999 $ 210 $ 514 $ 724
2000 210 508 718
2001 210 513 723
2002 213 485 698
2003 231 478 709
Thereafter 2,140 365 2,505
----------- ----------- ------------
Total minimum lease
payments and receipts $3,214 $2,863 $ 6,077
=========== =========== ============
Total rental expense for the years ended December 31, 1998, 1997 and 1996 was
$780,000, $640,000 and $654,000, respectively, and included $267,000, $390,000
and $390,000 in related party expense, respectively.
11. INCOME TAXES
------------
The temporary differences which give rise to deferred tax assets and
(liabilities) are presented below:
<TABLE>
<CAPTION>
In thousands December 31,
----------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
Net operating loss and tax credit carryforwards $ 36,679 $ 31,974
Inventory reserves and capitalization 1,312 1,402
Other 3,086 3,406
Depreciation 767 682
----------- -----------
Total deferred tax assets before valuation allowance 41,844 37,464
Valuation allowance (41,844) (37,464)
------------ ------------
Net deferred tax assets ---- ----
=========== ===========
</TABLE>
The Company's valuation allowance of $41.8 million was provided against the
deferred tax assets due to the uncertainty of realization.
F-16
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the United States Federal statutory rate to the Company's
effective tax rate for the years ended December 31, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Federal statutory rate (34.0%) (34.0%) (34.0%)
Expenses not deductible for tax purposes:
Increase in valuation allowance for deferred tax
assets and net operating losses not recognized
32.2% 32.6% 32.7%
Other 1.8% 1.4% 1.3%
----------- ----------- -----------
Effective tax rate ---- ---- ----
=========== =========== ===========
</TABLE>
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $48 million and $35 million for federal and state income tax
purposes, respectively, to offset future taxable income, if any, which expire
through 2018 and 2005, respectively.
At December 31, 1998, several of the Company's subsidiaries have unused net
operating loss and tax credit carryforwards arising from periods prior to the
Company's ownership. The net operating loss carryforwards (excluding Telios
Pharmaceuticals, Inc. ("Telios")) of approximately $10 million for federal
income tax purposes expire between 2000 and 2005. The Company's Telios
subsidiary has approximately $84 million of net operating losses, which expire
between 2002 and 2010. The amount of Telios' net operating losses that are
available and the Company's ability to utilize such losses is dependent on the
determined value of Telios at the date of acquisition. The timing and manner in
which these net operating losses may be utilized in any year by the Company are
severely limited by Section 382 and other provisions of the Internal Revenue
Code of 1986, as amended, and its applicable regulations.
12. EMPLOYEE BENEFIT PLANS
----------------------
The Company has a 401(k) Profit Sharing Plan and Trust ("401(k) Plan") for
eligible employees and their beneficiaries. The 401(k) Plan provides for
employee contributions through a salary reduction election. Employer
discretionary matching and discretionary profit sharing contributions, which are
determined annually by the Company, vest over a six-year period of service. For
the years ended December 31, 1998, 1997 and 1996, the Company's discretionary
matching was based on a percentage of salary reduction elections per eligible
participant and totaled $48, $35 and $33, respectively. No discretionary profit
sharing contribution was made in any year.
The Company received shareholder approval for its Employee Stock Purchase Plan
("ESPP") in May 1998. The purpose of the Plan is to provide eligible employees
of the Company and certain of its subsidiary corporations with the opportunity
to acquire shares of common stock at periodic intervals by means of accumulated
payroll deductions. Under the Plan, a total of 500,000 shares of Common Stock
have been reserved for issuance. These shares will be made available either from
the Company's authorized but unissued shares of Common Stock or from shares of
Common Stock reacquired by the Company as treasury shares.
F-17
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DEVELOPMENT, LICENSE AND ROYALTY AGREEMENTS
-------------------------------------------
The Company has various development funding agreements and grant awards under
which it receives payments to support research and development activities.
Significant development funding and grant awards include;
A strategic alliance with Johnson & Johnson Professional, Inc. (now know
as "DePuy") to develop and market a new product to regenerate articular
cartilage. The Company will develop an absorbable, collagen-based implant
designed in combination with a proprietary RGD peptide. DePuy will
develop the arthroscopic instrumentation used in the surgery and will
market the combined products worldwide. Under the terms of the agreement,
DePuy will make payments up to $13 million as the Company meets various
milestones, and will fund all necessary development costs beyond the
pre-clinical phase. Following successful development, the Company will be
responsible for manufacturing the product and for future new product
development. The Company received $1 million in development funding under
the agreement in 1998.
A three-year, $2 million Department of Commerce award under the National
Institute of Standards and Technology ("NIST") program for continued work
on a class of biodegradable polymers licensed from Rutgers University.
This second award began in April 1998 and the Company received
approximately $340 of funding under it in 1998.
An annual award under the Contraceptive Research and Development (CONRAD)
program in collaboration with the Eastern Virginia Medical School to
further develop polymer based materials for use in reproductive health
applications. Under the collaboration, CONRAD provides the Company with
grant funding to cover a portion of the expenditures under the program.
In connection with a distribution agreement with Genetics Institute, Inc.
("GI"), the Company receives development support payments from GI to
support development of specialized delivery matrices for the release of
GI's recombinant human bone morphogenic protein (rhBMP-2) to simulate
bone growth.
In March 1998, the Company entered into a series of agreements with Century
Medical, Inc ("CMI"), a wholly-owned subsidiary of ITOCHU Corporation, under
which CMI will distribute the Company's identified neurosurgical products. Under
the agreements, CMI paid an up-front non-refundable licensing fee of $1.0
million in the first quarter of 1998 and agreed to underwrite the costs of the
Japanese clinical trials and regulatory approval processes.
In January 1996, the Company and Cambridge Antibody Technology Limited ("CAT")
entered into an agreement consisting of a license to CAT of certain rights to
use anti-TGF-(beta) antibodies for the treatment of fibrotic diseases and the
granting of a right of first refusal to CAT for certain rights relating to
decorin, a molecule believed to mediate the production of TGF-(beta) in humans
and animals. Under the agreement, the Company received a $500,000 licensing fee
and is entitled to market any dermal application products developed with
royalties payable to CAT. The Company will also receive royalties upon the sale
by CAT of licensed products other than those directed at dermal applications.
F-18
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As consideration for certain technology, manufacturing, distribution and selling
rights and licenses granted to the Company, the Company has agreed to pay
royalties on the sales of products that are commercialized relative to the
granted rights and licenses. Through December, 31, 1998, royalties expense has
primarily been based on sales of Integra Artificial Skin(Registered) under
agreements with Massachusetts Institute of Technology and Hoechst Marion
Roussel. Royalty payments under these agreements by the Company were not
significant for any of the periods presented. All other licensing and technology
rights agreements with various third parties have yet to have commercial product
sold under them.
14. LEGAL MATTERS
-------------
Various lawsuits claims and proceedings are pending or have been settled by the
Company. The most significant of those are described below.
In November 1997, the Company and the Massachusetts Institute of Technology
("MIT") filed a patent infringement lawsuit against LifeCell Corporation
("LifeCell"). LifeCell filed counterclaims seeking declaratory judgments of
non-infringement and patent invalidity and filed a complaint against the Company
and MIT in Texas state court claiming tortious interference, business and
product disparagement, unfair competition amoung other charges. LifeCell was
seeking unspecified actual monetary damages in an amount not less than $12
million together with treble damages, unspecified punitive damages, and other
relief. In April 1998, the Company and LifeCell agreed to settle all litigation
pending between the parties. Under the terms of the settlement, the Company has
agreed not to assert certain patents against LifeCell's current technology or
reasonable equivalents thereof and LifeCell has acknowledged the validity of
these patents. As part of the settlement agreement, the Company agreed to
purchase $500,000 of LifeCell common stock, and LifeCell agreed to a
royalty-bearing license for any possible future biomaterials-based matrix
products developed by LifeCell that may be covered by the patents.
In January 1994, the Company entered into a five-year distribution agreement
with the distributor of the Company's Chronicure product pursuant to which the
distributor is obligated to purchase certain minimum quantities of wound care
products. In October 1995, the Company's subsidiary filed a complaint in the
United States District Court for the District of New Jersey claiming the
distributor breached the distribution agreement by, among other things, not
paying the subsidiary for certain products delivered. In November 1995, the
distributor filed an affirmative defense and counterclaim alleging, among other
things, fraudulent misrepresentation and breach of contract and seeking damages
of approximately $1.2 million plus unspecified punitive damages. In June 1998,
the Company and the distributor entered into a settlement agreement in which the
distributor agreed to pay an aggregate of $550,000 in installments over the
remainder of 1998. The Company recorded a net gain in other income in 1998 of
$545,000 as a result of the settlement.
F-19
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 peptide
sequence found in many extracellular matrix proteins. The defendants have filed
a countersuit asking for an award of defendants' reasonable attorney fees.
The Company is also subject to other claims and lawsuits in the ordinary course
of its business. In the opinion of management, such other claims are either
adequately covered by insurance or otherwise indemnified, and are not expected,
individually or in the aggregate, to result in a material adverse effect on the
financial condition of the Company. The Company's financial statements do not
reflect any significant amounts related to possible unfavorable outcomes of the
matters above or others. However, it is possible that the Company's results of
operations, financial position and cash flows in a particular period could be
materially affected by these contingencies.
15. SEGMENT INFORMATION AND MAJOR CUSTOMER DATA
-------------------------------------------
The Company adopted SAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information" in the fourth quarter of 1998. SFAS No. 131 requires a new
basis of determining reportable business segments, i.e., the management
approach. This approach designates the Company's internal organizational
structure as used by management for making operating decisions and assessing
performance, as the source of business segments. On this basis, the Company has
two reportable segments: (1) Medical Products; and (2) Skin Defects and Burns.
In the Company's Medical Products segment, many of the Company's products 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 customers have
paid license fees for the marketing and distribution rights or development
funding for the products. The Company's Skin Defects and Burns business includes
the Company's lead product, Integra Artificial Skin(Registered), and the
Panafil(Registered) product line acquired in the Rystan acquisition.
F-20
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Selected financial information on the Company's business segments is reported
below (in thousands):
<TABLE>
<CAPTION> Reportable
Medical Skin Defects Segments Corporate and
Products and Burns Sub-total All Other Total
- ----------------------------------------------------------------------------------------------------------------
1998
- ----
<S> <C> <C> <C> <C> <C>
Sales $ 7,755 $ 6,321 $ 14,076 $ --- $ 14,076
Total revenue 10,712 6,321 17,033 422 17,455
Operating costs 11,210 11,279 22,489 9,146 31,635
Net income (loss) (498) (4,958) (5,456) (6,886) (12,342)
1997
- ----
Sales 8,038 5,963 14,001 --- 14,001
Total revenue 8,309 5,963 14,272 474 14,746
Operating costs 9,071 9,602 18,673 14,984 33,657
Net income (loss) (762) (3,639) (4,401) (12,563) (16,964)
1996
- ----
Sales 8,091 3,119 11,210 --- 11,210
Total revenue 9,405 3,119 12,524 624 13,148
Operating costs 8,379 7,060 15,439 7,156 22,595
Net income (loss) 1,026 (3,941) (2,915) (4,613) (7,528)
</TABLE>
Research and development expense is allocated to segments based on a specific
identification of program costs within each segment. The Company allocates
specific general and administrative expenses such as regulatory and legal
expense items to the segments, with the remaining corporate activities reflected
as corporate activities. Included in Corporate and All Other are the Company's
activities under its Developing Businesses and Ventures activities, which
includes activities involving the pharmacological applications of its
technologies and other development programs not related to its core activities.
The Company does not review identifiable assets on a segment basis.
The following table represents customers that accounted for over 10% of product
sales in one or more years:
Customer 1998 1997 1996
-------- ---- ---- ----
Customer A 15% 13% 15%
Customer B -- -- 15%
Customer C 12% 11% 12%
---- ---- ----
27% 24% 42%
For the years ended December 31, 1998, 1997 and 1996, the Company's foreign
export sales, primarily to Europe and the Asia Pacific regions, were 18%, 14%
and 16% of total product sales, respectively.
The Company's product sales consists of several products that make up a large
percentage of the total, including the Company's Integra Artificial Skin product
which accounted for 41%, 43% and 28% of product sales for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-21
<PAGE>
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
In connection with the September 1998 acquisition of Rystan, the Company issued
800,000 shares of its common stock and two warrants with an aggregate value of
$3.9 million.
Included in other current liabilities at December 31, 1997 is $57,000 related to
fixed asset additions and leasehold improvements that were paid after year-end.
17. SUBSEQUENT EVENT
----------------
NeuroCare Group 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, for an acquisition price of $25 million. 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. 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 Integra Series B Preferred Stock and related warrants.
The convertible preferred shares are convertible into 2,617,801 shares of the
Company's common stock, has a liquidation preference of $10 million with a 10%
compounded annual return and is 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 Company
provided the balance of the cash portion of the purchase price. NeuroCare
designs, manufactures and sells implants, instruments and monitors used in
neurosurgery and intensive care units, primarily for the treatment of
hydrocephalus and neurological trauma. NeuroCare's product lines include the
Camino, Heyer-Schulte, Redmond and Neuro Navigational brand names.
F-22
<PAGE>
Exhibit 3.1(b)
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INTEGRA LIFESCIENCES CORPORATION
INTEGRA LIFESCIENCES CORPORATION, a corporation organized and existing
under and by virtue of the Delaware General Corporation Law (the
"Corporation"), DOES HEREBY CERTIFY THAT:
FIRST: The Board of Directors of the Corporation has adopted a
resolution proposing and declaring advisable and in the best interests of the
Corporation the following amendment to Article FOURTH of the Amended and
Restated Certificate of Incorporation of the Corporation, to read in its
entirety as follows (the "Charter Amendment"):
"FOURTH: The total number of shares of stock which the
Corporation shall have authority to issue is 75,000,000
shares, par value $.01 per share, of which 60,000,000 shares
are designated as Common Stock and 15,000,000 shares are
designated as Preferred Stock.
Effective as of 5:00 p.m., Eastern time, on the date of
filing with the Secretary of State of a Certificate of
Amendment (the "Effective Time"), each share of Common Stock
of the Corporation issued and outstanding immediately prior
thereto (the "Old Common Stock") shall automatically and
without action on the part of the holder thereof be
reclassified and changed into one-half of one share of Common
Stock of the Corporation, $.01 par value ( the "New Common
Stock"), subject to treatment of fractional share interests
as described below. Each holder of a certificate or
certificates which immediately prior to the Effective Time
represented outstanding shares of Old Common Stock (the "Old
Certificates," whether one or more) shall be entitled to
receive, upon surrender for cancellation of such Old
Certificates to the transfer agent designated by the
Corporation, a certificate or certificates (the "New
Certificates," whether one or more) representing the number
of shares of New Common Stock into which and for which the
shares of Old Common Stock formerly represented by such Old
Certificates so surrendered are reclassified under the terms
hereof. From and after the Effective Time, the Old
Certificates shall represent only the right to receive New
Certificates (and, where applicable, cash in lieu of
fractional shares, as provided below) pursuant to the
provisions hereof. No certificates or scrip representing
fractional interests in the shares of New Common Stock will
be issued, and no such fractional share interest will entitle
the holder thereof to vote or to any other rights of a
stockholder of the Corporation. A holder of the Old
Certificates shall receive, in lieu of any fraction of a
share of New Common Stock to which the holder would otherwise
be entitled, a cash amount in United States
<PAGE>
dollars equal to the same fraction multiplied by two times
the average closing price of the Common Stock on the Nasdaq
National Market for the five trading days immediately
preceding the Effective Time."
SECOND: The stockholders of the Corporation, at an annual meeting of
stockholders called and held upon notice properly given in accordance with
Section 222 of the Delaware General Corporation Law, have adopted and
approved the Charter Amendment in accordance with the provisions of Section
212 of the Delaware General Corporation Law.
THIRD: The Charter Amendment has been duly adopted and approved in
accordance with the provisions of Section 242 of the Delaware General
Corporation Law.
IN WITNESS WHEREOF, said Integra LifeSciences Corporation has caused
this Certificate of Amendment to Amended and Restated Certificate of
Incorporation to be executed by a duly authorized officer of the
Corporation this 22nd day of May, 1998.
INTEGRA LIFESCIENCES CORPORATION
By: /s/ Stuart M. Essig
--------------------------------------------
Stuart M. Essig
President and Chief Executive Officer
<PAGE>
Exhibit 4.2
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES B
CONVERTIBLE PREFERRED STOCK
OF
INTEGRA LIFESCIENCES CORPORATION
Integra LifeSciences Corporation, a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY THAT:
A. Pursuant to authority conferred upon the Board of Directors by the
Amended and Restated Certificate of Incorporation of the Corporation, as
amended (as amended, the "Certificate of Incorporation"), and pursuant to the
provisions of Section 151 of Title 8 of the Delaware Code of 1953, as amended,
said Board of Directors, at a meeting held on February 25, 1999, adopted
resolutions providing for the designation, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions of the Corporation's Series B Convertible
Preferred Stock, which resolutions are as follows:
WHEREAS, the Certificate of Incorporation of this Corporation
provides for two classes of shares known as Common Stock, par value $.01 per
share, and Preferred Stock, par value $.01 per share; and
WHEREAS, the Board of Directors of this Corporation is
authorized by the Certificate of Incorporation to provide for the issuance of
the shares of Preferred Stock in series, and by filing a certificate pursuant
to the applicable law of the State of Delaware, to establish from time to time
the number of shares to be included in each such series, and to fix the
designation, preferences and rights of the shares of each such series and the
qualifications, limitations and restrictions thereof.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors
deems it advisable to, and hereby does, designate a Series B Convertible
Preferred Stock and fixes and determines the preferences, rights,
qualifications, limitations and restrictions relating to the Series B
Convertible Preferred Stock as follows:
1. Designation/Ranking. The shares of such series of
Preferred Stock shall be designated as "Series B Convertible Preferred Stock"
(referred to herein as the "Series B Convertible Preferred Stock"). The Series
B Convertible Preferred Stock shall rank senior to the Corporation's Common
Stock and all other Preferred Stock of the Company, with respect to the payment
of distributions on liquidation, dissolution or winding up of the Corporation
and with respect to the payment of dividends.
2. Authorized Number. The number of shares constituting the
Series B Convertible Preferred Stock shall be 120,000 shares.
<PAGE>
3. Dividends. The holders of Series B Convertible Preferred
Stock shall be entitled to receive, out of funds legally available for such
purpose, annual cumulative dividends which shall accrue at the rate of 10% per
annum, payable upon the liquidation, dissolution or winding up of the
Corporation.
Dividends on each share of Series B Convertible Preferred
Stock shall be cumulative and shall accrue from the date of issuance of such
share of Series B Convertible Preferred Stock. The date on which the
Corporation initially issues any share of Series B Convertible Preferred Stock
shall be deemed to be its "date of issuance," regardless of the number of times
of transfer of such shares is made on the stock records maintained by or for
the Corporation and regardless of the number of certificates that may be issued
to evidence such share.
4. Liquidation.
(a) Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, in which all or
substantially all of the consideration, if any, received by the Corporation or
its stockholders is in cash, the holders of the shares of Series B Convertible
Preferred Stock shall be paid, before any distribution or payment is made upon
any stock ranking on liquidation junior to the Series B Convertible Preferred
Stock, an amount equal to $100 per share plus, in the case of each share, an
amount equal to any dividends declared but unpaid thereon, through the date
payment thereof is made available, and the holders of Series B Convertible
Preferred Stock shall not be entitled to any further payment (such amount
payable with respect to one share of Series B Convertible Preferred Stock being
sometimes referred to as the "Liquidation Payment" and with respect to all
shares of Series B Convertible Preferred Stock being sometimes referred to as
the "Liquidation Payments").
(b) Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, in which all or
substantially all of the consideration, if any, received by the Corporation or
its stockholders is in securities, the Corporation shall have the option, at
its election, of paying such Liquidation Payments to the holders of the shares
of Series B Convertible Preferred Stock in cash or in a preferred security of
the successor entity having terms substantially similar to the Series B
Convertible Preferred Stock.
(c) If upon such liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, the assets to be
distributed among the holders of Series B Convertible Preferred Stock shall be
insufficient to permit payment to the holders of Series B Convertible Preferred
Stock of the Liquidation Payments, then the entire assets of the Corporation to
be so distributed shall be distributed ratably among the holders of Series B
Convertible Preferred Stock. Upon any such liquidation, dissolution or winding
up of the Corporation, after the holders of Series B Convertible Preferred
Stock shall have been paid in full the Liquidation Payments to which they shall
be entitled, the Series B Convertible Preferred Stock shall be automatically
cancelled and the remaining net assets of the
<PAGE>
Corporation may be distributed to the holders of stock ranking on liquidation
junior to the Series B Convertible Preferred Stock.
(d) Written notice of such liquidation, dissolution
or winding up, stating a payment date, the amount of the Liquidation Payments
and the place where said Liquidation Payments shall be payable, shall be
delivered in person, mailed by certified or registered mail, return receipt
requested, or sent by telecopier or telex, not less than 10 days prior to the
payment date stated therein, to the holders of record of Series B Convertible
Preferred Stock, such notice to be addressed to each such holder at its address
as shown by the records of the Corporation.
(e) For purposes of this paragraph 4, a liquidation,
dissolution or winding up of the Corporation shall be deemed to include (i) the
Corporation's sale of all or substantially all of its assets or (ii) the merger
or consolidation of the Corporation into or with any other corporation, in
which all or substantially all of the consideration received by the Corporation
or its stockholders in connection with such sale, merger or consolidation is:
(x) in cash, or (y) in securities of the acquiring company or an affiliate
thereof having a fair market value per share of Common Stock which is lower
than the Conversion Price (as defined below) as last adjusted and in effect at
the date of such liquidation, dissolution or winding up; provided that a
liquidation, dissolution or winding up of the Corporation shall not include a
sale, merger or consolidation in which all or substantially all of the
consideration received by the Corporation or its stockholders in connection
therewith is in securities of the acquiring company or an affiliate thereof
having a fair market value per share of Common Stock which is equal to or
greater than the Conversion Price as last adjusted and in effect on the date of
such liquidation, dissolution or winding up. Nothing in this paragraph 4 shall
limit the rights of the holders of the Series B Convertible Preferred Stock to
convert their shares of Series B Convertible Preferred Stock in accordance with
the terms hereof prior to a liquidation, dissolution or winding up of the
Corporation.
(f) The Series B Convertible Preferred Stock shall,
with respect to distribution of assets and rights upon the liquidation,
dissolution or winding up of the Corporation, rank on a parity with any class
or series of capital stock of the Corporation hereafter created which expressly
provides that it ranks on a parity with the Series B Convertible Preferred
Stock with respect to distribution of assets and rights upon the liquidation,
dissolution or winding up of the Corporation. The Series B Convertible
Preferred Stock shall, with respect to distribution of assets and rights upon
the liquidation, dissolution or winding up of the Corporation, rank senior to
(i) the Corporation's Series A Convertible Preferred Stock, $.01 par value per
share, and (ii) each class or series of capital stock of the Corporation
hereafter created which does not expressly provide that it ranks on a parity
with or senior to the Series B Convertible Preferred Stock with respect to
distribution of assets and rights upon the liquidation, dissolution or winding
up of the Corporation.
5. Restrictions. At any time when shares of Series B
Convertible Preferred Stock are outstanding, except where the vote or written
consent of the holders of a greater number of shares of the Corporation is
required by law or by the Corporation's Articles of Incorporation, and in
addition to any other vote required by law or the Corporation's Articles of
Incorporation, without the approval of the holders of at least 66 _% of the
then outstanding
<PAGE>
shares of Series B Convertible Preferred Stock, given in writing or by vote at
a meeting, consenting or voting (as the case may be) separately as a series,
the Corporation will not:
(a) Create, issue or authorize the creation or
issuance of any additional class or series of shares of stock unless the same
ranks junior to the Series B Convertible Preferred Stock as to the distribution
of assets on the liquidation, dissolution or winding up of the Corporation, or
increase the authorized amount of the Series B Convertible Preferred Stock or
increase the authorized amount of any additional class or series of shares of
stock unless the same ranks junior to the Series B Convertible Preferred Stock
as to the distribution of assets on the liquidation, dissolution or winding up
of the Corporation, or create, issue (other than to the holder of any shares of
Series B Convertible Preferred Stock) or authorize the creation or issuance of
any obligation or security convertible into shares of Series B Convertible
Preferred Stock or into shares of any other class or series of stock unless the
same ranks junior to the Series B Convertible Preferred Stock as to the
distribution of assets on the liquidation, dissolution or winding up of the
Corporation, whether any such creation, issuance, authorization or increase
shall be by means of amendment to the Corporation's Articles of Incorporation
or by merger, consolidation or otherwise; or
(b) effect any transaction or other action that
would adversely affect the rights, preferences, powers (including, without
limitation, voting powers) and privileges of the Series B Preferred Stock;
provided that a merger or sale of substantially all of the Corporation's assets
in which all or substantially all of the consideration is stock of the
acquiring company or an affiliate thereof shall not require the consent or vote
of the holders of Series B Convertible Preferred Stock separately as a series.
6. Conversions. The holders of shares of Series B Convertible
Preferred Stock shall have the following conversion rights:
(a) Right to Convert. Subject to the terms and
conditions of this paragraph 6, the holder of any share or shares of Series B
Convertible Preferred Stock shall have the right, at its option at any time, to
convert any such shares (or fractions thereof) of Series B Convertible
Preferred Stock (except that upon any liquidation, dissolution or winding up of
the Corporation the right of conversion shall terminate at the close of
business on the business day immediately preceding the date fixed for payment
of the amount distributable on the Series B Convertible Preferred Stock) into
such number of fully paid and nonassessable shares of Common Stock as is
obtained by (i) multiplying the number of shares of Series B Convertible
Preferred Stock so to be converted by $100 and (ii) dividing the result by the
conversion price of $3.82 per share or, in case an adjustment of such price has
taken place pursuant to the further provisions of this paragraph 6, then by the
conversion price as last adjusted and in effect at the date any share or shares
of Series B Convertible Preferred Stock are surrendered for conversion (such
price, or such price as last adjusted, being referred to as the "Conversion
Price"). Such rights of conversion shall be exercised by the holder thereof by
giving written notice that the holder elects to convert a stated number of
shares of Series B Convertible Preferred Stock into Common Stock and by
surrender of a certificate or certificates for the shares so to be converted to
the Corporation at its principal office (or such other office or agency of the
Corporation as the Corporation may designate by notice in writing to the
holders of the Series B Convertible Preferred Stock) at any time during its
usual
<PAGE>
business hours on the date set forth in such notice, together with a
statement of the name or names (with address) in which the certificate or
certificates for shares of Common Stock shall be issued.
(b) Issuance of Certificates; Time Conversion
Effected. Promptly after the receipt of the written notice referred to in
subparagraph 6(a) and surrender of the certificate or certificates for the
share or shares of Series B Convertible Preferred Stock to be converted, the
Corporation shall issue and deliver, or cause to be issued and delivered, to
the holder, registered in such name or names as such holder may direct, a
certificate or certificates for the number of whole shares of Common Stock
issuable upon the conversion of such share or shares of Series B Convertible
Preferred Stock. To the extent permitted by law, such conversion shall be
deemed to have been effected and the Conversion Price shall be determined as of
the close of business on the date on which such written notice shall have been
received by the Corporation and the certificate or certificates for such share
or shares shall have been surrendered as aforesaid, and at such time the rights
of the holder of such share or shares of Series B Convertible Preferred Stock
shall cease, and the person or persons in whose name or names any certificate
or certificates for shares of Common Stock shall be issuable upon such
conversion shall be deemed to have become the holder or holders of record of
the shares of Common Stock represented thereby.
(c) Fractional Shares; Partial Conversion. No
fractional shares of Common Stock shall be issued upon conversion of Series B
Convertible Preferred Stock into Common Stock and no payment or adjustment
shall be made upon any conversion on account of any cash dividends on the
Common Stock issued upon such conversion. If the number of shares of Series B
Convertible Preferred Stock represented by the certificate or certificates
surrendered pursuant to subparagraph 6(a) exceeds the number of shares
converted, the Corporation shall, upon such conversion, execute and deliver to
the holder, at the expense of the Corporation, a new certificate or
certificates for the number of shares (or fractions thereof) of Series B
Convertible Preferred Stock represented by the certificate or certificates
surrendered which are not to be converted. If any fractional share of Common
Stock would, except for the provisions of the first sentence of this
subparagraph 6(c), be delivered upon such conversion, the Corporation, in lieu
of delivering such fractional share, shall pay to the holder surrendering the
Series B Convertible Preferred Stock for conversion an amount in cash equal to
the current market price of such fractional share as determined in good faith
by the Board of Directors of the Corporation.
(d) Subdivision or Combination of Common Stock. In
case the Corporation shall at any time subdivide (by any stock split, stock
dividend or otherwise) its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision shall be proportionately reduced, and, conversely, in case the
outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
(e) Reorganization, Recapitalization or
Reclassification. If any capital reorganization, recapitalization or
reclassification of the capital stock of the Corporation (other than a merger
or consolidation of the Corporation in which the Corporation
<PAGE>
is the surviving corporation and which does not result in a reclassification or
change of outstanding shares of Common Stock or a merger or consolidation which
is deemed to be a liquidation, dissolution or winding up of the Corporation
pursuant to paragraph 4) shall be effected in such a way that holders of Common
Stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for Common Stock, then, as a condition of such reorganization,
recapitalization or reclassification, lawful and adequate provisions shall be
made whereby each holder of a share or shares of Series B Convertible Preferred
Stock shall thereupon have the right to receive, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore receivable upon the conversion of such share or shares
of Series B Convertible Preferred Stock, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of shares of
such Common Stock immediately theretofore receivable upon such conversion had
such reorganization or reclassification not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests
of such holder to the end that the provisions hereof (including without
limitation provisions for adjustments of the Conversion Price) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise of such
conversion rights.
(f) Notice of Adjustment. Upon any adjustment of the
Conversion Price, then and in each such case the Corporation shall give written
notice thereof, by delivery in person, certified or registered mail, return
receipt requested, telecopier or telex, addressed to each holder of shares of
Series B Convertible Preferred Stock at the address of such holder as shown on
the books of the Corporation, which notice shall state the Conversion Price
resulting from such adjustment, setting forth in reasonable detail the method
upon which such calculation is based.
(g) Other Notice. In case at any time:
(1) the Corporation shall declare any
dividend upon its Common Stock payable in cash or stock or make any
other distribution to the holders of its Common Stock;
(2) the Corporation shall offer for
subscription pro rata to the holders of its Common Stock any additional
shares of stock of any class or other rights;
(3) there shall be any capital
reorganization or reclassification of the capital stock of the
Corporation, or a consolidation or merger of the Corporation with or
into another entity or entities, or a sale, lease, abandonment,
transfer or other disposition of all or substantially all its assets;
or
(4) there shall be a voluntary or
involuntary dissolution, liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier
or telex, addressed to each
<PAGE>
holder of any shares of Series B Convertible Preferred Stock at the address of
such holder as shown on the books of the Corporation, (i) at least 10 days'
prior written notice of the date on which the books of the Corporation shall
close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up and (ii) in the case of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, at least 10 days' prior written notice
of the date when the same shall take place. Such notice in accordance with the
foregoing clause (i) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto and such notice in accordance with the
foregoing clause (ii) shall also specify the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, disposition, dissolution, liquidation or winding up, as
the case may be.
(h) Stock to be Reserved. The Corporation will at
all times reserve and keep available out of its authorized shares of Common
Stock, solely for the purpose of issuance upon the conversion of Series B
Convertible Preferred Stock as herein provided, such number of shares of Common
Stock as shall then be issuable upon the conversion of all outstanding shares
of Series B Convertible Preferred Stock. The Corporation covenants that all
shares of Common Stock which shall be so issued shall be duly authorized,
validly issued, fully paid and nonassessable by the Corporation and free from
all taxes, liens and charges with respect to the issue thereof, and, without
limiting the generality of the foregoing, the Corporation covenants that it
will from time to time take all such action as may be requisite to assure that
the par value per share of the Common Stock is at all times equal to or less
than the Conversion Price in effect at the time. The Corporation will take all
such action as may be necessary to assure that all such shares of Common Stock
may be so issued without violation of any applicable law or regulation, or of
any requirement of any national securities exchange upon which the Common Stock
may be listed. The Corporation will not take any action which results in any
adjustment of the Conversion Price if the total number of shares of Common
Stock issued and issuable after such action upon conversion of the Series B
Convertible Preferred Stock would exceed the total number of shares of Common
Stock then authorized by the Corporation's Articles of Incorporation.
(i) No Reissuance of Series B Convertible Preferred
Stock. Shares of Series B Convertible Preferred Stock which are converted into
shares of Common Stock as provided herein shall not be reissued as shares of
Series B Convertible Preferred Stock.
(j) Issue Tax. The issuance of certificates for
shares of Common Stock upon conversion of Series B Convertible Preferred Stock
shall be made without charge to the holders thereof for any issuance tax in
respect thereof, provided that the Corporation shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than that of the holder of the
Series B Convertible Preferred Stock which is being converted.
(k) Closing of Books. The Corporation will at no
time close its transfer books against the transfer of any Series B Convertible
Preferred Stock or of any
<PAGE>
shares of Common Stock issued or issuable upon the conversion of any shares of
Series B Convertible Preferred Stock in any manner which interferes with the
timely conversion of such Series B Convertible Preferred Stock, except as may
otherwise be required to comply with applicable securities laws.
(l) Definition of "Common Stock." As used in this
paragraph 6, the term "Common Stock" shall be deemed to mean (i) the Common
Stock, par value $.01, and (ii) the stock of the Corporation of any class, or
series within a class, whether now or hereafter authorized, which has the right
to participate in the distribution of either earnings or assets of the
Corporation without limit as to the amount or percentage.
(m) Minimum Adjustment. No reduction of the
Conversion Price shall be made if the amount of any such reduction would be an
amount less than $.01, but any such amount shall be carried forward and
reduction with respect thereof shall be made at the time of and together with
any subsequent reduction which, together with such amount and any other amount
or amounts so carried forward, shall aggregate $.01 or more.
7. Future Issuance of Shares; Preemptive Rights.
(a) Offering Notice. Except for (i) capital stock of
the Corporation which may be issued to employees, consultants or directors of
the Corporation pursuant to a stock incentive plan or other employee benefit
arrangement approved by the Board of Directors, (ii) a subdivision of the
outstanding shares of Common Stock into a larger number of shares of Common
Stock, (iii) capital stock issued as full or partial consideration for a
merger, acquisition, joint venture, strategic alliance, license agreement or
other similar non-financing transaction, (iv) capital stock issued in
connection with a publicly registered offering, or (v) capital stock issued
upon exercise, conversion or exchange of any Preferred Stock, options or
warrants, if the Corporation wishes to issue any shares of capital stock or any
other securities convertible into or exchangeable for capital stock of the
Corporation (collectively, "New Securities") to any Person (the "Subject
Purchaser"), then the Corporation shall send written notice (the "New Issuance
Notice") to the holders of the Series B Preferred Stock, which New Issuance
Notice shall state (x) the number of New Securities proposed to be issued and
(y) the proposed purchase price per share of the New Securities that the
Corporation is willing to accept (the "Proposed Price").
<PAGE>
(b) Preemptive Rights; Exercise.
(i) For a period of fifteen (15) days after
the giving of the New Issuance Notice as provided in Section 7(a), each holder
of the Series B Preferred Stock (each, a "Preemptive Rightholder") shall have
the right to purchase up to its Proportionate Percentage (as hereinafter
defined) of the New Securities at a purchase price equal to the Proposed Price
and upon the terms and conditions set forth in the New Issuance Notice. Each
Preemptive Rightholder shall have the right to purchase up to that percentage
of the New Securities determined by dividing (a) a number equal to the number
of shares of Common Stock into which the shares of Series B Convertible
Preferred Stock then owned by such Preemptive Rightholder are convertible by
(b) the total of (i) the number of shares of Common Stock then outstanding and
(ii) the number of shares of Common Stock into which all outstanding shares of
Preferred Stock are convertible (the "Proportionate Percentage").
(ii) The right of each Preemptive
Rightholder to purchase the New Securities under subsection (i) above shall be
exercisable by delivering written notice of its exercise, prior to the
expiration of the 15-day period referred to in subsection (i) above, to the
Corporation, which notice shall state the amount of New Securities that the
Preemptive Rightholder elects to purchase as provided in Section 7(b)(i). The
failure of a Preemptive Rightholder to respond within the 15-day period shall
be deemed to be a waiver of the Preemptive Rightholder's rights under Section
7(b)(i); provided that each Preemptive Rightholder may waive its, his or her
rights under Section 7(b)(i) prior to the expiration of the 15-day period by
giving written notice to the Corporation.
(iii) If, following the expiration of the
15-day period referred to above, not all of the New Securities have been
subscribed for by the Subject Purchasers, each Preemptive Rightholder shall
have the option to reduce that number of New Securities it has elected to
purchase pursuant to Section 7(b)(i) by a proportionate amount.
(c) Closing. The closing of the purchase of New
Securities subscribed for by the Preemptive Rightholders under Section 7(b)
shall be held at the same time and place as the closing of the New Securities
subscribed for by the Subject Purchasers (the "Closing"). At the Closing, the
Corporation shall deliver certificates representing the New Securities, and the
New Securities shall be issued free and clear of all Liens and the Corporation
shall so represent and warrant, and further represent and warrant that the New
Securities shall be, upon issuance of the New Securities to the Preemptive
Rightholders and after payment for the New Securities, duly authorized, validly
issued, fully paid and nonassessable by the Corporation. At the Closing, the
Preemptive Rightholders purchasing the New Securities shall deliver payment in
full in immediately available funds for the New Securities purchased by it, him
or her. At the Closing, all of the parties to the transaction shall execute any
additional documents that are otherwise necessary or appropriate.
<PAGE>
(d) Sale to Subject Purchaser. The Corporation may
sell to the Subject Purchaser all of the New Securities not purchased by the
Preemptive Rightholders as provided in Section 7(b) on terms and conditions
that are no more favorable to the Subject Purchaser than those set forth in the
New Issuance Notice; provided, however, that the sale is bona fide and made
pursuant to a contract entered into within four (4) months of the earlier to
occur of (i) the waiver by the Preemptive Rightholders of their option to
purchase the New Securities as provided in Section 7(b) and (ii) the expiration
of the 15-day period referred to in Section 7(b). If such sale is not
consummated within such four (4) month period for any reason, then the
restrictions provided for in this Section 7 shall again become effective, and
no issuance and sale of New Securities may be made thereafter by the
Corporation without again offering the New Securities in accordance with this
Section 7. The closing of any issue and purchase contemplated by this Section
7(d) shall be held at the time and place as the parties to the transaction may
agree.
8. Voting Rights. Holders of Series B Convertible Preferred
Stock shall be entitled to notice of any stockholders' meeting. Except as
otherwise required by law, at any annual or special meeting of the
Corporation's stockholders, or in connection with any written consent in lieu
of any such meeting, each outstanding share of Series B Convertible Preferred
Stock shall be entitled to the number of votes equal to the number of full
shares of Common Stock into which such share of Series B Convertible Preferred
Stock is then convertible (calculated by rounding any fractional share down to
the nearest whole number) on the date for determination of stockholders
entitled to vote at the meeting. Except as otherwise required by law, the
Series B Convertible Preferred Stock and the Common Stock shall vote together
as a single class on each matter submitted to the stockholders, and not by
separate class or series.
9. Optional Redemption.
(a) For the purposes of this Section 9 the "Target
Market Price" shall mean an amount equal to: (i) in the twelve-month period
commencing on March 15, 2001, 2.5 times the Conversion Price as last adjusted
and then in effect; (ii) in the twelve-month period commencing on March 15,
2002, 3.25 times the Conversion Price as last adjusted and then in effect; and
(iii)in the twelve-month period commencing on March 15, 2003, 4 times the
Conversion Price as last adjusted and then in effect.
(b) If, at any time after March 15, 2001, for a
period of not less than thirty (30) consecutive trading days, the average
closing price of the Corporation's Common Stock on the principal securities
exchange or market on which such shares are then traded has been equal to or
greater than the Target Market Price, then the Corporation may, at the option
of the Board of Directors of the Corporation, redeem from any source of funds
legally available therefor, in whole or in part, in the manner provided herein,
any or all whole number of shares of Series B Convertible Preferred Stock at
any time outstanding for a cash amount per share to be redeemed equal to the
Liquidation Payment as defined in Section 4 (the "Redemption Price").
(c) Notwithstanding the foregoing, at any time and
from time to time after March 15, 2004, the Corporation may, at the option of
the Board of Directors of the
<PAGE>
Corporation, redeem from any source of funds legally available therefor, in
whole or in part, in the manner provided herein, any or all whole number of
shares of Series B Convertible Preferred Stock at any time outstanding for an
amount per share to be redeemed equal to the Redemption Price.
10. Redemption Procedure. At least forty-five (45) days prior
to the date fixed for redemption of the Series B Convertible Preferred Stock
pursuant to Section 8, written notice ("Redemption Notice") shall be mailed,
postage prepaid, to each holder of record of the Series B Convertible Preferred
Stock at its address last shown on the records of the Corporation. The
Redemption Notice shall state:
(a) whether all or less than all of the outstanding
shares of Series B Convertible Preferred Stock are to be redeemed and the total
number of shares of Series B Convertible Preferred Stock being redeemed;
(b) the number of shares of Series B Convertible
Preferred Stock held by the holder that the Corporation intends to redeem;
(c) the date of the redemption and the Redemption
Price; and
(d) that the holder is to surrender to the
Corporation, in the manner and at the place designated, his or her certificate
or certificates representing shares of Series B Convertible Preferred Stock to
be redeemed.
Any failure to mail the notice provided for herein or any
defect therein or in the mailing thereof shall not affect the validity of the
proceedings for the redemption of any shares so to be redeemed.
On or before the date fixed for any redemption of shares,
each holder of shares of Series B Convertible Preferred Stock to be redeemed on
such date, unless the holder has exercised his right to convert the shares as
provided in Section 6, shall surrender the certificate or certificates
representing such shares of Series B Convertible Preferred Stock to the
Corporation, in the manner and at the place designated in the Redemption
Notice, and thereupon the Redemption Price for such shares shall be payable to
the order of the person whose name appears on such certificate or certificates
as the owner thereof, and each surrendered certificate shall be cancelled and
retired. In the event less than all of the shares represented by such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares.
If the Redemption Notice is duly given, and if on or prior to
the Redemption Date the Redemption Price is either paid or made available for
payment, then notwithstanding that the certificates evidencing any of the
shares of Series B Convertible Preferred Stock so called for redemption have
not been surrendered, all rights with respect to such shares shall forthwith
after the Redemption Date cease and terminate, except only the right of the
holders to receive the Redemption Price without interest upon surrender of
their certificates therefor.
<PAGE>
B. The recitals and resolutions contained herein have not been
modified, altered or amended and are presently in full force and effect.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
12th day of March 1999.
INTEGRA LIFESCIENCES CORPORATION
By: /s/ Stuart M. Essig
---------------------------------
Name: Stuart M. Essig
Title: President
<PAGE>
Exhibit 10.18(b)
AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of this 30th day
of June, 1998 by and among BHP Diagnostics, Inc. ("BHP"), Medicus Corporation
(formerly known as Medicus Technologies, Inc.) ("Medicus" and, together with
BHP, "BHP/Medicus"), Integra LifeSciences I Ltd. (formerly known as Integra
Ltd.) ("ILTD") and Integra LifeSciences Corporation ("ILC" and, together with
ILTD, "Integra").
Background
BHP, Medicus, ILTD and ILC are parties to a Real Estate Lease and
Usage Agreement (the "Lease") and a Shared Facilities Usage Agreement (the
"Facilities Agreement"), each dated as of May 1, 1994, relating to that certain
facility located in West Chester, Pennsylvania that is leased by Medicus to
Integra (the "Facility").
The parties desire to terminate the Lease and the Facilities Agreement
and to enter into certain agreements relating to the Facility, all upon the
terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Termination of Agreements.
1.1 Effective as of June 30, 1998, the Lease and the Facilities
Agreement shall be terminated, without further action, and shall be of no
further force or effect.
1.2 ILC shall be responsible for all costs and expenses incurred in
connection with the operation and maintenance of the Facility on and prior to
June 30, 1998, and Medicus shall be responsible for all costs and expenses
incurred in connection with the operation of the Facility on and after July 1,
1998.
1.3 On July 1, 1998, ILC shall pay Medicus for the repair and
restoration items set forth on Exhibit A (items (1), (2), (3) and (4)) hereto.
Before and after June 30, 1998, ILC shall at its expense use its personnel or
independent contractors to complete the item set forth on Exhibit A (item (5))
as expeditiously as reasonably possible.
2. Covenants and Agreements of ILC and ILTD.
2.1 On the last business day of each month commencing July 31, 1998
and ending on April 30, 1999, Integra shall pay Medicus an amount equal to
$29,030.
2.2 ILC hereby grants to Medicus all of its right, title and interest
in and to the name "Medicus Technologies, Inc.," and forever relinquishes all
rights it may have with respect thereto. Integra shall promptly take all
necessary and other appropriate action, to transfer all the stock of its
inactive subsidiary, Medicus Technologies, Inc., to Medicus. ILC represents
that as of the date hereof, such inactive subsidiary never had a bank account,
transacted business through its accounts or made any commitments or contracts
with Integra or any other party. Further, to its knowledge, there are not
claims or threats of claims outstanding with respect to Medicus Technologies,
Inc.
<PAGE>
2.3 Upon the execution of this Agreement, ILC shall instruct electric,
telephone, gas and other utilities, taxing authorities and the like, to read
appropriate meters as of June 30, 1998 and send the bill for such utilities and
taxes to ILC, and commencing July 1, 1998 to bill in the name of Medicus
Technologies, Inc. for such utilities, taxes and the like and to send the bill
to Medicus Technologies, Inc. for such charges at 515 West Franklin Street,
West Chester, Pennsylvania.
2.4 To the extent required during a transition period not beyond April
30, 1999, in the event Medicus Technologies, Inc. is prior to July 1, 1998
unable to obtain its own utility accounts and/or insurance coverage on terms
acceptable to Medicus, ILC shall at the written instruction of Medicus continue
such insurance and/or utility account on behalf of Medicus Technologies, Inc.
and be entitled to charge and withhold payment to Medicus Technologies, Inc.
for the actual costs thereof incurred commencing July 1, 1998.
3. Covenants and Agreements of Medicus.
3.1 Promptly following April 30, 1999, Medicus shall deliver a report
to Integra detailing the operating costs (operating costs do not include
capital expenditures made by Medicus) and revenues of the freeze-drying
operation conducted by Medicus at the Facility for the period from July 1, 1998
through April 30, 1999. Along with such report, Medicus shall deliver to
Integra by wire transfer pursuant to instructions previously provided by
Integra the amount by which the revenues of the freeze-drying operation exceeds
the costs thereof, less $140,300.
3.2 For seven years following the date hereof, if Medicus is
conducting a freeze-drying operation at the Facility, Medicus shall provide
freeze-drying services to Integra at prices equal to the lowest prices charged
by Medicus to third parties for such services and shall make available service
capacity for Integra at the Facility to at least 20% of the current
freeze-drying capacity of the Facility based on a 5 day, 40 hour work week.
3.3 Medicus shall not (a) for a period of seven years following the
date hereof, sell or lease the Facility, either directly or indirectly, to any
of the entities set forth on Exhibit B hereto, or (b) for a period of two years
following the date hereof, compete directly with Integra in any non-human,
collagen-based, medical products business, provided that Medicus shall be
permitted to manufacture such products at the request of bona fide third
parties pursuant to arms' length manufacturing agreements. During the
seven-year period in (a) above, Medicus shall promptly notify Integra in
writing of its intentions to sublease the Facility to a third party. Upon
receiving such notice, Integra shall have thirty (30) days to exercise its
right to lease the Facility, as currently configured, from Medicus for $15,000
per month, plus an annual cost of living increase calculated from May 1, 1999.
If from July 1, 1998 Medicus makes substantial modifications or improvements to
the Facility, such modifications or improvements shall warrant additional fair
rent. If Integra does not exercise such right within the thirty-day period,
Medicus shall be permitted to sublease the Facility to a third party, subject
to the restrictions contained in the first sentence of this Section 3.3;
provided, however, that the provisions of this Section 3.3 relating to notice
and rights of Integra shall again become applicable if Medicus does not
sublease the Facility to a third party within sixty (60) days after the initial
thirty-day period expires.
3.4 Medicus agrees to employ John O'Donnell for a period of at least
ten (10) months ending April 30, 1999.
<PAGE>
4. Entire Agreement. This Agreement sets forth the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior arrangements or understandings with respect thereto.
5. Assignment. This Agreement and the rights or obligations of any party
hereunder may not be assigned or delegated without the written consent of each
other party hereto.
IN WITNESS WHEREOF, this Agreement has been executed as of
the date first above written.
BHP DIAGNOSTICS, INC. INTEGRA LIFESCIENCES CORPORATION
By: By:
--------------------- ---------------------------------
Name: Name:
Title: Title:
MEDICUS CORPORATION INTEGRA LIFESCIENCES I LTD.
By: By:
--------------------- ---------------------------------
Name: Name:
Title: Title:
<PAGE>
Exhibit 10.36
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made this 31st
day of December, 1998 by and between Integra LifeSciences Corporation, a
Delaware corporation, and George McKinney, Ph.D. ("Executive").
Background
Executive is currently the Executive Vice President of
Company serving as Chief Operating Officer. Company desires to continue to
employ Executive, and Executive desires to remain in the employ of Company, on
the terms and conditions contained in this Agreement. Executive will be
substantially involved with Company's operations and management and will learn
trade secrets and other confidential information relating to Company and its
customers; accordingly, the noncompetition covenant and other restrictive
covenants contained in Section 14 of this Agreement constitute essential
elements hereof.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements contained herein and intending to be legally bound hereby,
the parties hereto agree as follows:
Terms
1. Definitions. The following words and phrases shall have the
meanings set forth below for the purposes of this Agreement (unless the context
clearly indicates otherwise):
(a) "Base Salary" shall have the meaning set forth in
Section 5.
(b) "Board" shall mean the Board of Directors of Company,
or any successor thereto.
(c) "Cause," as determined by the Board in good faith,
shall mean Executive has --
(1) failed to perform his stated duties and
not cured such failure (if curable) within 15 days of his
receipt of written notice of the failure;
(2) breached any provision of this Agreement and
not cured such breach (if curable) within 15 days of his
receipt of written notice of the breach;
(3) demonstrated his personal dishonesty in
connection with his employment by Company;
(4) engaged in willful misconduct;
<PAGE>
(5) engaged in a breach of fiduciary duty;
(6) willfully violated any law, rule or
regulation, or final cease-and-desist order (other than
traffic violations or similar offenses); or
(7) engaged in other serious misconduct of such a
nature that his continued employment may reasonably be
expected to affect Company adversely.
(d) A "Change in Control" of Company shall be deemed to
have occurred:
(1) if the "beneficial ownership" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934) of
securities representing more than fifty percent (50%) of the
combined voting power of Company Voting Securities (as herein
defined) is acquired by any individual, entity or group (a
"Person"), Company, any trustee or other fiduciary holding
securities under any employee benefit plan of Company or an
affiliate thereof, or any corporation owned, directly or
indirectly, by the stockholders of Company in substantially
the same proportions as their ownership of stock of Company
(for purposes of this Agreement, "Company Voting Securities"
shall mean the then outstanding voting securities of Company
entitled to vote generally in the election of directors);
provided, however, that any acquisition from Company or any
acquisition pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of paragraph (3) of this
definition shall not be a Change in Control under this
paragraph (1); or
(2) if individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination
for election by Company's stockholders, was approved by a
vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual
or threatened election contest with respect to the election
or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(3) upon consummation by Company of a
reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of
Company or the acquisition of assets or stock of another
entity (a "Business Combination"), in each case, unless
immediately following such Business Combination: (i) more
than 50% of the combined voting power of the then outstanding
voting securities entitled to vote generally in the election
of directors of (x) the corporation resulting from such
Business Combination (the "Surviving Corporation"), or (y) if
applicable, a corporation which as a result of
<PAGE>
such transaction owns Company or all or substantially all of
Company's assets either directly or through one or more
subsidiaries (the "Parent Corporation"), is represented,
directly or indirectly, by Company Voting Securities
outstanding immediately prior to such Business Combination
(or, if applicable, is represented by shares into which such
Company Voting Securities were converted pursuant to such
Business Combination), and such voting power among the
holders thereof is in substantially the same proportions as
their ownership, immediately prior to such Business
Combination, of the Company Voting Securities; (ii) no Person
(excluding any employee benefit plan (or related trust) of
Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 50%
or more of the combined voting power of the then outstanding
voting securities eligible to elect directors of the Parent
Corporation (or, if there is no Parent Corporation, the
Surviving Corporation) except to the extent that such
ownership of Company existed prior to the Business
Combination; and (iii) at least a majority of the members of
the board of directors of the Parent Corporation (or, if
there is no Parent Corporation, the Surviving Corporation)
were members of the Incumbent Board at the time of the
execution of the initial agreement, or the action of the
Board, providing for such Business Combination; or
(4) upon approval by the stockholders of Company
of a complete liquidation or dissolution of Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) "Company" shall mean Integra LifeSciences Corporation
and any corporation, partnership or other entity owned directly or indirectly,
in whole or in part, by Integra LifeSciences Corporation.
(g) "Disability" shall mean Executive's inability to
perform his duties hereunder by reason of any medically determinable physical
or mental impairment which is expected to result in death or which has lasted
or is expected to last for a continuous period of not fewer than six months.
(h) "Good Reason" shall mean:
(1) a material breach of this Agreement by
Company which is not cured by Company within 15 days of its
receipt of written notice of the breach;
(2) without Executive's express written consent,
the Board reduces Executive's Base Salary or the aggregate
fringe benefits provided to Executive (except to the extent
permitted by Section 5 or Section 6, respectively); provided,
Executive resigns within 30 days after the change objected
to; or
<PAGE>
(3) Company fails to obtain the assumption of this
Agreement by any successor to Company.
(i) "Principal Executive Office" shall mean Company's
principal office for executives, presently located at 105 Morgan Lane,
Plainsboro, New Jersey 08536.
(j) "Retirement" shall mean the termination of Executive's
employment with Company in accordance with the retirement policies, including
early retirement policies, generally applicable to Company's salaried
employees.
(k) "Termination Date" shall mean the date specified in the
Termination Notice.
(l) "Termination Notice" shall mean a dated notice which:
(i) indicates the specific termination provision in this Agreement relied upon
(if any); (ii) sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for the termination of Executive's employment under
such provision; (iii) specifies a Termination Date; and (iv) is given in the
manner specified in Section 15(h).
2. Employment. Company hereby employs Executive as Executive
Vice President Company serving as Chief Operating Officer and Executive hereby
agrees to continue such employment and agrees to render services to Company in
such capacity (or in such other capacity in the future as the Chief Executive
Officer may decide in his sole discretion) on the terms and conditions set
forth in this Agreement. Executive's primary place of employment shall be at
the Principal Executive Office or other corporate location as the Chief
Executive Officer deems appropriate.
3. Term.
(a) Term and Renewal of Agreement. Unless earlier
terminated by Executive or Company as provided in Section 10 hereof, the term
of Executive's employment under this Agreement shall be three (3) years,
commencing on the date of this Agreement and, subject to subsection 3(b), shall
be deemed automatically, without further action, to extend for an additional
year on each annual anniversary of the date of this Agreement.
(b) Annual Review. Prior to the third annual anniversary of
the date of this Agreement and each annual anniversary thereafter, the Board
shall consider extending the term of this Agreement. The term shall continue to
extend in the manner set forth in subsection 3(a) unless either the Board does
not approve the extension and provides written notice to Executive of such
event, or Executive gives written notice to Company of Executive's election not
to extend the term. In either case, the written notice shall be given not fewer
than 30 days prior to any such anniversary date. References herein to the term
of this Agreement shall refer both to the initial term and successive terms.
4. Duties. Executive shall:
<PAGE>
(a) faithfully and diligently do and perform all such acts
and duties, and furnish such services as are assigned to Executive as of the
date this Agreement is signed, and (subject to Section 2) such additional or
different acts, duties and services as the Chief Executive Officer may assign
in the future; and
(b) devote his full professional time, energy, skill and
best efforts to the performance of his duties hereunder, in a manner that will
faithfully and diligently further the business and interests of Company, and
shall not be employed by or participate or engage in or in any manner be a part
of the management or operations of any business enterprise other than Company
without the prior written consent of the Board, which consent may be granted or
withheld in its sole discretion.
5. Compensation. Company shall compensate Executive for his
services at a minimum base salary of $240,000.00 per year ("Base Salary"),
payable in periodic installments in accordance with Company's regular payroll
practices in effect from time to time. Executive's Base Salary may not be
decreased without Executive's express written consent (unless the decrease is
pursuant to a general compensation reduction applicable to all, or
substantially all, executive officers of Company). Bonus payments may be made
as determined appropriate by the Board in its sole discretion.
6. Benefit Plans. Executive shall be entitled to participate
in and receive benefits under any employee benefit plan or stock-based plan of
Company, and shall be eligible for any other plans and benefits covering
executives of Company, to the extent commensurate with his then duties and
responsibilities fixed by the Board. Company shall not make any change in such
plans or benefits which would adversely affect Executive's rights thereunder,
unless such change affects all, or substantially all, executive officers of
Company.
7. Vacation. Executive shall be entitled to paid annual
vacation in accordance with the policies established from time to time by the
Board, which shall in no event be fewer than three weeks per annum. Regardless
of what the Company's standard vacation policy may be, Executive shall not be
entitled to extra cash payments for any vacation he does not utilize.
8. Business Expenses. Company shall reimburse Executive or
otherwise pay for all reasonable expenses incurred by Executive in furtherance
of or in connection with the business of Company, including, but not limited
to, automobile and traveling expenses and all reasonable entertainment
expenses, subject to such reasonable documentation and other limitations as may
be established by the Board.
9. Disability. In the event Executive incurs a Disability,
Executive's obligation to perform services under this Agreement will terminate,
and the Board may terminate this Agreement upon written notice to Executive.
10. Termination.
(a) Termination without Salary Continuation. In the event
(i) Executive terminates his employment hereunder other than for Good Reason,
or (ii) Executive's
<PAGE>
employment is terminated by Company due to his Retirement, Disability or death,
or for Cause, Executive shall have no right to compensation or other benefits
pursuant to this Agreement for any period after his last day of active
employment.
(b) Termination with Salary Continuation (No Change in
Control). Except as provided in subsection 10(c) in the event of a Change in
Control, in the event (i) Executive's employment is terminated by Company for a
reason other than Retirement, Disability, death or Cause, or (ii) Executive
terminates his employment for Good Reason, then Company shall:
(1) pay Executive a severance amount equal to the
greater of (i) one times Executive's Base Salary as of his
last day of active employment, or (ii) the unpaid portion of
Executive's Base Salary for the remainder of the then current
term of this Agreement; the severance amount shall be paid in
a single sum on the first business day of the month following
the Termination Date (unless Executive elects, in writing and
on, or not later than 30 days after, the date this Agreement
is executed, to receive the severance payment divided into 24
equal monthly installments, paid beginning on the first
business day of the month following the Termination Date);
and
(2) maintain and provide to Executive, at no cost
to Executive, for a period ending at the earliest of (i) the
expiration of 12 months from Executive's last day of active
employment; (ii) the date of Executive's full-time employment
by another employer; or (iii) Executive's death, continued
participation in all group insurance, life insurance, health
and accident, disability, and other employee benefit plans in
which Executive would have been entitled to participate had
his employment with Company continued throughout such period,
provided that such participation is not prohibited by the
terms of the plan or by Company for legal reasons.
(c) Termination with Salary Continuation (Change in
Control). Notwithstanding anything to the contrary set forth in subsection
10(b), in the event within six months of a Change in Control: (i) Executive
terminates his employment for Good Reason; or (ii) Executive's employment is
terminated by Company for a reason other than Retirement, Disability, death or
Cause, then Company shall:
(1) pay Executive a severance amount equal to
2.99 times Executive's Base Salary as of his last day of
active employment; the severance amount shall be paid in a
single sum on the first business day of the month following
the Termination Date (unless Executive elects, in writing and
on, or not later than 30 days after, the date this Agreement
is executed, to receive the severance payment divided into 24
equal monthly installments, paid beginning on the first
business day of the month following the Termination Date);
and
(2) maintain and provide to Executive, at no cost
to Executive, for a period ending at the earliest of (i) the
expiration of 12 months from Executive's last day of active
employment; (ii) the date of Executive's full-time
<PAGE>
employment by another employer; or (iii) Executive's death,
continued participation in all group insurance, life
insurance, health and accident, disability, and other
employee benefit plans in which Executive would have been
entitled to participate had his employment with Company
continued throughout such period, provided that such
participation is not prohibited by the terms of the plan or
by Company for legal reasons.
(d) Termination Notice. Except in the event of Executive's
death, a termination under this Agreement shall be effected by means of a
Termination Notice.
11. Withholding. Company shall have the right to withhold from
all payments made pursuant to this Agreement any federal, state, or local taxes
and such other amounts as may be required by law to be withheld from such
payments.
12. Assignability. Company may assign this Agreement and its
rights and obligations hereunder in whole, but not in part, to any entity to
which Company may transfer all or substantially all of its assets, if in any
such case said entity shall expressly in writing assume all obligations of
Company hereunder as fully as if it had been originally made a party hereto.
Company may not otherwise assign this Agreement or its rights and obligations
hereunder. This Agreement is personal to Executive and his rights and duties
hereunder shall not be assigned except as expressly agreed to in writing by
Company.
13. Death of Executive. Any amounts due Executive under this
Agreement (not including any Base Salary not yet earned by Executive) unpaid as
of the date of Executive's death shall be paid in a single sum as soon as
practicable after Executive's death to Executive's surviving spouse, or if
none, to the duly appointed personal representative of his estate.
14. Restrictive Covenants.
(a) Covenant Not to Compete. During the term of this
Agreement and for a period of two (2) years following the Termination Date,
Executive shall not directly or indirectly: (i) engage, anywhere within the
geographical areas in which Company is conducting business operations or
providing services as of the date of Executive's termination of employment, in
the tissue engineering business (the use of implantable absorbable materials,
with or without a bioactive component, to attempt to elicit a specific cellular
response in order to regenerate tissue or to impede the growth of tissue or
migration of cells) (the "Tissue Engineering Business") or any other business
the revenues of which constituted at least 30% of Company's revenues during the
six (6) month period prior to the Termination Date (together with the Tissue
Engineering Business, the "Business"); (ii) be or become a stockholder,
partner, owner, officer, director or employee or agent of, or a consultant to
or give financial or other assistance to, any person or entity engaged in the
Business; (iii) seek in competition with the business of Company to procure
orders from or do business with any customer of Company; (iv) solicit or
contact with a view to the engagement or employment by any person or entity of
any person who is an employee of Company; (v) seek to contract with or engage
(in such a way as to adversely affect or interfere with the business of
Company) any person or entity who has been contracted with or engaged to
manufacture, assemble, supply or deliver products, goods, materials or services
to Company; or (vi) engage in or participate in any effort or act to induce
<PAGE>
any of the customers, associates, consultants, or employees of Company to take
any action which might be disadvantageous to Company; provided, however, that
nothing herein shall prohibit Executive and his affiliates from owning, as
passive investors, in the aggregate not more than 5% of the outstanding
publicly traded stock of any corporation so engaged.
(b) Confidentiality. Executive acknowledges a duty of
confidentiality owed to Company and shall not, at any time during or after his
employment by Company, retain in writing, use, divulge, furnish, or make
accessible to anyone, without the express authorization of the Board, any trade
secret, private or confidential information or knowledge of Company obtained or
acquired by him while so employed. All computer software, business cards,
telephone lists, customer lists, price lists, contract forms, catalogs, Company
books, records, files and know-how acquired while an employee of Company are
acknowledged to be the property of Company and shall not be duplicated, removed
from Company's possession or premises or made use of other than in pursuit of
Company's business or as may otherwise be required by law or any legal process,
or as is necessary in connection with any adversarial proceeding against
Company and, upon termination of employment for any reason, Executive shall
deliver to Company, without further demand, all copies thereof which are then
in his possession or under his control. No information shall be treated as
"confidential information" if it is generally available public knowledge at the
time of disclosure or use by Executive.
(c) Inventions and Improvements. Executive shall promptly
communicate to Company all ideas, discoveries and inventions which are or may
be useful to Company or its business. Executive acknowledges that all such
ideas, discoveries, inventions, and improvements which heretofore have been or
are hereafter made, conceived, or reduced to practice by him at any time during
his employment with Company heretofore or hereafter gained by him at any time
during his employment with Company are the property of Company, and Executive
hereby irrevocably assigns all such ideas, discoveries, inventions, and
improvements to Company for its sole use and benefit, without additional
compensation. The provisions of this Section 14(c) shall apply whether such
ideas, discoveries, inventions, or improvements were or are conceived, made or
gained by him alone or with others, whether during or after usual working
hours, whether on or off the job, whether applicable to matters directly or
indirectly related to Company's business interests (including potential
business interests), and whether or not within the specific realm of his
duties. Executive shall, upon request of Company, but at no expense to
Executive, at any time during or after his employment with Company, sign all
instruments and documents reasonably requested by Company and otherwise
cooperate with Company to protect its right to such ideas, discoveries,
inventions, or improvements including applying for, obtaining, and enforcing
patents and copyrights thereon in such countries as Company shall determine.
(d) Breach of Covenant. Any breach or violation of the
provisions in this Section 14 by Executive will result in forfeiture by
Executive and all other persons of all rights to any further payments or
benefits under this Agreement, and in such event Company shall have no further
obligation to pay any amounts related thereto. Executive expressly acknowledges
that damages alone will be an inadequate remedy for any breach or violation of
any of the provisions of this Section 14 and that Company, in addition to all
other remedies, shall be entitled as a matter of right to equitable relief,
including injunctions and specific performance,
<PAGE>
in any court of competent jurisdiction. If any of the provisions of this
Section 14 are held to be in any respect unenforceable, then they shall be
deemed to extend only over the maximum period of time, geographic area, or
range of activities as to which they may be enforceable.
15. Miscellaneous.
(a) Amendment. No provision of this Agreement may be
amended unless such amendment is signed by Executive and such officer as may be
specifically designated by the Board to sign on Company's behalf.
(b) Nature of Obligations. Nothing contained herein shall
create or require Company to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that Executive acquires a
right to receive benefits from Company hereunder, such right shall be no
greater than the right of any unsecured general creditor of Company.
(c) Prior Employment. Executive represents and warrants
that his acceptance of employment with Company has not breached, and the
performance of his duties hereunder will not breach, any duty owed by him to
any prior employer or other person.
(d) Headings. The Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. In the event of a conflict between
a heading and the content of a Section, the content of the Section shall
control.
(e) Gender and Number. Whenever used in this Agreement, a
masculine pronoun is deemed to include the feminine and a neuter pronoun is
deemed to include both the masculine and feminine, unless the context clearly
indicates otherwise. The singular form, whenever used herein, shall mean or
include the plural form where applicable.
(f) Severability. If any provision of this Agreement or
the application thereof to any person or circumstance shall be invalid or
unenforceable under any applicable law, such event shall not affect or render
invalid or unenforceable any other provision of this Agreement and shall not
affect the application of any provision to other persons or circumstances.
(g) Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors,
permitted assigns, heirs, executors, and administrators.
(h) Notice. For purposes of this Agreement, notices and
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given if hand-delivered, sent by documented
overnight delivery service or by certified or registered mail, return receipt
requested, postage prepaid, addressed to the respective addresses set forth
below:
<PAGE>
To the Company:
Integra LifeSciences Corporation
105 Morgan Lane
Plainsboro, New Jersey 08536
Attn: President
To the Executive:
George McKinney, Ph.D.
15 Beechtree Lane
Plainsboro, NJ 08540
(i) Entire Agreement. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements, arrangements
and communications, whether oral or written, pertaining to the subject matter
hereof.
(j) Governing Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the United States where applicable and otherwise by the laws of the State of
New Jersey.
IN WITNESS WHEREOF, this Agreement has been executed as of
the date first above written.
INTEGRA LIFESCIENCES CORPORATION
By:
-----------------------------
Title:
EXECUTIVE
--------------------------------
George McKinney, III, Ph.D.
<PAGE>
Exhibit 10.37
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made this
31st day of December, 1998 by and between Integra LifeSciences Corporation, a
Delaware corporation, and Judith O'Grady ("Executive").
Background
Executive is currently the Senior Vice President, Regulatory
Affairs/Quality Assurance of Company. Company desires to continue to employ
Executive, and Executive desires to remain in the employ of Company, on the
terms and conditions contained in this Agreement. Executive will be
substantially involved with Company's operations and management and will learn
trade secrets and other confidential information relating to Company and its
customers; accordingly, the noncompetition covenant and other restrictive
covenants contained in Section 14 of this Agreement constitute essential
elements hereof.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements contained herein and intending to be legally bound hereby,
the parties hereto agree as follows:
Terms
16. Definitions. The following words and phrases shall have
the meanings set forth below for the purposes of this Agreement (unless the
context clearly indicates otherwise):
(a) "Base Salary" shall have the meaning set forth in
Section 5.
(b) "Board" shall mean the Board of Directors of Company,
or any successor thereto.
(c) "Cause," as determined by the Board in good faith,
shall mean Executive has --
(1) failed to perform his stated duties and not
cured such failure (if curable) within 15 days of his receipt
of written notice of the failure;
(2) breached any provision of this Agreement and
not cured such breach (if curable) within 15 days of his
receipt of written notice of the breach;
(3) demonstrated his personal dishonesty in
connection with his employment by Company;
(4) engaged in willful misconduct;
<PAGE>
(5) engaged in a breach of fiduciary duty;
(6) willfully violated any law, rule or
regulation, or final cease-and-desist order (other than
traffic violations or similar offenses); or
(7) engaged in other serious misconduct of such
a nature that his continued employment may reasonably be
expected to affect Company adversely.
(d) A "Change in Control" of Company shall be deemed to
have occurred:
(1) if the "beneficial ownership" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934) of
securities representing more than fifty percent (50%) of the
combined voting power of Company Voting Securities (as herein
defined) is acquired by any individual, entity or group (a
"Person"), Company, any trustee or other fiduciary holding
securities under any employee benefit plan of Company or an
affiliate thereof, or any corporation owned, directly or
indirectly, by the stockholders of Company in substantially
the same proportions as their ownership of stock of Company
(for purposes of this Agreement, "Company Voting Securities"
shall mean the then outstanding voting securities of Company
entitled to vote generally in the election of directors);
provided, however, that any acquisition from Company or any
acquisition pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of paragraph (3) of this
definition shall not be a Change in Control under this
paragraph (1); or
(2) if individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination
for election by Company's stockholders, was approved by a
vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual
or threatened election contest with respect to the election
or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(3) upon consummation by Company of a
reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of
Company or the acquisition of assets or stock of another
entity (a "Business Combination"), in each case, unless
immediately following such Business Combination: (i) more
than 50% of the combined voting power of the then outstanding
voting securities entitled to vote generally in the election
of directors of (x) the corporation resulting from such
Business Combination (the "Surviving Corporation"), or (y) if
applicable, a corporation which as a result of
<PAGE>
such transaction owns Company or all or substantially all
of Company's assets either directly or through one or more
subsidiaries (the "Parent Corporation"), is represented,
directly or indirectly, by Company Voting Securities
outstanding immediately prior to such Business Combination
(or, if applicable, is represented by shares into which
such Company Voting Securities were converted pursuant to
such Business Combination), and such voting power among the
holders thereof is in substantially the same proportions as
their ownership, immediately prior to such Business
Combination, of the Company Voting Securities; (ii) no
Person (excluding any employee benefit plan (or related
trust) of Company or such corporation resulting from such
Business Combination) beneficially owns, directly or
indirectly, 50% or more of the combined voting power of the
then outstanding voting securities eligible to elect
directors of the Parent Corporation (or, if there is no
Parent Corporation, the Surviving Corporation) except to
the extent that such ownership of Company existed prior to
the Business Combination; and (iii) at least a majority of
the members of the board of directors of the Parent
Corporation (or, if there is no Parent Corporation, the
Surviving Corporation) were members of the Incumbent Board
at the time of the execution of the initial agreement, or
the action of the Board, providing for such Business
Combination; or
(4) upon approval by the stockholders of Company
of a complete liquidation or dissolution of Company.
(e) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(f) "Company" shall mean Integra LifeSciences Corporation
and any corporation, partnership or other entity owned directly or indirectly,
in whole or in part, by Integra LifeSciences Corporation.
(g) "Disability" shall mean Executive's inability to
perform his duties hereunder by reason of any medically determinable physical
or mental impairment which is expected to result in death or which has lasted
or is expected to last for a continuous period of not fewer than six months.
(h) "Good Reason" shall mean:
(1) a material breach of this Agreement by
Company which is not cured by Company within 15 days of its
receipt of written notice of the breach;
(2) without Executive's express written consent,
the Board reduces Executive's Base Salary or the aggregate
fringe benefits provided to Executive (except to the extent
permitted by Section 5 or Section 6, respectively); provided,
Executive resigns within 30 days after the change objected
to; or
<PAGE>
(3) Company fails to obtain the assumption of
this Agreement by any successor to Company.
(i) "Principal Executive Office" shall mean Company's
principal office for executives, presently located at 105 Morgan Lane,
Plainsboro, New Jersey 08536.
(j) "Retirement" shall mean the termination of Executive's
employment with Company in accordance with the retirement policies, including
early retirement policies, generally applicable to Company's salaried
employees.
(k) "Termination Date" shall mean the date specified in
the Termination Notice.
(l) "Termination Notice" shall mean a dated notice which:
(i) indicates the specific termination provision in this Agreement relied upon
(if any); (ii) sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for the termination of Executive's employment under
such provision; (iii) specifies a Termination Date; and (iv) is given in the
manner specified in Section 15(h).
17. Employment. Company hereby employs Executive as Senior
Vice President, Regulatory Affairs/Quality Assurance and Executive hereby
agrees to continue such employment and agrees to render services to Company in
such capacity (or in such other capacity in the future as the Chief Executive
Officer may decide in his sole discretion) on the terms and conditions set
forth in this Agreement. Executive's primary place of employment shall be at
the Principal Executive Office or other corporate location as the Chief
Executive Officer deems appropriate.
18. Term.
(a) Term and Renewal of Agreement. Unless earlier
terminated by Executive or Company as provided in Section 10 hereof, the term
of Executive's employment under this Agreement shall be two (2) years,
commencing on the date of this Agreement and, subject to subsection 3(b), shall
be deemed automatically, without further action, to extend for an additional
year on each annual anniversary of the date of this Agreement.
(b) Annual Review. Prior to the second annual anniversary
of the date of this Agreement and each annual anniversary thereafter, the Board
shall consider extending the term of this Agreement. The term shall continue to
extend in the manner set forth in subsection 3(a) unless either the Board does
not approve the extension and provides written notice to Executive of such
event, or Executive gives written notice to Company of Executive's election not
to extend the term. In either case, the written notice shall be given not fewer
than 30 days prior to any such anniversary date. References herein to the term
of this Agreement shall refer both to the initial term and successive terms.
<PAGE>
19. Duties. Executive shall:
(a) faithfully and diligently do and perform all such acts
and duties, and furnish such services as are assigned to Executive as of the
date this Agreement is signed, and (subject to Section 2) such additional or
different acts, duties and services as the Chief Executive Officer may assign
in the future; and
(b) devote his full professional time, energy, skill and
best efforts to the performance of his duties hereunder, in a manner that will
faithfully and diligently further the business and interests of Company, and
shall not be employed by or participate or engage in or in any manner be a part
of the management or operations of any business enterprise other than Company
without the prior written consent of the Board, which consent may be granted or
withheld in its sole discretion.
20. Compensation. Company shall compensate Executive for his
services at a minimum base salary of $145,000 per year ("Base Salary"), payable
in periodic installments in accordance with Company's regular payroll practices
in effect from time to time. Executive's Base Salary may be increased from time
to time in such amounts as may be determined by the Board, but may not be
decreased without Executive's express written consent (unless the decrease is
pursuant to a general compensation reduction applicable to all, or
substantially all, executive officers of Company). Bonus payments may be made
as determined appropriate by the Board in its sole discretion.
21. Benefit Plans. Executive shall be entitled to participate
in and receive benefits under any employee benefit plan or stock-based plan of
Company, and shall be eligible for any other plans and benefits covering
executives of Company, to the extent commensurate with his then duties and
responsibilities fixed by the Board. Company shall not make any change in such
plans or benefits which would adversely affect Executive's rights thereunder,
unless such change affects all, or substantially all, executive officers of
Company.
22. Vacation. Executive shall be entitled to paid annual
vacation in accordance with the policies established from time to time by the
Board, which shall in no event be fewer than three weeks per annum. Regardless
of what the Company's standard vacation policy may be, Executive shall not be
entitled to extra cash payments for any vacation he does not utilize.
23. Business Expenses. Company shall reimburse Executive or
otherwise pay for all reasonable expenses incurred by Executive in furtherance
of or in connection with the business of Company, including, but not limited
to, automobile and traveling expenses and all reasonable entertainment
expenses, subject to such reasonable documentation and other limitations as may
be established by the Board.
24. Disability. In the event Executive incurs a Disability,
Executive's obligation to perform services under this Agreement will terminate,
and the Board may terminate this Agreement upon written notice to Executive.
<PAGE>
25. Termination
(a) Termination without Salary Continuation. In the event
(i) Executive terminates his employment hereunder other than for Good Reason,
or (ii) Executive's employment is terminated by Company due to his Retirement,
Disability or death, or for Cause, Executive shall have no right to
compensation or other benefits pursuant to this Agreement for any period after
his last day of active employment.
(b) Termination with Salary Continuation (No Change in
Control). Except as provided in subsection 10(c) in the event of a Change in
Control, in the event (i) Executive's employment is terminated by Company for a
reason other than Retirement, Disability, death or Cause, or (ii) Executive
terminates his employment for Good Reason, then Company shall:
(1) pay Executive a severance amount equal to
the greater of (i) one times Executive's Base Salary as of
his last day of active employment, or (ii) the unpaid portion
of Executive's Base Salary for the remainder of the then
current term of this Agreement; the severance amount shall be
paid in a single sum on the first business day of the month
following the Termination Date (unless Executive elects, in
writing and on, or not later than 30 days after, the date
this Agreement is executed, to receive the severance payment
divided into 24 equal monthly installments, paid beginning on
the first business day of the month following the Termination
Date); and
(2) maintain and provide to Executive, at no
cost to Executive, for a period ending at the earliest of (i)
the expiration of 12 months from Executive's last day of
active employment; (ii) the date of Executive's full-time
employment by another employer; or (iii) Executive's death,
continued participation in all group insurance, life
insurance, health and accident, disability, and other
employee benefit plans in which Executive would have been
entitled to participate had his employment with Company
continued throughout such period, provided that such
participation is not prohibited by the terms of the plan or
by Company for legal reasons.
(c) Termination with Salary Continuation (Change in
Control). Notwithstanding anything to the contrary set forth in subsection
10(b), in the event within six months of a Change in Control: (i) Executive
terminates his employment for Good Reason; or (ii) Executive's employment is
terminated by Company for a reason other than Retirement, Disability, death or
Cause, then Company shall:
(1) pay Executive a severance amount equal to
2.99 times Executive's Base Salary as of his last day of
active employment; the severance amount shall be paid in a
single sum on the first business day of the month following
the Termination Date (unless Executive elects, in writing and
on, or not later than 30 days after, the date this Agreement
is executed, to receive the severance payment divided into 24
equal monthly installments, paid beginning on the first
business day of the month following the Termination Date);
and
<PAGE>
(2) maintain and provide to Executive, at no
cost to Executive, for a period ending at the earliest of (i)
the expiration of 12 months from Executive's last day of
active employment; (ii) the date of Executive's full-time
employment by another employer; or (iii) Executive's death,
continued participation in all group insurance, life
insurance, health and accident, disability, and other
employee benefit plans in which Executive would have been
entitled to participate had his employment with Company
continued throughout such period, provided that such
participation is not prohibited by the terms of the plan or
by Company for legal reasons.
(d) Termination Notice. Except in the event of Executive's
death, a termination under this Agreement shall be effected by means of a
Termination Notice.
26. Withholding. Company shall have the right to withhold
from all payments made pursuant to this Agreement any federal, state, or local
taxes and such other amounts as may be required by law to be withheld from such
payments.
27. Assignability. Company may assign this Agreement and its
rights and obligations hereunder in whole, but not in part, to any entity to
which Company may transfer all or substantially all of its assets, if in any
such case said entity shall expressly in writing assume all obligations of
Company hereunder as fully as if it had been originally made a party hereto.
Company may not otherwise assign this Agreement or its rights and obligations
hereunder. This Agreement is personal to Executive and his rights and duties
hereunder shall not be assigned except as expressly agreed to in writing by
Company.
28. Death of Executive. Any amounts due Executive under this
Agreement (not including any Base Salary not yet earned by Executive) unpaid as
of the date of Executive's death shall be paid in a single sum as soon as
practicable after Executive's death to Executive's surviving spouse, or if
none, to the duly appointed personal representative of his estate.
29. Restrictive Covenants.
(a) Covenant Not to Compete. During the term of this
Agreement and for a period of two (2) years following the Termination Date,
Executive shall not directly or indirectly: (i) engage, anywhere within the
geographical areas in which Company is conducting business operations or
providing services as of the date of Executive's termination of employment, in
the tissue engineering business (the use of implantable absorbable materials,
with or without a bioactive component, to attempt to elicit a specific cellular
response in order to regenerate tissue or to impede the growth of tissue or
migration of cells) (the "Tissue Engineering Business") or any other business
the revenues of which constituted at least 30% of Company's revenues during the
six (6) month period prior to the Termination Date (together with the Tissue
Engineering Business, the "Business"); (ii) be or become a stockholder,
partner, owner, officer, director or employee or agent of, or a consultant to
or give financial or other assistance to, any person or entity engaged in the
Business; (iii) seek in competition with the business of Company to procure
orders from or do business with any customer of Company; (iv) solicit or
contact with a view to the engagement or employment by any person or entity of
<PAGE>
any person who is an employee of Company; (v) seek to contract with or engage
(in such a way as to adversely affect or interfere with the business of
Company) any person or entity who has been contracted with or engaged to
manufacture, assemble, supply or deliver products, goods, materials or services
to Company; or (vi) engage in or participate in any effort or act to induce any
of the customers, associates, consultants, or employees of Company to take any
action which might be disadvantageous to Company; provided, however, that
nothing herein shall prohibit Executive and his affiliates from owning, as
passive investors, in the aggregate not more than 5% of the outstanding
publicly traded stock of any corporation so engaged.
(b) Confidentiality. Executive acknowledges a duty of
confidentiality owed to Company and shall not, at any time during or after his
employment by Company, retain in writing, use, divulge, furnish, or make
accessible to anyone, without the express authorization of the Board, any trade
secret, private or confidential information or knowledge of Company obtained or
acquired by him while so employed. All computer software, business cards,
telephone lists, customer lists, price lists, contract forms, catalogs, Company
books, records, files and know-how acquired while an employee of Company are
acknowledged to be the property of Company and shall not be duplicated, removed
from Company's possession or premises or made use of other than in pursuit of
Company's business or as may otherwise be required by law or any legal process,
or as is necessary in connection with any adversarial proceeding against
Company and, upon termination of employment for any reason, Executive shall
deliver to Company, without further demand, all copies thereof which are then
in his possession or under his control. No information shall be treated as
"confidential information" if it is generally available public knowledge at the
time of disclosure or use by Executive.
(c) Inventions and Improvements. Executive shall promptly
communicate to Company all ideas, discoveries and inventions which are or may
be useful to Company or its business. Executive acknowledges that all such
ideas, discoveries, inventions, and improvements which heretofore have been or
are hereafter made, conceived, or reduced to practice by him at any time during
his employment with Company heretofore or hereafter gained by him at any time
during his employment with Company are the property of Company, and Executive
hereby irrevocably assigns all such ideas, discoveries, inventions, and
improvements to Company for its sole use and benefit, without additional
compensation. The provisions of this Section 14(c) shall apply whether such
ideas, discoveries, inventions, or improvements were or are conceived, made or
gained by him alone or with others, whether during or after usual working
hours, whether on or off the job, whether applicable to matters directly or
indirectly related to Company's business interests (including potential
business interests), and whether or not within the specific realm of his
duties. Executive shall, upon request of Company, but at no expense to
Executive, at any time during or after his employment with Company, sign all
instruments and documents reasonably requested by Company and otherwise
cooperate with Company to protect its right to such ideas, discoveries,
inventions, or improvements including applying for, obtaining, and enforcing
patents and copyrights thereon in such countries as Company shall determine.
(d) Breach of Covenant. Any breach or violation of the
provisions in this Section 14 by Executive will result in forfeiture by
Executive and all other persons of all rights to any further payments or
benefits under this Agreement, and in such event Company
<PAGE>
shall have no further obligation to pay any amounts related thereto. Executive
expressly acknowledges that damages alone will be an inadequate remedy for any
breach or violation of any of the provisions of this Section 14 and that
Company, in addition to all other remedies, shall be entitled as a matter of
right to equitable relief, including injunctions and specific performance, in
any court of competent jurisdiction. If any of the provisions of this Section
14 are held to be in any respect unenforceable, then they shall be deemed to
extend only over the maximum period of time, geographic area, or range of
activities as to which they may be enforceable.
30. Miscellaneous.
(a) Amendment. No provision of this Agreement may be
amended unless such amendment is signed by Executive and such officer as may be
specifically designated by the Board to sign on Company's behalf.
(b) Nature of Obligations. Nothing contained herein shall
create or require Company to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that Executive acquires a
right to receive benefits from Company hereunder, such right shall be no
greater than the right of any unsecured general creditor of Company.
(c) Prior Employment. Executive represents and warrants
that his acceptance of employment with Company has not breached, and the
performance of his duties hereunder will not breach, any duty owed by him to
any prior employer or other person.
(d) Headings. The Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. In the event of a conflict between
a heading and the content of a Section, the content of the Section shall
control.
(e) Gender and Number. Whenever used in this Agreement, a
masculine pronoun is deemed to include the feminine and a neuter pronoun is
deemed to include both the masculine and feminine, unless the context clearly
indicates otherwise. The singular form, whenever used herein, shall mean or
include the plural form where applicable.
(f) Severability. If any provision of this Agreement or
the application thereof to any person or circumstance shall be invalid or
unenforceable under any applicable law, such event shall not affect or render
invalid or unenforceable any other provision of this Agreement and shall not
affect the application of any provision to other persons or circumstances.
(g) Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors,
permitted assigns, heirs, executors, and administrators.
(h) Notice. For purposes of this Agreement, notices and
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given if hand-delivered, sent by documented
overnight delivery service or by certified
<PAGE>
or registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Company:
Integra LifeSciences Corporation
105 Morgan Lane
Plainsboro, New Jersey 08536
Attn: President
To the Executive:
Ms. Judith O'Grady
51 Sandlewood Drive
Marlboro, NJ 07746
(i) Entire Agreement. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements, arrangements
and communications, whether oral or written, pertaining to the subject matter
hereof.
(j) Governing Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the United States where applicable and otherwise by the laws of the State of
New Jersey.
IN WITNESS WHEREOF, this Agreement has been executed as of
the date first above written.
INTEGRA LIFESCIENCES CORPORATION
By:
-------------------------------
Title:
----------------------------
EXECUTIVE
----------------------------------
Judith O'Grady
<PAGE>
Exhibit 10.37
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made this
31st day of December, 1998 by and between Integra LifeSciences Corporation, a
Delaware corporation, and David B. Holtz ("Executive").
Background
Executive is currently the Vice President, Financial, and
Treasurer of Company. Company desires to continue to employ Executive, and
Executive desires to remain in the employ of Company, on the terms and
conditions contained in this Agreement. Executive will be substantially
involved with Company's operations and management and will learn trade secrets
and other confidential information relating to Company and its customers;
accordingly, the noncompetition covenant and other restrictive covenants
contained in Section 14 of this Agreement constitute essential elements hereof.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements contained herein and intending to be legally bound hereby,
the parties hereto agree as follows:
Terms
31. Definitions. The following words and phrases shall have
the meanings set forth below for the purposes of this Agreement (unless the
context clearly indicates otherwise):
(a) "Base Salary" shall have the meaning set forth in
Section 5.
(b) "Board" shall mean the Board of Directors of Company,
or any successor thereto.
(c) "Cause," as determined by the Board in good faith,
shall mean Executive has --
(1) failed to perform his stated duties and not
cured such failure (if curable) within 15 days of his receipt
of written notice of the failure;
(2) breached any provision of this Agreement and
not cured such breach (if curable) within 15 days of his
receipt of written notice of the breach;
(3) demonstrated his personal dishonesty in
connection with his employment by Company;
(4) engaged in willful misconduct;
<PAGE>
(5) engaged in a breach of fiduciary duty;
(6) willfully violated any law, rule or
regulation, or final cease-and-desist order (other than
traffic violations or similar offenses); or
(7) engaged in other serious misconduct of such
a nature that his continued employment may reasonably be
expected to affect Company adversely.
(d) A "Change in Control" of Company shall be deemed to have
occurred:
(1) if the "beneficial ownership" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934) of
securities representing more than fifty percent (50%) of the
combined voting power of Company Voting Securities (as herein
defined) is acquired by any individual, entity or group (a
"Person"), Company, any trustee or other fiduciary holding
securities under any employee benefit plan of Company or an
affiliate thereof, or any corporation owned, directly or
indirectly, by the stockholders of Company in substantially
the same proportions as their ownership of stock of Company
(for purposes of this Agreement, "Company Voting Securities"
shall mean the then outstanding voting securities of Company
entitled to vote generally in the election of directors);
provided, however, that any acquisition from Company or any
acquisition pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of paragraph (3) of this
definition shall not be a Change in Control under this
paragraph (1); or
(2) if individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination
for election by Company's stockholders, was approved by a
vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual
or threatened election contest with respect to the election
or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(3) upon consummation by Company of a
reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of
Company or the acquisition of assets or stock of another
entity (a "Business Combination"), in each case, unless
immediately following such Business Combination: (i) more
than 50% of the combined voting power of the then outstanding
voting securities entitled to vote generally in the election
of directors of (x) the corporation resulting from such
Business Combination (the "Surviving Corporation"), or (y) if
applicable, a corporation which as a result of
<PAGE>
such transaction owns Company or all or substantially all of
Company's assets either directly or through one or more
subsidiaries (the "Parent Corporation"), is represented,
directly or indirectly, by Company Voting Securities
outstanding immediately prior to such Business Combination
(or, if applicable, is represented by shares into which such
Company Voting Securities were converted pursuant to such
Business Combination), and such voting power among the
holders thereof is in substantially the same proportions as
their ownership, immediately prior to such Business
Combination, of the Company Voting Securities; (ii) no Person
(excluding any employee benefit plan (or related trust) of
Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 50%
or more of the combined voting power of the then outstanding
voting securities eligible to elect directors of the Parent
Corporation (or, if there is no Parent Corporation, the
Surviving Corporation) except to the extent that such
ownership of Company existed prior to the Business
Combination; and (iii) at least a majority of the members of
the board of directors of the Parent Corporation (or, if
there is no Parent Corporation, the Surviving Corporation)
were members of the Incumbent Board at the time of the
execution of the initial agreement, or the action of the
Board, providing for such Business Combination; or
(4) upon approval by the stockholders of Company
of a complete liquidation or dissolution of Company.
(e) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(f) "Company" shall mean Integra LifeSciences Corporation
and any corporation, partnership or other entity owned directly or indirectly,
in whole or in part, by Integra LifeSciences Corporation.
(g) "Disability" shall mean Executive's inability to
perform his duties hereunder by reason of any medically determinable physical
or mental impairment which is expected to result in death or which has lasted
or is expected to last for a continuous period of not fewer than six months.
(h) "Good Reason" shall mean:
(1) a material breach of this Agreement by
Company which is not cured by Company within 15 days of its
receipt of written notice of the breach;
(2) without Executive's express written consent,
the Board reduces Executive's Base Salary or the aggregate
fringe benefits provided to Executive (except to the extent
permitted by Section 5 or Section 6, respectively); provided,
Executive resigns within 30 days after the change objected
to; or
<PAGE>
(3) Company fails to obtain the assumption of
this Agreement by any successor to Company.
(i) "Principal Executive Office" shall mean Company's
principal office for executives, presently located at 105 Morgan Lane,
Plainsboro, New Jersey 08536.
(j) "Retirement" shall mean the termination of Executive's
employment with Company in accordance with the retirement policies, including
early retirement policies, generally applicable to Company's salaried
employees.
(k) "Termination Date" shall mean the date specified in
the Termination Notice.
(l) "Termination Notice" shall mean a dated notice which:
(i) indicates the specific termination provision in this Agreement relied upon
(if any); (ii) sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for the termination of Executive's employment under
such provision; (iii) specifies a Termination Date; and (iv) is given in the
manner specified in Section 15(h).
32. Employment. Company hereby employs Executive as Vice
President, Financial and Treasurer and Executive hereby agrees to continue such
employment and agrees to render services to Company in such capacity (or in
such other capacity in the future as the Chief Executive Officer may decide in
his sole discretion) on the terms and conditions set forth in this Agreement.
Executive's primary place of employment shall be at the Principal Executive
Office or other Corporate location as the Chief Executive Officer deems
appropriate.
33. Term.
(a) Term and Renewal of Agreement. Unless earlier
terminated by Executive or Company as provided in Section 10 hereof, the term
of Executive's employment under this Agreement shall be two (2) years,
commencing on the date of this Agreement and, subject to subsection 3(b), shall
be deemed automatically, without further action, to extend for an additional
year on each annual anniversary of the date of this Agreement.
(b) Annual Review. Prior to the second annual anniversary
of the date of this Agreement and each annual anniversary thereafter, the Board
shall consider extending the term of this Agreement. The term shall continue to
extend in the manner set forth in subsection 3(a) unless either the Board does
not approve the extension and provides written notice to Executive of such
event, or Executive gives written notice to Company of Executive's election not
to extend the term. In either case, the written notice shall be given not fewer
than 30 days prior to any such anniversary date. References herein to the term
of this Agreement shall refer both to the initial term and successive terms.
34. Duties. Executive shall:
(a) faithfully and diligently do and perform all such acts
and duties, and furnish such services as are assigned to Executive as of the
date this Agreement is signed,
<PAGE>
and (subject to Section 2) such additional or different acts, duties and
services as the Chief Executive Officer may assign in the future; and
(b) devote his full professional time, energy, skill and
best efforts to the performance of his duties hereunder, in a manner that will
faithfully and diligently further the business and interests of Company, and
shall not be employed by or participate or engage in or in any manner be a part
of the management or operations of any business enterprise other than Company
without the prior written consent of the Board, which consent may be granted or
withheld in its sole discretion.
35. Compensation. Company shall compensate Executive for his
services at a minimum base salary of $115,000 per year ("Base Salary"), payable
in periodic installments in accordance with Company's regular payroll practices
in effect from time to time. Executive's Base Salary shall be subject to annual
reviews, but may not be decreased without Executive's express written consent
(unless the decrease is pursuant to a general compensation reduction applicable
to all, or substantially all, executive officers of Company). Bonus payments
may be made as determined appropriate by the Board in its sole discretion.
36. Benefit Plans. Executive shall be entitled to participate
in and receive benefits under any employee benefit plan or stock-based plan of
Company, and shall be eligible for any other plans and benefits covering
executives of Company, to the extent commensurate with his then duties and
responsibilities fixed by the Board. Company shall not make any change in such
plans or benefits which would adversely affect Executive's rights thereunder,
unless such change affects all, or substantially all, executive officers of
Company.
37. Vacation. Executive shall be entitled to paid annual
vacation in accordance with the policies established from time to time by the
Board, which shall in no event be fewer than three weeks per annum. Regardless
of what the Company's standard vacation policy may be, Executive shall not be
entitled to extra cash payments for any vacation he does not utilize.
38. Business Expenses. Company shall reimburse Executive or
otherwise pay for all reasonable expenses incurred by Executive in furtherance
of or in connection with the business of Company, including, but not limited
to, automobile and traveling expenses and all reasonable entertainment
expenses, subject to such reasonable documentation and other limitations as may
be established by the Board.
39. Disability. In the event Executive incurs a Disability,
Executive's obligation to perform services under this Agreement will terminate,
and the Board may terminate this Agreement upon written notice to Executive.
40. Termination.
(a) Termination without Salary Continuation. In the event
(i) Executive terminates his employment hereunder other than for Good Reason,
or (ii) Executive's employment is terminated by Company due to his Retirement,
Disability or death, or for Cause,
<PAGE>
Executive shall have no right to compensation or other benefits pursuant to
this Agreement for any period after his last day of active employment.
(b) Termination with Salary Continuation (No Change in
Control). Except as provided in subsection 10(c) in the event of a Change in
Control, in the event (i) Executive's employment is terminated by Company for a
reason other than Retirement, Disability, death or Cause, or (ii) Executive
terminates his employment for Good Reason, then Company shall:
(1) pay Executive a severance amount equal to
the greater of (i) one times Executive's Base Salary as of
his last day of active employment, or (ii) the unpaid portion
of Executive's Base Salary for the remainder of the then
current term of this Agreement; the severance amount shall be
paid in a single sum on the first business day of the month
following the Termination Date (unless Executive elects, in
writing and on, or not later than 30 days after, the date
this Agreement is executed, to receive the severance payment
divided into 24 equal monthly installments, paid beginning on
the first business day of the month following the Termination
Date); and
(2) maintain and provide to Executive, at no
cost to Executive, for a period ending at the earliest of (i)
the expiration of 12 months from Executive's last day of
active employment; (ii) the date of Executive's full-time
employment by another employer; or (iii) Executive's death,
continued participation in all group insurance, life
insurance, health and accident, disability, and other
employee benefit plans in which Executive would have been
entitled to participate had his employment with Company
continued throughout such period, provided that such
participation is not prohibited by the terms of the plan or
by Company for legal reasons.
(c) Termination with Salary Continuation (Change in Control).
Notwithstanding anything to the contrary set forth in subsection 10(b), in the
event within six months of a Change in Control: (i) Executive terminates his
employment for Good Reason; or (ii) Executive's employment is terminated by
Company for a reason other than Retirement, Disability, death or Cause, then
Company shall:
(1) pay Executive a severance amount equal to
2.99 times Executive's Base Salary as of his last day of
active employment; the severance amount shall be paid in a
single sum on the first business day of the month following
the Termination Date (unless Executive elects, in writing and
on, or not later than 30 days after, the date this Agreement
is executed, to receive the severance payment divided into 24
equal monthly installments, paid beginning on the first
business day of the month following the Termination Date);
and
(2) maintain and provide to Executive, at no
cost to Executive, for a period ending at the earliest of (i)
the expiration of 12 months from Executive's last day of
active employment; (ii) the date of Executive's full-time
employment by another employer; or (iii) Executive's death,
continued
<PAGE>
participation in all group insurance, life insurance, health
and accident, disability, and other employee benefit plans in
which Executive would have been entitled to participate had
his employment with Company continued throughout such period,
provided that such participation is not prohibited by the
terms of the plan or by Company for legal reasons.
(d) Termination Notice. Except in the event of Executive's
death, a termination under this Agreement shall be effected by means of a
Termination Notice.
41. Withholding. Company shall have the right to withhold
from all payments made pursuant to this Agreement any federal, state, or local
taxes and such other amounts as may be required by law to be withheld from such
payments.
42. Assignability. Company may assign this Agreement and its
rights and obligations hereunder in whole, but not in part, to any entity to
which Company may transfer all or substantially all of its assets, if in any
such case said entity shall expressly in writing assume all obligations of
Company hereunder as fully as if it had been originally made a party hereto.
Company may not otherwise assign this Agreement or its rights and obligations
hereunder. This Agreement is personal to Executive and his rights and duties
hereunder shall not be assigned except as expressly agreed to in writing by
Company.
43. Death of Executive. Any amounts due Executive under this
Agreement (not including any Base Salary not yet earned by Executive) unpaid as
of the date of Executive's death shall be paid in a single sum as soon as
practicable after Executive's death to Executive's surviving spouse, or if
none, to the duly appointed personal representative of his estate.
44. Restrictive Covenants.
(a) Covenant Not to Compete. During the term of this
Agreement and for a period of two (2) years following the Termination Date,
Executive shall not directly or indirectly: (i) engage, anywhere within the
geographical areas in which Company is conducting business operations or
providing services as of the date of Executive's termination of employment, in
the tissue engineering business (the use of implantable absorbable materials,
with or without a bioactive component, to attempt to elicit a specific cellular
response in order to regenerate tissue or to impede the growth of tissue or
migration of cells) (the "Tissue Engineering Business") or any other business
the revenues of which constituted at least 30% of Company's revenues during the
six (6) month period prior to the Termination Date (together with the Tissue
Engineering Business, the "Business"); (ii) be or become a stockholder,
partner, owner, officer, director or employee or agent of, or a consultant to
or give financial or other assistance to, any person or entity engaged in the
Business; (iii) seek in competition with the business of Company to procure
orders from or do business with any customer of Company; (iv) solicit or
contact with a view to the engagement or employment by any person or entity of
any person who is an employee of Company; (v) seek to contract with or engage
(in such a way as to adversely affect or interfere with the business of
Company) any person or entity who has been contracted with or engaged to
manufacture, assemble, supply or deliver products, goods, materials or services
to Company; or (vi) engage in or participate in any effort or act to induce any
of the customers, associates, consultants, or employees of Company to take any
action which
<PAGE>
might be disadvantageous to Company; provided, however, that nothing herein
shall prohibit Executive and his affiliates from owning, as passive investors,
in the aggregate not more than 5% of the outstanding publicly traded stock of
any corporation so engaged.
(b) Confidentiality. Executive acknowledges a duty of
confidentiality owed to Company and shall not, at any time during or after his
employment by Company, retain in writing, use, divulge, furnish, or make
accessible to anyone, without the express authorization of the Board, any trade
secret, private or confidential information or knowledge of Company obtained or
acquired by him while so employed. All computer software, business cards,
telephone lists, customer lists, price lists, contract forms, catalogs, Company
books, records, files and know-how acquired while an employee of Company are
acknowledged to be the property of Company and shall not be duplicated, removed
from Company's possession or premises or made use of other than in pursuit of
Company's business or as may otherwise be required by law or any legal process,
or as is necessary in connection with any adversarial proceeding against
Company and, upon termination of employment for any reason, Executive shall
deliver to Company, without further demand, all copies thereof which are then
in his possession or under his control. No information shall be treated as
"confidential information" if it is generally available public knowledge at the
time of disclosure or use by Executive.
(c) Inventions and Improvements. Executive shall promptly
communicate to Company all ideas, discoveries and inventions which are or may
be useful to Company or its business. Executive acknowledges that all such
ideas, discoveries, inventions, and improvements which heretofore have been or
are hereafter made, conceived, or reduced to practice by him at any time during
his employment with Company heretofore or hereafter gained by him at any time
during his employment with Company are the property of Company, and Executive
hereby irrevocably assigns all such ideas, discoveries, inventions, and
improvements to Company for its sole use and benefit, without additional
compensation. The provisions of this Section 14(c) shall apply whether such
ideas, discoveries, inventions, or improvements were or are conceived, made or
gained by him alone or with others, whether during or after usual working
hours, whether on or off the job, whether applicable to matters directly or
indirectly related to Company's business interests (including potential
business interests), and whether or not within the specific realm of his
duties. Executive shall, upon request of Company, but at no expense to
Executive, at any time during or after his employment with Company, sign all
instruments and documents reasonably requested by Company and otherwise
cooperate with Company to protect its right to such ideas, discoveries,
inventions, or improvements including applying for, obtaining, and enforcing
patents and copyrights thereon in such countries as Company shall determine.
(d) Breach of Covenant. Any breach or violation of the
provisions in this Section 14 by Executive will result in forfeiture by
Executive and all other persons of all rights to any further payments or
benefits under this Agreement, and in such event Company shall have no further
obligation to pay any amounts related thereto. Executive expressly acknowledges
that damages alone will be an inadequate remedy for any breach or violation of
any of the provisions of this Section 14 and that Company, in addition to all
other remedies, shall be entitled as a matter of right to equitable relief,
including injunctions and specific performance, in any court of competent
jurisdiction. If any of the provisions of this Section 14 are held to be
<PAGE>
in any respect unenforceable, then they shall be deemed to extend only over the
maximum period of time, geographic area, or range of activities as to which
they may be enforceable.
45. Miscellaneous.
(a) Amendment. No provision of this Agreement may be
amended unless such amendment is signed by Executive and such officer as may be
specifically designated by the Board to sign on Company's behalf.
(b) Nature of Obligations. Nothing contained herein shall
create or require Company to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that Executive acquires a
right to receive benefits from Company hereunder, such right shall be no
greater than the right of any unsecured general creditor of Company.
(c) Prior Employment. Executive represents and warrants
that his acceptance of employment with Company has not breached, and the
performance of his duties hereunder will not breach, any duty owed by him to
any prior employer or other person.
(d) Headings. The Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. In the event of a conflict between
a heading and the content of a Section, the content of the Section shall
control.
(e) Gender and Number. Whenever used in this Agreement, a
masculine pronoun is deemed to include the feminine and a neuter pronoun is
deemed to include both the masculine and feminine, unless the context clearly
indicates otherwise. The singular form, whenever used herein, shall mean or
include the plural form where applicable.
(f) Severability. If any provision of this Agreement or
the application thereof to any person or circumstance shall be invalid or
unenforceable under any applicable law, such event shall not affect or render
invalid or unenforceable any other provision of this Agreement and shall not
affect the application of any provision to other persons or circumstances.
(g) Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors,
permitted assigns, heirs, executors, and administrators.
(h) Notice. For purposes of this Agreement, notices and
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given if hand-delivered, sent by documented
overnight delivery service or by certified or registered mail, return receipt
requested, postage prepaid, addressed to the respective addresses set forth
below:
<PAGE>
To the Company:
Integra LifeSciences Corporation
105 Morgan Lane
Plainsboro, New Jersey 08536
Attn: President
To the Executive:
Mr. David Holtz
214 Aspen Drive
Plainsboro, NJ 08536
(i) Entire Agreement. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements, arrangements
and communications, whether oral or written, pertaining to the subject matter
hereof.
(j) Governing Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the United States where applicable and otherwise by the laws of the State of
New Jersey.
IN WITNESS WHEREOF, this Agreement has been executed as of
the date first above written.
INTEGRA LIFESCIENCES CORPORATION
By:
-----------------------------
Title:
EXECUTIVE
--------------------------------
David B. Holtz
<PAGE>
Exhibit 21
Subsidiaries of Integra LifeSciences Corporation
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
1. ABS LifeSciences, Inc. Delaware
2. Advanced Reproductive Health Corporation Delaware
3. Applied Regenerative Technologies, Inc. Delaware
4. Colla-Tec, Inc. Delaware
5. Camino NeuroCare, Inc Delaware
6. Heyer-Schulte NeuroCare, Inc. Delaware
7. Integra (Artifical Skin) Corporation Delaware
8. Integra LifeSciences Surgical Products Corporation Delaware
9. Integra LifeSciences I, Ltd. Delaware
10. Integra NeuroCare LLC Delaware
11. Intellectual Properties and Asset Corporation Delaware
12. LifeSciences Corporate Holdings Corporation Delaware
13. LifeSciences Services Corporation Delaware
14. Medicol Sciences, spol. s.r.o. Czech Republic
15. Medicus Technologies, Inc. Delaware
16. NeuroCare Holding Corporation Delaware
17. Redmond NeuroCare LLC Delaware
18. Telios Pharmaceuticals, Inc. Delaware
19. Vitaphore Corporation Delaware
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements of
Integra Lifesciences Corporation and Subsidiaries on Form S-8 (File Nos.
333-58235 and 333-06577) of our report dated March 2, 1999 (except for Note 17,
as to which the date is March 29, 1999), on our audits of the consolidated
financial statements of Integra Lifesciences Corporations, as of December 31,
1998 and 1997, and for each of the three years in the period ended December 31,
1998, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 31, 1999
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