<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 29, 1999
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
-----------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-26224 51-0317849
- ---------------------------- ----------- -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
105 Morgan Lane
Plainsboro, New Jersey 08536
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 275-0500
Not Applicable
---------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2. Acquisition or Disposition of Assets.
On April 13, 1999, Integra LifeSciences Holdings Corporation, a
Delaware corporation (the "Company"), filed a Current Report on Form 8-K
disclosing that on March 29, 1999, the Company acquired certain assets and stock
held by Saba Medical Management Co., Inc., Saba Medical Group, L.P. and
Heyer-Schulte NeuroCare, L.P. and its subsidiaries, Heyer-Schulte NeuroCare,
Inc., Camino NeuroCare, Inc. and Neuro Navigational, L.L.C. (collectively, the
"NeuroCare Group"), through the Company's wholly-owned subsidiaries, NeuroCare
Holding Corporation ("NeuroCare Holding"), Integra NeuroCare LLC and Redmond
NeuroCare LLC. This Report on Form 8-K/A is being filed to present and disclose
the financial statements and pro forma financial information required to be
filed in connection with the acquisition of the NeuroCare Group.
The NeuroCare Group designs, manufactures and sells implants,
instruments and monitors used in neurosurgery and intensive care units,
primarily for the treatment of hydrocephalus and neurosurgical trauma. The
NeuroCare Group's product line includes the Camino, Heyer-Schulte, Redmond and
Neuro Navigational brand names, and its assets include a manufacturing,
packaging and 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 the Company intends to close by August 1, 1999. The
Company intends to continue the business and operations of the NeuroCare Group
through Integra NeuroCare LLC and its subsidiaries (collectively, "Integra
NeuroCare").
The purchase price for the NeuroCare Group consisted of $14 million in
cash and $11 million of indebtedness assumed by Integra NeuroCare under a term
loan from Fleet Capital Corporation ("Fleet"). Fleet is also providing a $4
million revolving credit facility to Integra NeuroCare for working capital and
other corporate purposes (together with the term loan, the "Fleet Credit
Facility"). All the assets and ownership interests of Integra NeuroCare have
been pledged as collateral under the Fleet Credit Facility, and NeuroCare
Holding has guaranteed Integra NeuroCare's obligations thereunder. In addition,
Integra NeuroCare is subject to various financial and non-financial covenants
under the Fleet Credit Facility, including restrictions on its ability to
transfer funds to the Company or the Company's other subsidiaries. The financial
covenants specify minimum levels of interest coverage, net worth, operating cash
flow and fixed charge coverage, and also specify maximum levels of capital
expenditures and total indebtedness to operating cash flow, among others. None
of the other assets of the Company or its other subsidiaries have been pledged
under the Fleet Credit Facility.
The purchase price was financed in part through the sale of $10 million
of the Company's Series B Convertible Preferred Stock (the "Series B Preferred
Stock") and related warrants (the "Warrants") to SFM Domestic Investments LLC
and Quantum Industrial Partners LDC (together, the "Series B Purchasers"),
affiliates of Soros Private Equity Partners LLC. The shares of Series B
Preferred Stock are convertible into 2,617,800 shares of the Company's common
stock. The Warrants are exercisable at any time prior to their expiration on
March 28, 2001 for 240,000 shares of the Company's common stock at an exercise
price of $3.82 per share. The Company utilized the proceeds from the sale of the
Series B Preferred Stock and funds from its existing cash balances to fund the
cash portion of the purchase price.
In connection with the purchase of the Series B Preferred Stock and the
Warrants, the Company has entered into a Registration Rights Agreement with the
Series B Purchasers pursuant to which the Company granted the Series B
Purchasers certain registration rights with respect to the shares of common
stock of the Company issuable upon conversion of the Series B Preferred Stock
and exercise of the Warrants.
2
<PAGE>
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired.
The following combined consolidated financial statements cover Saba
Medical Management Co., Inc., Saba Medical Group, L.P., and subsidiaries. Saba
Medical Management Co., Inc.and Saba Medical Group, L.P. were formed in June,
1994, for the purpose of acquiring and operating businesses in the medical
device industry.
Report of Independent Public Accountants.
Combined Consolidated Balance Sheets as of December 31, 1998 and 1997.
Combined Consolidated Statements of Income for the years ended December
31, 1998, 1997 and 1996.
Combined Consolidated Statements of Partnership Capital and
Stockholders' Equity for the years ended December 31, 1998,
1997 and 1996.
Combined Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
Notes to Combined Consolidated Financial Statements.
(b) Pro Forma Financial Information.
Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1998 (unaudited).
Pro Forma Condensed Consolidated Statement of Operations for the three
months ended March 31, 1999 (unaudited).
Notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.
3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Saba Medical Management Co., Inc.
and to the Partners of
Saba Medical Group, L.P.:
We have audited the accompanying combined consolidated balance sheets of SABA
MEDICAL MANAGEMENT CO., INC. (a Delaware corporation) AND SABA MEDICAL GROUP,
L.P. (a Delaware limited partnership) AND SUBSIDIARIES (together "Saba Medical")
as of December 31, 1998 and 1997, and the related combined consolidated
statements of income, partnership capital and stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
combined consolidated financial statements are the responsibility of Saba
Medical's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the combined consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the combined
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Saba Medical
as of December 31, 1998 and 1997, and the results of its operations and cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
March 5, 1999
4
<PAGE>
SABA MEDICAL MANAGEMENT CO., INC. AND SABA MEDICAL GROUP, L.P.
AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 415 $ 273
Accounts receivable--trade, net of allowance of $221 and $254
for doubtful accounts at December 31, 1998 and 1997, respectively 5,071 4,623
Inventories
Raw materials 3,274 2,569
Work in process 1,599 1,021
Finished goods 3,881 3,446
---------- ----------
Total inventories 8,754 7,036
Prepaid expenses 572 749
Deferred tax assets 399 367
---------- ----------
Total current assets 15,211 13,048
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 5,758 5,472
Less- Accumulated depreciation (3,331) (2,429)
---------- ----------
Property, plant and equipment, net 2,427 3,043
---------- ----------
GOODWILL, net of accumulated amortization of $5,060 in 1998 and
$4,302 in 1997 3,498 21,914
---------- ----------
PATENTS AND TRADEMARKS, net of accumulated amortization of
$3,762 in 1998 and $2,435 in 1997 2,848 3,775
---------- ----------
OTHER ASSETS 722 406
---------- ----------
Total assets $24,706 $42,186
========== ==========
</TABLE>
5
<PAGE>
SABA MEDICAL MANAGEMENT CO., INC. AND SABA MEDICAL GROUP, L.P.
AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES, PARTNERSHIP CAPITAL AND
STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------------------------------------------------------------- -------- --------
<S> <C> <C>
CURRENT LIABILITIES
Revolving credit agreement $ - $ 118
Current portion of term loans payable 1,500 1,125
Accounts payable 1,914 2,512
Accrued expenses-
Payroll and payroll related 1,217 798
Other 859 653
Income taxes payable 601 56
--------- ---------
Total current liabilities 6,091 5,262
--------- ---------
COMMITMENTS AND CONTINGENCIES
TERM LOAN PAYABLE 12,375 13,875
--------- ---------
SUBORDINATED PROMISSORY NOTES 25,798 23,146
--------- ---------
DEFERRED TAX LIABILITIES 968 1,174
--------- ---------
OTHER LIABILITIES 276 452
--------- ---------
PARTNERSHIP CAPITAL
Common units 1 1
Preferred units 6,975 6,133
Accumulated deficit (27,879) (7,958)
STOCKHOLDERS' EQUITY
Capital in excess of par 101 101
--------- ---------
Total partnership capital and stockholders' equity (20,802) (1,723)
--------- ---------
Total liabilities, partnership capital and stockholders'
equity $24,706 $42,186
========= =========
</TABLE>
The accompanying notes to combined consolidated financial
statements are an integral part of these balance sheets.
6
<PAGE>
SABA MEDICAL MANAGEMENT CO., INC. AND
SABA MEDICAL GROUP, L.P. AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF INCOME
For the Three Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
NET SALES $ 32,547 $30,508 $25,987
COST OF SALES 15,673 14,964 12,490
--------- --------- ---------
Gross profit 16,874 15,544 13,497
--------- --------- ---------
OPERATING EXPENSES
Selling and marketing 6,525 5,841 4,018
General and administrative 4,003 3,655 3,109
Research and development 2,314 2,857 2,534
Amortization of intangibles 2,380 2,608 2,272
Royalty expense 210 242 180
Goodwill impairment 17,120 - -
--------- --------- ---------
Operating income (loss) (15,678) 341 1,384
INTEREST EXPENSE, net (4,052) (4,072) (3,798)
OTHER INCOME, net 776 1,023 835
--------- --------- ---------
LOSS BEFORE INCOME TAXES (18,954) (2,708) (1,579)
PROVISION (BENEFIT) FOR INCOME TAXES 125 21 (67)
--------- --------- ---------
NET LOSS $(19,079) $ (2,729) $ (1,512)
========= ========= =========
</TABLE>
The accompanying notes to combined consolidated financial
statements are an integral part of these statements.
7
<PAGE>
19
SABA MEDICAL MANAGEMENT CO., INC. AND SABA MEDICAL GROUP, L.P.
AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF PARTNERSHIP CAPITAL
AND STOCKHOLDERS' EQUITY
For the Three Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Stockholders' Equity
-----------------------------
Common Stock, Total
Partnership Capital $0.01 Par Value, Partnership
----------------------------------------- 1,000 Shares Capital Capital and
Common Preferred Accumulated Issued and in Excess Stockholders'
Units Units Deficit Outstanding of Par Equity
--------- ----------- ------------- ------------------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 1 $4,349 $ (2,383) $ - $101 $ 2,068
Accretion on preferred units - 599 (599) - - -
Issuance of preferred units - 200 - - - 200
Net loss - - (1,512) - - (1,512)
--------- ----------- ------------- ------------------ --------- ---------------
BALANCE AT DECEMBER 31, 1996 1 5,148 (4,494) - 101 756
Accretion on preferred units - 735 (735) - - -
Issuance of preferred units - 250 - - - 250
Net loss - - (2,729) - - (2,729)
--------- ----------- ------------- ------------------ --------- ---------------
BALANCE AT DECEMBER 31, 1997 1 6,133 (7,958) - 101 (1,723)
Accretion on preferred units - 842 (842) - - -
Net loss - - (19,079) - - (19,079)
--------- ----------- ------------- ------------------ --------- ---------------
BALANCE AT DECEMBER 31, 1998 1 $6,975 $(27,879) $ - $101 $(20,802)
========= =========== ============= ================== ========= ===============
</TABLE>
The accompanying notes to combined consolidated financial
statements are an integral part of these statements.
8
<PAGE>
SABA MEDICAL MANAGEMENT CO., INC. AND
SABA MEDICAL GROUP, L.P. AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(19,079) $(2,729) $(1,512)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation 1,036 943 848
(Gain) loss on disposal of assets (6) 119 8
Amortization of intangibles 2,380 2,608 2,272
Goodwill impairment 17,120 - -
Accrued interest on subordinated promissory notes 2,653 2,357 1,953
Deferred income taxes (238) (60) (320)
Change in assets and liabilities, net of acquisitions of
businesses-
Accounts receivable (448) (244) (427)
Inventories (1,718) 313 421
Prepaid expenses 177 (11) 5
Other assets (375) (1,221) (511)
Accounts and income taxes payable (53) 331 203
Accrued expenses 624 (297) (840)
Other liabilities (176) 152 16
---------- --------- ---------
Net cash provided by operating activities 1,897 2,261 2,116
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (513) (1,009) (880)
Acquisition of business - (1,664) -
---------- --------- ---------
Net cash used in investing activities (513) (2,673) (880)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings (117) 2,275 190
Repayment of term loans (1,125) (3,098) (2,508)
Proceeds from subordinated promissory notes - 1,000 800
Issuance of preferred units - 250 200
---------- --------- ---------
Net cash provided by (used in) financing activities (1,242) 427 (1,318)
---------- --------- ---------
INCREASE (DECREASE) IN CASH 142 15 (82)
CASH, beginning of year 273 258 340
---------- --------- ---------
CASH, end of year $ 415 $ 273 $ 258
========== ========= =========
SUPPLEMENTAL INFORMATION
Accretion on preferred units $ 842 $ 735 $ 599
========== ========= =========
The accompanying notes to combined consolidated financial
statements are an integral part of these statements.
9
<PAGE>
SABA MEDICAL MANAGEMENT CO., INC. AND
SABA MEDICAL GROUP, L.P. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. DESCRIPTION OF BUSINESS
Saba Medical Management Co., Inc. (a Delaware corporation) ("SMMC, Inc.")
and Saba Medical Group, L.P. (a Delaware limited partnership) ("SMG,
L.P.") (together "Saba Medical") were formed in June, 1994, for the
purpose of acquiring and operating businesses in the medical device
industry. Principal businesses include Heyer-Schulte NeuroCare and Camino
NeuroCare, Inc.
Heyer-Schulte NeuroCare
The acquisition of the Heyer-Schulte product line was consummated on June
29, 1994, and resulted in the formation of two additional entities:
Heyer-Schulte NeuroCare, L.P. (a Delaware limited partnership) ("HSNC,
L.P.") and Heyer-Schulte NeuroCare, Inc. (a Delaware corporation) ("HSNC,
Inc."). SMMC, Inc., as general partner, is a 1% owner of both SMG, L.P.
and HSNC, L.P. SMG, L.P. and various investors own the remaining portion
of HSNC, L.P. which, in turn, owns 100% of HSNC, Inc. Heyer-Schulte is
engaged in the manufacture and sale of silicone shunts and drainage
systems used by neurosurgeons primarily in the treatment of hydrocephalus.
Camino NeuroCare, Inc.
Camino NeuroCare, Inc. (a Delaware corporation) ("CNC, Inc."), 100% owned
by HSNC, L.P., manufactures neurosurgical monitoring devices.
Saba Medical (along with HSNC, L.P.) is headquartered in Pleasant Prairie,
Wisconsin, with manufacturing operations for HSNC, Inc. and CNC, Inc.
located in Anasco, Puerto Rico and San Diego, California, respectively.
Saba Medical markets its products primarily to neurosurgeons and sells
mainly to hospitals and medical supplies distributors throughout the
United States and in over 50 foreign countries.
2. ACQUISITIONS
On January 2, 1997, Saba Medical (through HSNC, L.P.) acquired certain
assets (principally accounts receivable and inventories) of Redmond
Neurotechnologies Corporation for approximately $700,000 in cash plus the
assumption of certain liabilities. The agreement also included two
subordinated promissory notes to the former owner which vest based upon
the attainment of certain sales and gross margin levels for the three-year
period ending December 31, 1999. If all goals are attained, the vested
amount of the notes would total
10
<PAGE>
$1,050,000, which would be payable annually over a three-year period
beginning April 30, 2000. No amounts are due under these notes at December
31, 1998 or 1997.
On March 20, 1997, Saba Medical (through HSNC, L.P.) also acquired certain
assets (principally accounts receivable and inventories) from Ballard
Purchase Corporation for approximately $964,000 in cash plus the
assumption of certain liabilities. The agreement also includes an
additional contingent payment of up to $1,000,000 based upon the
attainment of certain net sales targets, as well as contingent payments of
8% of annual net sales in excess of $3,500,000 for a defined period. No
amounts are due under these contingent obligations at December 31, 1998 or
1997.
These acquisitions have been accounted for as purchases. The cost of the
acquisitions has been allocated on the basis of the estimated fair value
of the assets acquired and liabilities assumed. The allocation resulted in
goodwill of approximately $368,000, which is being amortized over 15
years.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination and Consolidation
The combined consolidated financial statements include the accounts of
SMMC, Inc. and SMG, L.P. and its subsidiaries, HSNC, L.P., HSNC, Inc.,
CNC, Inc. and Neuro Navigational, L.L.C. ("NN, L.L.C.") Collectively,
these six entities are referred to as "the Companies." All significant
intercompany transactions have been eliminated.
As described above, HSNC, Inc., CNC, Inc. and NN, L.L.C. are wholly owned
subsidiaries of HSNC, L.P., which in turn is majority owned by SMMC, Inc.
and SMG, L.P. The minority interest is not material to the financial
position or results of operations of the Companies.
Although parent-subsidiary relationships do not exist between SMMC, Inc.
and SMG, L.P., combined financial statements are presented since these
companies are under common ownership and management.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and include assets held
under capital leases. Improvements and additions are capitalized, while
maintenance and repairs which do not substantially improve or extend the
useful lives of the respective assets are expensed. Depreciation is
calculated on the straight-line method over the estimated useful lives of
the assets.
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Asset Description Life
-------------------------------------------- -------------
Machinery and equipment 3-7 years
Office furniture and equipment 3-7 years
Leasehold improvements 5-10 years
=============
Goodwill and Other Intangibles
Goodwill arising from business acquisitions is amortized on the
straight-line basis over 15 years.
Patents are being amortized on a straight-line basis over the period of
expected benefit (6-17 years).
Income Taxes
Provisions are made for federal and state income taxes on the reported
earnings of the corporate entities regardless of the period when such
taxes are payable. Deferred taxes are recognized for temporary differences
between financial and income tax reporting based on current tax laws and
rates.
Income taxes have not been provided for the noncorporate entities since
the entities are limited partnerships for income tax purposes. As such,
the limited partnerships' earnings or losses are allocated to the partners
for inclusion in their individual tax returns.
Warranty
Provisions are made for costs expected to be incurred in future years in
connection with warranty claims made by customers.
Research and Development
Costs incurred in connection with the development of new products and
changes in existing products and manufacturing methods are charged to
operations as incurred.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," long-lived assets held and used by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may be not
recoverable. For purposes of evaluating the recoverability of long-lived
assets, the recoverability test is performed using undiscounted net cash
flows.
Segment Reporting
The Companies, which operate in a single industry segment, manufacture
and market neurosurgical medical devices. No customer accounted for 10%
or more of the sales in 1998, 1997
12
<PAGE>
or 1996. The Companies had foreign export sales amounting to 28.6%, 29.4%
and 35.1% of total sales for the years ended December 31, 1998, 1997, and
1996, respectively.
The export sales were made principally to the following locations for the
years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
------- ------- -------
Japan 6.7% 7.1% 7.7%
Europe 13.3 13.1 14.8
Elsewhere 8.6 9.2 12.6
------- ------- -------
Total 28.6% 29.4% 35.1%
======= ======= =======
Concentration of Credit Risk
Financial instruments which potentially subject the Companies to credit
risk consist primarily of trade receivables. The Companies sell primarily
to customers in the healthcare industry. To reduce credit risk, the
Companies perform ongoing evaluations of their customers' financial
condition but do not generally require collateral.
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 and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Financial Instruments
The carrying values reflected in the balance sheet at December 31, 1998
and 1997, reasonably approximate the fair values for accounts receivable
and payable and debt. In making such assessments, Saba Medical utilizes
credit reviews, quoted market prices and discounted cash flow analyses as
appropriate.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1998 and 1997 (in thousands):
1998 1997
-------- --------
Machinery and equipment $2,801 $2,595
Office furniture and equipment 2,066 1,888
Leasehold improvements 818 780
Construction in process 73 209
-------- --------
$5,758 $5,472
======== ========
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<PAGE>
5. CAPITAL AND STOCKHOLDERS' EQUITY
Significant details of the equity structure of SMG, L.P. are as follows:
The Partnership has authorized the issuance of 5,000,000, 13%
accruing preferred units for an aggregate amount of $5,000,000, of
which $4,171,000 has been issued to various investors for the years
ended December 31, 1998 and 1997. These preferred units have an
annual yield of 13% compounded quarterly on the unreturned capital
plus any unpaid yield thereon from all prior quarterly periods.
The Partnership has also issued 93,120 regular units to various
unitholders, as well as 6,930 Class A Executive Units, 2,970 Class B
Executive Units, and 1,980 Class C Executive Units to management.
These units were issued for $.01 per unit.
The Class A Executive Units are time vested and vest ratably over a
five-year period beginning on June 29, 1994, subject to the holder
remaining employed by the Companies or subject to certain other
conditions as defined in the agreement of limited partnership.
The Class B and C Executive Units are performance vested and subject
to the investors achieving specific rate of return goals or certain
other conditions as defined in the agreement of limited partnership.
The purchase price, in the event that the holder should liquidate
his or her interest, for nonvested executive units is the lesser of
the fair market value or issue price. The purchase price for all
regular units, preferred units, and Classes A, B and C executive
units is the fair market value thereof as determined by the
provisions of the agreement.
The equity structure of HSNC, L.P. is similar to that of SMG, L.P. All
preferred and regular units of HSNC, L.P. are held by SMMC, Inc. and SMG,
L.P., while 13,841 Class A Executive Units are held by other investors at
December 31, 1998.
SMMC, Inc. has authorized 1,000 shares of $.01 par value common stock, all
of which were issued to investors in June, 1994, pursuant to the formation
of the Companies and remain outstanding as of December 31, 1998.
6. DEBT
Term Loans Payable
On January 8, 1998, Saba Medical (through HSNC, L.P., HSNC, Inc., CNC,
Inc. and NN, L.L.C. (the "Borrowers")) refinanced its credit agreement
with Fleet Capital Corporation (the "Credit Agreement"). This $21,000,000
agreement includes a $15,000,000 term loan together with a $6,000,000
revolving credit facility. Term loan interest is at prime plus 1.5% and
interest on the revolving credit facility is at prime plus 1% and is
payable monthly. The weighted average interest rate was 9.4% in 1998. The
term loan matures January 8, 2004. In addition, a monthly commitment fee
of 1/2 of 1% must be paid on the average unused portion of the facility.
The effect of the refinancing is reflected in the financial statements at
December 31, 1997.
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<PAGE>
Borrowings under the Credit Agreement are secured by 100% of the issued
and outstanding common stock of HSNC, Inc. and CNC, Inc. and the issued
and outstanding partnership interests of HSNC, L.P. held by SMMC, Inc. and
SMG, L.P. Also pledged as collateral are substantially all of the
receivables, inventory and machinery and equipment of the borrowers, along
with certain other properties and rights as defined in the Credit
Agreement.
The Credit Agreement requires the Borrowers to comply with certain
financial and nonfinancial covenants. The financial covenants specify
minimum levels of interest coverage, net worth, operating cash flow and
fixed charge coverage, and also specify maximum levels of capital
expenditures and total indebtedness to operating cash flow, among others.
The Companies were in compliance with or had obtained waivers for all
covenants at December 31, 1998.
Aggregate annual principal payments required on the term loan payable are
due as follows (in thousands):
1999 $ 1,500
2000 2,250
2001 2,500
2002 3,250
2003 and thereafter 4,375
---------
Total $13,875
=========
Subordinated Promissory Notes
Subordinated promissory notes, including accumulated accrued interest,
consist of the following at December 31, 1998 and 1997 (in thousands):
1998 1997
--------- ---------
11% subordinated promissory notes,
due June 29, 2004 $13,703 $12,294
11% subordinated promissory notes,
due January 20, 2005 9,887 8,871
11% subordinated promissory notes,
due December 30, 2006 994 892
11% subordinated promissory notes,
due March 18, 2007 1,214 1,089
--------- ---------
Total $25,798 $23,146
========= =========
Saba Medical (through SMG, L.P.) is authorized to issue up to $20,000,000
in aggregate principal amount of 11% subordinated promissory notes of
which $16,600,000 was outstanding for the years ended December 31, 1998
and 1997. These notes are payable on the earlier of the due dates shown or
on the date of an initial public offering of any capital stock of SMG,
L.P. following the reorganization of such entity into corporate form
pursuant to that entity's agreement of limited partnership. These notes
are subordinate to all indebtedness of the partnership including the
indebtedness under the $21,000,000 credit agreement described above.
Interest is payable quarterly but may be accumulated and compounded at the
15
<PAGE>
discretion of the Companies. At December 31, 1998 and 1997, the 11%
subordinated promissory notes included $9,198,000 and $6,546,000 of such
cumulative interest, respectively.
Financing costs of approximately $379,000 and $31,000 at December 31, 1998
and 1997, respectively, associated with the issuance of long-term debt are
amortized on a straight-line basis over the life of the debt which does
not differ materially from the effective interest method.
During 1998, 1997 and 1996, the Companies made cash payments for interest
of $1,531,000, $1,689,000 and $1,826,000, respectively.
7. LEASES
The Companies lease all of their facilities and certain equipment under
noncancelable operating leases expiring in various years through 2004.
Certain of the leases contain renewal options and generally require the
lessee to pay all maintenance, insurance and property taxes, and are
subject to periodic adjustment based on price indices or cost increases.
Rent expense totaled $528,000, $401,000 and $487,000 in 1998, 1997 and
1996, respectively. Included in property, plant and equipment are assets
financed under capital leases with a cost of $330,000 and $276,000, and
accumulated depreciation of $153,000 and $90,000 at December 31, 1998 and
1997, respectively. Future minimum cash payments for operating and capital
leases as of December 31, 1998, are as follows (in thousands):
Operating Capital
--------- ---------
Year ending-
1999 $372 $ 82
2000 264 40
2001 160 15
2002 45 -
2003 and thereafter - -
--------- ---------
Total $841 137
=========
Less- Interest portion 19
---------
Total $118
=========
16
<PAGE>
8. INCOME TAXES
The income tax provision (benefit) consisted of the following (in
thousands):
1998 1997 1996
------ ------ ------
Current-
Federal $553 $72 $112
State 48 15 42
------ ------ ------
601 87 154
Deferred (476) (66) (221)
------ ------ ------
Total provision (benefit) $125 $21 $ (67)
====== ====== ======
The Companies, through HSNC, Inc., have been granted a tax exemption
related to the operations in Puerto Rico under the provisions of the Tax
Incentives Act of 1987, as amended, which provides for a 90% exemption
from payment of Puerto Rico income tax and property taxes and a 60%
exemption on municipal taxes on its manufacturing operations through the
year 2002. In addition, the Companies have elected the benefits of Section
936 of the U.S. Internal Revenue Code, which, under special phase-out
rules, allows the Companies to continue to use the economic activity
method through December 31, 2001. The available credit exceeds the U.S.
tax liability for 1998.
A reconciliation of the statutory and effective income tax rate is as
follows:
1998 1997 1996
--------- --------- ---------
U.S. federal statutory rate (34.0%) (34.0%) (34.0%)
Loss of noncorporate entities for which no
benefit is provided 20.3 29.6 20.1
Goodwill amortization 13.9 3.7 4.8
Other 0.5 1.5 4.8
--------- --------- ---------
Net effective rate 0.7% 0.8% (4.3%)
========= ========= =========
17
<PAGE>
Deferred tax assets and liabilities at December 31 are as follows (in
thousands):
Deferred Tax
Assets
(Liabilities)
------------------
1998 1997
-------- ---------
Patents $(767) $(1,103)
Inventory reserves 111 88
Warranty 36 34
UNICAP 56 129
Accrued vacation 52 56
Acquisition costs (118) (136)
Other, net 61 125
-------- --------
Total net deferred tax $(569) $ (807)
======== ========
The Companies made cash payments of approximately $3,000, $388,000 and
$322,000 for income taxes in 1998, 1997 and 1996, respectively.
9. EMPLOYEE BENEFIT PLANS
The Companies maintain a defined contribution profit sharing 401(k) plan
which covers all employees, with the exception of those in HSNC, Inc., who
have attained age 21 and met defined service requirements. This plan
provides that the Companies shall contribute an amount equal to 35% of
employee contributions and may also include a discretionary amount as
determined each year. The employer match is applied to employee
contributions up to 5% of each employee's salary. Contributions to the
Plan were $96,000, $70,000 and $53,000 in 1998, 1997 and 1996,
respectively.
The Companies maintain a cash incentive program for certain former
executives of CNC, Inc. Awards granted under the program accrue interest
at a simple rate of 10%. Vested benefits will be paid at the earlier of
(a) six years from the date of grant, or (b) repayment of certain notes
between certain related parties. Total grants outstanding under the
program at December 31, 1998, were approximately $100,000, all of which
were vested.
10. COMMITMENTS AND CONTINGENCIES
Litigation
The Companies are party to various litigation which arises in the ordinary
course of business. Management is of the opinion that the outcome of such
litigation will not have a material adverse effect on the Companies'
financial position, results of operations, or cash flows.
During 1995, the Companies (through CNC, Inc.) reached a settlement in
connection with certain patent infringement litigation. The terms of the
settlement provide for future minimum royalties of $1 million per year,
beginning October, 1996, through 2000. Additional royalties of up to
$200,000 per year may be earned based on sales of applicable products.
18
<PAGE>
Additional royalties of $200,000 were earned for the years ended December
31, 1998 and 1997. There were no additional royalties earned in 1996.
Employment Contracts
The Companies have entered into employment agreements with certain
executives. These agreements have terms ranging from one to three years
and also contain noncompete and nonsolicitation requirements on the part
of the executives.
11. RELATED PARTIES
Certain investors in the Companies perform various acquisition, legal,
management and consulting services on behalf of the Companies. The total
amount incurred by the Companies for these services was $113,000 in 1998,
$328,000 in 1997 and $155,000 in 1996.
12. SUBSEQUENT EVENT--GOODWILL IMPAIRMENT
Subsequent to year-end, the Companies entered into an agreement to sell
substantially all of the assets of HSNC, L.P., including the investment in
its subsidiaries and NN, L.L.C., for approximately $25 million. The
Companies expect to complete the sale in March, 1999. In accordance with
SFAS No. 121, the Companies recorded a goodwill impairment loss of
approximately $17 million to reduce the carrying value of the goodwill of
HSNC, L.P. and CNC, Inc. to the estimated fair value based on the
estimated proceeds from the sale of the assets.
19
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations
The pro forma condensed consolidated statement of operations for the
year ended December 31, 1998 has been prepared by combining the consolidated
statement of operations of the Company for the year ended December 31, 1998 with
the combined consolidated statement of operations of Saba Medical Management
Co., Inc. and Saba Medical Group, L.P. and subsidiares ("Saba Medical") for the
year ended December 31, 1998, adjusted to give effect to the acquisition of a
portion of Saba Medical by the Company.
</TABLE>
<TABLE>
<CAPTION>
(In thousands, except per share data) Year Ended December 31, 1998
-----------------------------------------------------------------------
Integra Saba Medical
LifeSciences Management Co.
Holdings and Saba Medical Pro Forma
Corporation Group L.P. Adjustments Pro Forma
--------------- ----------------- --------------- ---------------
(In thousands, except per share data)
Statement of Operations Data
REVENUE
-------
<S> <C> <C> <C> <C>
Product sales..................................... $ 14,076 $ 32,547 $ --- $ 46,623
Product license fees.............................. 1,290 --- --- 1,290
Product development............................... 1,114 --- --- 1,114
Research grants................................... 687 --- --- 687
Royalty income.................................... 288 --- 1,200 (a) 1,488
--------------- ----------------- --------------- ---------------
Total revenue..................................... 17,455 2,100 1,200 51,202
COSTS AND EXPENSES
------------------
Cost of product sales............................. 7,420 15,883 --- 23,303
Research and development.......................... 8,424 2,314 --- 10,738
Selling and marketing............................. 5,955 6,525 --- 12,480
General and administrative........................ 9,836 6,383 (2,382) (b) 14,744
907 (c)
Goodwill impairment............................... --- 17,120 (17,120) (d) ---
--------------- ----------------- --------------- ---------------
Total costs and expenses.......................... 31,635 48,225 (18,648) 61,265
--------------- ----------------- --------------- ---------------
Operating loss.................................... (14,180) (15,678) 19,848 (10,063)
Interest income................................... 1,250 --- ---- 1,250
Interest expense.................................. --- (4,052) 2,653 (e) (989)
410 (f)
Other income (expense)............................ 588 776 (1,200) (a) 164
--------------- ----------------- --------------- ---------------
Net loss before income taxes...................... (12,342) (18,954) 21,711 (9,638)
Provision for income taxes........................ --- 125 (77) (g) 48
--------------- ----------------- --------------- ---------------
Net loss.......................................... $ (12,342) $ (19,079) $ 21,836 $ (9,686)
=============== ================= =============== ===============
Preferred dividends............................... 47 1,000 (h) 1,047
--------------- --------------- ---------------
Net loss available to common shareholders......... $ (12,389) 20,836 $ (10,733)
=============== =============== ===============
Net basic and diluted loss per share.............. $ (0.76) $ (0.67)
=============== ===============
Average number of basic and diluted shares
outstanding.................................... 16,139 16,139 (i)
=============== ===============
</TABLE>
20
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations
The pro forma condensed consolidated statement of operations for the
three months ended March 31, 1999 has been prepared by combining the
consolidated statement of operations of the Company for the three months ended
March 31, 1999 with the combined consolidated statement of operations of Saba
Medical for the period from January 1, 1999 to March 25, 1999, adjusted to give
effect to the acquisition of a portion of Saba Medical by the Company. As of
March 26, 1999, the results of the acquired portion of Saba Medical are included
in the Company's results.
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended March 31, 1999
----------------------------------------------------------------------
Integra Saba Medical
LifeSciences Management Co.
Holdings and Saba Medical Pro Forma
Corporation Group L.P. Adjustments Pro Forma
--------------- ----------------- --------------- ---------------
(In thousands, except per share data)
REVENUE
-------
<S> <C> <C> <C> <C>
Product sales..................................... $ 4,605 $ 7,172 $ --- $ 11,777
Product license fees.............................. --- --- --- ---
Product development............................... 112 --- --- 112
Research grants................................... 192 --- 192
Royalty income.................................... 59 --- --- 59
--------------- ----------------- --------------- ---------------
Total revenue................................. 4,968 7,172 ---- 12,140
COSTS AND EXPENSES
------------------
Cost of product sales............................. 2,694 3,453 --- 6,147
Research and development.......................... 1,997 650 --- 2,647
Selling and marketing............................. 1,579 1,321 --- 2,900
General and administrative........................ 2,226 1,334 (297) (b) 3,490
227 (c)
--------------- ----------------- --------------- ----------------
Total costs and expenses...................... 8,496 6,758 (70) 15,184
--------------- ----------------- --------------- ----------------
Operating income (loss)........................... (3,528) 414 70 (3,044)
Interest income................................... 253 --- --- 253
Interest expense.................................. --- (955) 653 (e) (259)
43 (f)
Gain on disposition of product line............... 4,161 ---- --- 4,161
Other income (expense)............................ --- (15) --- (15)
--------------- ----------------- --------------- ----------------
Net income (loss) before income taxes............. 886 (556) 766 $ 1,096
Provision for income taxes........................ 460 --- --- 460
--------------- ----------------- --------------- ----------------
Net income (loss)................................. $ 426 $ (556) $ 766 $ 636
=============== ================= =============== ================
Preferred dividends............................... 20 --- 249 269
--------------- ----------------- --------------- ----------------
Net income available to common shareholders....... $ 406 $ --- $ 517 $ 367
=============== ================= =============== ================
Net basic income per share........................ $ 0.02 $ 0.02
=============== ================
Average number of basic shares outstanding......... 16,731 16,731
================
===============
Net diluted income per share.......................$ 0.02 $ 0.02
=============== ================
Average number of diluted shares outstanding....... 17,256 17,279 (i)
=============== ===============
</TABLE>
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
1. The pro forma results presented are based on a preliminary allocation of
purchase price according to APB 16, "Accounting for Business
Combinations". The purchase price has resulted in acquired goodwill and
other intangible assets of approximately $13.0 million, which is being
amortized on a straight-line basis over 15 years. The following is a
summary of the preliminary allocation (in thousands):
Cash.......................................... $ 285
Accounts receivable........................... 4,899
Inventory..................................... 10,803
Property and equipment........................ 3,654
Other assets.................................. 837
Intangible assets and goodwill................ 12,983
Accrued expenses and other liabilities........ (7,835)
Term loan..................................... (11,000)
-----------
$ 14,626
Not included in the pro forma adjustments is an estimated $1.1 million in
costs the Company anticipates incurring over the remainder of 1999
associated with an employee retention program designed to retain personnel
at the Saba Medical Wisconsin operation prior to its shutdown in July 1999.
2. The following are the pro forma adjustments for the year ended December 31,
1998 and the three months ended March 31, 1999:
(a) Reclassification of royalty income to be consistent with the Company's
statement of operations presentation.
(b) Elimination of Saba Medical amortization expense.
(c) Amortization expense to reflect the valuation of the intangible assets
acquired.
(d) Elimination of the goodwill impairment charge as a result of the
subsequent sale of the Saba Medical business.
(e) Elimination of interest expense related to the subordinated promissory
notes not assumed in the acquisition.
(f) Reduction in interest expense to reflect the reduced level of term debt
assumed in the acquisition.
(g) Reduction of federal income tax provision for 1998 to reflect the
ability to file a consolidated corporate tax return.
(h) Preferred dividends accrued on the Series B Preferred Stock issued as
part of the financing for the transaction.
(i) The Series B Preferred Stock was not included in the dilutive
outstanding shares calculation because the result would be
antidilutive.
22
<PAGE>
(c) Exhibits.
--------
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K) Description of Exhibit
- --------------- ----------------------
2 Asset Purchase Agreement dated March 29, 1999 among
Heyer-Schulte NeuroCare, L.P., Neuro Navigational, L.L.C.,
Integra NeuroCare LLC and Redmond NeuroCare LLC.+
4.1 Certificate of Designation, Preferences and Rights of Series
B Convertible Preferred Stock of Integra LifeSciences
Corporation dated March 12, 1999.+
4.2 Warrant to Purchase 60,000 Shares of Common Stock of Integra
LifeSciences Corporation issued to SFM Domestic Investments
LLC.+
4.3 Warrant to Purchase 180,000 Shares of Common Stock of
Integra LifeSciences Corporation issued to Quantum
Industrial Partners LDC.+
10.1 Series B Convertible Preferred Stock and Warrant Purchase
Agreement dated March 29, 1999 among Integra LifeSciences
Corporation, Quantum Industrial Partners LDC and SFM
Domestic Investments LLC.+
10.2 Registration Rights Agreement dated March 29, 1999 among
Integra LifeSciences Corporation, Quantum Industrial
Partners LDC and SFM Domestic Investments LLC.+
10.3 Amended and Restated Loan and Security Agreement dated March
29, 1999 among the Lenders named therein, Fleet Capital
Corporation, Integra NeuroCare LLC and other Borrowers named
therein.+
10.4 Substituted and Amended Term Note dated March 29, 1999 by
Integra NeuroCare LLC, Redmond NeuroCare LLC, Heyer-Schulte
NeuroCare, Inc. and Camino NeuroCare, Inc. to Fleet Capital
Corporation.+
23 Consent of Arthur Andersen LLP.
99 Press Release issued by Integra LifeSciences Corporation on
March 29, 1999.+
- -----------------------------
+ Indicated Exhibits were filed on April 13, 1999 with the Company's
Current Report on Form 8-K.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
Date: June 11, 1999 By: /s/ Stuart M. Essig
--------------------------------
Stuart M. Essig, President and
Chief Executive Officer
24
<PAGE>
Exhibit Index
-------------
Exhibit Number
(Referenced to
Item 601 of
Regulation S-K) Description of Exhibit
- --------------- ----------------------
2 Asset Purchase Agreement dated March 29, 1999 among
Heyer-Schulte NeuroCare, L.P., Neuro Navigational, L.L.C.,
Integra NeuroCare LLC and Redmond NeuroCare LLC.+
4.1 Certificate of Designation, Preferences and Rights of Series
B Convertible Preferred Stock of Integra LifeSciences
Corporation dated March 12, 1999.+
4.2 Warrant to Purchase 60,000 Shares of Common Stock of Integra
LifeSciences Corporation issued to SFM Domestic Investments
LLC.+
4.3 Warrant to Purchase 180,000 Shares of Common Stock of
Integra LifeSciences Corporation issued to Quantum
Industrial Partners LDC.+
10.1 Series B Convertible Preferred Stock and Warrant Purchase
Agreement dated March 29, 1999 among Integra LifeSciences
Corporation, Quantum Industrial Partners LDC and SFM
Domestic Investments LLC.+
10.2 Registration Rights Agreement dated March 29, 1999 among
Integra LifeSciences Corporation, Quantum Industrial
Partners LDC and SFM Domestic Investments LLC.+
10.3 Amended and Restated Loan and Security Agreement dated March
29, 1999 among the Lenders named therein, Fleet Capital
Corporation, Integra NeuroCare LLC and other Borrowers named
therein.+
10.4 Substituted and Amended Term Note dated March 29, 1999 by
Integra NeuroCare LLC, Redmond NeuroCare LLC, Heyer-Schulte
NeuroCare, Inc. and Camino NeuroCare, Inc. to Fleet Capital
Corporation.+
23 Consent of Arthur Andersen LLP.
99 Press Release issued by Integra LifeSciences Corporation on
March 29, 1999.+
- -----------------------------
+ Indicated Exhibits were filed on April 13, 1999 with the Company's
Current Report on Form 8-K.
25
<PAGE>
Exhibit 23
----------
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference of our report on the 1998 combined consolidated financial statements
of Saba Medical Management Co., Inc., Saba Medical Group, L.P., Heyer-Schulte
NeuroCare, L.P., Heyer-Schulte NeuroCare, Inc., Camino Neurocare, Inc. included
in this Form 8-K/A, into Integra LifeSciences Holdings Corporation's
Registration Statement File No. 333-58235 and No. 333-06577.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
June 11, 1999
26
