SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 0-26224
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0317849
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
105 MORGAN LANE
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(609) 275-0500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. /X/ - YES / / - NO
AS OF NOVEMBER 10, 2000 THE REGISTRANT HAD OUTSTANDING 17,155,500
SHARES OF COMMON STOCK, $.01 PAR VALUE.
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 (Unaudited) 3
Consolidated Statements of Operations for the three and
nine months ended September 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 (Unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
Exhibits 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 13,011 $ 19,301
Short-term investments.................................. 4,043 4,311
Accounts receivable, net of allowances of $830 and $944. 12,402 8,365
Inventories............................................. 16,341 10,111
Prepaid expenses and other current assets............... 805 718
-------- --------
Total current assets................................ 46,602 42,806
Property and equipment, net.................................. 11,789 9,699
Goodwill and intangible assets, net.......................... 25,296 13,219
Other assets................................................. 2,073 529
-------- --------
Total assets........................................ $ 85,760 $ 66,253
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term loans and current maturities of long-term loans $ 5,084 $ 2,254
Current portion of note payable......................... 1,587 --
Accounts payable, trade................................. 3,710 994
Accrued expenses and other liabilities.................. 6,269 5,540
Income taxes payable.................................... 615 643
Customer advances and deposits.......................... 1,799 3,901
Deferred revenue........................................ 1,777 1,460
-------- --------
Total current liabilities........................... 20,841 14,792
Long-term loan............................................... 5,750 7,625
Note payable................................................. 1,204 --
Deferred revenue............................................. 4,521 5,049
Deferred tax liability....................................... 1,906 392
Other liabilities............................................ 411 406
-------- --------
Total liabilities................................... 34,633 28,264
-------- --------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value (15,000 authorized shares;
500 Series A Convertible shares issued and outstanding at
September 30, 2000 and December 31, 1999, $4,000 liquidation
preference; 100 Series B Convertible shares issued and
outstanding at September 30, 2000 and December 31, 1999,
$11,550 with a 10% compounded annual dividend liquidation
preference; 54 Series C Convertible shares issued and
outstanding at September 30, 2000, $5,670 with a 10%
compounded annual dividend liquidation preference)....... 7 6
Common stock, $.01 par value (60,000 authorized shares; 16,889
and 16,131 shares issued at September 30, 2000 and December
31, 1999, respectively)................................. 169 161
Additional paid-in capital................................... 145,483 132,340
Treasury stock, at cost (20 and 1 shares at September 30, 2000
and December 31, 1999, respectively).................... (180) (7)
Other........................................................ (61) (143)
Accumulated other comprehensive loss......................... (725) (64)
Accumulated deficit.......................................... (93,566) (94,304)
-------- --------
Total stockholders' equity.......................... 51,127 37,989
-------- --------
Total liabilities and stockholders' equity................... $ 85,760 $ 66,253
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
3
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2000 1999 2000 1999
---------------------- -----------------------
<S> <C> <C> <C> <C>
REVENUES
Product sales ..................................... $16,890 $11,464 $45,810 $28,202
Other revenue ..................................... 2,669 663 5,071 1,443
------- ------- ------- -------
Total revenues ........................... 19,559 12,127 50,881 29,645
COSTS AND EXPENSES
Cost of product sales, including depreciation of
$473, $276, $1,272 and $914, respectively..... 7,345 6,051 20,999 16,434
Research and development .......................... 1,741 2,198 5,497 6,393
Selling and marketing ............................. 4,072 2,409 10,856 6,883
General and administrative ........................ 3,481 3,584 10,830 9,771
Amortization and other depreciation................ 964 582 2,609 1,221
------- ------- ------- -------
Total costs and expenses ................. 17,603 14,824 50,791 40,702
Operating income (loss) ........................... 1,956 (2,697) 90 (11,057)
Interest income ................................... 123 270 555 781
Interest expense .................................. (327) (215) (927) (472)
Gain on disposition of product line ............... -- -- 1,146 4,161
Other income, net ................................. 45 72 177 80
------- ------- ------- -------
Income (loss) before income taxes ................. 1,797 (2,570) 1,041 (6,507)
Income tax expense (benefit) ...................... 80 (541) 303 (1,322)
------- ------- ------- -------
Net income (loss) ................................. $ 1,717 $(2,029) 738 $(5,185)
======= ======= ======= =======
Net income (loss) per share
Basic ........................................ $ 0.07 $ (0.14) $ (0.26) $ (0.34)
Diluted ...................................... $ 0.07 $ (0.14) $ (0.26) $ (0.34)
Weighted average common shares outstanding.........
Basic ........................................ 17,439 16,810 17,335 16,792
Diluted ...................................... 19,534 16,810 17,335 16,792
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
4
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................... $ 738 $ (5,185)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................. 3,868 2,128
Gain on sale of product line and investments................... (1,316) (4,158)
Deferred tax benefit........................................... -- (1,807)
Amortization of discount and interest on investments........... (146) (266)
Amortization of unearned compensation.......................... 48 308
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable........................................ (2,698) 186
Inventories................................................ (2,439) 2,450
Prepaid expenses and other current assets.................. (17) 203
Non-current assets......................................... (1,459) (27)
Accounts payable, accrued expenses and other liabilities... 2,237 (505)
Customer advances and deposits............................. (2,102) 1,505
Deferred revenue........................................... (211) 6,194
-------- --------
Net cash (used in) provided by operating activities............ (3,497) 1,026
-------- --------
INVESTING ACTIVITIES:
Proceeds from sale of product line and other assets............ 1,600 6,354
Proceeds from sale/maturity of investments..................... 13,081 20,000
Purchases of available-for-sale investments.................... (12,423) (12,768)
Cash used in business acquisition, net of cash acquired........ (15,552) (14,794)
Purchases of property and equipment............................ (2,683) (1,553)
-------- --------
Net cash used in investing activities...................... (15,977) (2,761)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from short-term borrowings........................ 2,581 21
Repayments of term loan........................................ (1,625) (750)
Proceeds from sale of preferred stock.......................... 5,375 9,924
Proceeds from private placement of common stock................ 5,000 --
Proceeds from exercise of stock options and warrants........... 2,122 211
Treasury stock purchases....................................... (170) --
Collection of related party note receivable.................... 35
Preferred dividends paid....................................... (60) (60)
-------- --------
Net cash provided by financing activities.................. 13,258 9,346
-------- --------
Effect of exchange rate changes on cash and cash equivalents........ (74) --
Net (decrease) increase in cash and cash equivalents................ (6,290) 7,611
Cash and cash equivalents at beginning of period.................... 19,301 5,277
-------- --------
Cash and cash equivalents at end of period.......................... $ 13,011 $ 12,888
======== ========
Non-cash investing and financing activities:
Common stock issued in settlement of obligation................ $641 --
Business acquisition costs accrued in liabilities.............. 634 $ 1,074
Note issued in a business acquisition.......................... 2,654 --
Term loan assumed in connection with a business acquisition.... -- 11,000
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
5
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
In the opinion of management, the September 30 unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) which the Company considers necessary for a fair presentation of the
financial position and results of operations of the Company. Operating results
for the periods ended September 30, 2000 are not necessarily indicative of the
results to be expected for the entire year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, including disclosures of
contingent assets and liabilities and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. These unaudited consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements for the year
ended December 31, 1999 included in the Company's Annual Report on Form 10-K.
2. Acquisitions
On April 6, 2000, the Company purchased the Selector(R) Ultrasonic Aspirator,
Ruggles(TM) hand-held neurosurgical instruments and Spembly Medical cryosurgery
product lines, including certain assets and liabilities, from NMT Medical, Inc.
for $11.6 million in cash. On January 17, 2000, the Company purchased the
business, including certain assets and liabilities, of Clinical Neuro Systems,
Inc. ("CNS") for $6.8 million. CNS designs, manufactures and sells neurosurgical
external ventricular drainage systems, including catheters and drainage bags, as
well as cranial access kits. The purchase price of the CNS business consisted of
$4.0 million in cash and a 5% $2.8 million promissory note issued to the seller.
The promissory note, which is payable in two principal payments of $1.4 million
each, plus accrued interest, in January 2001 and 2002, is collateralized by
inventory, property and equipment of the CNS business and by a collateral
assignment of a $2.8 million promissory note from one of the Company's
subsidiaries.
These acquisitions have been accounted for using the purchase method of
accounting, and the results of operations of the acquired businesses have been
included in the consolidated financial statements since their respective dates
of acquisition. The allocation of the purchase price of these acquisitions
resulted in acquired intangible assets, consisting primarily of completed
technology, customer lists and trademarks of approximately $10.0 million, which
are being amortized on a straight-line basis over lives ranging from 5 to 15
years, and residual goodwill of approximately $4.5 million, which is being
amortized on a straight-line basis over 15 years.
The following unaudited pro forma financial information assumes that the
acquisitions had occurred as of the beginning of each period (in thousands):
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
2000 1999
---- ----
<S> <C> <C>
Total revenue ....................................... $ 53,897 $ 40,605
Net income (loss) ................................... 1,057 (3,744)
Basic and diluted net loss per share ................ $ (0.25) $ (0.28)
</TABLE>
The pro forma amounts for the nine month periods ended September 30, 2000 and
1999, respectively, include $1.1 million ($0.07 per share) and $3.7 million
($0.22 per share) gains, net of tax, from the sale of product lines. Also,
included in the historical and pro forma results for the nine months ended
September 30, 2000 and the pro forma results for the nine month period ended
September 30, 1999 are $429,000 of fair value inventory purchase accounting
adjustments. The pro forma results do not necessarily represent results that
would have occurred if the acquisition had taken place on the basis assumed
above, nor are they indicative of the results of future combined operations.
6
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Issuance of Series C Preferred Stock
On March 29, 2000, the Company issued 54,000 shares of Series C Convertible
Preferred Stock ("Series C Preferred") and warrants to purchase 300,000 shares
of common stock at $9.00 per share to affiliates of Soros Private Equity
Partners LLC for $5.4 million, net of issuance costs. The Series C Preferred is
convertible into 600,000 shares of common stock and has a liquidation preference
of $5.4 million with a 10% annual cumulative dividend associated with the
liquidation preference. The Series C Preferred was issued with a beneficial
conversion feature that resulted in a nonrecurring, non-cash dividend of $4.2
million, which has been reflected in the net loss per share applicable to common
stock for the nine months ended September 30, 2000. The beneficial conversion
dividend is based upon the excess of the closing price of the underlying common
stock as compared to the fixed conversion price of the Series C Preferred Stock,
after taking into account the value assigned to the common stock warrants.
4. Income (Loss) per Share
Basic and diluted net income (loss) per share for the periods ended September 30
were as follows:
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ......................... $ 1,717 $ (2,029) $ 738 $(5,185)
Dividends on Series A preferred stock ..... (20) (20) (60) (60)
Dividends on Series B preferred stock ..... (275) (250) (800) (500)
Dividends on Series C preferred stock ..... (135) -- (270) --
Beneficial conversion feature on
Series C preferred stock ............... -- -- (4,170) --
------- -------- ------- -------
Net income (loss) applicable to common stock ... $ 1,287 $ (2,299) $(4,562) $(5,745)
Weighted average shares outstanding:
Basic ................................. 17,439 16,810 17,335 16,792
Effect of dilutive securities
Stock options 1,841 -- -- --
Stock purchase warrants 254 -- -- --
------- -------- ------- -------
Diluted ................................... 19,534 16,810 17,335 16,792
Income (loss) per share
Basic ..................................... $ 0.07 $ (0.14) $ (0.26) $ (0.34)
Diluted ................................... $ 0.07 $ (0.14) $ (0.26) $ (0.34)
</TABLE>
Shares of common stock issuable through exercise or conversion of the following
dilutive securities were not included in the computation of diluted net income
(loss) per share for each period because their effect would have been
antidilutive:
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Stock options .............................. 181 3,181 3,695 3,181
Stock purchase warrants .................... -- 910 551 910
Convertible preferred stock ................ 3,468 2,868 3,468 2,868
----- ----- ----- -----
Total ...................................... 3,649 6,959 7,714 6,959
</TABLE>
7
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Comprehensive Income (Loss)
Comprehensive income (loss) for the three and nine months ended September 30 was
as follows:
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ........................... $ 1,717 $ (2,029) $ 738 $ (5,185)
Foreign currency translation adjustments .... (385) -- (723) --
Unrealized (loss) gain on investments ....... (55) 101 238 9
Reclassification adjustment for gains
included in net income ..................... -- -- (176) --
------- -------- ----- --------
Comprehensive income (loss) ................. $ 1,277 $ (1,928) $ 77 $ (5,176)
======= ======== ===== ========
</TABLE>
6. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Finished goods..................... $ 7,745 $ 3,786
Work-in-process.................... 3,599 2,224
Raw materials...................... 4,997 4,101
-------- --------
$ 16,341 $ 10,111
======== ========
</TABLE>
8
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Segment Reporting
The Company's reportable business segments consist of the Integra NeuroSciences
division, which is a leading provider of implants, instruments and monitors used
in neurosurgery, neurotrauma, and related critical care, and the Integra
LifeSciences division, which develops and manufactures a variety of medical
products and devices, including products based on the Company's proprietary
tissue regeneration technology which are used to treat soft-tissue and
orthopedic conditions. Integra NeuroSciences sells primarily through a direct
sales organization, and Integra LifeSciences sells primarily through strategic
alliances and distributors. Selected financial information on the Company's
business segments is reported below (in thousands):
<TABLE>
<CAPTION>
Total
Integra Integra Reportable
NeuroSciences LifeSciences Segments Corporate Total
------------- ------------ ---------- --------- -----
<S> <C> <C> <C> <C> <C>
Three months ended September 30,
2000
----
Product sales ................ $ 11,877 $ 5,013 $ 16,890 $ -- $ 16,890
Total revenue ................ 12,127 7,432 19,559 -- 19,559
Operating costs .............. 10,203 5,257 15,460 1,475 16,935
---------
Segment profits (loss)........ 1,924 2,175 4,099 (1,475) 2,624
Amortization expense.... (668)
---------
Operating income........ 1,956
1999
----
Product sales ................ $ 7,046 $ 4,418 $ 11,464 $ -- $ 11,464
Total revenue ................ 7,046 5,081 12,127 -- 12,127
Operating costs .............. 7,846 5,132 12,978 1,574 14,552
---------
Segment profits (loss)........ (800) (51) (851) (1,574) (2,425)
Amortization expense.... (272)
---------
Operating income........ $ (2,697)
Nine months ended September 30,
2000
----
Product sales ................ $ 31,670 $ 14,140 $ 45,810 $ -- $ 45,810
Total revenue ................ 32,420 18,461 50,881 -- 50,881
Operating costs .............. 28,321 16,062 44,383 4,590 48,973
---------
Segment profits (loss)........ 4,099 2,399 6,498 (4,590) 1,908
Amortization expense.... (1,818)
---------
Operating income........ $ 90
1999
Product sales ................ $ 14,961 $ 13,241 $ 28,202 $ -- $ 28,202
Total revenue ................ 14,961 14,684 29,645 -- 29,645
Operating costs .............. 18,391 17,074 35,465 4,740 40,205
---------
Segment profits (loss)........ (3,430) (2,390) (5,820) (4,740) (10,560)
Amortization expense.... (497)
---------
Operating income........ $ (11,057)
</TABLE>
9
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Segment Reporting (continued)
Included in segment operating expenses were the following amounts of
depreciation (in thousands):
<TABLE>
<CAPTION>
Total
Integra Integra Reportable
NeuroSciences LifeSciences Segments Corporate Total
------------- ------------ ---------- --------- -----
<S> <C> <C> <C> <C> <C>
Three months ended September 30,
2000 410 285 695 60 755
1999 214 257 471 102 573
Nine months ended September 30,
2000 969 896 1,865 185 2,050
1999 528 884 1,412 219 1,631
</TABLE>
For the nine months ended September 30, 2000 and 1999, the Company's foreign
sales, primarily to Europe and the Asia Pacific regions, were 22% and 24% of
total product sales, respectively.
8. Legal Matters
In July 1996, the Company filed a patent infringement lawsuit in the United
States District Court for the Southern District of California 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 charged, 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 certain 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 filed a countersuit asking for an award of defendants' reasonable
attorney fees. This case went to trial in February 2000, and on March 17, 2000,
a jury returned a unanimous verdict for the Company, found that Merck KGaA had
infringed and induced the infringement of the Company's patents, and awarded
$15,000,000 in damages. On September 29, 2000, the United States District Court
for the Southern District of California entered judgment in favor of the Company
and against Merck KGaA in the case. In entering the judgment, the court also
granted the Company pre-judgment interest of approximately $1,350,000, bringing
the total amount to approximately $16,350,000. The Company expects that Merck
KGaA will appeal various decisions of the Court and request a new trial, a
reduction in damages, or a judgment as a matter of law notwithstanding the
verdict. No amounts for this favorable verdict have been reflected in the
Company's financial statements.
Bruce D. Butler, Ph.D., Bruce A. McKinley, Ph.D., and C. Lee Parmley (the "Optex
Claimants"), each parties to a Letter Agreement (the "Letter Agreement") with
Camino NeuroCare, Inc., a wholly-owned subsidiary of the Company ("Camino"),
dated as of December 18, 1996, alleged that Camino breached the terms of the
Letter Agreement prior to the Company's acquisition of the NeuroCare Group
(Camino's prior parent company). In August, 2000, the Company and the Optex
Claimants reached an agreement whereby the Company paid the Optex Claimants
$250,000 cash and issued 45,000 shares of the Company's common stock, valued at
$641,250, in settlement of all claims under the Letter Agreement. Subsequent to
the settlement of this matter, the Company received $350,000 from the seller of
the NeuroCare Group through assertion of the Company's right of indemnification.
The Company did not record any provision for this matter, as liabilities
recorded at the time of the Company's acquisition of the NeuroCare Group and the
$350,000 indemnification payment were adequate to cover this liability.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements, the notes thereto and the other financial
information included elsewhere in this report and in the Company's 1999 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
General
The Company develops, manufactures and markets medical devices, implants and
biomaterials. The Company's operations consist of (1) Integra NeuroSciences,
which is a leading provider of implants, instruments, and monitors used in
neurosurgery, neurotrauma, and related critical care and (2) Integra
LifeSciences, which develops and manufactures a variety of medical products and
devices, including products based on our proprietary tissue regeneration
technology which are used to treat soft tissue and orthopedic conditions.
Integra NeuroSciences sells primarily through a direct sales organization, and
Integra LifeSciences sells primarily through strategic alliances and
distributors.
The Company's segment financial results for the three and nine months ended
September 30, 2000 and 1999 may not be directly comparable as a result of the
certain transactions occurring in 1999 and 2000. In March 1999, the Company
acquired the NeuroCare Group of companies ("NeuroCare") for $25.4 million and,
in June 1999, the Company transitioned all selling and marketing efforts related
to INTEGRA(R) Dermal Regeneration Template to Johnson & Johnson Medical (now
Ethicon, Inc.) ("Ethicon") under an agreement with Ethicon (the "Ethicon
Agreement"). In January 2000, the Company acquired the business, including
certain assets and liabilities, of Clinical Neuro Systems, Inc. ("CNS") for $4.0
million in cash and a $2.8 million note payable to the seller. CNS designs,
manufactures and sells neurosurgical external ventricular drainage systems,
including catheters and drainage bags, as well as cranial access kits. In April
2000, the Company acquired the Selector(R) Ultrasonic Aspirator, Ruggles(TM)
hand-held neurosurgical instruments and the Spembly Medical cryosurgery product
lines, including certain assets and liabilities, from NMT Medical, Inc. ("NMT")
for $11.6 million in cash.
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Overall, the Company recorded net income of $1.7 million for the three months
ended September 30, 2000, as compared to a net loss of $2.0 million for the
comparable period in 1999. Operating results for the three months ended
September 30, 2000 improved by $4.7 million, with an operating profit of $2.0
million recorded in 2000 as compared to a $2.7 million operating loss in 1999.
Included in the third quarter 1999 operating loss were the effects of certain
acquisition related charges approximating $0.7 million incurred in connection
with the NeuroCare acquisition.
Total revenues increased by $7.5 million to $19.6 million for the three months
ended September 30, 2000 as compared to $12.1 million for the three months ended
September 30, 1999. Product sales increased by $5.5 million to $16.9 million for
the three months ended September 30, 2000 and other revenues increased $2.0
million to $2.7 million. Product sales and cost of product sales were as follows
(in thousands):
<TABLE>
<CAPTION>
Integra Integra
NeuroSciences LifeSciences Consolidated
<S> <C> <C> <C>
Three months ended September 30, 2000:
Product sales..................................... $11,877 $5,013 $16,890
Cost of product sales............................. 4,785 2,560 7,345
Gross margin on product sales..................... 7,092 2,453 9,545
Gross margin percentage........................... 60% 49% 57%
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Integra Integra
NeuroSciences LifeSciences Consolidated
<S> <C> <C> <C>
Three months ended September 30, 1999:
Product sales..................................... $ 7,045 $ 4,419 $ 11,464
Cost of product sales............................. 3,718 2,333 6,051
Gross margin on product sales..................... 3,327 2,086 5,413
Gross margin percentage........................... 47% 47% 47%
</TABLE>
Product sales in the Integra NeuroSciences division increased $4.8 million to
$11.9 million for the three months ended September 30, 2000 primarily as a
result of acquired product lines and sales of the DuraGen(TM) Dural Graft Matrix
product, which was launched in the third quarter of 1999. Sales of products
acquired in the CNS and NMT product line acquisitions totaled $2.9 million and
DuraGen(TM) sales increased $1.5 million during the three months ended September
30, 2000. Gross margin on product sales increased to 60% for the three months
ended September 30, 2000, as compared to 47% for the third quarter of 1999.
Gross margin on product sales for the quarter ended September 30, 1999 was
adversely affected by $0.4 million of fair value purchase accounting
adjustments. Excluding these purchase accounting adjustments, gross margin on
product sales would have been 53% in the third quarter of 1999. The increase in
adjusted gross margins resulted from increased sales (including acquired product
lines) of products with higher gross margins.
Product sales in the Integra LifeSciences division increased $0.6 million to
$5.0 million for the three months ended September 30, 2000. Sales growth in the
Integra LifeSciences business was led by sales of collagen matrices to the
Genetics Institute division of American Home Products Corporation for use in
their human recombinant bone morphogenetic protein-2 ("rhBMP-2") program for
various orthopedic and periodontal applications and sales of the recently
acquired Spembly Medical line of cyrosurgery products. Gross margin on product
sales increased to 49% for the three months ended September 30, 2000, as
compared to 47% for the three months ended September 30, 1999. Excluding $0.1
million of fair value purchase accounting adjustments recorded in the third
quarter of 1999, gross margin on product sales would have been 49% in 1999.
Other revenue in the Integra NeuroSciences segment increased $0.3 million to
$0.3 million for the three months ended September 30, 2000 and consisted of
royalty income. Other revenue in the Integra LifeSciences segment increased $1.7
million to $2.4 million for the three months ended September 30, 2000, as
compared to $0.7 million for the three months ended September 30, 1999. The
majority of this increase relates to $0.8 million of revenues recorded in
connection with the completion of one of the clinical and research payment
events under the Ethicon Agreement and $0.7 million of revenues recorded in
connection with the licensing of certain intellectual property rights relating
to antibodies for TGF-beta to Cambridge Antibody Technology (CAT) and Genzyme
General.
Research and development expenses were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
------ ------
<S> <C> <C>
Integra NeuroSciences $ 600 $ 538
Integra LifeSciences 1,141 1,660
------ ------
Total $1,741 $2,198
</TABLE>
Research and development activities within the Integra LifeSciences segment
decreased $0.5 million to $1.1 million for the three months ended September 30,
2000 primarily because of reduced headcount, a reduction in spending in the
DePuy cartilage program prior to moving into large animal studies, and the
completion in late 1999 of the majority of the activities associated with post
approval study for the INTEGRA(R) Dermal Regeneration Template, which was
submitted to the FDA in September 2000. Future expenditures will depend upon the
progress of ongoing research and development programs, including those for which
the Company receives funding from third parties.
<PAGE>
12
Selling and marketing expenses were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
------ ------
<S> <C> <C>
Integra NeuroSciences $ 3,484 $ 2,018
Integra LifeSciences 588 391
------- -------
Total $ 4,072 $ 2,409
</TABLE>
Integra NeuroSciences selling and marketing expenses increased by $1.5 million
to $3.5 million for the three months ended September 30, 2000 due to the
expansion of the direct sales force to over 40 field personnel in 2000 increased
sales commissions incurred on higher sales and costs associated with the
Company's new distribution center, which was opened in the second quarter of
2000. The increase of $0.2 million in Integra LifeSciences selling and marketing
expenses to $0.6 million for the three months ended September 30, 2000 is
primarily the result of increased costs associated with the Company's new
distribution center and sales and marketing expenses associated with the
acquired cryosurgery product line.
General and administrative expenses were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
------ ------
<S> <C> <C>
Integra NeuroSciences $ 1,193 $ 1,483
Integra LifeSciences 874 642
Corporate 1,414 1,459
------- -------
Total $ 3,481 $ 3,584
</TABLE>
Integra NeuroSciences general and administrative expenses decreased $0.3 million
to $1.2 million for the three months ended September 30, 2000. Included in
general and administrative expenses for the third quarter of 1999 were $0.3
million of severance costs in connection with the closure of an administrative
facility in Wisconsin that was acquired in the NeuroCare acquisition. Offsetting
this decrease is a provision for uncollectible accounts recorded in the third
quarter of 2000. General and administrative expenses in the Integra LifeSciences
segment increased $0.2 million to $0.9 million for the three months ended
September 30, 2000 primarily due to additional headcount.
The $0.4 million increase in amortization and other depreciation (excluding $0.5
million and $0.3 million of depreciation included in cost of sales for the three
months ended September 30, 2000 and 1999, respectively) to $1.0 million in the
third quarter of 2000 was primarily the result of additional amortization
related to the CNS and NMT product line acquisitions.
Interest expense increased $0.1 million for the three months ended September 30,
2000 to $0.3 million as a result of interest incurred on the $2.8 million note
payable to the seller of the CNS business and a net increase in average bank
borrowings in the third quarter of 2000 as compared to the comparable quarter in
1999. Interest income decreased because of lower average cash and investment
balances outstanding during the third quarter of 2000.
Income tax expense increased to $0.1 million in the third quarter of 2000, as
compared to an income tax benefit of $0.5 million recorded in the third quarter
of 1999 that was attributed to the deferred tax benefits recognized on the
consolidated post-acquisition losses to the extent of the deferred tax liability
recorded in the NeuroCare acquisition.
13
<PAGE>
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Overall, the Company recorded net income of $0.7 million for the nine months
ended September 30, 2000, as compared to a net loss of $5.2 million for the
comparable period in 1999. Operating results for the nine months ended September
30, 2000 improved by $11.1 million, with an operating profit of $0.1 million
recorded in 2000 as compared to an $11.1 million operating loss in 1999. The
improvement in 2000 operating results was primarily due to increased revenues in
2000 and the effects of certain acquisition related charges incurred in 1999 in
connection with the NeuroCare acquisition.
Total revenues increased by $21.2 million to $50.9 million for the nine months
ended September 30, 2000 as compared to $29.6 million for the nine months ended
September 30, 1999, primarily as a result of increased product sales. Product
sales increased by $17.6 million to $45.8 million for the nine months ended
September 30, 2000 as compared to $28.2 million for the nine months ended
September 30, 1999. Product sales and cost of product sales were as follows (in
thousands):
<TABLE>
<CAPTION>
Integra Integra
NeuroSciences LifeSciences Consolidated
------------- ------------ ------------
<S> <C> <C> <C>
Nine months ended September 30, 2000:
Product sales..................................... $31,670 $14,140 $45,810
Cost of product sales............................. 13,621 7,378 20,999
Gross margin on product sales..................... 18,049 6,762 24,811
Gross margin percentage........................... 57% 48% 54%
Integra Integra
NeuroSciences LifeSciences Consolidated
------------- ------------ ------------
Nine months ended September 30, 1999:
Product sales..................................... $ 14,961 $13,241 $28,202
Cost of product sales............................. 9,109 7,325 16,434
Gross margin on product sales..................... 5,852 5,916 11,768
Gross margin percentage........................... 39% 45% 42%
</TABLE>
Product sales in the Integra NeuroSciences division increased $16.7 million for
the nine months ended September 30, 2000 as a result of acquired product lines
and a $3.6 million increase in sales of the DuraGen(TM) product. Gross margin on
product sales increased to 57% for the nine months ended September 30, 2000,
with $0.3 million of fair value purchase accounting adjustments from the
acquired CNS and NMT product lines recorded in cost of product sales in 2000.
Gross margin on product sales for the nine months ended September 30, 1999 was
adversely affected by $1.9 million of fair value purchase accounting adjustments
and $0.5 million of inventory reserves against slow-moving products recorded in
cost of product sales. Excluding purchase accounting adjustments, gross margin
on product sales would have been 58% and 52% in 2000 and 1999, respectively. The
increase in adjusted gross margins resulted primarily from the higher gross
margins on sale of products acquired in the CNS and NMT product line
acquisitions and the DuraGen(TM) product and the effect of the $0.5 million
inventory reserves recorded in the nine months ended September 30, 1999.
Product sales in the Integra LifeSciences division increased $0.9 million for
the nine months ended September 30, 2000. The increase in sales was led by sales
of acquired product lines, sales from the first commercial shipment of tyrosine
polycarbonate polymers for use in clinical development of various fixation
devices in the first quarter of 2000, and sales of collagen matrices to the
Genetics Institute for use in their rhBMP-2 program. Offsetting these increases
was a decrease in sales of INTEGRA(R) Dermal Regeneration Template associated
with the lower transfer price to Ethicon under the Ethicon Agreement and a
decrease in sales related to the sale of a product line. Gross margin on product
sales increased to 48% for the nine months ended September 30, 2000, as compared
to 45% for the nine months ended September 30, 1999. Excluding $0.1 million and
$0.6 million of fair value purchase accounting adjustments recorded in the nine
months ended September 30, 2000 and 1999, respectively, gross margin on product
sales would have been 48% in 2000 and 49% in 1999. Lower gross margins on sales
of INTEGRA(R) Dermal Regeneration Template to Ethicon during the nine months
ended September 30, 2000 were offset by increased utilization of the Plainsboro
manufacturing facility and sales of higher margin acquired product lines during
the period.
14
<PAGE>
Other revenue in the Integra NeuroSciences segment increased $0.8 million to
$0.8 million for the nine months ended September 30, 2000 and consisted of
royalty income. Other revenue in the Integra LifeSciences segment increased $2.9
million to $4.3 million for the nine months ended September 30, 2000, as
compared to $1.4 million for the nine months ended September 30, 1999. The
majority of this increase relates to revenue recorded in connection with the
completion of one of the clinical and research payment events under the Ethicon
Agreement, licensing revenues from CAT and Genzyme General, and contract
research funding related to INTEGRA(R) Dermal Regeneration Template received
under the Ethicon Agreement.
Research and development expenses were as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Integra NeuroSciences $ 1,811 $ 1,411
Integra LifeSciences 3,686 4,982
------- -------
Total $ 5,497 $ 6,393
</TABLE>
Research and development activities within the Integra NeuroSciences segment
increased $0.4 million for the nine months ended September 30, 2000 to $1.8
million primarily as a result of the NeuroCare acquisition in March 1999.
Research and development activities within Integra LifeSciences segment
decreased $1.3 million to $3.7 million for the nine months ended September 30,
2000 primarily because of the elimination of research programs that were ongoing
in the first quarter of 1999, reduced headcount, a reduction in spending in the
DePuy cartilage program, and the completion in late 1999 of the majority of the
activities associated with post approval study for the INTEGRA(R) Dermal
Regeneration Template.
Selling and marketing expenses were as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Integra NeuroSciences $ 8,906 $ 4,015
Integra LifeSciences 1,950 2,868
------- -------
Total $10,856 $ 6,883
</TABLE>
Integra NeuroSciences selling and marketing expenses increased by $4.9 million
to $8.9 million for the nine months ended September 30, 2000 due to the
expansion of the direct sales force to over 40 field personnel in 2000,
increased sales commissions incurred on higher sales, higher tradeshow costs in
2000 and costs associated with the Company's new distribution center. Sales and
marketing expenses in the first quarter of 1999 before the NeuroCare acquisition
were minimal. The decrease of $0.9 million in Integra LifeSciences selling and
marketing expenses to $2.0 million for the nine months ended September 30, 2000
is the result of lower costs associated with the transition of INTEGRA(R) Dermal
Regeneration Template selling and marketing activities to Ethicon in June 1999
under the Ethicon Agreement, offset by higher costs associated with the
Company's new distribution center, and sales and marketing expenses associated
with the acquired cryosurgery product line.
General and administrative expenses were as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Integra NeuroSciences $ 3,657 $ 3,513
Integra LifeSciences 2,456 1,794
Corporate 4,717 4,464
------- -------
Total $10,830 $ 9,771
15
</TABLE>
<PAGE>
Integra NeuroSciences general and administrative expenses increased $0.1 million
to $3.7 million for the nine months ended September 30, 2000. This increase
relates primarily to general and administrative costs associated with acquired
facilities and a $0.2 million provision for uncollectible accounts recorded in
2000. Offsetting this increase were $1.0 million of severance costs incurred in
the nine months ended September 30, 1999 in connection with the closure of an
administrative facility in Wisconsin that was acquired in the NeuroCare
acquisition. General and administrative expenses in the Integra LifeSciences
segment increased $0.7 million to $2.5 million for the nine months ended
September 30, 2000 primarily due to additional headcount. The increase of $0.3
million in corporate general and administrative expenses to $4.7 million for the
nine months ended September 30, 2000 is primarily due to additional headcount.
The $1.4 million increase in amortization and other depreciation (excluding $1.3
million and $0.9 million of depreciation included in cost of sales for the nine
months ended September 30, 2000 and 1999, respectively) to $2.6 million in 2000
was the result of $1.3 million of additional amortization and $0.1 million of
additional depreciation. Increased amortization relates primarily to
acquisitions.
Interest expense increased $0.5 million for the nine months ended September 30,
2000 to $0.9 million as a result of interest incurred on the $2.8 million note
payable to the seller of the CNS business acquired in January 2000, three full
quarters of interest expense in 2000 on debt assumed in the NeuroCare
acquisition, and increased average bank borrowings in 2000 as compared to the
comparable period in 1999. Interest income decreased because of lower average
cash and investment balances outstanding during the nine months ended September
30, 2000, as compared to the comparable period in 1999.
For the nine months ended September 30, 2000 and 1999, the Company recorded a
gain of $1.1 million and $4.2 million, respectively, in connection with the sale
of product lines.
Income tax expense increased to $0.3 million for the nine months ended September
30, 2000, as compared to an income tax benefit of $1.3 million recorded for the
nine months ended September 30, 1999. This net $1.3 million tax benefit related
to $1.8 million of deferred tax benefits recognized on the consolidated
post-acquisition losses to the extent of the deferred tax liability recorded in
the NeuroCare acquisition, offset by a $0.4 million tax provision on the sale of
a product line and $0.1 million of state income taxes. Income taxes recorded in
the nine months ended September 30, 2000 relate primarily to taxes incurred by a
foreign subsidiary and state income taxes.
Liquidity and Capital Resources
Prior to the third quarter of 2000, the Company had incurred losses from
operations since its inception and may incur such losses in the future unless
product sales and research and collaborative arrangements generate sufficient
revenue to fund continuing operations. As of September 30, 2000, the Company had
an accumulated deficit of $93.6 million.
The Company has funded its operations to date primarily through private and
public offerings of equity securities, product revenues, research and
collaboration funding, borrowings under a revolving credit line and cash
acquired in connection with business acquisitions and dispositions. At September
30, 2000, the Company had cash, cash equivalents and short-term investments of
approximately $17.1 million and $13.6 million in short and long-term borrowings.
The Company's principal uses of funds during the nine months ended September 30,
2000 were $4.1 million for the acquisition of CNS, $11.6 million for the
acquisition of certain product lines from NMT, $2.7 million in purchases of
property and equipment, $1.6 million of term loan repayments, and $3.5 million
used in operations. Cash used in operations for the nine months ended September
30, 2000 was primarily impacted by increased inventory needs and increased
accounts receivable balances generated from higher product sales. This compares
to a $1.0 million positive operating cash flow generated in the nine months
ended September 30, 1999, which resulted primarily from a $6.2 million increase
in deferred revenues, most of which was provided by cash received under the
Ethicon Agreement. During the nine months ended September 30, 2000, the Company
raised $5.4 million from the sale of Series C Preferred Stock and warrants to
affiliates of Soros Private Equity Partners LLC, $5.0 million from a private
placement of common stock, $2.1 million from the issuance of common stock
through exercised stock options and stock purchase warrants, $2.6 million of
proceeds from short-term borrowings, and $1.6 million from the sale of product
lines.
16
<PAGE>
The Company maintains a term loan and revolving credit facility from Fleet
Capital Corporation (collectively, the "Fleet Credit Facility"), which is
collateralized by all the assets and ownership interests of various subsidiaries
of the Company including Integra NeuroCare LLC, and NeuroCare Holding
Corporation (the parent company of Integra NeuroCare LLC) has guaranteed Integra
NeuroCare LLC's obligations. Integra NeuroCare LLC is subject to various
financial and non-financial covenants under the Fleet Credit Facility, including
significant restrictions on its ability to transfer funds to the Company or the
Company's other subsidiaries. The financial covenants specify minimum levels of
interest and fixed charge coverage and net worth, and also specify maximum
levels of capital expenditures and total indebtedness to operating cash flow,
among others. While the Company anticipates that Integra NeuroCare LLC will be
able to satisfy the requirements of these financial covenants, there can be no
assurance that Integra NeuroCare LLC will generate sufficient earnings before
interest, taxes, depreciation and amortization to meet the requirements of such
covenants. The term loan is subject to mandatory prepayment amounts if certain
levels of cash flow are achieved.
Additionally, in January 2000, the Company issued a 5% $2.8 million promissory
note to the seller of the CNS business. The promissory note, which is payable in
two principal payments of $1.4 million each, plus accrued interest, in January
2001 and 2002, is collateralized by inventory, property and equipment of the CNS
business and by a collateral assignment of a $2.8 million promissory note from
one of the Company's subsidiaries.
In the short-term, the Company believes that it has sufficient resources to fund
its operations. However, in the longer-term, there can be no assurance that the
Company will be able to generate sufficient revenues to obtain positive
operating cash flows or profitability.
Other Matters
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Investments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivatives and hedging activities and supercedes
several existing standards. SFAS No. 133, as amended by SFAS No. 137 and SFAS
No. 138, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company does not expect that the adoption of SFAS No. 133
will have a material impact on the Company's consolidated financial statements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 "Accounting for Certain Transactions Involving Stock Compensation --an
interpretation of APB Opinion No. 25". ("FIN No. 44"). FIN No. 44 clarifies the
application of APB Opinion 25 for certain issues. FIN No. 44 became effective
July 1, 2000, but certain conclusions cover specific events that occurred after
either December 15, 1998, or January 12, 2000. The adoption of FIN No. 44 did
not have an impact on the Company's consolidated financial statements.
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities - a replacement of FASB
Statement No. 125" ("SFAS No. 140"). SFAS No. 140 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 133 is effective for fiscal years
ending after December 15, 2000. The Company does not expect that the adoption of
SFAS No. 140 will have any impact on the Company's consolidated financial
statements.
In December 1999 (as amended in March 2000 and June 2000) the staff of the
Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101,
Revenue Recognition (the "SAB"). To the extent the guidance in the SAB differs
from generally accepted accounting principles previously utilized by an SEC
registrant, the SAB indicates that the SEC staff will not object to reporting
the cumulative effect of a change in accounting principle. The Company is
currently assessing the full impact that the SAB will have on its financial
statements. Once the final assessment is complete, the total financial impact of
the SAB, if any, will be recorded as a cumulative effect of a change in
accounting principle in the fourth quarter of 2000.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In July 1996, the Company filed a patent infringement lawsuit in the United
States District Court for the Southern District of California 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 charged, 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 certain 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 filed a countersuit asking for an award of defendants' reasonable
attorney fees. This case went to trial in February 2000, and on March 17, 2000,
a jury returned a unanimous verdict for the Company, found that Merck KGaA had
infringed and induced the infringement of the Company's patents, and awarded
$15,000,000 in damages. On September 29, 2000, the United States District Court
for the Southern District of California entered judgment in favor of the Company
and against Merck KGaA in the case. In entering the judgment, the court also
granted the Company pre-judgment interest of approximately $1,350,000, bringing
the total amount to approximately $16,350,000. The Company expects that Merck
KGaA will appeal various decisions of the Court and request a new trial, a
reduction in damages, or a judgment as a matter of law notwithstanding the
verdict. No amounts for this favorable verdict have been reflected in the
Company's financial statements.
Bruce D. Butler, Ph.D., Bruce A. McKinley, Ph.D., and C. Lee Parmley (the "Optex
Claimants"), each parties to a Letter Agreement (the "Letter Agreement") with
Camino NeuroCare, Inc., a wholly-owned subsidiary of the Company ("Camino"),
dated as of December 18, 1996, alleged that Camino breached the terms of the
Letter Agreement prior to the Company's acquisition of the NeuroCare Group
(Camino's prior parent company). In August, 2000, the Company and the Optex
Claimants reached an agreement whereby the Company paid the Optex Claimants
$250,000 cash and issued 45,000 shares of the Company's common stock, valued at
$641,250, in settlement of all claims under the Letter Agreement. Subsequent to
the settlement of this matter, the Company received $350,000 from the seller of
the NeuroCare Group through assertion of the Company's right of indemnification.
The Company did not record any provision for this matter, as liabilities
recorded at the time of the Company's acquisition of the NeuroCare Group and the
$350,000 indemnification payment were adequate to cover this liability.
Item 2. Changes in Securities and Use of Proceeds
On September 28, 2000, the Company issued and sold 333,334 shares of its common
stock at $15.00 per share to ArthroCare Corporation, resulting in aggregate
proceeds to the Company of $5,000,000. The proceeds of this transaction are
available for general corporate purposes. The shares were issued in a private
placement and will become available for sale on the first anniversary of their
issuance pursuant to Rule 144 under the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed with the Securities and Exchange Commission a Report on Form
8-K dated September 28, 2000 with respect to the issuance of 333,334 shares of
common stock to ArthroCare Corporation through a private placement.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
Date: November 14, 2000 /s/ STUART M. ESSIG
-------------------
Stuart M. Essig
President and Chief Executive Officer
Date: November 14, 2000 /s/ DAVID B. HOLTZ
------------------
David B. Holtz
Vice President, Finance and Treasurer
19
<PAGE>
INDEX OF EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
27 Financial Data Schedule
20
