SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number 0-26224
INTEGRA LIFESCIENCES 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 May 11, 1998 the registrant had outstanding 29,905,097 shares
of Common Stock, $.01 par value.
INTEGRA LIFESCIENCES CORPORATION
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 (Unaudited) 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
Exhibits 13
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
March 31, 1998 December 31, 1997
-------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 5,922 $ 2,083
Short-term investments........................... 17,632 24,189
Accounts receivable, net......................... 3,139 2,780
Inventories...................................... 2,390 2,350
Prepaid expenses and other current assets........ 521 400
------------ ----------
Total current assets......................... 29,604 31,802
Property and equipment, net.......................... 6,376 6,414
Other assets......................................... 115 140
------------ ----------
Total assets...................................... $ 36,095 $ 38,356
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade............................ $ 325 $ 541
Accrued expenses and other current liabilities..... 3,080 1,854
------------ ----------
Total current liabilities.................... 3,405 2,395
Other liabilities.................................... 247 206
------------ ----------
Total liabilities............................ 3,652 2,601
------------ ----------
Stockholders' Equity:
Preferred stock, $.01 par value (15,000,000
authorized shares; no shares issued or
outstanding)....................................... - -
Common stock, $.01 par value (60,000,000
authorized shares; 29,905,097 and 29,903,082
issued and outstanding at March 31, 1998 and
December 31, 1997, respectively)................... 299 299
Additional paid-in capital............................ 111,736 111,728
Unearned compensation related to stock options........ (232) (266)
Notes receivable - related parties.................... (35) (35)
Accumulated other comprehensive income................ (77) (26)
Treasury stock at cost (1,000 shares at
March 31, 1998).................................. (4) -
Accumulated deficit................................... (79,244) (75,945)
------------- -----------
Total stockholders' equity................... 32,443 35,755
------------ ----------
Total liabilities and stockholders' equity........... $ 36,095 $ 38,356
============ ==========
The accompanying notes are an integral part
of the condensed consolidated financial statements
3
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended March 31,
---------------------------
1998 1997
---- ----
REVENUE
Product sales............................... $ 3,163 $ 2,970
Product license fees........................ 1,015 -
Product development......................... 250 -
Research grants............................. 69 154
Royalties................................... 63 64
-------- --------
Total revenue........................... 4,560 3,188
COSTS AND EXPENSES
------------------
Cost of product sales....................... 1,726 1,556
Research and development.................... 2,142 1,417
Selling and marketing....................... 1,560 1,118
General and administrative.................. 2,822 1,415
--------- ---------
Total costs and expenses................ 8,250 5,506
--------- ---------
Operating loss.............................. (3,690) (2,318)
Other income................................ 390 488
--------- ---------
Net loss.................................... $ (3,300) $ (1,830)
========== ==========
Basis and diluted net loss per share........ $ (0.10) $ (0.06)
========== ==========
Weighted average number of common and
common equivalent shares outstanding.... 31,904 28,935
========== ==========
The accompanying notes are an integral part
of the condensed consolidated financial statements
4
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net loss............................................................... $ (3,300) $ (1,830)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization....................................... 336 486
Gain on sale of assets.............................................. (40) (43)
Amortization of discount and interest on investments................ 249 22
Amortization of unearned compensation............................... 34 31
Changes in assets and liabilities:
Accounts receivable.............................................. (359) 526
Inventories...................................................... (40) (131)
Prepaid expenses and other current assets........................ (121) (74)
Non-current assets............................................... (7) -
Accounts payable, accrued expenses and other liabilities......... 1,108 (197)
----------- ------------
Net cash used in operating activities............................... (2,140) (1,210)
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of assets........................................... 47 48
Purchases of available-for-sale investments............................ (8,662) (9,922)
Proceeds from sale/maturity of investments............................. 14,920 8,000
Purchases of property and equipment.................................... (330) (147)
------------ ------------
Net cash provided by (used in) investing activities................. 5,975 (2,021)
----------- ------------
FINANCING ACTIVITIES:
Treasury stock purchase................................................ (4) -
Proceeds from exercised stock options.................................. 8 286
Proceeds from sale of common stock..................................... - -
------------ ------------
Net cash provided by financing activities........................... 4 286
----------- ------------
Net increase (decrease) in cash and cash equivalents....................... 3,839 (2,945)
Cash and cash equivalents at beginning of period........................... 2,083 11,762
----------- -----------
Cash and cash equivalents at end of period................................. $ 5,922 $ 8,817
=========== ===========
The accompanying notes are an integral part
of the condensed consolidated financial statements
5
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
In the opinion of management, the March 31 unaudited condensed
consolidated financial statements contain all adjustments (consisting
only of normal recurring accruals) which the Company considers necessary
for a fair presentation of the financial position and results of
operations of the Company. Operating results for the three month period
ended March 31, 1998 are not necessarily indicative of the results to be
expected for the entire year. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, including disclosures of contingent
assets and liabilities, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. These unaudited condensed consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements for the year ended December 31, 1997 included in the Company's
Annual Report on Form 10-K.
2. Loss per share
Since the Company incurred net losses in all periods presented,
outstanding options and warrants to purchase an aggregate of 3,812,000
and 2,911,000 shares of common stock at March 31, 1998 and March 31,
1997, respectively, were not included in the diluted per share
calculations, as their effect would be antidilutive.
3. Recent accounting pronouncement
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and display an alternative income measurement and
its components (revenue, expenses, gains and losses) in a full set of
general purpose financial statements. The total comprehensive income for
the three months ended March 31, 1998 is $3,351,000, compared to
$1,861,000 for the three-month period ending March 31, 1997. Total
comprehensive income includes the net loss and the net unrealized gains
and losses on securities.
4. Inventory
Inventories consist of the following:
(In thousands) March 31, 1997 December 31, 1997
--------------- -----------------
Finished goods............................. $ 758 $ 773
Work-in-process............................ 1,242 1,251
Raw materials.............................. 390 326
---------- ---------
$ 2,390 $ 2,350
========== =========
6
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Current Liabilities
Accrued expenses and other liabilities consist of the following:
(In thousands) March 31, 1997 December 31, 1997
--------------- -----------------
Legal fees................................. $ 1,360 $ 471
Contract research.......................... 288 252
Vacation .................................. 268 214
Other ..................................... 1,164 917
---------- ---------
$ 3,080 $ 1,854
========== =========
6. Legal Matters
On or about November 4, 1997, Integra (Artificial Skin) Corporation ("IASC"),
a wholly-owned subsidiary of the Company, and the Massachusetts Institute of
Technology ("MIT") filed a patent infringement lawsuit against LifeCell
Corporation ("LifeCell"). LifeCell filed counterclaims seeking declaratory
judgments of non-infringement and patent invalidity and filed a complaint
against MIT and IASC in Texas state court claiming tortious interference,
business and product disparagement, unfair competition amoung other charges.
LifeCell was seeking unspecified actual monetary damages in an amount not less
than $12 million together with treble damages, unspecified punitive damages,
and other relief. On April 9, 1998, the Company and LifeCell agreed to settle
all litigation pending between the parties. Under the terms of the settlement,
the Company has agreed not to assert certain patents against LifeCell's
current technology or reasonable equivalents thereof and LifeCell has
acknowledged the validity of these patents. As part of the settlement
agreement, the Company agreed to purchase $500,000 of LifeCell common stock,
and LifeCell agreed to a royalty-bearing license for any possible future
biomaterials-based matrix products developed by LifeCell that may be covered
by the patents.
In January 1994, ABS LifeSciences, Inc., a wholly-owned subsidiary of the
Company, entered into a five-year distribution agreement with the distributor
of the Company's Chronicure product pursuant to which the distributor is
obligated to purchase certain minimum quantities of wound care products. In
October 1995, the Company's subsidiary filed a complaint in the United States
District Court for the District of New Jersey claiming the distributor
breached the distribution agreement by, among other things, not paying the
subsidiary for certain products delivered. In November 1995, the distributor
filed an affirmative defense and counterclaim alleging, among other things,
fraudulent misrepresentation and breach of contract and seeking damages of
approximately $1.2 million plus unspecified punitive damages. During 1997, the
case was inactive and dismissed by the court based on a tentative settlement
with leave to reinstate on the request of either party. Settlement discussions
are continuing and the Company has submitted a request to reinstate the case
in the event that a settlement is not reached. The Company will continue to
defend the counterclaim if the case is reinstated.
On or about July 18, 1996, Telios Pharmaceuticals, Inc. ("Telios"), a wholly
owned subsidiary of the Company, filed a patent infringement lawsuit against
three parties: Merck KGaA, a German corporation, Scripps Research Institute, a
California nonprofit corporation, and David A. Cheresh, Ph.D., a research
scientist with Scripps. The lawsuit was filed in the U.S. District Court for
the Southern District of California. The complaint charges, among other
things, that the defendant Merck KGaA "willfully and deliberately induced, and
continues to willfully and deliberately induce, defendants Scripps Research
Institute and Dr. David A. Cheresh to infringe United States Letters Patent
No. 4,729,255." This patent is one of a group of five patents granted to The
Burnham Institute and licensed by Telios 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 Company is
7
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
pursuing numerous medical applications of the RGD technology in the fields of
anti-thrombic agents, cancer, osteoporosis, and a cell adhesive coating
designed to improve the performance of implantable devices and their
acceptance by the body. The defendants have filed a countersuit asking for an
award of defendants' reasonable attorney fees.
In August 1995, Telios received confirmation of its Chapter 11 plan of
reorganization in the United States Bankruptcy Court for the Southern District
of California. Under the plan, Telios assumed a certain License Agreement and
a certain Research Agreement entered into with the University of Utah and the
University of Utah Research Foundation ("University") in 1991. On March 27,
1996, Telios filed a motion with the bankruptcy court for a determination as
to whether there were any "cure" requirements for the assumed contracts with
the University (the "Motion"). In the meantime, on March 22, 1996, the
University filed a complaint against Telios in the United States District
Court for the District of Utah seeking a declaration that the License
Agreement and Research Agreement were terminated or terminable. The District
Court case was subsequently dismissed in light of the pending Motion in the
bankruptcy court. In November 1997, the bankruptcy court entered an order
decreeing that Telios' license to certain of the patents and technology rights
under the License Agreement had been reduced to a non-exclusive license.
However, the court did not terminate the license. In addition, Telios still
retains an exclusive license to certain patents, technology and rights to
make, use and sell licensed products thereunder, which have been exclusively
sublicensed by Telios to Cambridge Antibody Technology, Limited. A hearing has
been set for May 27, 1998 to determine whether Telios has licensing rights to
a certain new invention disclosed by the University under the License
Agreement and/or the Research Agreement.
The ultimate liability of the cases not settled can not be determined because
of the considerable uncertainties that exist. The Company's financial
statements do not reflect any significant amounts related to possible
unfavorable outcomes of these matters. The Company intends to continue its
vigorous defense of these matters. However, it is possible that the Company's
results of operations, financial position and cash flows in a particular
period could be materially affected by these contingencies.
7. Century Medical, Inc.
--------------------
On March 12, 1998, the Company entered into a series of agreements with
Century Medical, Inc. ("CMI"), a wholly-owned subsidiary of ITOCHU Corporation,
under which CMI will distribute the Company's neuro-surgery products in Japan.
Under the agreements, CMI paid an up-front non-refundable licensing fee of
$1.0 million on March 31,1998 and agreed to purchase 500,000 shares of newly
issued preferred stock of the Company for $4.0 million in the second quarter of
1998. CMI will also underwrite all costs of the Japanese clinical trials and
regulatory approval processes. On April 30, 1998, CMI closed on
its initial purchase of 250,000 shares of preferred stock for $2 million.
8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion contains trend information and other
forward-looking statements related to the future use and revenues of
INTEGRA(TM) Artificial Skin and anticipated expenditure levels and are made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Such statements involve risks and uncertainties which may cause
results to differ materially from those set forth in these statements. In
addition, the economic, competitive, governmental, technological and other
factors identified in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission could affect such results.
General
The Company develops, manufactures and markets medical devices, implants
and biomaterials primarily used in the treatment of burns and skin defects,
spinal and cranial disorders, orthopedics and other surgical applications. The
Company seeks to be the world's leading company specializing in implantable
medical and biopharmaceutical therapies to target and control cell behavior,
and to build shareholder value by acquiring, discovering and discovering
cost-effective, off-the-shelf products that satisfy unmet medical needs.
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Total revenues increased to approximately $4.6 million for the three
months ended March 31, 1998 from $3.2 million for the three months ended March
31,1997 with increases in licensing fees, product development funding and
product sales. Product sales increased to $3.2 million for the three months
ended March 31, 1998 from $3.0 million for the three months ended March 31,
1997. Sales of INTEGRA(TM) Artificial Skin ("INTEGRA") for the three months
ended March 31, 1998 increased slightly to $1.3 from the prior year as
international sales increases (representing 36% of INTEGRA sales) were offset
by a decline in North American sales. The Company believes that the primary
application of INTEGRA in the United States has been for patients with severe
life-threatening burns, and it believes that future domestic sales growth will
require the expansion of use to additional indications including reconstructive
procedures. These additional indications require approval by the FDA before
the product can be marketed domestically for the applications. The Company has
clinical data on the use of INTEGRA in reconstructive and wound healing
procedures and recently received CE Mark approval in the European Community to
market the product for these applications. The Company believes that in
addition to the severe burn market, the use and sale of INTEGRA will depend on
its ability to market the product in the EU and other international markets
for reconstructive indications. The Company also plans on submitting a
pre-approval market amendment to the FDA seeking the additional indications in
the United States.
Product sales of the Company's other medical devices were approximately
$1.8 million for the three months ended March 31, 1998 up slightly from $1.7
million for the three months ended March 31, 1997. Product sales increases in
the Company's infection control and dental products were partially offset by a
decline related to a discontinued product. Sales of the Company's other
medical devices can vary significantly on a quarter to quarter basis depending
on the timing of shipments to private label customers and contract
distributors. Export sales for the three months ended March 31, 1998 increased
to $640,000 from $290,000 for the three months ended March 31, 1997 and
included an increase of $275,000 in international INTEGRA sales.
Other revenue, which includes grant revenue, license fees, product
development revenue and royalties, was approximately $1.4 million for the
three months ended March 31, 1998 compared to $220,000 for the three months
ended March 31, 1997. Included in other revenue during the first quarter of
1998 was a $1 million non-refundable licensing fee from Century Medical, Inc.
related to a distribution agreement for the
9
Company's neurosurgical products. The Company's product development revenue
increased by $250,000 related to the Company's development and marketing
agreement with Johnson & Johnson Professional, Inc. The Company continues to
seek research grants, licensing arrangements and development funding for
several of its technologies, although the timing and amount of such revenue,
if any, can not be predicted.
Cost of product sales increased to approximately $1.7 million (55% of
product sales) for the three months ended March 31, 1998 from $1.6 million
(52% of product sales) for the three months ended March 31, 1997. The increase
in cost of product sales as a percentage of product sales was primarily
attributable to lower utilization of the Company's INTEGRA manufacturing
facility during the quarter. Due to the high fixed costs of the manufacturing
facility for INTEGRA, the Company is anticipating higher unit costs until
there is a requirement for higher production volume. The Company believes its
current capacity to produce INTEGRA and its other medical products is
sufficient to support significant growth, and the utilization of this capacity
will affect its gross margin on product sales.
Research and development expense increased to approximately $2.1 million
for the three-month period ended March 31, 1998 from $1.4 million for the
three-month period ended March 31, 1997. Increases included the addition of
development personnel and the funding of several contract development programs
for the skin and orthopedic business lines as well as other business ventures.
The Company expects the level of research and development expenditures in 1998
will continue to exceed 1997 levels as the Company continues to expand its
development programs. The amount of resources and the allocation of those
resources to fund research and development will vary depending upon a number
of factors, including the progress of development of the Company's
technologies, the timing and outcome of pre-clinical and clinical results,
changing competitive conditions, potential funding opportunities and
determinations with respect to the commercial potential of the Company's
technologies.
Selling and marketing expense increased to approximately $1.6 million for
the three-month period ended March 31, 1998 from $1.1 million for the
three-month period ended March 31, 1997. Increases included international sales
and marketing expenses associated with the addition of technical personnel and
consultants involved in training and promotional activities, and domestic
costs associated with the Company's product and cost reimbursement training
programs.
General and administrative expense increased to approximately $2.8 million
for the three-month period ended March 31, 1998 from $1.4 million for the
three-month period ended March 31, 1997, and included a provision of $200,000
related to the closing of the Company's West Chester, Pennsylvania facility. The
hiring of additional management personnel during the latter part of 1997
(including the Company's Chief Executive Officer and Chief Operating Officer)
and additional legal and other professional costs contributed to the increase in
general and administrative expenses during the first quarter of 1998 and are
expected to continue to represent an increase over the comparable year prior
periods for the next several quarters of 1998. The Company settled its
litigation with LifeCell Corporation during April 1998, but expects to continue
to incur significant litigation costs associated with the Company's various
litigation matters. (See footnote 6 under Item 1).
Liquidity and Capital Resources
At March 31, 1998, the Company had cash, cash equivalents and short-term
investments of approximately $23.6 million and no long-term debt. The
Company's principal uses of funds during the three-month period ended March
31, 1998 were $2.1 million for operations and $340,000 in purchases of
property and equipment. The Company anticipates that it will continue to use
its liquid assets to fund operations until sufficient revenues can be
generated through product sales and collaborative arrangements. There can be
no assurance that the Company will be able to generate sufficient revenues to
obtain positive operating cash flows or profitability.
10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3 Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock of Integra LifeSciences Corporation
10.1 Stock Purchase Agreement dated as of February 26, 1998 by and
between Integra LifeSciences Corporation and Century Medical, Inc.
10.2 Registration Rights Agreement dated as of April 30, 1998 by and
between Integra LifeSciences Corporation and Century Medical, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on February 3, 1998 with respect
to (1) an Employment Agreement dated December 27, 1997 between Integra
LifeSciences Corporation and Stuart M. Essig, (2) a Stock Option Grant and
Agreement made December 27, 1997 by and between Integra LifeSciences Corporation
and Stuart M. Essig, (3) a Restricted Units Agreement dated December 27, 1997 by
and between Integra LifeSciences Corporation and Stuart M. Essig, (4) amendments
to the Company's By-Laws and (5) amendments to the Company's 1996 Incentive
Stock Option and Non-Qualified Stock Option Plan.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTEGRA LIFESCIENCES CORPORATION
Date: May 14, 1998 /s/ Stuart M. Essig
--------------------
Stuart M. Essig, Ph.D.
President and Chief Executive Officer
Date: May 14, 1998 /s/ David B. Holtz
-------------------
David B. Holtz
Vice President, Treasurer
12