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 June 30, 2002
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.)
311 Enterprise Drive
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 August 9, 2002 the registrant had outstanding 26,998,369 shares of
Common Stock, par value $.01 per share.
27
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
INDEX
<table>
<caption>
<s> <c>
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 (Unaudited) 3
Consolidated Statements of Operations for the three and six month periods ended
June 30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows for the six month periods ended June 30, 2002
and 2001 (Unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
Exhibits 27
</table>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<table>
In thousands, except per share amounts
<caption>
June 30, December 31,
2002 2001
------------ ------------
<s> <c>
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 51,195 $ 44,518
Short-term investments .................................. 50,512 22,183
Accounts receivable, net of allowances of
$303 and $964 ....................................... 15,642 14,024
Inventories ............................................. 25,025 24,329
Prepaid expenses and other current assets ............... 2,708 2,898
--------- ---------
Total current assets ................................ 145,082 107,952
Noncurrent investments ................................... 37,613 64,335
Property, plant, and equipment, net ...................... 11,273 11,662
Deferred income taxes, net ............................... 6,459 10,243
Identifiable intangible assets, net ...................... 15,247 16,898
Goodwill ................................................. 16,502 14,627
Other assets ............................................. 2,214 1,871
--------- ---------
Total assets .............................................. $ 234,390 $ 227,588
========= =========
<caption>
<s> <c> <c>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt ......................................... $ -- $ 3,576
Accounts payable, trade ................................. 2,989 2,924
Income taxes payable .................................... 1,703 1,481
Customer advances and deposits .......................... 4,062 4,843
Deferred revenue ........................................ 929 772
Accrued expenses and other current liabilities .......... 5,441 5,550
--------- ---------
Total current liabilities ........................... 15,124 19,146
Deferred revenue ......................................... 3,602 3,949
Other liabilities ........................................ 516 437
--------- ---------
Total liabilities ......................................... 19,242 23,532
<caption>
<s> <c> <c>
Commitments and contingencies
Stockholders' Equity:
Preferred stock; $0.01 par value; 15,000 authorized
shares; 0 and 54 Series C Convertible shares issued and
outstanding at June 30, 2002 and December 31,
2001, respectively .................................... -- 1
Common stock; $0.01 par value; 60,000 authorized shares;
26,984 and 26,129 issued and outstanding at June 30,
2002 and December 31, 2001, respectively .............. 269 261
Additional paid-in capital .............................. 285,549 284,021
Treasury stock, at cost; 6 shares at June 30, 2002 and
December 31, 2001, respectively ....................... (51) (51)
Other ................................................... (24) (37)
Accumulated other comprehensive income (loss) ........... 665 (539)
Accumulated deficit ..................................... (71,260) (79,600)
--------- ---------
Total stockholders' equity ............................ 215,148 204,056
--------- ---------
Total liabilities and stockholders' equity ............... $ 234,390 $ 227,588
========= =========
The accompanying notes are an integral part of the consolidated financial statements
</Table>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<table>
(In thousands, except per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
<caption>
<c> <c> <c> <c>
REVENUES
Product sales .................... $24,703 $21,385 $49,133 $41,669
Other revenue .................... 1,738 1,535 3,224 2,935
------- ------- ------- -------
Total revenues ................ 26,441 22,920 52,357 44,604
COSTS AND EXPENSES
Cost of product sales ............ 9,465 8,310 18,993 16,904
Research and development ......... 2,073 1,837 3,895 3,910
Selling and marketing ............ 5,928 5,269 11,600 10,020
General and administrative ....... 3,121 3,319 6,340 6,523
Amortization ..................... 364 729 714 1,409
------- ------- ------- -------
Total costs and expenses ...... 20,951 19,464 41,542 38,766
Operating income ................. 5,490 3,456 10,815 5,838
Interest income (expense), net ... 993 (114) 1,986 (192)
Other income (expense), net ...... 55 (151) 32 (213)
------- ------- ------- -------
Income before income taxes ....... 6,538 3,191 12,833 5,433
Income tax expense ............... 2,289 429 4,493 675
------- ------- ------- -------
Net income........................ $ 4,249 $ 2,762 $ 8,340 $ 4,758
======= ======= ======= =======
Basic net income per share ....... $ 0.15 $ 0.12 $ 0.28 $ 0.20
Diluted net income per share ..... $ 0.14 $ 0.10 $ 0.27 $ 0.18
Weighted average common shares outstanding:
Basic ...................... 29,080 20,245 28,770 19,931
Diluted .................... 30,849 25,049 30,783 22,211
The accompanying notes are an integral part of these consolidated financial statements
</table>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<table>
(In thousands)
Six Months Ended June 30,
----------------------------
2002 2001
---- ----
<caption>
<c> <c>
OPERATING ACTIVITIES:
Net income ...................................................... $ 8,340 $ 4,758
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................... 2,338 2,855
Deferred tax provision .......................................... 3,640 --
Amortization of discount and premium on investments ............. 882 --
Other, net ...................................................... 30 82
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable .......................................... (1,476) (1,492)
Inventories .................................................. (670) (5,406)
Prepaid expenses and other current assets .................... 105 605
Non-current assets ........................................... (139) 642
Accounts payable, accrued expenses and other liabilities ..... 218 520
Customer advances and deposits ............................... (781) 1,535
Deferred revenue ............................................. (191) (1,115)
-------- --------
Net cash provided by operating activities ....................... 12,296 2,984
-------- --------
<caption>
<s> <c> <c>
INVESTING ACTIVITIES:
Proceeds from sale/maturity of investments ...................... 11,157 1,000
Purchases of available-for-sale investments ..................... (13,549) (2,891)
Cash used in business acquisition, net of cash acquired ......... (67) (5,899)
Purchases of property and equipment ............................. (1,103) (1,168)
-------- --------
Net cash used in investing activities ........................... (3,562) (8,958)
-------- --------
<caption>
<s> <c> <c>
FINANCING ACTIVITIES:
Net proceeds from revolving credit facility ..................... -- 747
Repayment of term loan .......................................... -- (3,203)
Repayment of note payable ....................................... (3,600) (1,540)
Proceeds from exercised stock options and warrants .............. 1,480 4,533
-------- --------
Net cash (used in) provided by financing activities ............. (2,120) 537
-------- --------
Effect of exchange rate changes on cash and cash equivalents .... 63 (47)
Net increase (decrease) in cash and cash equivalents ............ 6,677 (5,484)
Cash and cash equivalents at beginning of period ................ 44,518 14,086
-------- --------
Cash and cash equivalents at end of period ...................... $ 51,195 $ 8,602
======== ========
Non-cash investing activities:
Business acquisition costs accrued in liabilities ..... $ -- $ 716
The accompanying notes are an integral part of these consolidated financial statements
</table>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
General
In the opinion of management, the June 30 unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial position, results
of operations and cash flows of the Company. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
These unaudited consolidated financial statements should be read in conjunction
with the Company's consolidated financial statements for the year ended December
31, 2001 included in the Company's Annual Report on Form 10-K. Operating results
for the three-month and six month periods ended June 30, 2002 are not
necessarily indicative of the results to be expected for the entire year.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent liabilities, and the reported amounts of revenues and
expenses. Significant estimates affecting amounts reported or disclosed in the
consolidated financial statements include allowances for doubtful accounts
receivable and sales returns, net realizable value of inventories, estimates of
future cash flows associated with long-lived asset valuations, depreciation and
amortization periods for long-lived assets, valuation allowances recorded
against deferred tax assets, loss contingencies, and estimates of costs to
complete performance obligations associated with research, licensing, and
distribution arrangements for which revenue is accounted for using percentage of
completion accounting. These estimates are based on historical experience and on
various other assumptions that are believed to be reasonable under the current
circumstances. Actual results could differ from these estimates.
The Company has reclassified certain prior year amounts to conform with the
current year's presentation.
Recently Issued Accounting Standards
On July 31, 2002, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (Statement 146). Statement 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Statement 146 nullifies
Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)", which required that a liability for
an exit cost be recognized at the date of an entity's commitment to an exit
plan. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
assessing the impact that Statement 146 will have on its financial statements.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement
144). Statement 144 supercedes Statement of Financial Accounting Standards No
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". Statement 144 applies to all long-lived assets,
including discontinued operations, and consequently amends Accounting Principles
Board Opinion No. 30, "Reporting Results of Operations-- Reporting the Effects
of Disposal of a Segment of a Business". The Company adopted Statement 144 on
January 1, 2002. The adoption of Statement 144 had no impact on the Company's
financial statements.
<page>
1. BASIS OF PRESENTATION (continued)
Recently Issued Accounting Standards
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" (Statement 141), and No.142,
"Goodwill and Other Intangible Assets" (Statement 142).
Statement 141 requires that all business combinations initiated after June 30,
2001, be accounted for using the purchase method of accounting and further
clarifies the criteria to recognize intangible assets separately from goodwill.
The Company determined that its assembled workforce intangible asset does not
meet the criteria for recognition as a separate identifiable intangible asset
and thus, effective January 1, 2002, reclassified the net book value of its
assembled workforce intangible asset into goodwill. Under Statement 142,
goodwill and indefinite-lived intangible assets are no longer amortized, but are
reviewed for impairment at the reporting unit level annually, or more frequently
if impairment indicators arise. Separable intangible assets that are not deemed
to have an indefinite life will continue to be amortized over their useful
lives. The Company reassessed the useful lives of its identifiable intangible
assets and determined that they continue to be appropriate. As required by
Statement 142, the Company amortized through December 31, 2001 all goodwill
acquired prior to July 1, 2001. Effective January 1, 2002, the Company ceased
amortization of all goodwill. The implementation of Statement 142 is expected to
reduce amortization expense by approximately $1.0 million in 2002.
If the non-amortization provisions of Statement 142 had been applied for all of
2001, net income for the three and six months ended June 30, 2001 would have
been as follows:
<table>
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
----------------- -----------------
(in thousands)
<caption>
<s> <c> <c>
Net income, as reported ................... $ 2,762 $ 4,758
Add: Goodwill amortization ................ 218 365
Assembled workforce amortization ..... 36 65
------- -------
Net income, as adjusted ................... $ 3,016 $ 5,188
Net income per share, as adjusted
Basic .................................. $ 0.14 $ 0.22
Diluted ................................ $ 0.12 $ 0.20
</table>
The Company completed its initial impairment review for goodwill as of June 30,
2002 and determined that its reporting unit goodwill was not impaired.
2. INVENTORIES
<table>
Inventories consisted of the following:
<caption>
June 30, December 31,
2002 2001
---- ----
(in thousands)
<s> <c> <c>
Raw materials.............................. $ 7,603 $ 7,559
Work-in process............................ 3,862 3,493
Finished goods............................. 13,560 13,277
------- -------
$ 25,025 $24,329
======= =======
</table>
<page>
3. GOODWILL AND OTHER INTANGIBLE ASSETS
<table>
Changes in the carrying amount of reporting unit goodwill for the six months
ended June 30, 2002, were as follows:
<caption>
Integra Integra
NeuroSciences LifeSciences Total
------------- ------------- -------------
(in thousands)
<s> <c> <c> <c>
Goodwill, net of accumulated amortization
at December 31, 2001 .................... $ 13,815 $ 812 $ 14,627
Reclassification of assembled workforce
intangible, net of accumulated
amortization ............................ 1,245 30 1,275
Foreign currency translation ............... 597 3 600
-------- -------- --------
Goodwill at June 30, 2002 .................. $ 15,657 $ 845 $ 16,502
======== ======== ========
The components of the Company's identifiable intangible assets were as follows:
<caption>
June 30, 2002 December 31, 2001
---------------------- ----------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
-------- ------------ -------- ------------
(in thousands)
<s> <c> <c> <c> <c>
Technology ................................ $ 11,565 $ (1,919) $ 11,255 $ (1,516)
Customer base ............................. 3,620 (865) 3,575 (674)
Trademarks ................................ 1,715 (363) 1,715 (305)
Assembled work force ...................... -- -- 1,581 (306)
Other ..................................... 1,838 (344) 1,824 (251)
-------- ------------ -------- ------------
$ 18,738 $ (3,491) $ 19,950 $ (3,052)
Accumulated amortization .................. (3,491) (3,052)
-------- --------
$ 15,247 $ 16,898
======== ========
</table>
Before the effects of recent acquisitions (see Note 10), amortization expense is
expected to approximate $1.4 million annually in each of the next five years.
4. COMMON AND PREFERRED STOCK
On April 15, 2002, the Company notified the holders of the 54,000 shares of
Series C Preferred Stock of its intention to redeem these shares on May 31, 2002
for $6.6 million. On April 16, 2002, all of the holders of the Series C
Preferred Stock exercised their right to convert their shares into 600,000
shares of common stock prior to the redemption.
5. INCOME TAXES
Income tax expense was approximately 35% and 12% of income before income taxes
for the six months ended June 30, 2002 and 2001, respectively. Income tax
expense for the six months ended June 30, 2002 included a deferred income tax
provision of $3.6 million, or 28% of income before income taxes. The effective
rate for the six months ended June 30, 2001 reflects the utilization of net
operating loss carryforwards during the period. In the quarter ended December
31, 2001, the Company reversed a portion of the valuation allowance recorded
against the deferred tax assets related to these net operating loss
carryforwards.
6. COMPREHENSIVE INCOME
<table>
Comprehensive income was as follows:
(In thousands)
<caption>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
<c> <c> <c>
Net income ......................... $ 4,249 $ 2,762 $ 8,340 $ 4,758
Foreign currency translation
adjustment ...................... 1,355 (414) 1,127 (745)
Unrealized gain on investments ..... 526 121 77 107
-------- -------- -------- --------
Comprehensive income ............... $ 6,130 $ 2,469 $ 9,544 $ 4,120
======== ======== ======== ========
7. NET INCOME PER SHARE
Basic and diluted net income per share were as follows:
(In thousands, except per share amounts)
<caption>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
<s> <c> <c> <c> <c>
Basic net income per share:
Net income ................................. $ 4,249 $ 2,762 $ 8,340 $ 4,758
Dividends on preferred stock ............... (24) (371) (159) (756)
------ ------ ------ ------
Net income available to common stock ..... $ 4,225 $ 2,391 $ 8,181 $ 4,002
Basic net income per share ............... $ 0.15 $ 0.12 $ 0.28 $ 0.20
====== ====== ====== ======
Diluted net income per share:
Net income ................................. $ 4,249 $ 2,762 $ 8,340 $ 4,758
Dividends on preferred stock ............... (24) (135) (159) (756)
------ ------ ------ ------
Net income available to common stock ..... $ 4,225 $ 2,627 $ 8,181 $ 4,002
Diluted net income per share ............. $ 0.14 $ 0.10 $ 0.27 $ 0.18
====== ====== ====== ======
Weighted average shares outstanding:
Basic........................................ 29,080 20,245 28,770 19,931
Effect of dilutive securities:
Options and warrants..................... 1,769 2,330 2,013 2,280
Preferred stock.......................... -- 2,474 -- --
------ ------ ------ ------
Diluted...................................... 30,849 25,049 30,783 22,211
====== ====== ====== ======
</table>
Prior to its conversion on April 16, 2002, the Series C Preferred Stock
(convertible into 600,000 shares of common stock) was not included in the
computation of diluted net income per share for the three or six month periods
ended June 30, 2002 because its effect would have been antidilutive. Prior to
its conversion on June 26, 2001, the Series B Preferred Stock (convertible into
2,617,800 shares of common stock) was not included in the computation of diluted
net income per share for the six month period ended June 30, 2001 because its
effect would have been antidilutive. Options outstanding at June 30, 2002 to
purchase 627,000 shares of common stock were excluded from the computation of
diluted net income per share for the three and six month periods ended June 30,
2002 because their exercise price exceeded the average market price of the
common stock for the applicable period.
8. DIVISION AND GEOGRAPHIC INFORMATION
Integra's business is divided into two divisions: Integra NeuroSciences(TM) and
Integra LifeSciences(TM).
The Integra NeuroSciences division is a leading provider of implants, devices,
and systems used in neurosurgery, neurotrauma, and related critical care and a
distributor of disposables and supplies used in the diagnosis and monitoring of
neurological disorders. The Integra LifeSciences division develops and
manufactures a variety of medical products and devices, including products based
on the Company's proprietary tissue regeneration technology that are used to
treat soft tissue and orthopedic conditions.
Integra NeuroSciences sells primarily through a direct sales force in the United
States and Western Europe and through a network of distributors elsewhere
throughout the world. For the majority of the products manufactured by the
Integra LifeSciences division, the Company has partnered with market leaders for
the development and marketing efforts related to these products.
As a result of the acquisitions of NeuroSupplies, Inc. (renamed Integra
NeuroSupplies, Inc.) in December 2001, and GMSmbH and Satelec Medical in April
2001, the following division financial results may not be directly comparable.
<table>
Total
Integra Integra Reportable
NeuroSciences LifeSciences Divisions
------------- ------------ ----------
(in thousands)
<caption>
Three months ended June 30, 2002
----------------------------------
<c> <c> <c>
Product sales .................... $ 20,062 $ 4,641 $ 24,703
Total revenue .................... 20,090 6,351 26,441
Operating expenses ............... 14,818 3,761 18,579
Operating income ................. 5,272 2,590 7,862
Depreciation included in division
operating expenses ............ 519 250 769
Three months ended June 30, 2001
----------------------------------
Product sales .................... $ 17,032 $ 4,353 $ 21,385
Total revenue .................... 17,310 5,610 22,920
Operating expenses ............... 12,799 4,163 16,962
Operating income ................. 4,511 1,447 5,958
Depreciation included in division
operating expenses ............ 373 257 630
Six months ended June 30, 2002
----------------------------------
Product sales .................... $ 39,857 $ 9,276 $ 49,133
Total revenue .................... 39,913 12,444 52,357
Operating expenses ............... 29,424 7,419 36,843
Operating income ................. 10,489 5,025 15,514
Depreciation included in division
operating expenses ............ 1,072 497 1,569
Six months ended June 30, 2001
----------------------------------
Product sales .................... $ 32,818 $ 8,851 $ 41,669
Total revenue .................... 33,374 11,230 44,604
Operating expenses ............... 24,657 8,860 33,517
Operating income ................. 8,717 2,370 11,087
Depreciation included in division
operating expenses ............ 790 555 1,345
</table>
<page>
8. DIVISION AND GEOGRAPHIC INFORMATION (continued)
<table>
A reconciliation of the amounts reported for total reportable divisions to the
consolidated financial statements is as follows:
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
(in thousands)
<s> <c> <c> <c> <c>
Operating expenses:
Total reportable divisions .............. $18,579 $16,962 $36,843 $33,517
Plus: Corporate general and
administrative expenses ........ 2,008 1,773 3,985 3,840
Amortization ...................... 364 729 714 1,409
------ ------ ------ ------
Consolidated total operating expenses ... $20,951 $19,464 $41,542 $38,766
Operating income:
Total reportable divisions .............. $ 7,862 $ 5,958 $15,514 $11,087
Less: Corporate general and
administrative expenses ........ 2,008 1,773 3,985 3,840
Amortization ...................... 364 729 714 1,409
------ ------ ------ ------
Consolidated operating income ........... $ 5,490 $ 3,456 $10,815 $ 5,838
<caption>
Product sales consisted of the following:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
(in thousands)
<c> <c> <c> <c>
Integra NeuroSciences:
Neuro intensive care unit ...... $ 6,973 $ 6,914 $14,214 $13,492
Neuro operating room ........... 10,610 9,056 20,702 17,294
Other NeuroSciences products ... 2,479 1,062 4,941 2,032
------ ------ ------ ------
Total product sales ............ 20,062 17,032 39,857 32,818
Integra LifeSciences:
Tissue repair products ......... $ 2,333 1,836 4,454 3,626
Other medical devices .......... 2,308 2,517 4,822 5,225
------ ------ ------ ------
Total product sales ............ 4,641 4,353 9,276 8,851
Consolidated product sales ........ $24,703 $21,385 $49,133 $41,669
Product sales by major geographic area are summarized below:
<caption>
United Asia Other
States Europe Pacific Foreign Total
-------- -------- -------- -------- --------
(in thousands)
<s> <c> <c> <c> <c> <c>
Three months ended June 30, 2002 ... $ 20,022 $ 2,826 $ 1,103 $ 752 $ 24,703
Three months ended June 30, 2001 ... 16,819 2,330 1,390 846 21,385
Six months ended June 30, 2002 ..... $ 39,305 $ 5,850 $ 2,342 $ 1,636 $ 49,133
Six months ended June 30, 2001 ..... 32,750 4,714 2,505 1,700 41,669
</table>
9. COMMITMENTS AND CONTINGENCIES
As consideration for certain technology, manufacturing, distribution and selling
rights and licenses granted to the Company, the Company has agreed to pay
royalties on the sales of products that are commercialized relative to the
granted rights and licenses. Royalty payments under these agreements by the
Company were not significant for any of the periods presented.
Various lawsuits claims and proceedings are pending or have been settled by the
Company. The most significant of those are described below.
In July 1996, the Company filed a patent infringement lawsuit in the United
States District Court for the Southern District of California (the "Court")
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. 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 ("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. In March, 2000, a jury returned a
unanimous verdict for the Company and awarded $15,000,000 in damages, finding
that Merck KGaA had willfully infringed and induced the infringement of the
Company's patents. The Court dismissed Scripps and Dr. Cheresh from the case.
In October, 2000, the Court entered judgment in the Company's favor 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
award to approximately $16,350,000, plus post-judgment interest. Merck KGaA
filed various post-trial motions requesting a judgment as a matter of law
notwithstanding the verdict or a new trial, in each case regarding infringement,
invalidity and damages. In September 2001, the Court entered orders in favor of
the Company and against Merck KGaA on the final post-judgment motions in the
case, and denied Merck KGaA's motions for judgment as a matter of law and for a
new trial.
Merck KGaA and Integra have each appealed various decisions of the Court. We
expect the court of appeals to hear arguments in the appeal during late 2002 or
early 2003 and to issue its opinion during 2003. Integra has not recorded any
gain in connection with this favorable judgment.
The Company is also subject to other claims and lawsuits in the ordinary course
of our business, including claims by employees or former employees and with
respect to our products. In the opinion of management, such other claims are
either adequately covered by insurance or otherwise indemnified, or are not
expected, individually or in the aggregate, to result in a material adverse
effect on the Company's financial condition. The Company's financial statements
do not reflect any material amounts related to possible unfavorable outcomes of
the matters above or others. However, it is possible that the Company's results
of operations, financial position and cash flows in a particular period could be
materially affected by these contingencies.
10. SUBSEQUENT EVENTS
On July 1, 2002, the Company acquired the assets of Signature Technologies,
Inc., a specialty manufacturer of titanium and stainless steel implants for the
neurosurgical and spinal markets, and certain other intellectual property
assets. The purchase price consisted of $2.8 million in cash paid at closing,
and certain other consideration to be paid upon the release of new products to
be sold through the Integra NeuroSciences sales force. The acquired product
lines generated approximately $3.2 million in sales during the year ended
December 31, 2001, primarily from the manufacture of cranial fixation systems
for sale under a contract manufacturing agreement that expires in June 2004.
On August 1, 2002, the Company acquired the neurosciences division of NMT
Medical, Inc. for $5.4 million in cash. Through this acquisition, the Company
added a range of leading differential pressure valves, including the
Orbis-Sigma(R), Integra Hakim(R) and horizontal-vertical ("H-V") lumbar valves,
and external ventricular drainage products to its neurosurgical product line.
The acquired product lines generated sales of approximately $13.9 million during
the year ended December 31, 2001. The acquired operations include a facility
located in Biot, France that manufactures, packages and distributes shunting,
catheter and drainage products, and a distribution facility located in Atlanta,
Georgia. The Company expects to consolidate the Atlanta operations into its
Cranbury, New Jersey National Distribution Center before the end of 2002.
The Company is currently evaluating the allocation of the purchase price of
these acquisitions, including any potential in-process research and development
charge associated with acquired intellectual property or undeveloped technology.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes thereto appearing elsewhere in this report and
in our 2001 Annual Report on Form 10-K filed with the Securities and Exchange
Commission. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including but not limited to those under the heading
"Risk Factors" contained in our 2001 Annual Report on Form 10-K.
General
Integra is a global, diversified medical device company that develops,
manufactures, and markets medical devices, implants and biomaterials primarily
for use in neurosurgery, orthopedics and soft tissue repair. Our business is
divided into two divisions: Integra NeuroSciences(TM) and Integra
LifeSciences(TM).
Our Integra NeuroSciences division is a leading provider of implants, devices,
and systems used in neurosurgery, neurotrauma, and related critical care and a
distributor of disposables and supplies used in the diagnosis and monitoring of
neurological disorders. Integra NeuroSciences sells primarily through a direct
sales force of more than 90 people in the United States, the United Kingdom,
Germany, France and Belgium.
Our Integra LifeSciences division develops and manufactures a variety of medical
products and devices, including products based on our proprietary tissue
regeneration technology that are used to treat soft tissue and orthopedic
conditions. For the majority of the products manufactured by our Integra
LifeSciences division, we have partnered with market leaders for the development
and marketing efforts related to these products. Many of these products address
large, diverse markets, and we believe that they can be promoted more
cost-effectively through leveraging marketing partners than through developing
our own sales infrastructure. We have strategic alliances with Ethicon, a
division of Johnson & Johnson, Wyeth, Medtronic, and Centerpulse.
Acquisitions
As a result of the acquisitions of NeuroSupplies, Inc. (renamed Integra
NeuroSupplies, Inc.) in December 2001, and GMSmbH and Satelec Medical in April
2001, our division financial results for the three and six month periods ended
June 30, 2002 and 2001 may not be directly comparable. Reported product sales
for the three and six month periods ended June 30, 2002 and 2001 included the
following amounts in sales of acquired product lines:
<table>
<caption>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(in thousands) 2002 2001 2002 2001
------ ------ ------ ------
<s> <c> <c> <c> <c>
Integra NeuroSciences
Products acquired in 2001(1) ................. $ 2,093 $ 451 $ 4,095 $ 451
All other product sales ...................... 17,969 16,581 35,762 32,367
------ ------ ------ ------
Total Integra NeuroSciences product sales .... 20,062 17,032 39,857 32,818
Integra LifeSciences
Products acquired in 2001 .................... $ -- $ -- $ -- $ --
All other product sales ...................... 4,641 4,353 9,276 8,851
------ ------ ------ ------
Total Integra LifeSciences product sales ..... 4,641 4,353 9,276 8,851
Consolidated product sales ...................... $24,703 $21,385 $49,133 $41,669
</table>
(1) Excludes sales of the LICOX(R) product in those territories where Integra
NeuroSciences had exclusive distribution rights to the product prior to our
acquisition of GMSmbH.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Future divisional financial results are also expected to be impacted by the
following acquisitions, which we completed subsequent to June 30, 2002:
|X| On July 1, 2002, we acquired the assets of Signature Technologies,
Inc. (renamed Integra Signature Technologies, Inc.), a specialty
manufacturer of titanium and stainless steel implants for the
neurosurgical and spinal markets, and certain other intellectual
property assets. The purchase price consisted of $2.8 million
in cash paid at closing, and certain other consideration to be paid
upon the release of new products to be sold through our Integra
NeuroSciences sales force. The acquired product lines generated
approximately $3.2 million in sales during the year ended December 31,
2001, primarily from the manufacture of cranial fixation systems for
sale under a contract manufacturing agreement that expires in June
2004. We expect that ongoing sales from existing relationships will be
approximately $2.5 million per year. Sales of Integra Signature
products to contract manufacturing partners will be included in the
Integra LifeSciences division.
|X| On August 1, 2002, we acquired the neurosciences division of NMT
Medical, Inc.("NMT Neurosciences")for $5.4 million in cash. Through
this acquisition, we added a range of leading differential pressure
valves, including the Orbis-Sigma(R), Integra Hakim(R)and horizontal-
vertical ("H-V") lumbar valves, and external ventricular drainage
products to our neurosurgical product line. Although the acquired
product lines generated sales of approximately $13.9 million during
the year ended December 31, 2001, we estimate that the net effect of
this acquisition and our planned elimination of redundant or under
performing product lines (including products already sold by us prior
to the acquisition of NMT Neurosciences) will be to increase our
product sales by approximately $2.5 million per quarter through the
end of 2003. Sales of NMT Neurosciences products will be included in
the Integra NeuroSciences division.
The Company is currently evaluating the allocation of the purchase price of
these acquisitions, including any potential in-process research and development
charge associated with acquired intellectual property or undeveloped technology.
Results of Operations
Second Quarter Ended June 30, 2002 Compared to Second Quarter Ended June 30,
2001
For the second quarter ended June 30, 2002, total revenues increased 15% over
the quarter ended June 30, 2001 to $26.4 million, led by a 16% increase in
product sales to $24.7 million. Domestic product sales increased $3.2 million in
the second quarter of 2002 to $20.0 million, or 81% of product sales, as
compared to 79% of product sales in the second quarter ended June 30, 2001. The
Integra NeuroSciences division, which reported a $2.8 million increase in total
revenues to $20.1 million, a 16% increase over the prior year quarter, led
growth in total revenues and product sales for the second quarter of 2002. The
Integra LifeSciences division reported a $0.7 million increase in total revenues
to $6.3 million, a 13% increase over the second quarter of 2001.
Net income for the second quarter of 2002 was $4.2 million, or $0.14 per share,
as compared to net income of $2.8 million, or $0.10 per share, reported in the
prior year quarter. In addition to the increase in revenues, results for the
second quarter of 2002 benefited from a one percentage point improvement in
consolidated gross margin on product sales to 62%, which is three percentage
points better than the 59% reported for the full year 2001. The improvement in
gross margins in the second quarter of 2002 reflects a greater proportion of
sales of higher margin products compared to the second quarter of 2001 and
increased direct sales in Europe. The increase in the proportion of higher
margin product sales was
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
attributable both to increases in sales of the
DuraGen(R) Dural Graft Matrix and other single-use products and decreases in
sales of certain lower-margin capital equipment products.
We expect gross margins for the remainder of 2002 to be adversely affected by
the planned rationalization of our product lines and by inventory fair market
value adjustments to be recorded in connection with our recent acquisitions of
Integra Signature Technologies and NMT Neurosciences. After giving effect to
these items and the lower gross margins associated with the recently acquired
product lines, we expect consolidated gross margins to approximate 60% for the
remainder of 2002 and 62% for the full year 2003 based on a continued
improvement in product and geographic sales mix.
An increase in our effective tax rate from 13% in the second quarter of 2001 to
a 35% rate recorded in 2002 offset the improved gross margin results in the
second quarter of 2002. The effective rate for the second quarter of 2001
reflects the utilization of our net operating loss carryforwards during the
period. In the fourth quarter ended December 31, 2001, we reversed a portion of
the valuation allowance recorded against the deferred tax assets related to
these net operating loss carryforwards, which is expected to result in an
ongoing effective tax rate of 35%. We expect our actual cash tax rate to be in
the 6% to 8% range in 2002. Had our effective tax rate been 35% in 2001,
reported earnings would have been $0.08 per share in the second quarter of 2001.
The following discussion of divisional financial results excludes corporate
general and administrative expenses and amortization of intangible assets, which
are not included in the measurement of divisional operating results.
INTEGRA NEUROSCIENCES DIVISION
Quarter Ended June 30,
2002 2001
-------- --------
(in thousands)
<s> <c> <c>
Product sales:
- Neuro intensive care unit .................. $ 6,973 $ 6,914
- Neuro operating room ....................... 10,610 9,056
- Other NeuroSciences products ............... 2,479 1,062
-------- --------
Total product sales ............................. 20,062 17,032
Other revenue ................................... 28 278
-------- --------
Total revenue ................................... 20,090 17,310
Cost of product sales ........................... 7,194 6,078
Gross margin as a percentage of product sales ... 64% 64%
Research and development expenses ............... 943 712
Sales and marketing expenses .................... 5,740 4,845
General and administrative expenses ............. 941 1,164
-------- --------
Operating income ................................ $ 5,272 $ 4,511
</table>
Product sales in the Integra NeuroSciences division increased $3.0 million in
the second quarter of 2002 to $20.1 million, an 18% increase over the prior year
quarter. This increase included $1.4 million in sales of products acquired since
the end of the second quarter of 2001. This growth has been generated through
acquisitions, new product launches, and increased direct sales and marketing
efforts, both domestically and in Europe.
Sales of neuro intensive care unit products increased $0.1 million to $7.0
million in the second quarter of 2002 and neuro operating room product sales
increased $1.5 million to $10.6 million, led by increased sales of our
DuraGen(R) Dural Graft Matrix product. The $1.4 million increase in other
NeuroSciences products to $2.5 million was related to acquired product lines.
The $0.3 million decrease in other revenues was the result of decreased royalty
revenues from an agreement that expired.
<page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
We expect our recent increase in the domestic sales force to 63 territories, the
continued implementation of our direct sales strategy in Europe and sales of
products which have been recently launched or acquired to drive future revenue
growth in the Integra NeuroSciences division.
Gross margin on product sales for the Integra NeuroSciences division was
consistent at 64% of product sales in both the second quarter of 2002 and 2001.
The effects of an increase in the proportion of higher margin product sales and
increased direct sales in Europe in the second quarter of 2002 compared to the
second quarter of 2001 was offset by lower gross margins from our Integra
NeuroSupplies business. Gross margin on product sales is expected to decrease
approximately one percentage point for the remainder of 2002 as a result of the
acquisition of NMT Neurosciences.
The $0.2 million increase in research and development expenses in the second
quarter of 2002 was primarily related to the development of a new collagen
hemostatic device for use in neurosurgical procedures. Sales and marketing
spending in the second quarter of 2002 increased $0.9 million as a result of the
continued expansion in the domestic and international sales force. Sales and
marketing expenses remained consistent at approximately 28.5% of product sales
in both the second quarter of 2002 and 2001. The $0.2 million decrease in
general and administrative expenses was primarily related to a $0.2 million
favorable adjustment to the allowance for doubtful accounts recorded in the
second quarter of 2002, as compared to a $0.2 million increase in the allowance
for doubtful accounts recorded in the second quarter of 2001. We reduced the
allowance for doubtful accounts in 2002 because of a substantial improvement in
collection efforts. Offsetting this benefit was approximately $0.1 million of
general and administrative costs related to the acquired Integra NeuroSupplies
business and higher personnel costs related to increased headcount.
The NMT Neurosciences operations acquired in August 2002 include a facility
located in Biot, France that manufactures, packages and distributes shunting,
catheter and drainage products, and a distribution facility located in Atlanta,
Georgia. The Biot plant is expected to become an important part of Integra's
continental European distribution activities. Accordingly, operating expenses in
the Integra NeuroSciences division are expected to increase in the future from
the acquired Biot operations. Additionally, sales and marketing costs through
the remainder of 2002 are expected to include incremental and redundant
distribution costs that will be incurred until the Atlanta operations are
integrated into Integra's existing operations.
We may achieve future financial and operating synergies by increasing capacity
utilization at the Biot, France facility, which is currently operating at less
than 50% capacity, and by leveraging sales of existing Integra NeuroSciences
products through the customer base of the acquired business, especially in
France and Germany.
The five direct European sales representatives from the acquired NMT
Neurosciences business are expected to join our direct sales team. In
international markets where both Integra and the acquired NMT business sell
through distributors, we will evaluate the competing distributors with the goal
of improving sales and profitability of the affected products.
Research and development expenses are also expected to increase through the end
of 2002 and into the beginning of 2003 as a result of projected costs to develop
our own line of metal implants based on the intellectual property acquired from
Signature Technologies.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
<table>
INTEGRA LIFESCIENCES DIVISION
<caption>
Quarter Ended June 30,
2002 2001
-------- --------
(in thousands)
<s> <c> <c>
Product sales:
- Tissue repair products ..................... $ 2,333 $ 1,836
- Other medical devices ...................... 2,308 2,517
-------- --------
Total product sales ............................. 4,641 4,353
Other revenue ................................... 1,710 1,257
-------- --------
Total revenue ................................... 6,351 5,610
Cost of product sales ........................... 2,271 2,232
Gross margin as a percentage of product sales ... 51% 49%
Research and development expenses ............... 1,130 1,125
Sales and marketing expenses .................... 188 424
General and administrative expenses ............. 172 382
-------- --------
Operating income ................................ $ 2,590 $ 1,447
</table>
Product sales in the Integra LifeSciences division increased $0.3 million in the
second quarter of 2002 to $4.6 million, a 7% increase over the prior year
quarter. This growth was generated primarily by a $0.5 million increase in sales
of tissue repair products, or 27% growth over the prior year quarter, offset by
a $0.2 million decline in sales of other medical devices. The increase in sales
of tissue repair products was primarily related to increased sales to Wyeth of
our Absorbable Collagen Sponges that are used as a component in Medtronic's
INFUSE(TM) Bone Graft product for the treatment of certain types of spinal
degenerative disc disease, which received FDA approval in July 2002.
Future sales growth in the Integra LifeSciences division is expected to be led
by increased sales of Absorbable Collagen Sponges and the INTEGRA(R) Dermal
Regeneration Template and from sales of the Signature Technologies product lines
acquired in July 2002. In April 2002, the FDA approved our pre-market approval
application supplement to market INTEGRA(R) Dermal Regeneration Template for the
repair of scar contractures, the first indication in the United States for the
device outside of the treatment of severe burns.
Gross margin on product sales in the Integra LifeSciences division increased two
percentage points to 51% in the second quarter primarily as a result of
increased sales of higher margin products. Gross margin on product sales is
expected to decrease approximately one percentage point for the remainder of
2002 and approximately one-and-one-half percentage points in 2003 as a result of
the acquisition of Signature Technologies.
Other revenue consists of i) research and development funding from strategic
partners and government grants, ii) license, distribution, and other
event-related revenues from strategic partners and other third parties, and iii)
product royalty income. The $0.4 million increase in other revenue in the second
quarter of 2002 was primarily related to a $0.5 million event payment from
Johnson & Johnson for the achievement of a clinical and regulatory objective for
INTEGRA(R) Dermal Regeneration Template related to the expanded indications for
the product that we received during the quarter. This is the second event
payment received this year.
Sales and marketing expenses decreased $0.2 million in the second quarter of
2002 primarily due to the termination of distributors who had been paid
commissions during the prior year period. Sales and marketing activities in the
Integra LifeSciences division are primarily the responsibility of our strategic
marketing partners and distributors.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
<table>
CORPORATE EXPENSES AND AMORTIZATION
<caption>
Quarter Ended June 30,
2002 2001
-------- --------
(in thousands)
<s> <c> <c>
Total divisional operating costs and expenses ....... $ 18,579 $ 16,962
Corporate general and administrative expenses ....... 2,008 1,773
Amortization ........................................ 364 729
-------- --------
Consolidated total operating expenses ............... $ 20,951 $ 19,464
</table>
Corporate general and administrative expenses increased $0.2 million in the
second quarter of 2002 primarily as a result of spending on the appeal of the
judgment in our favor in the litigation with Merck KGaA, and increases in the
cost of premiums for our various insurance policies. Amortization expense
decreased $0.3 million in the second quarter of 2002 to $0.4 million as a result
of the full implementation of Statement of Financial Accounting Standard No 142
in January 2002. The reduction in goodwill amortization related to the
implementation of Statement 142 had a favorable impact on earnings of
approximately $0.01 per share in the second quarter of 2002.
We reported operating EBITDA, representing operating earnings before
depreciation and amortization, of $6.7 million in the second quarter of 2002, as
compared to $4.9 million in the prior year quarter.
NON-OPERATING INCOME AND EXPENSES
We raised $113.4 million in a follow-on public offering of 4.7 million shares of
common stock in August 2001 and subsequently used $9.3 million to repay all
outstanding indebtedness. Accordingly, net interest income increased $1.1
million in the second quarter of 2002 to $1.0 million.
INCOME TAXES
Income tax expense was approximately 35% and 13% of income before income taxes
for the second quarter of 2002 and 2001, respectively. Income tax expense for
the second quarter of 2002 included a deferred income tax provision of $1.8
million, or 29% of income before income taxes.
We are currently assessing the impact, if any, that the recent acquisitions will
have on our effective and actual cash tax rates.
Six Month Period Ended June 30, 2002 Compared to Six Month Period Ended
June 30, 2001
For the six month period ended June 30, 2002, total revenues increased 17% over
the six month period ended June 30, 2001 to $52.4 million, led by an 18%
increase in product sales to $49.1 million. Domestic product sales increased
$6.6 million in the six month period ended June 30, 2002 to $39.3 million, or
80% of product sales, as compared to 79% of product sales in the prior year
period. The Integra NeuroSciences division, which reported a $6.5 million
increase in total revenues to $39.9 million in the six month period ended June
30, 2002, a 20% increase over the prior year period, led growth in total
revenues and product sales in 2002. The Integra LifeSciences division reported a
$1.2 million increase in total revenues to $12.5 million, an 11% increase over
the prior year period.
Net income for the six month period ended June 30, 2002 was $8.3 million, or
$0.27 per share, as compared to net income of $4.8 million, or $0.18 per share,
reported in the prior year period. In addition to the increase in revenues,
results for the six month period ended June 30, 2002 benefited from a two
percentage point improvement in consolidated gross margin on product sales to
61%. The improvement in gross margins reflects a greater proportion of sales of
higher margin products in 2002, increased direct
<page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
sales in Europe, and an increase in capacity utilization, offset by lower gross
margins from our Integra NeuroSupplies business.
Offsetting the improved gross margin results in 2002 was an increase in our
effective tax rate from 12% in the six month period ended June 30, 2001 to a 35%
rate recorded in the six month period ended June 30, 2002. Had our effective tax
rate been 35% in 2001, reported earnings would have been $0.12 per share in the
six month period ended June 30, 2001.
The following discussion of divisional financial results excludes corporate
general and administrative expenses and amortization of intangible assets, which
are not included in the measurement of divisional operating results.
<table>
INTEGRA NEUROSCIENCES DIVISION
<caption>
Six Month Period Ended June 30,
2002 2001
-------- --------
(in thousands)
<s> <c>
Product sales:
- Neuro intensive care unit .................. $ 14,214 $ 13,492
- Neuro operating room ....................... 20,702 17,294
- Other NeuroSciences products ............... 4,941 2,032
-------- --------
Total product sales ............................. 39,857 32,818
Other revenue ................................... 56 556
-------- --------
Total revenue ................................... 39,913 33,374
Cost of product sales ........................... 14,422 12,126
Gross margin as a percentage of product sales ... 64% 63%
Research and development expenses ............... 1,826 1,400
Sales and marketing expenses .................... 11,223 9,155
General and administrative expenses ............. 1,953 1,976
-------- --------
Operating income ................................ $ 10,489 $ 8,717
</table>
Product sales in the Integra NeuroSciences division increased $7.0 million in
the six month period ended June 30, 2002 to $39.9 million, a 21% increase over
the prior year period. Sales in the six month periods ended June 30, 2002 and
2001 included $4.1 million and $0.5 million, respectively, in sales of products
acquired in 2001.
Sales of neuro intensive care unit products increased $0.7 million to $14.2
million in the six month period ended June 30, 2002. Neuro intensive care unit
sales in the six month periods ended June 30, 2002 and 2001 included $0.5
million and $0.2 million, respectively, in sales of products acquired in 2001.
Neuro operating room product sales increased $3.4 million to $20.7 million, led
by increased sales of our DuraGen(R) Dural Graft Matrix product. Neuro operating
room sales in the six month periods ended June 30, 2002 and 2001 included $0.8
million and $0.3 million, respectively, in sales of products acquired in 2001.
The $2.9 million increase in other NeuroSciences products to $4.9 million was
primarily related to $2.8 million in sales of acquired products. The $0.5
million decrease in other revenues was the result of decreased royalty revenues
from an agreement that expired.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The $0.4 million increase in research and development expenses in the six month
period ended June 30, 2002 was primarily related to the development of a new
collagen hemostatic device for use in neurosurgical procedures. Sales and
marketing spending in the six month period ended June 30, 2002 increased $2.1
million as a result of the continued expansion in the domestic and international
sales force. General and administrative expenses remained relatively consistent
at $2.0 million in the six month periods ended June 30, 2002 and 2001. The
benefit of a $0.2 million favorable adjustment to the allowance for doubtful
accounts recorded in the six month period ended June 30, 2002, as compared to a
$0.2 million increase in the allowance for doubtful accounts recorded in the six
month period ended June 30, 2001, was offset by an increase in general and
administrative costs related to acquisitions and higher personnel costs
resulting from increased headcount.
<table>
INTEGRA LIFESCIENCES DIVISION
<caption>
Six Month Period Ended June 30,
2002 2001
-------- --------
(in thousands)
<s> <c> <c>
Product sales:
- Tissue repair products ..................... $ 4,454 $ 3,626
- Other medical devices ...................... 4,822 5,225
-------- --------
Total product sales ............................. 9,276 8,851
Other revenue ................................... 3,168 2,379
-------- --------
Total revenue ................................... 12,444 11,230
Cost of product sales ........................... 4,571 4,778
Gross margin as a percentage of product sales ... 51% 46%
Research and development expenses ............... 2,069 2,510
Sales and marketing expenses .................... 377 865
General and administrative expenses ............. 402 707
-------- --------
Operating income ................................ $ 5,025 $ 2,370
</table>
Product sales in the Integra LifeSciences division increased $0.4 million in the
six month period ended June 30, 2002 to $9.3 million, a 5% increase over the
prior year period. This growth was generated primarily by a $0.8 million
increase in sales of tissue repair products, or 23% growth over the prior year
period, offset by a $0.4 million decline in sales of other medical devices. The
increase in sales of tissue repair products was primarily related to increased
sales to Wyeth of our Absorbable Collagen Sponges. The decrease in sales of
other medical devices was primarily related to reduced orders for the
VitaCuff(R) infection control product from one of our OEM customers in the first
quarter of 2002.
Gross margin on product sales in the LifeSciences division increased five
percentage points to 51% in the six month period ended June 30, 2002 primarily
as a result of increased sales of higher margin orthopedic products and
increased capacity utilization.
The $0.8 million increase in other revenue in the six month period ended June
30, 2002 was primarily related to the $1.0 million in event payments received
from Johnson & Johnson, offset by a decrease in grant revenue.
The decrease in research and development expenses in the six month period ended
June 30, 2002 was primarily related to the completion of a grant program in the
first quarter of 2001, and is consistent with the decrease in grant revenue.
Sales and marketing activities decreased $0.5 million in the six month period
ended June 30, 2002 primarily due to the termination of distributors who had
been paid commissions during the prior year period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
CORPORATE EXPENSES AND AMORTIZATION
<table>
<caption>
Six Month Period Ended June 30,
2002 2001
-------- --------
(in thousands)
<s> <c> <c>
Total divisional operating costs and expenses ....... $ 36,843 $ 33,517
Corporate general and administrative expenses ....... 3,985 3,840
Amortization ........................................ 714 1,409
-------- --------
Consolidated total operating expenses ............... $ 41,542 $ 38,766
</table>
Amortization expense decreased $0.7 million in the six month period ended June
30, 2002 to $0.7 million as a result of the full implementation of Statement of
Financial Accounting Standard No 142 in January 2002. The reduction in goodwill
amortization related to the implementation of Statement 142 had a favorable
impact on earnings of approximately $0.02 per share in the six month period
ended June 30, 2002.
We reported operating EBITDA of $13.2 million in the six month period ended June
30, 2002, as compared to $8.7 million in the prior year period.
NON-OPERATING INCOME AND EXPENSES
Net interest income increased $2.2 million in the six month period ended June
30, 2002 to $2.0 million primarily as a result of the $113.4 million raised in
the August 2001 follow-on public offering and the subsequent repayment of all
outstanding indebtedness.
INCOME TAXES
Income tax expense was approximately 35% and 12% of income before income taxes
for the six month periods ended June 30, 2002 and 2001, respectively. Income tax
expense for the six month period ended June 30, 2002 included a deferred income
tax provision of $3.6 million, or 28% of income before income taxes.
International Product Sales and Operations
Product sales by major geographic area are summarized below:
<table>
<caption>
United Asia Other
States Europe Pacific Foreign Total
-------- -------- -------- -------- --------
(in thousands)
<s> <c> <c> <c> <c> <c>
Six months ended June 30, 2002 ..... $ 39,305 $ 5,850 $ 2,342 $ 1,636 $ 49,133
Six months ended June 30, 2001 ..... 32,750 4,714 2,505 1,700 41,669
</table>
In the six month period ended June 30, 2002, sales to customers outside the
United States totaled $9.8 million, or 20% of consolidated product sales, of
which approximately 60% were to European customers. Of this amount, $5.2 million
of these sales were generated in foreign currencies from our foreign-based
subsidiaries in the United Kingdom, Germany and France. In the six month period
ended June 30, 2001, sales to customers outside the United States totaled $8.9
million, or 21% of consolidated product sales, of which approximately 53% were
to European customers. Of this amount, $3.0 million of these sales were
generated in foreign currencies from our subsidiaries.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Our international sales and operations are subject to the risk of foreign
currency fluctuations, both in terms of exchange risk related to transactions
conducted in foreign currencies and the price of our products in those markets
for which sales are denominated in the U.S. dollar. We expect that our recent
establishment of a direct sales and marketing infrastructure in the United
Kingdom, Germany, France and Belgium, the recent transfer of certain distributor
accounts to our European operations, and the recent acquisition of the NMT
Neurosciences business will cause our sales generated in countries outside the
United States and sales denominated in foreign currencies, particularly the Euro
and the British pound, to increase as a percentage of total sales in the future.
Approximately 55% of sales of the acquired NMT Neurosciences products were
generated outside the United States during the year ended December 31, 2001.
We do not currently use any financial instruments to hedge foreign currency
fluctuations.
Liquidity and Capital Resources
Historically, we have funded our operations 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. Since 1999, we have
substantially reduced our net use of cash from operations and, in 2001, we
generated positive operating cash flows on an annual basis for the first time.
For the six month period ended June 30, 2002, we generated $12.3 million in cash
flows from operations.
Our principal uses of funds during the six month period ended June 30, 2002 were
$3.6 million for the repayment of debt and $1.1 million for purchases of
property and equipment. Principal sources of funds were approximately $12.3
million in operating cash flows and $1.5 million from the issuance of common
stock through the exercise of stock options.
At June 30, 2002, we had cash, cash equivalents and current and non-current
investments totaling approximately $139.3 million and no outstanding debt. In
July and August 2002, we used approximately $8.2 million of cash for business
acquisitions.
Investments consist almost entirely of highly-liquid, interest bearing debt
securities. Given our objective to grow by acquisition and alliances, our
financial position and future financial results could change significantly if we
were to use a significant portion of our liquid assets to complete a business
acquisition.
In February 2002, our Board of Directors reauthorized our share repurchase
program. Under the program, we may repurchase up to 500,000 shares of our common
stock for an aggregate purchase price not to exceed $15 million. Shares may be
repurchased under this program through December 31, 2002 either in the open
market or in privately negotiated transactions. We did not repurchase any shares
of our common stock under this program in 2001 or in the six month period ended
June 30, 2002.
Other Matters
A valuation allowance of $34.4 million is recorded against net deferred tax
assets. However, we may recognize a deferred income tax benefit in future
periods if we determine that all or a portion of the remaining deferred tax
assets can be realized.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
FORWARD-LOOKING STATEMENTS
We have made statements in this report, including statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are subject to a number of risks, uncertainties
and assumptions about the Company, including those described under "Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended December
31, 2001 filed with the Securities and Exchange Commission. In light of these
risks and uncertainties, the forward-looking events and circumstances discussed
in this report may not occur and actual results could differ materially from
those anticipated or implied in the forward-looking statements.
You can identify these forward-looking statements by forward-looking words such
as "believe," "may," "could," "will," "estimate," "continue," "anticipate,"
"intend," "seek," "plan," "expect," "should," "would" and similar expressions in
this report.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 15, 2002, we notified the holders of the 54,000 shares of Series C
Preferred Stock of our intention to redeem those shares on May 31, 2002 for $6.6
million. On April 16, 2002, all of the holders of the Series C Preferred Stock
exercised their right to convert their shares into 600,000 shares of common
stock prior to the redemption.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 21, 2002 and in
connection therewith, proxies were solicited by management pursuant to
Regulation 14 under the Securities Exchange Act of 1934. An aggregate of
26,897,253 shares of the Company's common stock were outstanding and entitled to
a vote at the meeting. At the meeting the following matters (not including
ordinary procedural matters) were submitted to a vote of the holders of shares,
with the results indicated below:
1. Election of directors to serve until the 2003 Annual Meeting. The following
persons, all of whom were serving as directors and were management's
nominees for election, were elected. There was no solicitation in
opposition to such nominees. The tabulation of votes was as follows:
<table>
<caption>
<s> <c> <c>
Nominee For Withheld
------- ----------- -----------
Keith Bradley 22,075,219 177,376
Richard E. Caruso 22,028,019 224,576
Stuart M. Essig 20,485,278 1,767,317
Neil Moszkowski 22,075,219 177,376
James M. Sullivan 22,075,219 177,376
</table>
2. Ratification of independent auditors. The appointment of
PricewaterhouseCoopers LLP as the Company's independent auditors for the
current fiscal year was ratified. The tabulation of votes was as follows:
For Against Abstentions
----------- ----------- -----------
21,635,258 613,998 3,339
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
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: August 14, 2002 /s/ Stuart M. Essig
-------------------
Stuart M. Essig
President and Chief Executive Officer
Date: August 14, 2002 /s/ David B. Holtz
-------------------
David B. Holtz
Senior Vice President, Finance and Treasurer
Exhibit 99.1
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as created
by Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer
Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the Sarbanes-Oxley
Act of 2002, the undersigned officer of Integra LifeSciences Holdings
Corporation (the "Company") hereby certifies, to such officer's knowledge, that:
(i) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended June 30, 2002 (the "Report") fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the
Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: August 14, 2002 /s/ Stuart M. Essig
------------------- ----------------------------------
Stuart M. Essig
President and Chief Executive Officer
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the Sarbanes-Oxley
Act of 2002, the undersigned officer of Integra LifeSciences Holdings
Corporation (the "Company") hereby certifies, to such officer's knowledge, that:
(i) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended June 30, 2002 (the "Report") fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the
Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: August 14, 2002 /s/ David B. Holtz
--------------- ----------------------------------------------
David B. Holtz
Senior Vice President, Finance and Treasurer