INTEGRA LIFESCIENCES HOLDINGS CORP - 10-Q Quarterly Report

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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, 2003

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

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED
FILER /X/ YES / / NO

AS OF MAY 7, 2003 THE REGISTRANT HAD OUTSTANDING 26,061,739 SHARES OF
COMMON STOCK, $.01 PAR VALUE.

INTEGRA LIFESCIENCES HOLDINGS CORPORATION

INDEX

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Number

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)

3

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousands, except per share amounts
March 31, December 31,
2003 2002
------------ ------------

4

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

5

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

General

In the opinion of management, the March 31, 2003 unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) 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, 2002 included in the Company's Annual
Report on Form 10-K. Operating results for the three-month period ended March
31, 2003 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

In January 2003, the Emerging Issues Task Force (EITF) released EITF 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables". EITF 00-21
clarifies the timing and recognition of revenue from certain transactions that
include the delivery and performance of multiple products or services. EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company is currently reviewing the impact of
this EITF.

In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure".
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation and amends certain disclosure requirements of SFAS No. 123
"Accounting for Stock Based Compensation". SFAS No. 148 does not require
companies to expense stock options in current earnings. The disclosure
requirements are effective for the Company beginning with its March 31, 2003
consolidated financial statements.

Employee stock based compensation is recognized using the intrinsic value method
prescribed by APB Opinion No. 25 "Accounting for Stock Issued to Employees" and
FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation -an interpretation of APB Opinion No. 25".

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Had the compensation cost for the Company's stock option plans been determined
based on the fair value at the date of grant consistent with the provisions of
SFAS No. 123, the Company's net income and basic and diluted net income per
share would have been as follows:

Three Months Ended March 31,
2003 2002
-------- --------
(in thousands, except
per share amounts)

As options vest over a varying number of years and awards are generally made
each year, the pro forma impacts shown above may not be representative of future
pro forma expense amounts. The pro forma additional compensation expense was
calculated based on the fair value of each option grant using the Black-Scholes
model with the following weighted-average assumptions:

2. ACQUISITIONS

On March 17, 2003, the Company acquired all of the outstanding capital stock of
J. Jamner Surgical Instruments, Inc. (doing business as JARIT(R) Surgical
Instruments) ("JARIT") for $42.4 million in cash, net of cash acquired, subject
to a working capital adjustment and other adjustments with respect to certain
income tax elections. For more than 30 years, JARIT has marketed a wide variety
of high quality, reusable surgical instruments to virtually all surgical
disciplines. JARIT sells its products to more than 5,200 hospitals and surgery
centers worldwide. In the United States, JARIT sells through a 20 person sales
management force that works with over 100 distributor sales representatives.

With more than 5,000 instrument patterns and a 98% order fill rate, JARIT has
developed a strong reputation as a leading provider of high-quality surgical
instruments. JARIT manages its vendor relationships and purchases, packages and
labels its products directly from instrument manufacturers through its facility
in Germany. The acquisition of JARIT broadens Integra's existing customer base
and surgical instrument product offering and provides an opportunity to achieve
operating costs savings, including the procurement of Integra's
Redmond(TM)-Ruggles(TM) and Padgett Instruments Inc.(R) products directly from
the instrument manufacturers.

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In connection with this acquisition, the Company recorded approximately $29.2
million of intangible assets, consisting primarily of trade name and customer
relationships, which are being amortized on a straight-line basis over lives
ranging from 5 to 40 years. The following table summarizes the preliminary fair
value of the assets acquired and liabilities assumed in the JARIT acquisition:

Current assets ....................... $ 17,338
Property, plant and equipment ........ 1,285
Intangible assets .................... 29,165
Other non-current assets ............. 104
---------
Total assets acquired ................ 47,892

Current liabilities .................. 3,375
Net assets acquired .................. $ 44,517

In December 2002, the Company acquired the neurosurgical shunt and epilepsy
monitoring business of the Radionics division of Tyco Healthcare Group for $3.5
million in cash, including expenses associated with the acquisition.

In October 2002, the Company acquired all of the outstanding capital stock of
Padgett Instruments, Inc., an established marketer of instruments used in
reconstructive and plastic surgery, for $9.6 million in cash, including expenses
associated with the acquisition. In March 2003, Padgett's distribution
operations were consolidated into the Company's distribution center located in
Cranbury, New Jersey.

In August 2002, the Company acquired all of the capital stock of the
neurosciences division of NMT Medical, Inc. for $5.7 million in cash, including
expenses associated with the acquisition. Through this acquisition, the Company
added a range of leading differential pressure valves and external ventricular
drainage products to its neurosurgical product line.

In July 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 $2.9 million in cash (including expenses
associated with the acquisition) paid at closing, $0.5 million of deferred
consideration paid in March 2003, and royalties on future sales of products to
be developed.

The results of operations of these acquired businesses have been included in the
consolidated financial statements since the respective dates of acquisition.

The following unaudited pro forma financial information assumes that all
acquisitions consummated in 2003 and 2002 had occurred as of the beginning of
each period (in thousands, except per share data):

4. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the three months ended March 31,
2003, were as follows:

The components of the Company's identifiable intangible assets were as follows:

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Annual amortization expense is expected to approximate $2.9 million in 2003,
$3.0 million in 2004, and $2.8 million in each of the years 2005 to 2007.
Identifiable intangible assets are initially recorded at fair market value at
the time of acquisition generally using an income or cost approach.

5. DEBT

In March 2003, the Company completed a private placement of contingent
convertible subordinated notes totaling $100.0 million, due 2008. The Company
granted the initial purchasers an option to purchase up to an additional $20.0
million principal amount of notes, of which $5.0 million was exercised in March
2003.

The notes bear interest at 2.5 percent per annum, payable semiannually. The
Company will pay additional interest ("Contingent Interest") if, at thirty days
prior to maturity, Integra's common stock price is greater than $37.56. The
Contingent Interest will be payable for each of the last three years the notes
remain outstanding in an amount equal to the greater of i) 0.50% of the face
amount of the notes and ii) the amount of regular cash dividends paid during
each such year on the number of shares of common stock into which each note is
convertible. The Company recorded a $320,000 liability related to the current
estimated fair value of the Contingent Interest obligation on the initial $105.0
million of notes issued in March 2003. The fair value of the Contingent Interest
obligation will be marked to its fair value at each balance sheet date, with
changes in the fair value recorded to interest expense.

Debt issuance costs are expected to total $3.9 million and will be amortized
using the straight-line method over the five-year term of the notes.

Holders may convert their notes into shares of Integra common stock at an
initial conversion price of $34.15 per share, upon the occurrence of certain
conditions, including when the market price of Integra's common stock on the
previous trading day is more than 110% of the conversion price.

The notes are general, unsecured obligations of the Company and will be
subordinate to any future senior indebtedness of the Company. The Company cannot
redeem the notes prior to their maturity. Holders of the notes may require the
Company to repurchase the notes upon a change in control.

Concurrent with the issuance of the notes, the Company used approximately $35.3
million of the proceeds from this private placement to purchase 1.5 million
shares of its common stock.

In April 2003, the initial purchasers exercised their option to purchase the
remaining $15.0 million of the notes.

6. COMPREHENSIVE INCOME

Comprehensive income was as follows:

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7. NET INCOME PER SHARE

Options outstanding at March 31, 2003 and 2002, respectively, to purchase
771,376 and 10,222 shares of common stock were excluded from the computation of
diluted net income per share for the three month periods ended March 31, 2003
and 2002 because their exercise price exceeded the average market price of the
Company's common stock during the period. Notes payable outstanding at March 31,
2003 that are convertible into 3,074,896 shares of common stock were excluded
from the computation of diluted net income per share for the three month period
ended March 31, 2003 because the conditions required to convert the notes were
not met. Preferred stock convertible into 600,000 shares of common stock at
March 31, 2002 was excluded from the computation of diluted net income per share
for the three month period ended March 31, 2002 because its assumed conversion
would have been antidilutive.

8. SEGMENT AND GEOGRAPHIC INFORMATION

Management of the Company has historically managed the business and reviewed
financial results under two separate operating segments: Integra NeuroSciences
and Integra LifeSciences. In 2003, following the integration of several recently
acquired, diverse businesses, management began to manage the business and review
financial results on an aggregate basis, instead of through these two operating
segments. In 2003, management redefined the internal management and financial
reporting structure to be based on centrally managed operating functions such as
manufacturing, research, sales, marketing and administration. Accordingly, the
Company now reports financial results under a single operating segment--the
development, manufacturing, and distribution of medical devices.

The Company develops, manufactures, and markets medical devices for use
primarily in neuro-trauma and neurosurgery, plastic and reconstructive surgery,
and soft tissue repair. The Company's product lines include traditional medical
devices, such as monitoring and drainage systems, surgical instruments, and
fixation systems, as well as innovative tissue repair products, such as the

11

DuraGen(R) Dural Graft Matrix, the NeuraGen(TM) Nerve Guide, and the INTEGRA(R)
Dermal Regeneration Template, that incorporate the Company's proprietary
absorbable implant technology.

Products, including food as well as pharmaceuticals and medical devices, that
contain materials derived from animal sources are increasingly subject to
scrutiny in the press and by regulatory authorities. Certain of the Company's
products, including DuraGen(R) Dural Graft Matrix, NeuraGen(TM) Nerve Guide,
INTEGRA(R) Dermal Regeneration Template, and BioMend(R) Absorbable Collagen
Membrane, contain material derived from bovine tissue. These products comprised
approximately 30% and 32% of product revenues in the three month periods ended
March 31, 2003 and 2002, respectively. Accordingly, widespread public
controversy concerning collagen products, new regulation, or a ban of the
Company's products containing material derived from bovine tissue, could have a
significant adverse effect on the Company's current business or its ability to
expand its business.

Product revenues by major geographic area are summarized below:

9. COMMITMENTS AND CONTINGENCIES

As consideration for certain technology, manufacturing, distribution and selling
rights and licenses, the Company has agreed to pay royalties on the sales of
certain of its products. Payments under these agreements 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, and in March 2000, a jury returned a
unanimous verdict for the Company, finding that Merck KGaA had willfully
infringed and induced the infringement of the Company's patents, and awarded
$15,000,000 in damages. 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
amount to approximately $16,350,000, plus post-judgment interest. Merck KGaA
filed various post-trial motions requesting a judgment as a matter of law

12

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. The
court of appeals heard arguments in the appeal in November 2002, and we expect
the court to issue its opinion in 2003. Integra has not recorded any gain in
connection with this matter.

The Company is also subject to various claims, lawsuits and proceedings in the
ordinary course of business, including claims by current or former employees and
distributors and with respect to its products. In the opinion of management,
such 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. 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.

In September 2001, three subsidiaries of the recently acquired neurosciences
division of NMT Medical, Inc. received a tax reassessment notice from the French
tax authorities seeking more than $1.5 million in back taxes, interest and
penalties. NMT Medical, Inc., the former owner of these entities, has agreed to
specifically indemnify Integra against any liability in connection with these
tax claims. In addition, NMT Medical, Inc. has agreed to provide the French tax
authorities with payment of the tax, if required.

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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 2002 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. Our 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 set forth under the
heading "Risk Factors" contained in our 2002 Annual Report on Form 10-K and in
Exhibit 99.2 appearing elsewhere in this report.

General

Integra develops, manufactures, and markets medical devices for use primarily in
neuro-trauma and neurosurgery, plastic and reconstructive surgery, and soft
tissue repair. Our product lines include traditional medical devices, such as
monitoring and drainage systems, surgical instruments and fixation systems, as
well as innovative tissue repair products, such as the DuraGen(R) Dural Graft
Matrix, the NeuraGen(TM) Nerve Guide and the INTEGRA(R) Dermal Regeneration
Template, that incorporate our proprietary absorbable implant technology.

We have historically managed our business and reviewed financial results under
two separate operating segments: Integra NeuroSciences and Integra LifeSciences.
In 2003, following the integration of several recently acquired, diverse
businesses, we began to manage our business and review financial results on an
aggregate basis, instead of through two separate operating segments. We have
redefined our internal management structure to use a single, centralized
organization to manage operating functions such as manufacturing, research,
sales, marketing and administration. Accordingly, we now report our financial
results under a single operating segment--the development, manufacturing, and
distribution of medical devices.

To provide better insight into how our growth is distributed across our
products, we report revenue by the following product lines:

- - Neuromonitoring products, which include our intracranial monitoring
systems, systems for cerebrospinal fluid drainage and cranial access,
epilepsy monitoring electrodes and our Integra NeuroSupplies(TM)
business;

- - Operating Room products, which include DuraGen Dural Graft Matrix,
NeuraGen Nerve Guide, and our neurosurgical shunts, carotid shunts and
absorbable collagen hemostatic agents;

- - Instruments, which include JARIT(R) Surgical Instruments, Padgett
Instruments, Redmond(TM)-Ruggles(TM) neurosurgical and spinal
instruments, and our ultrasonic aspirators; and

- - Private Label products, which include INTEGRA Dermal Regeneration
Template, VitaCuff(R) catheter access infection control device,
BioPatch(R) Antimicrobial Wound Dressing, and our absorbable collagen
membranes and wound dressings and cranial fixation devices and custom
cranial plates.

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We sell our products directly through various sales forces and through a variety
of distribution channels. Our direct sales organizations include the following:

- - Our Integra NeuroSciences(TM) sales force provides neurosurgeons and
critical care units with implants, devices, instruments, and systems
used in neurosurgery, neuromonitoring, neurotrauma, and related
critical care. Integra NeuroSciences' direct marketing effort in the
United States and Europe currently involves more than 100
professionals, including direct salespeople (called neurospecialists in
the United States), sales management, and clinical educators who
educate and train both our salespeople and customers in the use of our
products. In all other markets, Integra NeuroSciences products are sold
through a network of distributors.
- - Our JARIT(R) Surgical Instruments sales force markets a wide variety of
high quality surgical instruments for use in both traditional and
minimally invasive surgery in virtually all surgical applications,
including general, plastic, neuro, ear, nose and throat (ENT),
cardiovascular, ob-gyn, and ophthalmic surgical procedures. JARIT sells
its products in the United States through a twenty-person sales
management force that works with over 100 distributor sales
representatives as well as certain original equipment manufacturer
accounts. Outside the Unites States, JARIT sells its products through a
network of distributors.
- - Our Integra Padgett Instruments sales force markets a wide variety of
high quality, reusable surgical instruments to plastic and
reconstructive surgeons, burn surgeons, ENT surgeons, hospitals,
surgery centers, and other physicians. Padgett markets its surgical
instruments primarily through an eight-person sales force in the United
States. Outside the Unites States, Padgett sells its products through a
network of distributors.
- - Integra NeuroSupplies(TM) distributes disposables and supplies used in
the diagnosis and monitoring of neurological disorders. These products
are marketed primarily through a catalog, which is mailed once a year,
and are used by neurologists, hospitals, sleep clinics, and other
physicians in the United States.

We market our private label products through strategic partners or OEM
customers. Our private label products address large, diverse markets, and we
believe that we can develop and promote these products more cost-effectively
through leveraging strategic partners than through developing them ourselves or
selling them through our own direct sales infrastructure. We have partnered with
market leaders, such as Johnson & Johnson, Medtronic, Wyeth, and Centerpulse,
for the development and marketing efforts related to many of these products.

Acquisitions

Our strategy for growing our business includes the acquisition of complementary
product lines and companies. Our acquisitions of J. Jamner Surgical Instruments,
Inc. ("JARIT") in March 2003, the epilepsy monitoring and neurosurgical shunt
business of the Radionics division of Tyco Healthcare Group in December 2002,
Padgett Instruments, Inc. in October 2002, certain assets of Novus Monitoring
Limited in September 2002, the neurosciences division of NMT Medical, Inc. in
August 2002, and Signature Technologies, Inc. in July 2002, may make our
division financial results for the three month period ended March 31, 2003 not
directly comparable to those of the corresponding prior year period.

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Reported product revenues for the three month periods ended March 31, 2003 and
2002 included the following amounts in revenues from acquired product lines:

Results of Operations

For the quarter ended March 31, 2003, total revenues increased by $10.9 million,
or 42%, over the quarter ended March 31, 2002 to $36.8 million. Product revenues
increased by $10.6 million, or 43%, over the prior year period and accounted for
substantially all of the growth in total revenues.

Revenues of products acquired since the first quarter of 2002 accounted for $6.2
million of the $10.6 million increase in product revenues over the prior year
period. Excluding revenues from acquired product lines, first quarter product
revenues grew by $4.4 million, or 18%, over the prior year quarter. Domestic
product revenues increased $7.9 million in the first quarter of 2003 to $27.3
million, or 78% of product revenues, as compared to 79% of product revenues in
the first quarter ended March 31, 2002.

Each of our product lines contributed to our revenue growth over the prior year
quarter. Revenues from our neuromonitoring product lines increased $2.0 million,
or 23%, over the prior year period primarily as a result of increased sales of
our drainage and cranial access kits. Our operating room product line revenues
increased over the prior year period by $4.7 million, or 60%, largely as a
result of sales of neurosurgical shunt products acquired from NMT Medical and
Radionics in 2002 and continued growth in sales of our DuraGen(R) Dural Graft
Matrix and our NeuraGen(R) Nerve Guide. Revenues from our instrument product
lines increased by 63%, principally as a result of revenues from the Padgett and
JARIT surgical instrument lines we acquired in 2002 and 2003. Our private label

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product revenue grew by 36%, due in large part to revenues from Integra
Signature, which we acquired in 2002, and to increased revenue from the
Absorbable Collagen Sponge we supply for use in Medtronic's bone graft product
and from our VitaCuff(R) product.

We expect that our expanded product lines, distribution channels and domestic
sales force, continued implementation of our direct sales strategy in Europe and
introduction of internally developed and acquired products will drive our future
revenue growth. We also seek to acquire businesses that complement our
existing businesses and products.

Additionally, we expect that we will benefit from the national contract
relationships that JARIT has established with group purchase organizations such
as Novation, Broadlane, MedAssets, and Consorta and the relationship we recently
established with Premier, Inc. for our neurosurgical products.

Our revenues are subject to quarterly fluctuations, based on business conditions
and on the availability of funds for capital purchases by hospitals. Typically,
our revenues in the fourth quarter of each calendar year benefit
from hospitals' utilization of funding available at the end of their fiscal
years, Integra sales promotions which tie compensation for our sales people to
meeting annual quotas, and supply and distribution contracts with our private
label customers with annual minimum purchase requirements.

Our gross margin on product revenues in the first quarter of 2003 was 61%,
consistent with that of the first quarter of 2002. Our cost of product revenue
in the first quarter of 2003 included $346,000 of inventory fair value purchase
accounting adjustments for acquired inventory sold during the quarter. We expect
to include approximately $600,000 of inventory fair value purchase accounting
adjustments in our cost of product revenue in the second quarter of 2003 as we
continue to sell inventory acquired in the JARIT, Padgett and Radionics
transactions.

Other revenue, which consists primarily of development funding from strategic
partners and license and distribution revenues, increased by $253,000 from the
prior year quarter to $1.7 million. A $555,000 increase in product development
revenue offset a $250,000 decrease in licensing and distribution fees.

Consistent with our increase in revenues, total other operating expenses, which
exclude cost of product revenues but include amortization, increased 41% to
$15.6 million in the first quarter of 2003, compared to $11.1 million in the
first quarter of 2002.

Sales and marketing expenses increased 34% over the prior year period to $7.6
million, as a result of growth in product revenues subject to commissions and to
the build out of our marketing and sales support and management functions. As a
percentage of product revenues, sales and marketing expenses declined slightly
from 23% in the first quarter of 2002 to 22% in the first quarter of 2003.

Research and development expenses increased 28% to $2.7 million in the first
quarter of 2003, largely as a result of research and development activity in
businesses acquired in 2002 and the development of a next generation ultrasonic
aspirator product line.

We are obligated to pay $1.5 million to the sellers of the Novus Monitoring
Limited assets if Novus achieves a product development milestone. If such
payment is made, we estimate that approximately $1.0 million will be recorded as
an in-process research and development charge. Currently, we expect that the
product development milestone will be achieved in the second half of 2003.

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General and administrative expenses increased 63% to $4.8 million in the
quarter, due primarily to costs incurred in operating and integrating businesses
acquired in 2002 and 2003. We expect that the rate of increase of general and
administrative expenses will slow as we complete the integration of our acquired
businesses and consolidate certain of our existing facilities.

Amortization expense increased $227,000 in the first quarter of 2003 because of
acquisitions. Including the impact of the JARIT acquisition, we expect future
amortization expense to approximate $800,000 per quarter.

NON-OPERATING INCOME AND EXPENSES

Net interest income decreased by $217,000 in the first quarter of 2003 as a
result of a continued decline in interest rates. We expect to record net
interest expense beginning in the second quarter of 2003, as approximately $1.0
million of quarterly interest expense associated with the convertible notes we
issued on March 31, 2003 and April 15, 2003 is expected to exceed the interest
income earned on the larger cash and marketable securities balances on hand.

In the three month period ended March 31, 2003, we realized a $0.2 million gain
on the sale of available-for-sale securities, the proceeds of which were used to
finance the JARIT acquisition. This gain was reported in other income (expense),
net.

We recorded a $320,000 liability related to the current estimated fair value of
the contingent interest obligation on the initial $105.0 million of notes issued
in March 2003. The fair value of the contingent interest obligation will be
marked to its fair value at each balance sheet date, with changes in the fair
value recorded to interest expense.

Income tax expense was approximately 36.5% and 35% of income before income taxes
for the first quarter of 2003 and 2002, respectively. Income tax expense for the
first quarter of 2003 and 2002 included a deferred income tax provision of $2.6
million and $1.9 million, respectively. The increase in the effective income tax
rate in 2003 is the result of our expectation that a greater proportion of
taxable income in 2003 will be generated in higher tax jurisdictions.

We reported net income for the first quarter of 2003 of $5.4 million, or $0.18
per share, as compared to net income of $4.1 million, or $0.13 per share, for
the prior year quarter.

In future periods, the "if-converted" method will be used to determine the
dilutive effect on earnings per share of our 2 1/2% contingent convertible notes
due 2008 in periods when the holders of such securities are permitted to
exercise their conversion rights. See Note 5 to the consolidated financial
statements appearing elsewhere in this report and "Liquidity and Capital
Resources" below for a further discussion of the notes.

International Product Revenues and Operations

Because we have operations based in Europe and we generate certain revenues and
incur certain operating expenses in British pounds and the euro, we will
experience currency exchange risk with respect to foreign currency denominated
revenues or expenses. We expect our exposure to currency exchange risk to
increase in the future because the recently acquired JARIT business purchases

18

substantially all of its instruments from vendors in Europe in euro-denominated
transactions, but generates the majority of its sales in U.S. dollars.
Additionally, we plan to substantially increase the use of these vendors for
purchases of our remaining instrument product lines (Redmond(TM)-Ruggles(TM),
Padgett). Currently, we purchase the majority of these instruments
through vendors in U.S. dollar-denominated transactions.

Currently, we do not use derivative financial instruments to manage foreign
currency risk. As the volume of our business transacted in foreign currencies
increases, we will continue to assess the potential effects that changes in
foreign currency exchange rates could have on our business. If we believe that
this potential impact presents a significant risk to our business, we may enter
into derivative financial instruments, including forward contracts to purchase
or sell foreign currencies, to mitigate this risk.

Additionally, we generate significant revenues outside the United States, a
portion of which are U.S. dollar-denominated transactions conducted with
customers who generate revenue in currencies other than the U.S. dollar. As
a result, currency fluctuations between the U.S. dollar and the currencies in
which those customers do business may have an impact on the demand for our
products in foreign countries where the U.S. dollar has increased or decreased
compared to the local currency.

Our sales to foreign markets may be affected by local economic conditions.
Relationships with customers and effective terms of sale frequently vary by
country, and foreign sales often result in longer-term receivables than are
typical in the United States.

Product revenues by major geographic area are summarized below:

In the quarter ended March 31, 2003, product revenues from customers outside the
United States totaled $7.9 million, or 22% of consolidated product revenue, of
which approximately 64% were to European customers. Of this amount, $4.1 million
was generated in foreign currencies primarily by our foreign-based
subsidiaries in the United Kingdom, Germany and France.

In the quarter ended March 31, 2002, product revenues from customers outside the
United States totaled $5.1 million, or 21% of consolidated product revenue, of
which approximately 59% were to European customers. Of this amount, $2.1 million
was generated in foreign currencies by our foreign-based subsidiaries in the
United Kingdom, Germany and France.

Liquidity and Capital Resources

Cash provided by operations has recently been and is expected to continue to be
our primary means of funding existing operations. Prior to 2001, we primarily
relied on funds generated from private and public offerings of equity
securities, research and collaboration funding, and borrowings under a revolving
credit line to fund existing operations. Since 2001, we have generated positive
operating cash flows on an annual basis, including $15.7 million in 2001 and
$32.0 million in 2002, and we generated $8.8 million of operating cash flows in
the first quarter of 2003.

19

Our principal uses of funds during the three month period ended March 31, 2003
were $42.4 million for acquisition consideration, $35.3 million for the purchase
of treasury stock and $0.5 million for purchases of property and equipment.
Principal sources of funds were approximately $101.9 million from the issuance
of convertible notes, $8.8 million in operating cash flows and $2.2 million from
the issuance of common stock through the exercise of stock options.

On March 31, 2003, we received approximately $101.9 million of net proceeds from
the sale of $105.0 million of our contingent convertible subordinated notes due
2008. We will pay interest on the notes at an annual rate of 2 1/2% each
September 15th and March 15th. We will also pay contingent interest on the notes
if, at thirty days prior to maturity, Integra's common stock price is greater
than $37.56. The contingent interest will be payable for each of the last three
years the notes remain outstanding in an amount equal to the greater of i) 0.50%
of the face amount of the notes and ii) the amount of regular cash dividends
paid during each such year on the number of shares of common stock into which
each note is convertible. Holders of the notes may convert them into shares of
our common under certain circumstances, including when the market price of our
common stock on the previous trading day is more than $37.56 per share, based on
an initial conversion price of $34.15 per share.

The notes are general, unsecured obligations of Integra and will be subordinate
to any future senior indebtedness. We cannot redeem the notes prior to their
maturity and the notes' holders may compel us to repurchase the notes upon a
change of control.

We used approximately $35.3 million of the proceeds from this offering to
repurchase 1.5 million shares of our common stock.

On April 15, 2003, we sold an additional $15.0 million of notes for aggregate
net proceeds of $14.5 million.

At March 31, 2003, we had cash, cash equivalents and current and non-current
investments totaling approximately $169.7 million. Our investments consist
almost entirely of highly liquid, interest bearing debt securities. We believe
that our cash and marketable securities are sufficient to finance our operations
in the short term. However, given the significant level of liquid assets and our
objective to grow by acquisitions and alliances, our financial position and
future financial results could change significantly if we were to use a
significant portion of our liquid assets.

We are obligated to pay $3.0 million for interest per year on our contingent
convertible notes and to repay their principal amount of $120.0 million
on March 15, 2008. We are contractually obligated to pay the following amounts
under the terms of operating lease agreements for our facilities:

2003 $2.0 million
2004 1.7 million
2005 0.9 million
2006 0.8 million
2007 0.8 million
Thereafter 2.0 million

We may be obligated to pay Novus an additional $1.5 million upon Novus'
achievement of a development milestone and up to an additional $2.5 million
based upon revenues from Novus' products. Additionally, we are obligated to pay
royalties based on sales of certain of our products, including $0.2 million in
future guaranteed minimum royalty payments to the seller of a business we
acquired in 2001, and fees to various group purchasing organizations based on a
percentage of sales of certain of our products. We have no other significant
future contractual obligations.

20

In February 2003, our Board of Directors reauthorized our share repurchase
program. Under the program, we may repurchase up to an additional 1,000,000
shares of our common stock for an aggregate purchase price not to exceed $15
million. We may repurchase shares under this program through February 2004
either in the open market or in privately negotiated transactions. During 2002,
we repurchased approximately 100,000 shares of our common stock under this
program. Repurchases under this program are separate and in addition to the 1.5
million shares of common stock repurchased concurrent with the issuance of the
contingent convertible notes in March 2003.

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, 2002 filed with the Securities and Exchange Commission and those set forth
in Exhibit 99.2 appearing elsewhere in this report. 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.

21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have exposure to financial risk from changes in foreign exchange rates and
interest rates.

Foreign Currency Exchange

A discussion of foreign currency exchange risks is provided under the caption
"International Product Revenues and Operations" under "Management's Discussion
and Analysis of Financial Condition and Results of Operations".

Interest Rate and Credit Risk

We are exposed to the risk of interest rate fluctuations on the fair value and
interest income earned on our cash and cash equivalents and investments in
available-for-sale marketable debt securities and on the fair value of our
contingent convertible notes. We do not have any floating rate debt
obligations.

A hypothetical 100 basis point movement in interest rates applicable to our cash
and cash equivalents and investments in marketable debt securities outstanding
at March 31, 2003 would increase or decrease interest income by approximately
$1.7 million on an annual basis. We are not subject to material foreign currency
exchange risk with respect to these investments.

A hypothetical 100 basis point increase in interest rates would decrease the
fair value of our $105.0 million of contingent convertible notes outstanding at
March 31, 2003 by approximately $4.7 million. We are not subject to foreign
currency exchange risk with respect to this debt.

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days before filing this report, the Chief Executive Officer and Senior
Vice President, Finance and Treasurer evaluated the effectiveness of the design
and operation of Integra's disclosure controls and procedures. Integra's
disclosure controls and procedures are the controls and other procedures that
the Chief Executive Officer and Senior Vice President, Finance and Treasurer
have designed to ensure that Integra records, processes, summarizes and reports
in a timely manner the information we must disclose in reports filed under the
Securities Exchange Act of 1934, as amended. Stuart M. Essig, Chief Executive
Officer, and David B. Holtz, Senior Vice President, Finance and Treasurer,
reviewed and participated in this evaluation. Based on this evaluation, Messrs.
Essig and Holtz concluded that, as of the date of their evaluation, Integra's
disclosure controls and procedures were effective.

Since the date of the evaluation described above, there have not been any
significant changes in our internal controls or in other factors that could
significantly affect those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.

22

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 9 to the Unaudited Consolidated Financial Statements.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On March 31, 2003, we issued and sold, in a private placement, $105.0 million
aggregate principal amount of 2 1/2 Contingent Convertible Subordinated Notes
due March 15, 2008. The notes are convertible into our common stock at a
conversion rate of 29.2847 shares of common stock per $1,000 principal amount of
notes, which is equivalent to an initial conversion price of approximately
$34.15 per share. Conversion of the notes is subject to certain conditions,
including when the market price of our common stock on the previous trading day
is more than 110% of the conversion price. In addition to fixed interest at the
rate of 2.50% per year, the notes also pay contingent interest under certain
circumstances. See Note 5 to the Company's Unaudited Financial Statements.

We sold the notes to Credit Suisse First Boston LLC, Banc of America Securities
LLC, and U.S. Bancorp Piper Jaffray Inc. in reliance upon the private placement
exemption afforded by Section 4(2) of the Securities Act of 1933, as amended.
The initial purchasers offered and sold the notes to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933, as amended. We have
agreed to file a registration statement under the Securities Act to permit
registered resales of the notes and of the common stock issuable upon their
conversion.

The aggregate offering price of the notes was $105.0 million, 100% of the
principal amount thereof. We received aggregate net proceeds of approximately
$101.9 million, the difference between the aggregate offering price of the notes
and the initial purchasers' discount of $3.1 million, or 3% of the principal
amount of the notes. We used approximately $35.3 million of the aggregate net
proceeds to repurchase 1.5 million shares of our common stock.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

4.1 Indenture, dated as of March 31, 2003, between Integra LifeSciences
Holdings Corporation and Wells Fargo Bank Minnesota, National
Association.

10.1 Retention Agreement of Robert Paltridge dated as of February 20, 2003

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 (1)

99.2 Risk Factors

(b) Reports on Form 8-K

On March 25, 2003, we filed with the Securities and Exchange Commission a Report
on Form 8-K with respect to the acquisition of all of the issued and outstanding
capital stock of J. Jamner Surgical Instruments, Inc. on March 17, 2003.

(1) The certifications are furnished to, and not filed with, the Securities and
Exchange Commission and are not incorporated by reference into any registration
statement filed under the Securities Act of 1933, as amended.

23

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: May 15, 2003 /s/ Stuart M. Essig
-------------------
Stuart M. Essig
President and Chief Executive Officer

Date: May 15, 2003 /s/ David B. Holtz
-------------------
David B. Holtz
Senior Vice President, Finance and Treasurer

CERTIFICATIONS

Certification of Principal Executive Officer

I, Stuart M. Essig, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Integra
LifeSciences Holding Corporation;

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

24

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Date: May 15, 2003

/s/ Stuart M. Essig

------------------------
Stuart M. Essig
Chief Executive Officer

Certification of Principal Financial Officer

I, David B. Holtz, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Integra
LifeSciences Holding Corporation;

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):

25

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Date: May 15, 2003

/s/ David B. Holtz

------------------------
David B. Holtz
Senior Vice President,
Finance and Treasurer

26

Exhibits

4.1 Indenture, dated as of March 31, 2003, between Integra LifeSciences
Holdings Corporation and Wells Fargo Bank Minnesota, National
Association.

10.1 Retention Agreement of Robert Paltridge dated as of February 20, 2003

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 (1)

99.2 Risk Factors

(1) The certifications are furnished to, and not filed with, the Securities and
Exchange Commission and are not incorporated by reference into any registration
statement filed under the Securities Act of 1933, as amended.

27

Exhibit 4.1

Integra LifeSciences Holdings Corporation
2 1/2% CONTINGENT CONVERTIBLE SUBORDINATED NOTES DUE 2008

--------------------
INDENTURE
DATED AS OF MARCH 31, 2003

--------------------
WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION,
AS TRUSTEE

================================================================================

================================================================================

Integra LifeSciences Holdings Corporation

2 1/2% CONTINGENT CONVERTIBLE SUBORDINATED NOTES DUE 2008

--------------------

INDENTURE
DATED AS OF MARCH 31, 2003

--------------------

WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION,
AS TRUSTEE

================================================================================

CROSS-REFERENCE TABLE*

* This Cross-Reference Table shall not, for any purpose, be deemed a part of
this Indenture.
** N.A. means Not Applicable

THIS INDENTURE dated as of March 31, 2003 is between Integra
LifeSciences Holdings Corporation, a corporation duly organized under the laws
of the State of Delaware (the "Company"), and Wells Fargo Bank Minnesota,
National Association, a national bank association organized and existing under
the laws of the United States, as Trustee (the "Trustee").

In consideration of the premises and the purchase of the
Securities by the Holders thereof, both parties agree as follows for the benefit
of the other and for the equal and ratable benefit of the registered Holders of
the Company's 2 1/2% Contingent Convertible Subordinated Notes due 2008.

ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE

SECTION 1.1. DEFINITIONS

"Additional Interest" has the meaning specified in Section 5
of the Registration Rights Agreement. All references herein to interest accrued
or payable as of any date shall include any Additional Interest accrued or
payable as of such date as provided in the Registration Rights Agreement.

"Affiliate" means, with respect to any specified person, any
other person directly or indirectly controlling or controlled by or under direct
or indirect common control with such specified person. For the purposes of this
definition, "control" when used with respect to any person means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

"Agent" means any Registrar, Paying Agent or Conversion Agent.

"Applicable Procedures" means, with respect to any transfer or
exchange of beneficial ownership interests in a Global Security, the rules and
procedures of the Depositary, in each case to the extent applicable to such
transfer or exchange.

"Board of Directors" means either the board of directors of
the Company or any committee of the Board of Directors authorized to act for it
with respect to this Indenture.

"Business Day" means each day that is not a Legal Holiday.

"Capital Stock" or "capital stock" of any Person means any and
all shares, interests, rights to purchase, warrants, options, participations or
other equivalents of or interests in (however designated) equity of such Person,
but excluding any debt securities convertible into such equity.

"Cash" or "cash" means such coin or currency of the United
States as at any time of payment is legal tender for the payment of public and
private debts.

"Cash Equivalents" means (i) marketable direct obligations
issued by, or unconditionally guaranteed by, the United States Government or
issued by any agency thereof and backed by the full faith and credit of the
United States, in each case maturing within one year from the date of
acquisition thereof; (ii) marketable direct obligations issued by any state of
the United States of America or any political subdivision of any such state of
the United States of America or any political subdivision of any such state or
any public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Ratings Service or
Moody's Investors Service, Inc.; (iii) commercial paper maturing no more than
one year from the date of acquisition thereof issued by any bank organized under
the laws of the United States of America or any state thereof or the District of
Columbia or any U.S. branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250,000,000; (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (i) above entered into with any bank
meeting the qualifications specified in clause (iii) above; and (v) money market
funds which invest substantially all their assets in securities of the types
described in clauses (i) through (iv) above.

"Certificated Security" means a Security that is in
substantially the form attached hereto as Exhibit A and that does not include
the information or the schedule called for by footnotes 1, 3 and 4 thereof.

"Common Stock" means the common stock of the Company, $0.01
par value, as it exists on the date of this Indenture and any shares of any
class or classes of capital stock of the Company resulting from any
reclassification or reclassifications thereof and which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company and which are
not subject to redemption by the Company; provided, however, that if at any time
there shall be more than one such resulting class, the shares of each such class
then so issuable on conversion of Securities shall be substantially in the
proportion which the total number of shares of such class resulting from all
such reclassifications bears to the total number of shares of all such classes
resulting from all such reclassifications.

"Company" means the party named as such in the first paragraph
of this Indenture until a successor replaces it pursuant to the applicable
provisions of this Indenture, and thereafter "Company" shall mean such successor
Company.

"Continuing Directors" means, as of any date of determination,
any member of the Board of Directors who (a) was a member of the Board of
Directors as of the date hereof or (b) was nominated for election or elected to
the Board of Directors with the approval of a majority of the Continuing
Directors who were members at the time of the new director's nomination or
election.

"Conversion Rate" means the number of shares of Common Stock
into which each Security is convertible, and shall equal the quotient obtained
by dividing $1,000 by the then current Conversion Price.

"Corporate Trust Office" means the principal office of the
Trustee at which at any particular time its corporate trust business shall be
administered, which office at the date of the execution of this Indenture is
located at 213 Court Street, Suite 703, Middletown, CT 06457, Attention:
Corporate Trust Services or at any other time at such other address as the
Trustee may designate from time to time by notice to the Company.

"Default" or "default" means, when used with respect to the
Securities, any event which is or, after notice or passage of time or both,
would be an Event of Default.

"Designated Senior Indebtedness" means any particular Senior
Indebtedness of the Company in which the instrument creating or evidencing the
same or the assumption or guarantee thereof (or any related agreements or
documents to which the Company is a party) expressly provides that such Senior
Indebtedness shall be "Designated Senior Indebtedness" for purposes of this
Indentur