<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-22598
INTERPORE INTERNATIONAL
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3043318
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
181 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92718
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (714) 453-3200
not applicable
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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.
Yes [x] No [ ]
As of May 6, 1996, there were 7,008,925 shares of the registrant's
common stock issued and outstanding.
<PAGE> 2
Interpore International
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page(s)
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<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1996 (unaudited) and December 31, 1995 . . . . . . . . . . . 3
Condensed Consolidated Statements of Income (unaudited)
for the three month periods ended March 31, 1996 and
March 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three month periods ended March 31, 1996 and
March 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
2
<PAGE> 3
Interpore International
Condensed Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,051 $ 3,694
Short-term investments - 7,935
Accounts receivable, less allowance for doubtful accounts of
$541 and $523 in 1996 and 1995, respectively 3,480 3,175
Inventories 3,848 3,757
Prepaid expenses 802 480
Deferred income taxes 596 596
Other current assets 150 438
---------- ---------
Total current assets 19,927 20,075
Property, plant and equipment, net 834 699
Deferred income taxes 904 904
Other assets 27 27
---------- ---------
Total assets $ 21,692 $ 21,705
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 500 $ 860
Accrued compensation and related expenses 478 374
Accrued sales taxes 379 374
Accrued distributor returns 256 411
Other accrued liabilities 669 438
Current portion of long-term debt 116 113
---------- ---------
Total current liabilities 2,398 2,570
---------- ---------
Long-term debt 47 78
Contingencies
Shareholders' equity:
Series E preferred stock, voting, no par value: Authorized, issued
and outstanding shares - 237,837 at March 31, 1996 and 240,505
at December 31, 1995; liquidation value of $1,784 at March 31,
1996 and $1,804 at December 31, 1995 1,503 1,520
Preferred stock: Authorized shares - 296,358; issued and
outstanding shares - none - -
Common stock, no par value: Authorized shares - 20,000,000; issued and
outstanding shares - 6,976,325 at March 31, 1996 and 6,958,642 at
December 31, 1995 35,613 35,581
Accumulated deficit (17,869) (18,044)
---------- ---------
Total shareholders' equity 19,247 19,057
---------- ---------
Total liabilities and shareholders' equity $ 21,692 $ 21,705
========== =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
Interpore International
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
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<S> <C> <C>
Net sales $ 4,996 $ 4,248
Cost of goods sold 1,331 1,099
Royalty expense 75 107
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Gross profit 3,590 3,042
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Operating expenses:
Research and development 500 492
Selling and marketing 2,387 1,674
General and administrative 699 591
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Total operating expenses 3,586 2,757
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Income from operations 4 285
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Interest income 140 173
Interest expense (9) (15)
Other income 40 14
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Total interest and other income, net 171 172
------- -------
Income before taxes 175 457
Provision for income taxes - 19
------- -------
Net income $ 175 $ 438
======= =======
Net income per share $ .02 $ .06
======= =======
Shares used in computing net income per share 7,509 7,581
======= =======
</TABLE>
See accompanying notes.
4
<PAGE> 5
Interpore International
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 175 $ 438
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 89 80
Changes in operating assets and liabilities:
Accounts receivable (305) 441
Inventories (91) (224)
Prepaid expenses (322) (541)
Other assets 288 (201)
Accounts payable (360) (111)
Accrued liabilities 185 (52)
-------- --------
Net cash used in operating activities (341) (170)
-------- --------
INVESTING ACTIVITIES
Sales of short-term investments, net 7,935 2,003
Capital expenditures (224) (97)
-------- --------
Net cash provided by investing activities 7,711 1,906
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FINANCING ACTIVITIES
Proceeds from exercise of stock options 15 67
Repayments of notes payable - (79)
Repayment of lease financing (28) (23)
-------- --------
Net cash used in financing activities (13) (35)
-------- --------
Net increase in cash and cash equivalents 7,357 1,701
Cash and cash equivalents at beginning of period 3,694 6,410
-------- --------
Cash and cash equivalents at end of period $ 11,051 $ 8,111
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
Interpore International
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Interpore International (the "Company") without audit,
pursuant to the Securities and Exchange Commission regulations. In the opinion
of management, the unaudited financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the consolidated financial position at March 31, 1996 and the consolidated
statements of income and cash flows for the three month periods ended March 31,
1996 and 1995.
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, Interpore Orthopaedics, Inc. and Interpore
Dental, Inc., after elimination of all significant intercompany transactions.
The statements of income and cash flows for the 1996 interim periods are not
necessarily indicative of results to be expected for the full year.
These consolidated financial statements should be read in conjunction with the
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, as filed with the Securities and Exchange
Commission.
2. INVENTORIES
Inventories are stated at the lower of average cost or market and consist of
the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Raw materials $ 782 $ 854
Work-in-process 614 523
Finished goods 2,452 2,380
--------- --------
$ 3,848 $ 3,757
========= ========
</TABLE>
3. SHAREHOLDERS' EQUITY
During the three month period ended March 31, 1996, 2,668 shares of Series E
preferred stock were converted into 2,684 shares of the Company's common stock.
6
<PAGE> 7
4. CONTINGENCIES
In the ordinary course of its business, the Company is subject to legal
proceedings, claims and liabilities, including product liability matters. In
the opinion of management, the amount of ultimate liability with respect to any
known proceedings or claims will not materially affect the financial position
or results of operations of the Company.
5. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1996, the Company adopted the FASB Statement of Financial
Accounting Standards No. 121 (SFAS 121), Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The adoption of
SFAS 121 had no impact on the Company's financial condition or results of
operations.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table presents the Company's results of operations as
percentages:
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------------------------
1996 1995 1996 vs. 1995
------ ------ -------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 17.6%
Cost of goods sold 26.6% 25.9% 21.1%
Royalty expense 1.5% 2.5% (29.9%)
------ ------ ------
Gross profit 71.9% 71.6% 18.0%
------ ------ ------
Operating expense:
Research and development 10.0% 11.6% 1.6%
Selling and marketing 47.8% 39.4% 42.6%
General and administrative 14.0% 13.9% 18.3%
------ ------ ------
Total operating expenses 71.8% 64.9% 30.1%
------ ------ ------
Income from operations 0.1% 6.7% (98.6%)
====== ====== ======
</TABLE>
For the quarter ended March 31, 1996, net sales of $5.0 million were $748,000
or 17.6% higher than sales of $4.2 million for the same period of 1995. Sales
of Pro Osteon(R) bone graft substitute material, for orthopaedic applications,
increased by $991,000 or 54% to $2.8 million compared to $1.8 million for the
first quarter of 1995. Sales of the Company's oral/maxillofacial products
(titanium dental implant systems and Interpore 200(R) Porous Hydroxyapatite for
dental use) declined by $313,000 or 14% from $2.2 million to $1.9 million.
Sales of the Company's hydroxyapatite orbital implants, which are entirely
dependent on the requirements of a single customer, increased by 38.5% to
$252,000 versus $182,000 for the first quarter of 1995.
During 1995, the Company restructured its distribution channels for the sale of
Pro Osteon. Distribution agreements with certain domestic distributors that
were not achieving satisfactory market penetration were terminated, and direct
sales representatives were recruited and hired for the respective territories.
Additionally, in the first quarter of 1996, the Company established an
international sales management group and hired three experienced managers with
the responsibility for building an organization of independent dealers
internationally. As of March 31, 1996, the Company had 27 direct sales
representatives compared with ten as of March 31, 1995. The growth in Pro
Osteon sales for the first quarter of 1996 was primarily caused by the sales
growth in direct sales territories, but also reflected a slight growth overall
in sales to domestic distributors.
The Company's sales of oral/maxillofacial products have declined since the
first quarter of 1995 due to continued strong competition in this slow growth
market along with the lack of major new dental product introductions. In late
1995, the Company introduced the Smooth Staple Implant(R) System, and during
the first quarter of 1996 introduced the IMZ(R) Bone Tack System. Sales of
these products in the first quarter of 1996 helped to partially offset the
sales decline in the other dental products and generate slight sales growth
sequentially over the fourth quarter of 1995.
8
<PAGE> 9
The gross margins as percentages of sales for the quarters ended March 31, 1996
and 1995 were approximately the same, at 71.9% and 71.6%, respectively.
Total operating expenses for the quarter ended March 31, 1996 increased by
30.1% or $829,000 as compared to the same quarter of 1995. Research and
development expenses remained essentially the same while selling and marketing
expenses and general and administrative expenses increased by 42.6% and 18.3%,
respectively. Most of the increase in selling and marketing expenses was
related to payroll and related costs and travel expenses associated with the
direct sales organization for the orthopaedic division and costs of the
international sales management group. The general and administrative expense
increase reflects an accrual for the Company's annual incentive plan.
No income tax provision was recorded during the first quarter of 1996 due to
the anticipated realization and recognition of the Company's net operating loss
carryforwards during 1996. The Company's effective tax rate for the first
quarter of 1995 was 10%, representing federal alternative minimum tax and state
income tax for that period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996 and December 31, 1995, cash, cash equivalents and short-term
investments totaled $11.0 million and $11.6 million, respectively. Total
working capital of $17.5 million at March 31, 1996 remained unchanged from
December 31, 1995, while the current ratio improved from 7.8 to 8.3 from
December 31, 1995 to March 31, 1996.
The $11 million total of cash and cash equivalents remains available to support
the Company's continued investment in the development of its business,
including the pursuit of FDA approvals for additional indications for the use
of Pro Osteon, development or acquisition of new bone graft products or
complementary products, and possible acquisitions of businesses. Additionally,
the Company has a $3 million revolving line of credit which expires in July
1996 and which had no amount outstanding at March 31, 1996.
The Company believes it currently possesses sufficient resources to meet the
cash requirements of its operations for at least the next year.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a. Exhibits.
Reference is made to the Exhibit Index on Page 12 hereof.
b. Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter
ended March 31, 1996.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: May 7, 1996 INTERPORE INTERNATIONAL
(Registrant)
By: /s/ David C. Mercer
------------------------------
David C. Mercer,
President and Chief Executive
Officer
By: /s/ Richard L. Harrison
-----------------------------
Richard L. Harrison
Vice President and
Chief Financial Officer
11
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- - ------ ----------- ----
<S> <C> <C>
3.01 Third Amended and Restated Articles of Incorporation of Registrant,
executed on December 9, 1991(1)
3.02 First Amendment to the Third Amended and Restated Articles of
Incorporation of Registrant, executed on April 22, 1992(1)
3.03 Second Amendment to Third Amended and Restated Articles of Incorporation
of Registrant, executed on November 30, 1993(5)
3.04 Bylaws of Registrant dated October 24, 1983(1)
3.05 Third Amendment to Third Amended and Restated Articles of Incorporation
of Registrant, executed on November 30, 1993(5)
4.01 Rights Agreement dated August 29, 1995(6)
4.02 First Amendment to the Rights Agreement, executed on November 1, 1995(9)
10.01 Revised License Agreement dated March 12, 1984, between Registrant and
Research Corporation Technologies, Inc., as amended by a First Amendment
dated December 7, 1984, and as further amended by a Fourth Amendment
dated July 22, 1988(1)
10.02 Single Tenant Lease dated July 25, 1991 between Registrant and The Irvine
Company(1)
10.03 Koll Business Center Lease between Registrant and Airport Industrial
Park(1)
10.04 Master Lease Agreement dated March 10, 1993 between Registrant and
Comdisco, Inc.(1)
10.05 Asset Purchase Agreement dated March 1, 1993 regarding sale of assets of
Interpore Orthopaedics, Inc. to Applied Epigenetics, Inc.(1)
10.06 Cancellation and Release Agreement dated March 1, 1993 among Registrant,
Interpore Orthopaedics, Inc., Pfizer, Inc. and Howmedica, Inc.(1)
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- - ------ ----------- ----
<S> <C> <C>
10.07 Series E Preferred Stock and Common Stock Warrant Purchase Agreement
dated December 19, 1991(1)
10.08 Series E Preferred Stock Purchase Agreement dated October 30, 1992(1)
10.09 Loan and Security Agreement dated October 24, 1990 among Registrant,
Interpore Orthopaedics, Inc. and Silicon Valley Bank(1)
10.10 Amendment to the Loan Agreement dated July 1, 1995 among Registrant,
Interpore Orthopaedics, Inc. and Silicon Valley Bank(7)
10.11 Amended and Restated Stock Option Plan dated March 19, 1991(2), First
Amendment to the Amended and Restated Stock Option Plan, effective
October 15, 1991(1); Amendment to the Amended and Restated Stock Option
Plan dated September 17, 1994(4)
10.12 Employee Qualified Stock Purchase Plan(3)
10.13 1995 Stock Option Plan(3)
10.14 Stock Option Plan for Non-Employee Directors of Interpore International(8)
10.15 Form of Indemnification Agreement(1)
11.01 Computations of Net Income per Share 15
27.01 Financial Data Schedule 16
</TABLE>
_________________________________________________________________
(1) Incorporated by reference from the Company's Registration Statement on
Form S-1, Registration No. 33-69872.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-8, Registration No. 33-77426.
(3) Incorporated by reference from the Company's Proxy Statement for the
Company's 1994 Annual Meeting of Shareholders.
(4) Incorporated by reference from the Company's Registration Statement on
Form S-8, Registration No. 33-86290.
(5) Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1994.
13
<PAGE> 14
(6) Incorporated by reference from the Company's Current Report on Form
8-K dated August 29, 1995.
(7) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1995.
(8) Incorporated by reference from the Company's Proxy Statement for the
Company's 1995 Annual Meeting of Shareholders.
(9) Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
14
<PAGE> 1
Exhibit 11.01
Interpore International
Computations of Net Income Per Share
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1995
------ ------
<S> <C> <C>
Net income $ 175 $ 438
====== ======
Calculation of shares used in computing net income per share:
Weighted average common shares outstanding 6,963 6,762
Weighted average convertible preferred stock 240 495
Common share equivalents outstanding 306 324
------ ------
Shares used in computing net income per share 7,509 7,581
====== ======
Net income per share $ .02 $ .06
====== ======
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited condensed consolidated financial statements as of and for the three
month period ended March 31, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 11,051,000
<SECURITIES> 0
<RECEIVABLES> 4,021,000
<ALLOWANCES> 541,000
<INVENTORY> 3,848,000
<CURRENT-ASSETS> 19,927,000
<PP&E> 2,706,000
<DEPRECIATION> 1,872,000
<TOTAL-ASSETS> 21,692,000
<CURRENT-LIABILITIES> 2,398,000
<BONDS> 47,000
0
1,503,000
<COMMON> 35,613,000
<OTHER-SE> (17,869,000)
<TOTAL-LIABILITY-AND-EQUITY> 21,692,000
<SALES> 4,996,000
<TOTAL-REVENUES> 4,996,000
<CGS> 1,331,000
<TOTAL-COSTS> 1,406,000
<OTHER-EXPENSES> 3,626,000
<LOSS-PROVISION> 20,000
<INTEREST-EXPENSE> (131,000)
<INCOME-PRETAX> 175,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 175,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 175,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
