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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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 92618-2402
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (714) 453-3200
NOT APPLICABLE
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(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 proceeding 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 7, 1996, there were 6,956,546 shares of the registrant's
common stock issued and outstanding.
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Interpore International
Index
<TABLE>
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Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996 ............................................ 3
Condensed Consolidated Statements of Income (unaudited) for the three
month periods ended March 31, 1997 and March 31, 1996 ........................ 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three month periods ended March 31, 1997 and March 31, 1996 .................. 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
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Interpore International
Condensed Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,211 $ 6,112
Short-term investments 3,054 4,220
Accounts receivable, less allowance for doubtful accounts of
$327 and $339 in 1997 and 1996, respectively 3,148 3,771
Inventories 3,361 3,462
Prepaid expenses 710 436
Deferred income taxes 596 596
Other current assets 124 107
-------- -------
Total current assets 19,204 18,704
Property, plant and equipment, net 606 688
Deferred income taxes 904 904
Other assets 28 27
======== ========
Total assets $ 20,742 $ 20,323
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 779 629
Accrued compensation and related expenses 463 591
Accrued sales taxes 281 252
Deferred rent payable 81 103
Other accrued liabilities 318 212
Current portion of long-term debt 3 5
-------- --------
Total current liabilities 1,925 1,792
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Contingencies
Shareholders' equity:
Series E convertible preferred stock, voting, no par value:
Authorized, issued and outstanding shares - 76,593 at
March 31, 1997 and December 31, 1996; aggregate liquidation
value of $574 at March 31, 1997 and December 31, 1996 484 484
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 - 6,956,547 at March 31, 1997
and 6,945,447 at December 31, 1996 35,460 35,433
Accumulated deficit (17,127) (17,386)
-------- --------
Total shareholders' equity 18,817 18,531
======== ========
Total liabilities and shareholders' equity $ 20,742 $ 20,323
======== ========
</TABLE>
See accompanying notes.
3
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Interpore International
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1997 1996
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<S> <C> <C>
Net sales $4,725 $4,996
Cost of goods sold 1,269 1,331
Royalty expense 34 75
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Gross profit 3,422 3,590
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Operating expenses:
Research and development 529 500
Selling and marketing 2,247 2,387
General and administrative 619 699
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Total operating expenses 3,395 3,586
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Income from operations 27 4
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Interest income 139 140
Interest expense (4) (9)
Other income 97 40
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Total interest and other income, net 232 171
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Income before taxes 259 175
Provision for income taxes - -
------ ------
Net income $ 259 $ 175
====== ======
Net income per share $ .04 $ .02
====== ======
Shares used in computing net income per share 7,316 7,509
====== ======
</TABLE>
See accompanying notes.
4
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Interpore International
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 259 $ 175
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 96 89
Changes in operating assets and liabilities:
Accounts receivable 623 (305)
Inventories 101 (91)
Prepaid expenses (274) (322)
Other assets (18) 288
Accounts payable 150 (360)
Accrued liabilities (15) 185
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Net cash provided by (used in) operating activities 922 (341)
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INVESTING ACTIVITIES
Sales of short-term investments, net 1,166 7,935
Capital expenditures (14) (224)
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Net cash provided by investing activities 1,152 7,711
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FINANCING ACTIVITIES
Proceeds from exercise of stock options 27 15
Repayment of lease financing (2) (28)
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Net cash provided by (used in) financing activities 25 (13)
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Net increase in cash and cash equivalents 2,099 7,357
Cash and cash equivalents at beginning of period 6,112 3,694
======= ========
Cash and cash equivalents at end of period $ 8,211 $ 11,051
======= ========
</TABLE>
See accompanying notes.
5
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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
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, 1997 and the consolidated statements of income
and cash flows for the three month periods ended March 31, 1997 and 1996.
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 1997 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, 1996, 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,
1997 1996
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Raw materials $ 824 $ 692
Work-in-process 300 385
Finished goods 2,237 2,385
====== ======
$3,361 $3,462
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</TABLE>
3. 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.
6
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4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, FASB Statement of Financial Accounting Standards No. 128 (SFAS
128) was issued and is effective for interim and annual periods ending after
December 15, 1997. SFAS 128 requires presentation of both basic and dilutive
earnings per share. Management believes that basic and dilutive earnings per
share will not differ materially from the earnings per share amounts in the
accompanying statements of income.
5. SUBSEQUENT EVENT
In April 1997, the Company entered into a definitive agreement for the sale of
its dental implant business to Steri-Oss Inc. of Yorba Linda, California. In May
1997, the sale was completed, and the Company received an initial cash payment
of $1.5 million. A deferred cash payment of up to $1.5 million, subject to
certain purchase price adjustments, is due in January 1998. The Company
anticipates that there will be a loss on the transaction, which will be recorded
in the second quarter of 1997.
7
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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,
----------------------------------------
1997 1996 1997 vs. 1996
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<S> <C> <C> <C>
Net sales 100.0% 100.0% (5.4%)
Cost of goods sold 26.9% 26.6% (4.7%)
Royalty expense .7% 1.5% (54.7%)
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Gross profit 72.4% 71.9% (4.7%)
------ ------- -------
Operating expense:
Research and development 11.2% 10.0% 5.8%
Selling and marketing 47.5% 47.8% (5.9%)
General and administrative 13.1% 14.0% (11.4%)
------ ------ -------
Total operating expenses 71.8% 71.8% (5.3%)
====== ====== =======
Income from operations .6% .1% 575.0%
====== ====== =======
</TABLE>
For the quarter ended March 31, 1997, net sales of $4.7 million were $271,000 or
5.4% lower than sales of $5.0 million for the same period of 1996.
Sales of orthopaedic products, primarily Pro Osteon(R) bone graft substitute
material for orthopaedic applications, increased in the quarter ended March 31,
1997 by $238,000 or 8.4% to $3.1 million compared to $2.8 million for the first
quarter of 1996. Domestic sales during the first quarter of 1997 through direct
sales representatives increased 46.6% while sales through distributors decreased
34.4% compared to the same quarter of 1996. International sales through
distributors increased 233.3% between the respective quarters.
Sales of the Company's OEM products, which consist mostly of porous
hydroxyapatite orbital implants manufactured for a single customer, decreased by
11.5% in the quarter ended March 31, 1997 to $223,000 versus $252,000 for the
first quarter of 1996.
Sales of the Company's oral/maxillofacial products (titanium dental implant
systems and Interpore 200(R) Porous Hydroxyapatite for dental use) during the
first quarter of 1997 declined by $480,000 or 24.9% from $1.9 million to $1.4
million. Management believes that sales were adversely affected by negotiations
which took place during the fourth quarter of 1996 and first quarter of 1997
regarding the sale of the dental business. In April 1997, the Company entered
into a definitive agreement for the sale of the dental business to Steri-Oss
Inc. of Yorba Linda, California. In May 1997, the sale was completed, and the
Company received an initial cash payment of $1.5 million. A deferred cash
payment of up to $1.5 million, subject to certain purchase price adjustments, is
due in January 1998. The Company anticipates that there will be a loss on the
transaction, which will be recorded in the second quarter of 1997. As part of
the transaction, the Company and Steri-Oss Inc. negotiated a distribution
agreement whereby the Company will manufacture and provide Interpore 200 bone
void filler for distribution by Steri-Oss Inc.
8
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The gross margins as percentages of sales for the quarters ended March 31, 1997
and 1996 were approximately the same, at 72.4% and 71.9%, respectively.
Total operating expenses for the quarter ended March 31, 1997 decreased by 5.3%
or $191,000 as compared to the same quarter of 1996. Research and development
expenses increased by 5.8% or $29,000. Selling and marketing expenses and
general and administrative expenses decreased by 5.9% and 11.4%, respectively.
Most of the decrease in selling and marketing expenses was caused by reduced
expenditures related to the dental business. The general and administrative
expense decrease was primarily caused by reduced professional fees.
No income tax provision was recorded during the first quarters of 1997 and 1996
due to the anticipated utilization of the Company's net operating loss
carryforwards during the two periods.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997 and December 31, 1996, cash, cash equivalents and short-term
investments totaled $11.3 million and $10.3 million, respectively. Total working
capital increased to $17.3 million at March 31, 1997 from $16.9 million at
December 31, 1996 and the current ratio decreased from 10.4 to 10.0 from
December 31, 1996 to March 31, 1997.
The $11.3 million total of cash, cash equivalents and short-term investments
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 $5 million revolving line of credit
which expires in July 1997 and which had no amount outstanding at March 31,
1997.
The Company believes it currently possesses sufficient resources to meet the
cash requirements of its operations for at least the next year.
9
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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, 1997.
10
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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 12, 1997 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
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EXHIBIT INDEX
<TABLE>
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SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE
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<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 (8)
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) as amended by a Third Amendment to Lease dated December 11, 1996 (10)
10.03 Koll Business Center Lease between Registrant and Airport Industrial Park (1)
10.04 Asset Purchase Agreement dated March 1, 1993 regarding sale of assets of
Interpore Orthopaedics, Inc. to Applied Epigenetics, Inc. (1)
10.05 Cancellation and Release Agreement dated March 1, 1993 among Registrant,
Interpore Orthopaedics, Inc., Pfizer, Inc. and Howmedica, Inc. (1)
10.06 Series E Preferred Stock and Common Stock Warrant Purchase Agreement dated
December 19, 1991 (1)
</TABLE>
12
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<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ----
<S> <C> <C>
10.07 Series E Preferred Stock Purchase Agreement dated October 30, 1992 (1)
10.08 Amended Schedule to Loan and Security Agreement dated July 25, 1996 among
Registrant, Interpore Orthopaedics, Inc. and Silicon Valley Bank (9)
10.09 Amendment to the Loan Agreement dated July 25, 1996 among Registrant,
Interpore Orthopaedics, Inc. and Silicon Valley Bank (9)
10.10 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)
10.11 Employee Qualified Stock Purchase Plan (3)
10.12 1995 Stock Option Plan (3)
10.13 Stock Option Plan for Non-Employee Directors of Interpore International (7)
10.14 Form of Indemnification Agreement (1)
11.1 Computations of Net Income per Share
27.1 Financial Data Schedule
</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
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(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 Proxy Statement for the
Company's 1995 Annual Meeting of Shareholders.
(8) Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
(9) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1996.
(10) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
14
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EXHIBIT 11.1
Interpore International
Computations of Net Income Per Share
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1996
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<S> <C> <C>
Net income $ 259 $ 175
====== ======
Calculation of shares used in computing net income per share:
Weighted average common shares outstanding 6,955 6,963
Weighted average convertible preferred stock 77 240
Common share equivalents outstanding 284 306
------ ------
Shares used in computing net income per share 7,316 7,509
====== ======
Net income per share $ .04 $ .02
====== ======
</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, 1997 AND IS QUALIFIED IN IS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,211,000
<SECURITIES> 3,054,000
<RECEIVABLES> 3,475,000
<ALLOWANCES> 327,000
<INVENTORY> 3,361,000
<CURRENT-ASSETS> 19,204,000
<PP&E> 2,856,000
<DEPRECIATION> 2,250,000
<TOTAL-ASSETS> 20,742,000
<CURRENT-LIABILITIES> 1,925,000
<BONDS> 3,000
0
484,000
<COMMON> 35,460,000
<OTHER-SE> (17,127,000)
<TOTAL-LIABILITY-AND-EQUITY> 20,742,000
<SALES> 4,725,000
<TOTAL-REVENUES> 4,725,000
<CGS> 1,269,000
<TOTAL-COSTS> 1,303,000
<OTHER-EXPENSES> 3,298,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (135,000)
<INCOME-PRETAX> 0
<INCOME-TAX> 259,000
<INCOME-CONTINUING> 259,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 259,000
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
