<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 September 30, 1998
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. 0-22958
INTERPORE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 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: (949) 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 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 November 5, 1998, there were 14,019,659 shares of the registrant's
common stock issued and outstanding.
<PAGE> 2
Interpore International, Inc.
Index
Page(s)
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 (unaudited) and December 31, 1997 ....... 3
Condensed Consolidated Statements of Operations (unaudited)
for the three month and nine month periods ended
September 30, 1998 and September 30, 1997 .................. 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended September 30, 1998 and
September 30, 1997 ......................................... 5
Notes to Condensed Consolidated Financial Statements ........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 15
Item 6. Exhibits and Reports on Form 8-K .............................. 16
2
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Interpore International, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,212 $ 11,809
Short-term investments 1,983 4,826
Accounts receivable, less allowance for doubtful
accounts of $485 and $370 in 1998 and 1997,
respectively 6,336 6,590
Inventories 12,073 10,374
Prepaid expenses 840 438
Deferred income taxes 1,426 1,454
Other current assets 246 963
-------- --------
Total current assets 32,116 36,454
Property, plant and equipment, net 1,425 1,550
Deferred income taxes 2,639 2,639
Other assets 733 895
-------- --------
Total assets $ 36,913 $ 41,538
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease
obligations $ 15 $ 95
Accounts payable 1,270 1,094
Accrued compensation and related expenses 740 758
Accrued disposition costs 253 610
Accrued merger-related expenses and restructuring charges 860 -
Accrued income taxes - 1,067
Other accrued liabilities 1,132 1,101
-------- --------
Total current liabilities 4,270 4,725
-------- --------
Long-term liabilities:
Long-term debt 3,322 5,080
Deferred income taxes 55 55
Obligations under capital leases, net 34 44
-------- --------
Total long-term liabilities 3,411 5,179
-------- --------
Contingencies
Shareholders' equity:
Series E convertible preferred stock, voting, par value - -
$.01 per share: Authorized shares - 594,000; issued and
outstanding shares - 32,906 at September 30, 1998 and
December 31, 1997; aggregate liquidation value of $247
at September 30, 1998 and December 31, 1997
Preferred stock, par value $.01 per share: Authorized - -
shares 4,406,000; outstanding shares - none
Common stock, par value $.01 per share: Authorized shares 140 138
- 50,000,000; issued and outstanding shares - 14,019,663
at September 30, 1998 and 13,765,538 at December 31, 1997
Additional paid-in-capital 43,922 43,114
Accumulated deficit (14,830) (11,618)
-------- --------
Total shareholders' equity 29,232 31,634
-------- --------
Total liabilities and shareholders' equity $ 36,913 $ 41,538
======== ========
</TABLE>
See accompanying notes.
3
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Interpore International, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 7,343 $ 7,191 $ 22,046 $ 21,722
Cost of goods sold 2,130 2,390 6,180 6,417
-------- -------- -------- --------
Gross profit 5,213 4,801 15,866 15,305
-------- -------- -------- --------
Operating expenses:
Research and development 890 811 2,702 2,300
Selling and marketing 2,905 2,593 8,610 8,556
General and administrative 1,019 1,061 3,142 3,576
Merger-related expenses - - 3,031 -
Restructuring charges - - 1,512 -
Non-recurring charges 381 - 381 -
Loss on sale of dental business - - - 617
-------- -------- -------- --------
Total operating expenses 5,195 4,465 19,378 15,049
-------- -------- -------- --------
Income (loss) from operations 18 336 (3,512) 256
-------- -------- -------- --------
Interest income 157 246 601 616
Interest expense (117) (140) (508) (453)
Other income 108 62 266 236
-------- -------- -------- --------
Total interest and other income, net 148 168 359 399
-------- -------- -------- --------
Income (loss) before taxes 166 504 (3,153) 655
Income tax provision (benefit) - (30) 59 (67)
-------- -------- -------- --------
Net income (loss) from continuing operations 166 534 (3,212) 722
Net income from discontinued operations - - - 2,597
-------- -------- -------- --------
Net income (loss) $ 166 $ 534 $ (3,212) $ 3,319
======== ======== ======== ========
Basic earnings per share:
Net income (loss) from continuing operations $ .01 $ .04 $ (.23) $ .05
Net income from discontinued operations $ .00 $ .00 $ .00 $ .20
Net income (loss) $ .01 $ .04 $ (.23) $ .25
Shares used in computing earnings per share 13,989 13,476 13,898 13,365
Diluted earnings per share:
Net income (loss) from continuing operations $ .01 $ .04 $ (.23) $ .05
Net income from discontinued operations $ .00 $ .00 $ .00 $ .19
Net income (loss) $ .01 $ .04 $ (.23) $ .24
Shares used in computing earnings per share 14,301 14,142 13,898 13,955
</TABLE>
See accompanying notes.
4
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Interpore International, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used in continuing operations $ (3,777) $ (2,250)
Net cash provided by discontinued operations - 175
-------- --------
Net cash used in operating activities (3,777) (2,075)
-------- --------
INVESTING ACTIVITIES
Expenditures for intangible assets (26) (48)
Sales (purchases) of short-term investments, net 2,843 (556)
Purchases of property, plant and equipment (599) (475)
Proceeds from sale of dental business, net - 741
-------- --------
Net cash provided by (used in) continuing operations 2,218 (338)
Net cash used in discontinued operations - (91)
Proceeds from sale of recovery products segment - 8,177
-------- --------
Net cash provided by investing activities 2,218 7,748
-------- --------
FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations (1,751) (1,659)
Proceeds from exercise of stock options 650 261
Proceeds from employee stock purchase plan 63 42
Proceeds from the sale of common stock - 2,242
-------- --------
Net cash provided by (used in) continuing operations (1,038) 886
Net cash used in discontinued operations - (197)
-------- --------
Net cash provided by (used in) financing activites (1,038) 689
-------- --------
Net increase (decrease) in cash and cash equivalents (2,597) 6,362
Cash and cash equivalents at beginning of period 11,809 6,328
-------- --------
Cash and cash equivalents at end of period $ 9,212 $ 12,690
======== ========
</TABLE>
See accompanying notes.
5
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Interpore International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Interpore International, Inc. (the "Company") is a medical device company that
operates in one business segment: the design, manufacture and marketing of
synthetic bone and tissue products and spinal implant devices. The Company
distributes these products in the United States and internationally.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by Interpore International, Inc. (the "Company") without audit,
pursuant to Securities and Exchange Commission regulations. In the opinion of
management, the accompanying condensed consolidated financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the consolidated financial position at September 30, 1998 and the
results of operations and cash flows for the three month and nine month periods
ended September 30, 1998 and 1997.
The accompanying condensed consolidated financial statements include the
accounts of the Company and its subsidiaries, including Interpore Orthopaedics,
Inc., Interpore Cross International, Inc. and Cross Medical Products, Inc.
("Cross"), after elimination of all significant intercompany transactions.
The results of operations and cash flows for the three month and nine month
periods ended September 30, 1998 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 and Cross' Annual Reports on Form
10-K for the year ended December 31, 1997, as filed with the Securities and
Exchange Commission.
3. INVENTORIES
Inventories are stated at the lower of average cost or market. Inventories are
comprised of the following (in thousands):
September 30, December 31,
1998 1997
------------- ------------
Raw materials $ 663 $ 737
Work-in-process 197 227
Finished goods 11,213 9,410
------- -------
$12,073 $10,374
======= =======
6
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4. CONTINGENCIES
The Company's subsidiary, Cross Medical Products, Inc. ("Cross") and other
spinal implant manufacturers were named as defendants in various purported class
action products liability lawsuits alleging that the plaintiffs were injured by
spinal implants supplied by Cross and others. All such lawsuits were
consolidated for pretrial proceedings in the Federal District Court for the
Eastern District of Pennsylvania and, on February 22, 1995, class certification
was denied. The federal court lawsuits will remain coordinated for further
pretrial purposes, but are individual lawsuits. In response to the denial of
class certification, a large number of additional individual lawsuits have been
filed alleging, in addition to damages from spinal implants, a conspiracy among
manufacturers, physicians and other spinal implant industry members to defraud
the public and market products without the proper regulatory approvals. Cross
was named as a defendant, among others, in over 750 such lawsuits. In
approximately 230 of these cases, which involved products manufactured by
Acromed, another spinal implant manufacturer, Cross has been dismissed as a
defendant. In addition, Cross has recently been dismissed as a defendant from
approximately 38 additional cases. Of the remaining cases, approximately six
involve products manufactured by Cross, in which cases the Company is vigorously
defending itself. Cross cannot estimate precisely at this time the number of
such lawsuits that may eventually be filed. Most of the lawsuits are pending in
federal courts and are in preliminary stages. The Federal District Court
recently dismissed certain claims regarding conspiracy to violate certain
federal regulations, a decision which is currently being appealed to the Court
of Appeals of the Third Circuit. The plaintiffs have withdrawn their other
claims pending resolution of this appeal. Discovery proceedings, including the
taking of depositions, have commenced in certain of the lawsuits. Plaintiffs in
these cases typically seek relief in the form of monetary damages, often in
unspecified amounts. While the aggregate monetary damages eventually sought in
all of such individual actions is substantial and exceeds the limits of the
Company's products liability insurance policies, the Company believes that it
has affirmative defenses, including, without limitation, preemption, and that
these individual lawsuits are otherwise without merit.
The class action lawsuits and the individual products liability cases are being
defended by the Company's insurance carrier, in some cases under a reservation
of rights. The Company maintains claims made products liability insurance
policies with at least $5 million of coverage both per occurrence and in the
aggregate. The Company believes that it has adequate insurance for its business,
however, there can be no assurance that the $5 million per policy year limit of
coverage will be sufficient to cover the cost of defending all lawsuits or the
payment of any amounts that may be paid in satisfaction of any settlements or
judgments. Further, there can be no assurance that the Company will continue to
be able to obtain sufficient amounts of products liability insurance coverage at
commercially reasonable premiums. Future operating results could be materially
adversely affected by the formal resolution of pending cases or future claims,
whether or not such cases or claims are covered by insurance.
In addition to the above, the nature of the Company's business subjects it to
products liability and various other legal proceedings from time to time. At
September 30, the Company was party to one business litigation. The Company has
denied liability in this matter and is vigorously defending the same.
5. LONG-TERM DEBT
Long-term debt at September 30, 1998 consists of $3,322,000 of Convertible
Subordinated Debentures (the "Debentures") at 8.5% due June 1, 2003. The
Debentures are convertible at any time before maturity, unless previously
redeemed, into shares of the Company's common stock at a conversion price
7
<PAGE> 8
of $6.37 per share (the "Conversion Price)". Pursuant to the terms of the
underlying indenture, upon the merger of Cross with the Company, Debenture
holders were allowed to request redemption until June 26, 1998 at 101% of the
principal amount thereof, plus accrued interest. Requests for redemption
totaling $1.7 million were made, and redemption took place in July 1998.
Beginning July 1, 1999 and on July 1 of each succeeding year, the Company will
be obligated to redeem any Debentures tendered by June 1, 1999 or June 1 of any
succeeding year, respectively, at 100% of the principal amount thereof plus
accrued interest, subject to an annual limitation of $25,000 per holder and an
annual aggregate limitation of $262,500. During the first nine months of 1998,
$97,000 of Debentures were converted into 15,221 shares of the Company's common
stock.
6. BUSINESS COMBINATION
In February 1998, the Company entered into an agreement to merge with Cross
Medical Products, Inc. ("Cross"), a publicly traded Ohio-based worldwide
supplier of spinal implant systems used to treat degenerative conditions and
deformities of the spine. The merger was approved by the shareholders of both
companies on May 6, 1998 and became effective on May 7, 1998. Approximately 6.7
million shares of the Company's common stock were issued in exchange for all of
the common stock of Cross. The merger has been accounted for as a
pooling-of-interests. During the second quarter, the Company recorded
merger-related expenses and restructuring charges of $3.0 million and $1.5
million, respectively. The merger-related expenses included legal, accounting
and administrative costs incurred in connection with the merger of the Company
and Cross. The restructuring charges were associated with the closing of the
Dublin, Ohio facility and included severance benefits for employees not
remaining with the Company, the write-off of fixed assets which were not being
transferred to the Company's Irvine, California headquarters, and the accrual of
remaining lease payments for the Dublin facility. During the third quarter of
1998, the Company recorded $381,000 of non-recurring charges related to the
relocation of assets and employees from the Dublin, Ohio facility to the Irvine,
California headquarters.
In February 1998, the Board of Directors of the Company approved a proposal for
the Company to reincorporate from California to Delaware. The proposed
reincorporation was approved by the Company's shareholders and was completed on
May 6, 1998. In connection with the reincorporation, the Company's name was
changed from Interpore International to Interpore International, Inc.
7. SALE OF ASSETS
In April 1997, the Company entered into a definitive agreement for the sale of
its dental implant business. In May 1997, the sale was completed, and the
Company received an initial cash payment of $1.5 million. A deferred cash
payment of $749,000 was received in March 1998. The transaction, including
associated costs, resulted in a net charge of $617,000 in the second quarter of
1997.
8. SALE OF RECOVERY PRODUCTS SEGMENT
On March 12, 1997, Cross Medical Products, Inc. entered into an agreement to
sell its recovery products segment for approximately $8.2 million in cash and
the assumption of approximately $5.0 million of debt and other liabilities. The
buyer also acquired 38,250 shares of the Company's common stock for $242,000.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
Interpore International, Inc. (the "Company") is a medical device company that
operates in one business segment: the design, manufacte and marketing of
synthetic bone and tissue products and spinal implant devices. The Company
distributes these products in the United States and internationally.
SIGNIFICANT EVENTS
In February 1998, the Company entered into an agreement to merge with Cross
Medical Products, Inc. ("Cross"), a publicly traded Ohio-based worldwide
supplier of spinal implant systems used to treat degenerative conditions and
deformities of the spine. The merger was approved by the shareholders of both
companies on May 6, 1998 and became effective on May 7, 1998. Approximately 6.7
million shares of the Company's common stock were exchanged for all of the
common stock of Cross. The merger has been accounted for as a
pooling-of-interests.
In February 1998, the Board of Directors of the Company approved a proposal for
the Company to reincorporate from California to Delaware. The proposed
reincorporation was approved by the Company's shareholders and was completed on
May 6, 1998. In connection with the reincorporation, the Company's name was
changed from Interpore International to Interpore International, Inc.
In April 1997, the Company entered into a definitive agreement for the sale of
its 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 $749,000 was received in March 1998. As part
of the transaction, the Company and Steri-Oss negotiated a distribution
agreement whereby the Company manufactures and provides Interpore 200(R) Porous
Hydroxyapatite Bone Void Filler ("Interpore 200") for distribution by Steri-Oss
in the dental market. The transaction, including associated costs, resulted in a
net charge of $617,000, which was recorded in the quarter ended June 30, 1997.
On March 12, 1997, Cross entered into an agreement to sell its recovery products
segment for approximately $8.2 million in cash and the assumption of
approximately $5.0 million of debt and other liabilities. The buyer also
acquired 38,250 shares of the Company's common stock for $242,000.
9
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RESULTS OF OPERATIONS
The following table presents the Company's results of operations as percentages:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
Increase Increase
1998 1997 (decrease) 1998 1997 (decrease)
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 2.1% 100.0% 100.0% 1.5%
Cost of goods sold 29.0% 33.2% (10.8%) 28.0% 29.5% (3.7%)
----- ----- ----- ----- ----- -----
Gross profit 71.0% 66.8% 8.6% 72.0% 70.5% 3.7%
----- ----- ----- ----- ----- -----
Operating expense:
Research and development 12.1% 11.3% 9.7% 12.3% 10.6% 17.5%
Selling and marketing 39.6% 36.1% 12.0% 39.1% 39.4% .6%
General and administrative 13.9% 14.7% (4.0%) 14.3% 16.5% (12.1%)
Merger-related expenses - - n/a 13.7% - n/a
Restructuring charges - - n/a 6.8% - n/a
Non-recurring charges 5.2% - n/a 1.7% - n/a
Loss on sale of dental business - - n/a - 2.8% n/a
----- ----- ----- ----- ----- -----
Total operating expenses 70.8% 62.1% 16.3% 87.9% 69.3% 28.8%
----- ----- ----- ----- ----- -----
Income (loss) from operations .2% 4.7% (94.6%) (15.9%) 1.2% n/a
===== ===== ===== ===== ===== =====
</TABLE>
Three months ended September 30, 1998 and 1997
For the quarter ended September 30, 1998, net sales of $7.3 million were
$152,000 or 2.1% greater than sales of $7.2 million for the same period of 1997.
Three months ended
September 30, Change
------------------ -----------------
1998 1997 Amount %
------ ------ ------ ------
Bone biologics product sales $3,841 $3,501 $ 340 9.7%
Spinal implant product sales 3,502 3,690 (188) (5.1%)
------ ------ ------ -----
Total sales.............. $7,343 $7,191 $ 152 2.1%
====== ====== ====== =====
Sales of bone biologics products, which include Pro Osteon(R) bone graft
substitute material, OEM orbital implants and OEM bone graft products for the
dental marketplace, increased in the quarter ended September 30, 1998 by
$340,000 or 9.7% to $3.8 million compared to $3.5 million for the third quarter
of 1997. This increase is attributable primarily to a $532,000 increase in Pro
Osteon(R) product sales partially offset by a $192,000 decrease in OEM sales.
Sales of spinal implant products, primarily the Synergy(TM) Spinal System,
decreased in the quarter ended September 30, 1998 by $188,000 or 5.1% to $3.5
million compared to $3.7 million for the third quarter of 1997. While domestic
sales of spinal implant products increased by 36% in the third quarter compared
to the same period a year ago, this increase was more than offset by decreased
international sales and instrument set revenues.
Total domestic sales for the quarter ended September 30, 1998 increased by
$661,000 or 12.2% to $6.1 million from $5.4 million for the quarter ended
September 30, 1997. Total international sales decreased $509,000 or 28.5% to
$1.3 million in the third quarter of 1998 compared with $1.8 million for the
same quarter of 1997.
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The gross margins as percentages of sales for the quarters ended September 30,
1998 and 1997 were 71.0% and 66.8%, respectively. The increase primarily
reflects the comparatively greater percentage of bone biologics products sales
in the 1998 period which have a higher gross margin than spinal implant
products. Additionally, higher margin domestic sales represented a greater
portion of total sales in the 1998 quarter than in the 1997 quarter.
Total operating expenses for the quarter ended September 30, 1998 increased by
$730,000 as compared to the same quarter of 1997. Excluding $381,000 of
non-recurring charges related to the closing of the Company's Dublin, Ohio
facility, operating expenses increased by $349,000 or 7.8%. Research and
development expenses increased by 9.7% or $79,000 primarily due to increased
development efforts related to the Company's spinal implant products. Selling
and marketing expenses increased $312,000 or 12.0% compared to the third quarter
of 1997 due primarily to commissions on incremental domestic sales. General and
administrative expenses decreased by 4.0%, primarily as a result of reduced
costs following the merger of the Company with Cross.
The $20,000 decrease in net interest and other income primarily relates to a
reduction in interest income due to lower cash, cash equivalents and short-term
investments. This decrease was partially offset by a decline in interest expense
due to the redemption of $1.7 million of debentures in July 1998 and higher
royalty income.
No income tax provision was recorded during the third quarter of 1998 due to the
utilization of the Company's net operating loss carryforwards during the period.
Nine months ended September 30, 1998 and 1997
For the nine months ended September 30, 1998, net sales of $22.0 million were
$324,000 or 1.5% greater than sales of $21.7 million for the same period of
1997.
Nine months ended
September 30, Change
-------------------- --------------------
1998 1997 Amount %
------- ------- ------- ------
Bone biologics product sales $10,889 $10,520 $ 369 3.5%
Spinal implant product sales 11,157 9,496 1,661 17.5%
------- ------- ------- ------
Sub-total................ 22,046 20,016 2,030 10.1%
Dental product sales........ - 1,706 (1,706) (100.0%)
------- ------- ------- ------
Total sales.............. $22,046 $21,722 $ 324 1.5%
======= ======= ======= ======
Sales of bone biologics products, which include Pro Osteon(R) bone graft
substitute material, OEM orbital implants and OEM bone graft products for the
dental marketplace, increased $369,000 or 3.5% to $10.9 million for the nine
months ended September 30, 1998 compared to $10.5 million for the same period of
1997. Sales of spinal implant products, primarily the Synergy(TM) Spinal System,
increased in the nine months ended September 30, 1998 by $1.7 million or 17.5%
to $11.2 million compared to $9.5 million for the nine months ended September
30, 1997, primarily due to increasing market penetration of the Synergy(TM)
Spinal System.
Domestic sales of bone biologics and spinal products increased by 10.8% or $1.6
million to $16.8 million for the nine months ended September 30, 1998 compared
to $15.2 million for the same period of 1997. International sales increased by
$393,000 or 8.1% to $5.2 million for the nine month period ended September 30,
1998 from $4.9 million for the same period of 1997.
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There were no dental product sales in the nine month period ended September 30,
1998, reflecting the Company's sale of its dental business in May 1997.
The gross margin for the nine months ended September 30, 1998 improved to 72.0%
from 70.5% for the same period of 1997. Revenues from spinal instrument sets,
which are sold at a price approximating cost, were significantly lower in the
1998 period. Also, in 1998 domestic bone biologics dealers, which in the past
purchased Pro Osteon(R) at a discount from list price, were converted into
commissioned agents, effectively eliminating the discount.
Total operating expenses for the nine months ended September 30, 1998 increased
by $4.3 million as compared to the same period of 1997 due to $4.9 million of
merger-related expenses, restructuring charges and non-recurring charges.
Excluding these charges and the 1997 loss on the sale of the dental business,
total operating expenses remained relatively level between the two nine month
periods. Research and development expenses increased by 17.5% or $402,000 as a
result primarily of increased spinal product development efforts. Selling and
marketing expenses increased slightly compared to the nine months ended
September 30, 1997 due primarily to increased commissions on higher domestic
sales offset by the elimination of selling and marketing expenses directly
related to the dental business. General and administrative expenses decreased by
$434,000 or 12.1%, primarily the result of cost reductions following the sale of
the dental business and a reduction in products liability insurance costs.
The $40,000 or 10.0% decrease in net interest and other income resulted
primarily from the write-off of unamortized convertible debenture issuance costs
associated with the $1.7 million redemption of debentures in July 1998.
Limited income tax provisions were recorded during the nine month periods ended
September 30, 1998 and 1997 due to the utilization of the Company's net
operating loss carryforwards during the periods.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 and December 31, 1997, cash, cash equivalents and
short-term investments totaled $11.2 million and $16.6 million, respectively.
The decrease in cash, cash equivalents and short-term investments of $5.4
million was primarily the result of the payment of $4.0 million in
merger-related expenses, restructuring charges and non-recurring charges. Also,
the Company expended approximately $1.7 million in July 1998 for the redemption
of convertible debentures. Accordingly, total working capital decreased to $27.8
million from $31.7 million and the current ratio decreased to 7.5 from 7.7 at
September 30, 1998 and December 31, 1997, respectively.
The $11.2 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 regulatory approvals for
additional indications for the use of Pro Osteon, development or acquisition of
new bone biologic and spinal implant products, and possible acquisitions of
businesses. In addition, the Company will spend additional cash in the fourth
quarter for remaining merger-related expenses and restructuring activities. The
Company has a $5 million revolving line of credit which expires in July 1999 and
which had no amount outstanding at September 30, 1998.
The Company believes it currently possesses sufficient resources to meet the
cash requirements of its operations for at least the next year.
12
<PAGE> 13
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. If not corrected, many
computer applications could fail or create erroneous results by not recognizing
"00" to mean the year 2000. Interpore uses only third party software, and in its
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 reported
on its initial assessment of software used by the company.
State of Readiness
In its initial assessment, Interpore contacted the authors of its critical
software programs and determined that each was either already Year 2000
compliant or expected to be Year 2000 compliant by December 31, 1999. Currently,
the Company is in the process of evaluating its remaining software as well as
hardware, vendors and customers (collectively, "Elements") to determine those
which it considers to be mission critical. For Elements determined to be mission
critical, the Company will seek to obtain assurances of Year 2000 compliance.
The assurances will be in the form of vendor or customer certifications,
identification of alternatives, company-administered testing efforts, or a
combination of certain assurances. The Company has no way of ensuring that
mission critical vendors or customers will be Year 2000 compliant, and their
inability to become compliant on a timely basis could materially impact the
Company.
Costs to Address the Company's Year 2000 Issues
Through September 30, 1998, Interpore has not incurred any direct costs
associated with Year 2000 issues. Certain costs associated with the
consolidation of operations following the Company's recent merger with Cross
resulted in obtaining software/hardware that is Year 2000 compliant. While the
process of evaluating Elements is not complete, at this time, the Company does
not have any reason to believe that it will need to replace any material
non-compliant systems or to hire any Year 2000 solution providers. Therefore, at
this time, Interpore estimates that future costs to address Year 2000 issues
should not be material.
Risks of the Company's Year 2000 Issues
The SEC Rules require a reasonable description of our most reasonably likely
worst case Year 2000 scenarios. The Company has yet to identify any mission
critical Element that it expects to not be Year 2000 compliant. Therefore, the
Company is unable to describe a most reasonably likely worst case Year 2000
scenario. In the future, as the Company completes its evaluation of mission
critical Elements, it will address its ability to determine reasonably likely
worst case scenarios
The Company's Contingency Plans
The Company has not yet established a contingency plan relative to Year 2000
issues. As the Company's assessment continues, it will evaluate the likely worst
case scenarios and determine whether a contingency plan is feasible and
cost-justified.
Certain statements in this description of Year 2000 issues are forward-looking
and may involve risks and uncertainties, including, but not limited to: the
ability to identify mission critical Elements, the ability to identify
alternatives to mission critical Elements, estimated future costs, and probable
outcomes.
13
<PAGE> 14
Certain statements in this Quarterly Report on Form 10-Q are forward-looking and
may involve risks and uncertainties, including, but not limited to: risks that
the bone biologics and spinal systems businesses cannot be successfully or
timely integrated; product demand, competition and market acceptance risks;
risks related to product liability and other litigation; risks related to the
development of future products and the successful completion of clinical
studies; risk that the company will not receive regulatory approval of new
products; and the impact of competitive products. Additional information on
factors that could affect the Company's reports filed from time to time with the
Securities and Exchange Commissions.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's subsidiary, Cross Medical Products, Inc. ("Cross") and other
spinal implant manufacturers were named as defendants in various purported class
action products liability lawsuits alleging that the plaintiffs were injured by
spinal implants supplied by Cross and others. All such lawsuits were
consolidated for pretrial proceedings in the Federal District Court for the
Eastern District of Pennsylvania and, on February 22, 1995, class certification
was denied. The federal court lawsuits will remain coordinated for further
pretrial purposes, but are individual lawsuits. In response to the denial of
class certification, a large number of additional individual lawsuits have been
filed alleging, in addition to damages from spinal implants, a conspiracy among
manufacturers, physicians and other spinal implant industry members to defraud
the public and market products without the proper regulatory approvals. Cross
was named as a defendant, among others, in over 750 such lawsuits. In
approximately 230 of these cases, which involved products manufactured by
Acromed, another spinal implant manufacturer, Cross has been dismissed as a
defendant. In addition, Cross has recently been dismissed as a defendant from
approximately 38 additional cases. Of the remaining cases, approximately six
involve products manufactured by Cross, in which cases the Company is vigorously
defending itself. Cross cannot estimate precisely at this time the number of
such lawsuits that may eventually be filed. Most of the lawsuits are pending in
federal courts and are in preliminary stages. The Federal District Court
recently dismissed certain claims regarding conspiracy to violate certain
federal regulations, a decision which is currently being appealed to the Court
of Appeals of the Third Circuit. The plaintiffs have withdrawn their other
claims pending resolution of this appeal. Discovery proceedings, including the
taking of depositions, have commenced in certain of the lawsuits. Plaintiffs in
these cases typically seek relief in the form of monetary damages, often in
unspecified amounts. While the aggregate monetary damages eventually sought in
all of such individual actions is substantial and exceeds the limits of the
Company's products liability insurance policies, the Company believes that it
has affirmative defenses, including, without limitation, preemption, and that
these individual lawsuits are otherwise without merit.
The class action lawsuits and the individual products liability cases are being
defended by the Company's insurance carrier, in some cases under a reservation
of rights. The Company maintains claims made products liability insurance
policies with at least $5 million of coverage both per occurrence and in the
aggregate. The Company believes that it has adequate insurance for its business,
however, there can be no assurance that the $5 million per policy year limit of
coverage will be sufficient to cover the cost of defending all lawsuits or the
payment of any amounts that may be paid in satisfaction of any settlements or
judgments. Further, there can be no assurance that the Company will continue to
be able to obtain sufficient amounts of products liability insurance coverage at
commercially reasonable premiums. Future operating results could be materially
adversely affected by the formal resolution of pending cases or future claims,
whether or not such cases or claims are covered by insurance.
In addition to the above, the nature of the Company's business subjects
it to products liability and various other legal proceedings from time to time.
At September 30, the Company was party to one business litigation. The Company
has denied liability in this matter and is vigorously defending the same.
15
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
Reference is made to the Exhibit Index on Page 18 hereof.
b. Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter ended
September 30, 1998.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this quarterly report on Form 10-Q to be signed on its behalf by
the undersigned, thereunto duly authorized.
DATE: November 10, 1998 INTERPORE INTERNATIONAL, INC.
By: /s/ David C. Mercer
-------------------------------------
David C. Mercer,
Chairman and Chief Executive Officer
By: /s/ Richard L. Harrison
-------------------------------------
Richard L. Harrison
Sr. Vice President and
Chief Financial Officer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.01 Certificate of Incorporation of Interpore Delaware, Inc.(6)
3.02 Bylaws of Registrant(6)
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 as amended by a Third Amendment to Lease
dated December 11, 1996(5)
10.03 Asset Purchase Agreement dated March 1, 1993 regarding sale of assets of
Interpore Orthopaedics, Inc. to Applied Epigenetics, Inc.(1)
10.04 Cancellation and Release Agreement dated March 1, 1993 among Registrant,
Interpore Orthopaedics, Inc., Pfizer, Inc. and Howmedica, Inc.(1)
10.05 Series E Preferred Stock and Common Stock Warrant Purchase Agreement dated
December 19, 1991(1)
10.06 Series E Preferred Stock Purchase Agreement dated October 30, 1992(1)
10.07 Amended Schedule to Loan and Security Agreement dated August 11, 1998 among
Registrant, Interpore Orthopaedics, Inc., Cross Medical Products, Inc. and
Silicon Valley Bank(14)
10.08 Amendment to the Loan Agreement dated August 11, 1998 among Registrant,
Interpore Orthopaedics, Inc., Cross Medical Products, Inc. and Silicon Valley
Bank(14)
10.09 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(3)
10.10 Employee Qualified Stock Purchase Plan(2)
10.11 1995 Stock Option Plan(2)
10.12 Stock Option Plan for Non-Employee Directors of Interpore International(4)
10.13 Form of Indemnification Agreement(13)
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
10.14 Schedule of parties to Form of Indemnification Agreement
10.15 Asset Purchase Agreement dated April 18, 1997 regarding sale of assets of
Interpore Dental, Inc.(6)
10.16 Agreement and Plan of Merger, dated as of February 11, 1998, by
and among Interpore International, Buckeye International and
Cross Medical Products, Inc. ("Cross")(8)
10.17 Asset Purchase Agreement, dated March 12, 1997, by and among Cross, Danninger
Healthcare, Inc. and OrthoLogic Corp.(8)
10.18 Cross Amended and Restated 1984 Incentive Stock Option Plan,
reserving 750,000 shares of Common Stock, as amended by the
Board of Directors of Cross on April 2, 1992.(9)
10.19 Cross Amended and Restated 1984 Non-Statutory Stock Option Plan, reserving
300,000 shares of Common Stock, as amended by the Board of Directors on April
2, 1992.(9)
10.20 Cross 1994 Stock Option Plan, reserving 600,000 shares of Common Stock.(10)
10.21 Indenture concerning 8.5% Convertible Subordinated Debentures by and between
Cross and The Fifth Third Bank(7)
10.22 Non-Competition Agreement dated September 6, 1996, between Cross and Stephen
R. Draper.(11)
10.23 Agreement between Dr. Edward Funk and Cross, dated February 11, 1998.(12)
10.24 Supplemental Indenture by and between Interpore International, Inc. and Cross
Medical Products, Inc. and The Fifth Third Bank.(14)
10.25 Form of Employment Agreement, dated August 17, 1998, between Interpore
International, Inc., and executive officers of the companies.
10.26 Schedule of parties to form of Employment Agreement dated August 17, 1998.
11.01 Computations of Net Income per Share
27.01 Financial Data Schedule
</TABLE>
19
<PAGE> 20
- ------------------
(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 Proxy Statement for the
Company's 1994 Annual Meeting of Shareholders.
(3) Incorporated by reference from the Company's Registration Statement on
Form S-8, Registration No. 33-86290.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
(5) Incorporated by reference from the Company's Current Report on Form 8-K
dated February 11, 1998.
(6) Incorporated by reference from the Company's Registration Statement on
Form S-4, Registration No. 333-49487.
(7) Incorporated by reference from the Cross Registration Statement on
Form S-2 filed April 4, 1996.
(8) Incorporated by reference from the Cross Annual Report on Form 10-K for
the year ended December 31, 1996.
(9) Incorporated by reference from the Cross Annual Report on Form 10-K for
the year ended December 31, 1992.
(10) Incorporated by reference from the Cross Form 10 filed August 12, 1994.
(11) Incorporated by reference from the Cross Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1996.
(12) Incorporated by reference from the Cross Annual Report on Form 10-K for
the year ended December 31, 1997.
(13) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1998.
(14) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1998.
20
<PAGE> 1
EXHIBIT 10.14
INTERPORE INTERNATIONAL, INC.
SCHEDULE OF PARTIES TO FORM OF INDEMNIFICATION AGREEMENT
<TABLE>
<CAPTION>
Date of
Name Title Agreement
---- ----- ---------
<S> <C> <C>
David C. Mercer Chairman of the Board, Chief Executive Officer May 7, 1998
Joseph A. Mussey President and Chief Operating Officer May 7, 1998
Richard L. Harrison Sr. Vice President, Finance, Chief Financial Officer May 7, 1998
William A. Eisenecher Director May 7, 1998
Daniel A. Funk Director May 7, 1998
G. Bradford Jones Director May 7, 1998
Robert J. Williams Director May 7, 1998
William A. Franklin, Jr. Vice President, Operations October 14, 1998
Edwin C. Shors, Ph.D Vice President, Research and New Technology October 14, 1998
Maxwell R. Simmonds Sr. Vice President, Sales and Marketing October 14, 1998
Philip A. Mellinger Vice President, Product Development October 20, 1998
</TABLE>
<PAGE> 1
EXHIBIT 10.25
INTERPORE INTERNATIONAL, INC.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this 17th day of August, 1998,
("Agreement") between Interpore International, Inc., a Delaware corporation
("Interpore"), [Cross Medical Products, Inc., a Delaware corporation ("Cross")],
and ____________________ ("Executive").
Recitals
A. Interpore is the owner, directly or indirectly, of all of the issued capital
stock of Cross, Interpore Orthopaedics, Inc., a Delaware corporation, and
Interpore Cross International, Inc., a California corporation (collectively,
the "Subsidiaries").
B. Interpore and its Subsidiaries (collectively, the "Company") design,
develop, test, assemble, license, manufacture, market and sell certain
synthetic bone graft materials for the orthopaedic, oral and maxillofacial
markets, certain spinal implant products and related parts and supplies.
C. The Executive is currently employed as an executive of the Company.
D. The Company considers the continued services of the Executive to be in the
best interest of the Company and desires to assure the continued services of
the Executive on behalf of the Company on an objective and impartial basis
and without distraction or conflict of interest in the event of an attempt
to obtain control of the Company.
E. The Executive is willing to remain in the employ of the Company upon the
understanding that the Company will provide income security in the event of
a change in control of the Company.
F. The Company and the Executive desire to enter into an employment
relationship upon the terms and conditions contained herein. NOW, THEREFORE,
the parties agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive and the
Executive accepts such employment upon the terms and conditions hereinafter set
forth.
2. DUTIES. The Executive shall be employed on the terms and
subject to the conditions hereof:
(a) to serve in the capacity set forth on Schedule A
attached hereto, and to serve in other capacities for the Company, if so
elected, subject to the authority and direction of the Board of Directors of
Interpore, as the case may be; and
(b) to perform such other duties and responsibilities
similar to those performed by the Executive prior hereto and exercise such other
authority, perform such other or additional duties and responsibilities and have
such other or different title (or have no title) as the Board of Directors of
Interpore may, from time to time, prescribe.
So long as he is employed under this Agreement, the Executive agrees to
devote his full time and efforts exclusively on behalf of the Company and to
competently, diligently, and effectively discharge
<PAGE> 2
his duties hereunder. The Executive shall not be prohibited from engaging in
such personal, charitable, or other nonemployment activities as do not interfere
with his full time employment hereunder and which do not violate the other
provisions of this Agreement. The Executive further agrees to comply fully with
all reasonable policies of the Company as are from time to time in effect.
3. COMPENSATION.
(a) As his entire compensation for all services rendered to
the Company pursuant to this Agreement, in whatever capacity rendered, the
Company shall pay to the Executive during the term hereof an annual base salary
as determined by the Board of Directors of Interpore from time to time ("Basic
Salary"), payable monthly or in other more frequent installments, as determined
by the Company.
(b) In addition, the Executive will be entitled to receive
incentive compensation, if any, including incentive bonuses and stock options,
pursuant to the terms of plans adopted by the Board of Directors of Interpore
from time to time. The Executive acknowledges that such incentive compensation
is to be granted, if at all, at the sole discretion of the Board and that such
incentive compensation need not and may never be paid.
4. BUSINESS EXPENSES. The Company shall promptly pay directly, or
reimburse the Executive for, all business expenses to the extent such expenses
are paid or incurred by the Executive during the term of employment in
accordance with Company policy in effect from time to time and to the extent
such expenses are reasonable and necessary to the conduct by the Executive of
the Company's business and properly substantiated.
5. FRINGE BENEFITS. During the term of this Agreement and the
Executive's employment hereunder, the Company shall provide to the Executive
such insurance, vacation, sick leave and other like benefits as are provided
from time to time to its other employees holding equivalent executive positions
with the Company in accordance with the policy of the Company as may be
established from time to time; provided, however, that the Company shall
maintain at least the level of benefits presently provided to the Executive.
6. TERM; TERMINATION. Notwithstanding any other provision of this
Agreement, the Executive is employed by the Company "at will." The Executive's
employment may be terminated at any time. For purposes of this Section 6,
"Termination Date" shall mean the date on which any notice period required under
this Section 6 expires or, if no notice period is specified in this Section 6,
the effective date of the termination referenced in the notice.
(a) Termination by the Executive. The Executive may
terminate his employment upon giving at least 30 days' advance written notice to
the Company and the Company will pay the Executive the earned but unpaid portion
of the Executive's Basic Salary through the Termination Date. If the Executive
gives notice of termination hereunder, the Company shall have the right to
relieve the Executive, in whole or in part, of his duties under this Agreement
and to advance the Termination Date from the date set by the Executive's notice
to a date not less than 14 days from the receipt of the Executive's notice of
termination.
(b) Termination by Company Without Cause. The Company may
terminate the Executive's employment without cause upon giving 30 days' advance
written notice to the Executive. If the Executive's employment is terminated
without cause under this
<PAGE> 3
Section 6(b), the Company will pay the Executive the earned but unpaid portion
of the Executive's Basic Salary , will continue to pay the Executive his Basic
Salary and to provide the fringe benefits at the level in place at the
Termination Date for 12 months following the Termination Date ("Severance
Period"), and will provide outplacement services at a cost to the Company not to
exceed the Executive's Basic Salary for one month; provided, however, that the
Company may terminate payment of the Basic Salary, may terminate fringe
benefits, and may terminate outplacement services during the Severance Period if
the Executive accepts other employment or is in breach of obligations under
Sections 7 or 8 of this Agreement.
(c) Termination by Company For Good Cause. The Company may
terminate the Executive's employment upon a determination by the Company that
"Good Cause" exists for the Executive's termination and the Company serves
written notice of such termination upon the Executive. As used in this
Agreement, the term "Good Cause" shall refer only to any one or more of the
following actions by the Executive:
(i) commission of an act of dishonesty, including, but
not limited to, misappropriation of funds or any property of the
Company;
(ii) engagement in activities or conduct clearly
injurious to the reputation of the Company;
(iii) refusal to perform his assigned duties and
responsibilities;
(iv) gross insubordination;
(v) the clear violation of any of the material terms and
conditions of this Agreement or any written agreement or
agreements the Executive may from time to time have with the
Company (following 30-days' written notice from the Company
specifying the violation and the Executive's failure to cure
such violation within such 30-day period); or
(vi) commission of a misdemeanor involving an act of
moral turpitude or a felony.
In the event of a termination under this Section 6(c), the Company will
pay the Executive the earned but unpaid portion of the Executive's Basic
Salary.
(d) Termination upon Death or Permanent Disability. The
Executive's employment shall terminate upon the death or permanent disability of
the Executive. For purposes hereof, "permanent disability," shall mean the
inability of the Executive, as determined by the Board of Directors of the
Company, by reason of physical or mental illness to perform the duties required
of him under this Agreement for more than 180 days in any 360-day period.
Successive periods of disability, illness or incapacity will be considered
separate periods unless the later period of disability, illness or incapacity is
due to the same or related cause and commences less than six months from the
ending of the previous period of disability. Upon a determination by the Board
of Directors of Interpore or the Subsidiary that the Executive's employment
shall be terminated under this Section 6(d), the Board of Directors shall give
the Executive 30 days' prior written notice of the termination. If a
determination of the Board of Directors under this Section 6(d) is disputed by
the Executive, the parties agree to abide by the
<PAGE> 4
decision of a panel of three physicians. The Company will select a physician,
the Executive will select a physician and the physicians selected by the Company
and the Executive will select a third physician. The Executive agrees to make
himself available for and submit to examinations by such physicians as may be
directed by the Company. Failure to submit to any examination shall constitute a
breach of a material part of this Agreement. In the event of a termination under
this Section 6(d), the Company will pay Executive or his duly appointed and
qualified executor or other personal representative the earned but unpaid
portion of the Executive's Basic Salary.
(e) Termination Following Change of Control. If a "Change in
Control", as defined in Section 6(e)(v), shall have occurred and in anticipation
of or within one year following such Change in Control the Company terminates
the employment of the Executive for other than Good Cause, as defined in Section
6(c), or the Executive terminates his employment for Good Reason, as that term
is defined in Section 6(e)(vii), then the Executive shall be entitled to the
benefits described below:
(i) The Executive shall be entitled to the unpaid portion
of his Basic Salary plus credit for any vacation accrued but not
taken, plus 2 times the Executive's "Current Annual Compensation"
as defined in this Section 6(e)(i) ("Salary Termination
Benefit"). For this purpose "Current Annual Compensation" shall
mean the total of Executive's annual Basic Salary in effect at
the Termination Date, plus any performance bonuses received by
Executive in the prior twelve months, and shall not include the
value of any stock options granted or exercised, contributions to
401(k) or other qualified plans, medical, dental, or other
insurance benefits, or other fringe benefits. The Salary
Termination Benefit shall be paid to the Executive in 24 equal
consecutive monthly payments commencing on the first day of the
month after termination of employment following a Change in
Control.
(ii) All outstanding stock options issued to the Executive
shall become 100% vested and thereafter exercisable in accordance
with such governing stock option agreements and plans.
(iii) The Company shall maintain for the Executive's
benefit until the earlier of (y) 24 months after termination of
employment following a Change in Control, or (z) the Executive's
commencement of full-time employment with a new employer, all
life insurance, medical, health and accident, and disability
plans or programs in which the Executive shall have been entitled
to participate prior to termination of employment following a
Change in Control, provided the Executive's continued
participation is permitted under the general terms of such plans
and programs after the Change in Control ("Fringe Termination
Benefits"; collectively the Salary Termination Benefit and the
Fringe Termination Benefit are referred to as the "Termination
Benefits"). In the event the Executive's participation in any
such plan or program is not permitted, the Company will provide
directly or reimburse the Executive for the cost of the benefits
to which the Executive would be entitled under such plans and
programs.
(iv) The Termination Benefits shall be payable to the
Executive as severance pay in consideration of his past service
and of his continued services from the date hereof. Executive
shall have no duty to mitigate his damages by seeking other
employment, and the Company shall not be entitled to set off
against amounts payable hereunder any compensation which the
Executive may receive from future employment.
<PAGE> 5
(v) A "Change in Control" shall be deemed to have occurred
if and when, after the date hereof, (A) any Person (as defined
below) is or becomes the Beneficial Owner (as defined below),
directly or indirectly, of securities of Interpore representing
50% or more of the combined voting power of Interpore's then
outstanding securities; (B) the stockholders of Interpore approve
a merger or consolidation of Interpore with any corporation (or
other entity), other than a merger or consolidation which would
result in the voting securities of Interpore outstanding
immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of Interpore or such
surviving entity outstanding immediately after such merger or
consolidation; (C) the stockholders of Interpore approve a plan
of complete liquidation of Interpore or an agreement for the sale
or disposition by the Company of all or substantially all of the
Company's assets; or (D) during any period of two consecutive
years during the term of this Agreement (not including any period
prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of Directors of
Interpore cease for any reason to constitute at least two-thirds
thereof, unless the election of each director who was not a
director at the beginning of such period has been approved in
advance by directors of Interpore representing at least
two-thirds of the directors then in office who were directors at
the beginning of the period.
(vi) If the payments and benefits provided under this
Agreement to the Executive, either alone or with other payments
and benefits, would constitute "excess parachute payments" as
defined in Section 280G of the Internal Revenue Code of 1986, as
amended ("Code"), then the payments and other benefits under this
Agreement shall be reduced to the extent necessary so that no
portion thereof shall be subject to the excise tax imposed by
Section 4999 of the Code. Either the Company or the Executive may
request a determination as to whether the payments or benefits
would constitute an excess parachute payment and, if requested,
such determination shall be made by independent tax counsel
selected by the Company and approved by the Executive. At the
Executive's election and to the extent not otherwise paid, the
Executive may determine the amount of cash and/or elements of
non-cash fringe benefits to reduce so that such payments and
benefits will not constitute excess parachute payments.
(vii) As used in this Agreement, the term "Good Reason"
means, without the Executive's written consent,
(a) a change in status, position or
responsibilities which, in the Executive's reasonable
judgment, does not represent a promotion from existing
status, position or responsibilities as in effect
immediately prior to the Change in Control; the assignment
of any duties or responsibilities which, in the
Executive's reasonable judgment, are inconsistent with
such status, position or responsibilities; or any removal
from or failure to reappoint or reelect the Executive to
any of such positions, except in connection with the
termination of employment for total and permanent
disability, death or Good Cause or by the Executive other
than for Good Reason;
(b) a reduction by the Company in the Executive's
base salary as in effect on the date hereof or as the same
may be increased from time to time
<PAGE> 6
during the term of this Agreement or the Company's failure
to increase (within twelve months of the Executive's last
increase in base salary) the Executive's base salary after
a Change in Control in an amount which at least equals, on
a percentage basis, the average percentage increase in
base salary for all executive and senior officers of the
Company effected in the preceding twelve months;
(c) the relocation of the Company's principal
executive offices to a location outside the Orange County
area or the relocation of the Executive by the Company to
any place other than the location at which the Executive
performed duties prior to a Change in Control, except for
required travel on the Company's business to an extent
substantially consistent with business travel obligations
at the time of a Change in Control;
(d) the failure of the Company to continue in
effect any incentive, bonus or other compensation plan in
which the Executive participates, including but not
limited to the Company's stock option plans, unless an
equitable arrangement (embodied in an ongoing substitute
or alternative plan), evidenced by the Executive's written
consent, has been made with respect to such plan in
connection with the Change in Control, or the failure by
the Company to continue the Executive's participation
therein, or any action by the Company which would directly
or indirectly materially reduce participation therein;
(e) the failure by the Company to continue to
provide the Executive with benefits substantially similar
to those enjoyed or entitled under any of the Company's
pension, profit sharing, life insurance, medical, dental,
health and accident, or disability plans at the time of a
Change in Control, the taking of any action by the Company
which would directly or indirectly materially reduce any
of such benefits or deprive the Executive of any material
fringe benefit enjoyed or entitled to at the time of the
Change in Control, or the failure by the Company to
provide the number of paid vacation and sick leave days to
which the Executive is entitled on the basis of years of
service with the Company in accordance with the Company's
normal vacation policy in effect on the date hereof;
(f) the failure of the Company to obtain a
satisfactory agreement from any successor or assign of the
Company to assume and agree to perform this Agreement; or
(g) any request by the Company that the Executive
participate in an unlawful act or take any action
constituting a breach of what is considered in the
Executive's reasonable judgment to be a professional
standard of conduct. Notwithstanding anything in this
Section to the contrary, the Executive's right to
terminate the employment pursuant to this Section shall
not be affected by incapacity due to physical or mental
illness.
(viii) Upon any termination or expiration of this
Agreement or any cessation of the Executive's employment
hereunder, the Company shall have no further obligations under
this Agreement and no further payments shall be payable by the
Company to the Executive, except as provided in Sections 6(a),
6(b), 6(d) and 6(e) above
<PAGE> 7
and except as required under any benefit plans or arrangements
maintained by the Company and applicable to the Executive at the
time of such termination, expiration or cessation of the
Executive's employment, including, without limitation thereto,
salary, incentive compensation, sick leave, and vacation pay.
(ix) Enforcement of Agreement. The Company is aware that
upon the occurrence of a Change in Control, the Board of
Directors or a shareholder of the Company may then cause or
attempt to cause the Company to refuse to comply with its
obligations under this Agreement, or may cause or attempt to
cause the Company to institute, or may institute litigation
seeking to have this Agreement declared unenforceable, or may
institute litigation seeking to have this Agreement declared
unenforceable, or may take or attempt to take other action to
deny the Executive the benefits intended under this Agreement. In
these circumstances, the purpose of this Agreement could be
frustrated. It is the intent of the Company that the Executive
not be required to incur the expenses associated with the
enforcement of any rights under this Agreement by litigation or
other legal action, nor be bound to negotiate any settlement of
any rights hereunder, because the cost and expense of such legal
action or settlement would substantially detract from the
benefits intended to be extended to the Executive hereunder.
Accordingly, if following a Change in Control it should appear to
the Executive that the Company has failed to comply with any of
its obligations under this Agreement or in the event that the
Company or any other person takes any action to declare this
Agreement void or enforceable, or institutes any litigation or
other legal action designed to deny, diminish or to recovery from
the Executive the benefits entitled to be provided to the
Executive hereunder, and that the Executive has complied with all
obligations under this Agreement, the Company irrevocably
authorizes the Executive from time to time to retain counsel of
the Executive's choice, at the expense of the Company as provided
in this Section, to represent the Executive in connection with
the initiation or defense of any litigation or other legal
action, whether such action is by or against the Company or any
Director, officer, shareholder, or other person affiliated with
the Company, in any jurisdiction. The reasonable fees and
expenses of counsel selected from time to time by the Executive
as hereinabove provided shall be paid or reimbursed to the
Executive by the Company on a regular, periodic basis upon
presentation by the Executive of a statement or statements
prepared by such counsel in accordance with its customary
practices. Any legal expenses incurred by the Company by reason
of any dispute between the parties as to enforceability of or the
terms contained in this Agreement, notwithstanding the outcome of
any such dispute, shall be the sole responsibility of the
Company, and the Company hereby waives, and agrees not to take,
any action to seek reimbursement from the Executive for such
expenses.
(f) In addition to any other payments due to the Executive
hereunder, if the Executive's employment is terminated pursuant to Section 6(b),
6(d) or 6(e) of this Agreement, the Company shall pay promptly after the close
of the Company's fiscal year in which the termination of Executive's employment
occurs, a prorated portion of any unpaid bonus or other incentive compensation,
if any, which the Executive would have been entitled to receive pursuant to
plans, if any, adopted by the Board of Directors of Interpore. If the
Executive's employment is terminated following a Change of Control and the
Company ceases to function as a separate operating unit or for any other reason
the performance criteria set forth in the bonus or incentive plan, if any,
adopted by the Board of Directors of Interpore is no longer a viable or accurate
indicator of the performance of the Executive or the Company, then for purposes
of
<PAGE> 8
determining and payment of bonus or other incentive compensation, the
performance criteria shall be deemed to have been met.
7. NON-COMPETITION.
(a) The Executive agrees that he will not:
(i) during the term or any extension of this Agreement
while the Executive is so employed by the Company, engage or
participate, directly or indirectly, either as principal, agent,
employee, employer, consultant, stockholder (except as the holder
of not more than five percent of the stock of any publicly traded
corporation), or in any other individual or representative
capacity whatsoever, in the operation, management or ownership of
any business, firm, corporation, association, or other entity
engaged in the design, license, manufacture, marketing, or sale
of bone biologics products or devices and instruments used in
spinal surgery or in any other business engaged in by the
Company; or
(ii) for a period of 12 months after termination of
employment with the Company, whether such termination is
voluntary or involuntary or with Good Cause or without cause,
directly or indirectly, for himself or in conjunction with or on
behalf of any other individual or entity, solicit, divert, take
away or endeavor to take away from the Company any customer,
account or employee of the Company who was a customer, account or
employee of the Company at any time during the 12 months prior to
the date of the Executive's termination of employment with the
Company.
(b) In the event of a violation of this Section 7, the
non-competition time periods provided in Section 7(a) shall be tolled during the
time of such violation.
8. CONFIDENTIAL INFORMATION; ASSIGNMENT OF INVENTIONS. The
Executive agrees that that certain Invention and Secrecy Agreement between
Interpore Cross International and the Executive shall remain in full force and
effect as if such agreement originally were made by and between the Company and
the Executive.
9. NO CONFLICTS. The Executive represents that the performance by
the Executive of all the terms of this Agreement does not and will not breach
any agreement as to which the Executive or the Company is or was a party and
which requires Executive to keep any information in confidence or in trust. The
Executive has not entered into, and will not enter into, any agreement either
written or oral in conflict herewith.
10. REASONABLENESS OF RESTRICTIONS. The Executive acknowledges
that the restrictions contained in this Agreement are reasonable, but should any
provisions of this Agreement be determined to be invalid, illegal or otherwise
unenforceable to its full extent, or if any such restriction is found by a court
of competent jurisdiction to be unreasonable under applicable law, then the
restriction shall be enforced to the maximum extent permitted by law, and the
parties hereto hereby consent and agree that such scope of protection, time or
geographic area (or any one of them, as the case may be) shall be modified
accordingly in any proceeding brought to enforce such restriction. The Executive
acknowledges that the validity, legality and enforceability of the other
provisions shall not be affected thereby. The Executive hereby acknowledges and
confirms that the business of the Company extends
<PAGE> 9
throughout the world and that, without limitation of any remedies for breach of
such covenant, the Company shall be entitled to temporary and permanent
injunctive relief.
11. REMEDIES; VENUE; PROCESS.
(a) The Executive hereby acknowledges and agrees that the
Confidential Information disclosed to the Executive prior to and during the term
of this Agreement is of a special, unique and extraordinary character, and that
any breach of this Agreement will cause the Company irreparable injury and
damage, and consequently the Company shall be entitled, in addition to all other
remedies available to it, to injunctive and equitable relief to prevent or cease
a breach of Sections 7 or 8 of this Agreement without further proof of harm and
entitlement; that the terms of this Agreement, if enforced by the Company, will
not unduly impair the Executive's ability to earn a living or pursue his
vocation; and further, that the Company may withhold compensation and benefits
if the Executive fails to comply with this Agreement, without restricting the
Company from other legal and equitable remedies. The parties agree that the
prevailing party shall be entitled to all costs and expenses (including
reasonable legal fees and expenses) which it incurs in successfully enforcing
this Agreement and in prosecuting or defending any litigation (including
appellate proceedings) arising out of this Agreement.
(b) The parties agree that jurisdiction and venue in any
action brought pursuant to this Agreement to enforce its terms or otherwise with
respect to the relationships between the parties shall properly lie in any
federal or state court located in Orange County, California. Such jurisdiction
and venue is exclusive, except that the Company may bring suit in any
jurisdiction and venue where jurisdiction and venue would otherwise be proper if
Executive has breached Sections 7 or 8 of this Agreement. The parties further
agree that the mailing by certified or registered mail, return receipt
requested, of any process required by any such court shall constitute valid and
lawful service of process against them, without the necessity for service by any
other means provided by statute or rule of court.
12. WITHHOLDING. The Company may withhold from any payments to be
made hereunder such amounts as it may be required to withhold under applicable
federal, state or other law, and transmit such withheld amounts to the
appropriate taxing authority.
13. ASSIGNMENT. This Agreement is personal to the Executive and
the Executive may not assign or delegate any of his rights or obligations
hereunder. Subject to the foregoing, this Agreement shall be binding upon and
inure to the benefit of the respective parties hereto, their heirs, executors,
administrators, successors and assigns.
14. WAIVER. The waiver by either party hereto of any breach or
violation of any provision of this Agreement by the other party shall not
operate as or be construed to be a waiver of any subsequent breach by such
waiving party.
<PAGE> 10
15. NOTICES. Any and all notices required or permitted to be
given under this Agreement will be sufficient and deemed effective three (3)
days following deposit in the United States mail if furnished in writing and
sent by certified mail to the Executive at the address set forth on Schedule A
hereto, and to the Company at:
Interpore International, Inc.
181 Technology Drive
Irvine, California 92618
Attention: Richard L. Harrison
with a copy to:
Latham & Watkins
650 Town Center Drive, 20th Floor
Costa Mesa, California 92626
Attention: Charles K. Ruck
16. GOVERNING LAW. This Agreement shall be interpreted, construed
and governed according to the laws of the State of California applicable to
contracts made and to be wholly performed within such state.
17. AMENDMENT. This Agreement and the Schedules hereto may only
be amended or supplemented by agreement in writing executed by both parties
hereto.
18. SECTION HEADINGS. Section headings contained in this
Agreement are for convenience only and shall not be considered in construing
any provision hereof.
19. ENTIRE AGREEMENT. This Agreement terminates, cancels and
supersedes all previous employment agreements or other agreements relating to
the employment of the Executive with the Company, written or oral, entered into
between the parties hereto, and this Agreement contains the entire understanding
of the parties hereto with respect to the subject matter of this Agreement. This
Agreement was fully reviewed and negotiated on behalf of each party and shall
not be construed against the interest of either party as the drafter of this
Agreement. This Agreement supersedes all prior agreements and understandings
between the Parties with respect to such subject matter. [That certain
Employment Agreement dated as of August 15, 1997 between Executive and Cross, as
in existence prior to the execution hereof, is hereby terminated and is and
shall be after the date hereof null and void and of no further force and
effect.] The Schedules to this Agreement are hereby incorporated by reference
and for all purposes shall constitute a part hereof as if included in the text
of the Agreement. THE EXECUTIVE ACKNOWLEDGES THAT, BEFORE PLACING HIS SIGNATURE
HEREUNDER, HE HAS READ ALL OF THE PROVISIONS OF THIS EMPLOYMENT AGREEMENT AND
HAS THIS DAY RECEIVED A COPY HEREOF.
20. SEVERABILITY. The invalidity or unenforceability of any one
or more provisions of this Agreement shall not affect the validity or
enforceability of any other provisions of this Agreement or parts thereof.
21. SURVIVAL. Sections 6 through 13 of this Agreement and this
Section 21 shall survive any termination or expiration of this Agreement.
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
EXECUTIVE: INTERPORE INTERNATIONAL, INC.
By:
Its:
[CROSS MEDICAL PRODUCTS, INC.
By:
Its: ]
<PAGE> 1
EXHIBIT 10.26
INTERPORE INTERNATIONAL, INC.
SCHEDULE OF PARTIES TO FORM OF EMPLOYMENT AGREEMENT
Name Title
---- -----
David C. Mercer Chairman of the Board, Chief Executive Officer
Joseph A. Mussey President and Chief Operating Officer
Richard L. Harrison Sr. Vice President, Finance, Chief Financial Officer
Maxwell R. Simmonds Sr. Vice President, Sales and Marketing
William A. Franklin, Jr. Vice President, Operations
Edwin C. Shors, Ph.D Vice President, Research and New Technology
Philip A. Mellinger Vice President, Product Development
<PAGE> 1
EXHIBIT 11.01
Interpore International, Inc.
Computations of Net Income Per Share
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) from continuing operations $ 166 $ 534 $(3,212) $ 722
Net income from discontinued operations - - - 2,597
------- ------- ------- -------
Net income (loss) $ 166 $ 534 $(3,212) $ 3,319
======= ======= ======= =======
Shares used in computing net income
per share - basic:
Weighted average common shares outstanding 13,989 13,476 13,898 13,365
Effect of dilutive securities:
Weighted average convertible preferred stock 33 76 * 77
Common share equivalents outstanding 279 590 * 513
------- ------- ------- -------
Shares used in computing net income
per share - diluted 14,301 14,142 13,898 13,955
======= ======= ======= =======
Basic earnings per share:
Net income (loss) from continuing operations $ .01 $ .04 $ (.23) $ .05
Net income from discontinued operations $ .00 $ .00 $ .00 $ .20
Net income (loss) $ .01 $ .04 $ (.23) $ .25
Diluted earnings per share:
Net income (loss) from continuing operations $ .01 $ .04 $ (.23) $ .05
Net income from discontinued operations $ .00 $ .00 $ .00 $ .19
Net income (loss) $ .01 $ .04 $ (.23) $ .24
</TABLE>
- --------------------
* Effect of dilutive securities would have been anti-dilutive; accordingly, the
amounts are excluded from shares used in computing diluted earnings per share.
Shares issuable from the convertible subordinated debentures were excluded from
the calculation of diluted earnings per share because their effect would have
been anti-dilutive.
<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 nine
month period ended September 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,212,000
<SECURITIES> 1,983,000
<RECEIVABLES> 6,821,000
<ALLOWANCES> 485,000
<INVENTORY> 12,073,000
<CURRENT-ASSETS> 32,116,000
<PP&E> 3,872,000
<DEPRECIATION> 2,447,000
<TOTAL-ASSETS> 36,913,000
<CURRENT-LIABILITIES> 4,270,000
<BONDS> 3,322,000
0
0
<COMMON> 140,000
<OTHER-SE> 29,092,000
<TOTAL-LIABILITY-AND-EQUITY> 36,913,000
<SALES> 22,046,000
<TOTAL-REVENUES> 22,046,000
<CGS> 6,180,000
<TOTAL-COSTS> 6,180,000
<OTHER-EXPENSES> 19,112,000
<LOSS-PROVISION> 72,000
<INTEREST-EXPENSE> (93,000)
<INCOME-PRETAX> (3,153,000)
<INCOME-TAX> 59,000
<INCOME-CONTINUING> (3,212,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,212,000)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
