<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 June 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 August 6, 1998, there were 13,969,947 shares of the registrant's
common stock issued and outstanding.
<PAGE> 2
Interpore International, Inc.
Index
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1998 (unaudited) and December 31, 1997 ......................... 3
Condensed Consolidated Statements of Operations (unaudited)
for the three month and six month periods ended
June 30, 1998 and June 30, 1997 ......................................... 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the six month periods ended June 30, 1998
and
June 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 ........................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ......................... 14
Item 5. Other Information ........................................................... 15
Item 6. Exhibits and Reports on Form 8-K ............................................ 15
</TABLE>
2
<PAGE> 3
Interpore International, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,243 $ 11,809
Short-term investments 1,998 4,826
Accounts receivable, less allowance for doubtful accounts of
$512 and $370 in 1998 and 1997, respectively 6,703 6,590
Inventories 11,530 10,374
Prepaid expenses 1,219 438
Deferred income taxes 1,426 1,454
Other current assets 73 963
-------- --------
Total current assets 34,192 36,454
Property, plant and equipment, net 1,228 1,550
Deferred income taxes 2,778 2,639
Other assets 773 895
-------- --------
Total assets $ 38,971 $ 41,538
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Current portion of long term debt and capital lease obligations $ 15 $ 95
Accounts payable 1,556 1,094
Accrued compensation and related expenses 805 758
Accrued disposition costs 450 610
Accrued merger-related expenses and restructuring charges 1,193 --
Accrued income taxes -- 1,067
Other accrued liabilities 979 1,101
-------- --------
Total current liabilities 4,998 4,725
-------- --------
Long-term liabilities:
Long-term debt 4,983 5,080
Deferred income taxes 55 55
Obligations under capital leases, net 37 44
-------- --------
Total long-term liabilities 5,075 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 June 30, 1998 and December 31, 1997; aggregate liquidation
value of $247 at June 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 - 13,959,761 at June 30,
1998 and 13,765,538 at December 31, 1997
Additional paid-in-capital 43,754 43,114
Accumulated deficit (14,996) (11,618)
-------- --------
Total shareholders' equity 28,898 31,634
-------- --------
Total liabilities and shareholders' equity $ 38,971 $ 41,538
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
Interpore International, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 7,333 $ 7,033 $ 14,703 $ 14,531
Cost of goods sold 2,214 1,685 4,050 4,027
-------- -------- -------- --------
Gross profit 5,119 5,348 10,653 10,504
-------- -------- -------- --------
Operating expenses:
Research and development 951 748 1,812 1,489
Selling and marketing 2,966 2,826 5,705 5,963
General and administrative 1,087 1,158 2,123 2,515
Merger-related expenses 2,963 -- 3,031 --
Restructuring charges 1,512 -- 1,512 --
Loss on sale of dental business -- 617 -- 617
-------- -------- -------- --------
Total operating expenses 9,479 5,349 14,183 10,584
-------- -------- -------- --------
Loss from operations (4,360) (1) (3,530) (80)
-------- -------- -------- --------
Interest income 204 217 444 370
Interest expense (258) (136) (391) (313)
Other income 93 77 158 174
-------- -------- -------- --------
Total interest and other income, net 39 158 211 231
-------- -------- -------- --------
Income (loss) before taxes (4,321) 157 (3,319) 151
Income tax provision (benefit) -- 51 59 (37)
-------- -------- -------- --------
Net income (loss) from continuing operations (4,321) 106 (3,378) 188
Net income (loss) from discontinued operations -- (94) -- 2,597
-------- -------- -------- --------
Net income (loss) $ (4,321) $ 12 $ (3,378) $ 2,785
======== ======== ======== ========
Basic earnings per share:
Net income (loss) from continuing operations $ (.31) $ .01 $ (.24) $ .01
Net income (loss) from discontinued operations $ .00 $ (.01) $ .00 $ .20
Net income (loss) $ (.31) $ .00 $ (.24) $ .21
Shares used in computing earnings per share 13,894 13,354 13,853 13,307
Diluted earnings per share:
Net income (loss) from continuing operations $ (.31) $ .01 $ (.24) $ .01
Net income (loss) from discontinued operations $ .00 $ (.01) $ .00 $ .19
Net income (loss) $ (.31) $ .00 $ (.24) $ .20
Shares used in computing earnings per share 13,894 13,887 13,853 13,882
</TABLE>
See accompanying notes.
4
<PAGE> 5
Interpore International, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------- --------
1998 1997
-------- --------
<S> <C> <C>
Net cash used in continuing operations $ (3,596) $ (1,772)
Net cash provided by discontinued operations -- 229
-------- --------
Net cash used in operating activities (3,596) (1,543)
-------- --------
Cash flows from investing activities:
Expenditures for patents rights and license (22) (48)
Sales (purchases) of short-term investments, net 2,828 (387)
Purchases of property, plant and equipment (234) (285)
Proceeds from sale of dental business, net -- 689
-------- --------
Net cash provided by (used in) continuing operations 2,572 (31)
Net cash used in discontinued operations -- (91)
Proceeds from sale of recovery products segment -- 8,177
-------- --------
Net cash provided by investing activities 2,572 8,055
-------- --------
Cash flows from financing activities:
Repayment of term debt and capital lease obligations (87) (1,624)
Proceeds from exercise of stock options 482 173
Proceeds from employee stock purchase plan 63 42
Proceeds from the sale of common stock -- 242
-------- --------
Net cash provided by (used in ) continuing operations 458 (1,167)
Net cash used in discontinued operations -- (197)
-------- --------
Net cash provided by (used in) financing activities 458 (1,364)
-------- --------
Net increase (decrease) in cash and cash equivalents (566) 5,148
Cash and cash equivalents at beginning of period 11,809 6,328
======== ========
Cash and cash equivalents at end of period 11,243 11,476
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
Interpore International, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(unaudited)
1. 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 June 30, 1998 and the
results of operations and cash flows for the three month and six month periods
ended June 30, 1998 and 1997.
The accompanying condensed consolidated financial statements include the
accounts of the Company and its subsidiaries, including Interpore Orthopaedics,
Inc., Interpore Acquisition Corporation, 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 six month
periods ended June 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.
2. INVENTORIES
Inventories are stated at the lower of average cost or market. Inventories are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------- -------
<S> <C> <C>
Raw materials $ 653 $ 737
Work-in-process 220 227
Finished goods 9,410 10,657
------- -------
$11,530 $10,374
======= =======
</TABLE>
3. CONTINGENCIES
The nature of the Company's business subjects it to products liability and
related claims from time to time.
6
<PAGE> 7
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 market
products without the proper regulatory approvals. Cross has been named as a
defendant, among others, in over 750 such lawsuits. None of these cases involve
products manufactured by Cross. 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. 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.
In addition, Cross has eight pending cases claiming products liability for
allegedly defective products manufactured by Cross.
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, in the ordinary course of business, the Company has
been named as a defendant in various other legal proceedings. The Company has
denied liability in all such lawsuits and is vigorously defending the same.
4. LONG-TERM DEBT
Long-term debt at June 30, 1998 consists of $4,983,000 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 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, the Company will be obligated to redeem the Debentures
tendered by June 1, 1999 or June 1 of any succeeding year 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 six months of 1998, $97,000 of Debentures were converted into 15,221
shares of the Company's common stock.
7
<PAGE> 8
5. 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 include legal, accounting and
administrative costs incurred in connection with the merger of the Company and
Cross. The restructuring charges are associated with the planned closing of the
Dublin, Ohio facility and include severance benefits for employees not remaining
with the Company, the write-off of fixed assets not being transferred to the
Company's Irvine, California headquarters, and the accrual of remaining lease
payments for the Dublin facility.
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.
6. 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.
7. 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
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.
RESULTS OF OPERATIONS
The following table presents the Company's results of operations as percentages:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------- ------------------------------
1998 vs. 1998 vs.
1998 1997 1997 1998 1997 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 4.3% 100.0% 100.0% 1.2%
Cost of goods sold 30.2% 24.0% 31.4% 27.5% 27.7% .6%
------ ------ ------ ------ ------ ------
Gross profit 69.8% 76.0% (4.3%) 72.5% 72.3% 1.4%
------ ------ ------ ------ ------ ------
Operating expense:
Research and development 13.0% 10.6% 27.1% 12.3% 10.2% 21.7%
Selling and marketing 40.5% 40.2% 5.0% 38.8% 41.0% (4.3%)
General and administrative 14.8% 16.4% (6.1%) 14.5% 17.3% (15.6%)
Merger-related expenses 40.4% -- n/a 20.6% -- n/a
Restructuring charges 20.6% -- n/a 10.3% -- n/a
Loss on sale of dental business -- 8.8% n/a -- 4.3% n/a
------ ------ ------ ------ ------ ------
Total operating expenses 129.3% 76.0% 77.2% 96.5% 72.8% 34.0%
------ ------ ------ ------ ------ ------
Loss from operations (59.5%) -- n/a (24.0%) (.5%) n/a
====== ====== ====== ====== ====== ======
</TABLE>
9
<PAGE> 10
Three months ended June 30, 1998 and 1997
- -----------------------------------------
For the quarter ended June 30, 1998, net sales of $7.3 million were $300,000 or
4.3% greater than sales of $7.0 million for the same period of 1997.
<TABLE>
<CAPTION>
Change
Three months ended June 30, ----------------------------
1998 1997 Amount %
------ ------ ------ -------
<S> <C> <C> <C> <C>
Bone biologics product sales $3,341 $3,738 $ (397) (10.6%)
Spinal implant product sales 3,992 3,033 959 31.6%
------ ------ ------ -------
Sub-total ............... 7,333 6,771 562 8.3%
Dental product sales ....... -- 262 (262) (100.0%)
------ ------ ------ -------
Total sales ............. $7,333 $7,033 $ 300 4.3%
====== ====== ====== =======
</TABLE>
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, decreased in the quarter ended June 30, 1998 by $397,000 or
10.6% to $3.3 million compared to $3.7 million for the second quarter of 1997.
This decrease is attributable primarily to a $343,000 decrease in OEM product
sales and a $167,000 return from a domestic dealer that was converted to an
agent relationship during the second quarter of 1998. Sales of spinal implant
products increased in the quarter ended June 30, 1998 by $1.0 million or 31.6%
to $4.0 million compared to $3.0 million for the second quarter of 1997,
primarily due to increasing market penetration of the Synergy(TM) Spinal Implant
System.
Domestic sales of bone biologics and spinal products were approximately $5.4
million for both quarters ended June 30, 1998 and 1997. International sales
increased $583,000 or 43.3% to $1.9 million in the second quarter of 1998
compared with $1.3 million for the same quarter of 1997.
There were no dental product sales in the quarter ended June 30, 1998,
reflecting the Company's 1997 sale of its dental business.
The gross margins as percentages of sales for the quarters ended June 30, 1998
and 1997 were 69.8% and 76.0%, respectively. The decrease primarily reflects the
comparatively higher percentage of spinal implant product sales in the 1998
period which have a lower gross margin than bone biologics products.
Additionally, less favorable purchase price and overhead absorption variances
associated with lower purchase volumes of spinal implant products in the 1998
period contributed to the decreased gross margin.
Total operating expenses for the quarter ended June 30, 1998 increased by $4.1
million as compared to the same quarter of 1997 due to the $4.5 million of
merger-related and restructuring charges. Excluding these charges and the 1997
loss on the sale of the dental business, operating expenses increased by
$272,000 or 6%. Research and development expenses increased by 27.1% or $203,000
due to increased development efforts related to the Company's spinal implant
products. Selling and marketing expenses increased $140,000 or 5.0% compared to
the second quarter of 1997 due to increased commissions to independent agents,
offset partially by the elimination of selling and marketing expenses directly
related to the dental business. General and administrative expenses decreased by
6.1%, mostly the result of cost reductions following the sale of the dental
business.
10
<PAGE> 11
The $119,000 decrease in net interest and other income primarily relates to the
write-off of unamortized convertible debenture issuance costs associated with
the request by certain holders to redeem $1.7 million of debentures. The holders
of the debentures were entitled to redeem the debentures as a result of the
change in control of Cross resulting from the merger of the Company and Cross.
No income tax provision was recorded during the second quarter of 1998 due to
the anticipated utilization of the Company's net operating loss carryforwards
during the period.
Six months ended June 30, 1998 and 1997
- ---------------------------------------
For the six months ended June 30, 1998, net sales of $14.7 million were $172,000
or 1.2% greater than sales of $14.5 million for the same period of 1997.
<TABLE>
<CAPTION>
Six months ended June 30, Change
---------------------------- -----------------------------
1998 1997 Amount %
------- ------- ------- -------
<S> <C> <C> <C> <C>
Bone biologics product sales $ 7,048 $ 7,019 $ 29 .4%
Spinal implant product sales 7,655 5,806 1,849 31.8%
------- ------- ------- -------
Sub-total ............... 14,703 12,825 1,878 14.6%
Dental product sales ....... -- 1,706 (1,706) (100.0%)
------- ------- ------- -------
Total sales ............. $14,703 $14,531 $ 172 1.2%
======= ======= ======= =======
</TABLE>
Sales of bone biologics products remained relatively level at $7.0 million in
the six months ended June 30, 1998 and 1997. Sales of spinal implant products
increased in the six months ended June 30, 1998 by $1.8 million or 31.8% to $7.7
million compared to $5.8 million for the six months ended June 30, 1997,
primarily due to increasing market penetration of the Synergy Spinal Implant
System.
Domestic sales of bone biologics and spinal products increased by 10% or $1.0
million to $10.7 million for the six months ended June 30, 1998 compared to $9.7
million for the same quarter of 1997. International sales increased by $890,000
or 28.9% to $4.0 million for the six month period ended June 30, 1998 from $3.1
million for the same period of 1997.
There were no dental product sales in the six month period ended June 30, 1998,
reflecting the Company's 1997 sale of its dental business.
The gross margins as percentages of sales for the six month periods ended June
30, 1998 and 1997 were 72.5% and 72.3%, respectively.
Total operating expenses for the six months ended June 30, 1998 increased by
$3.6 million as compared to the same period of 1997 due to the $4.5 million of
merger-related expenses and restructuring charges. Excluding these charges and
the 1997 loss on the sale of the dental business, operating expenses increased
by $327,000 or 3%. Research and development expenses increased by 21.7% or
$323,000 related to increased spinal product development efforts. Selling and
marketing expenses decreased $258,000 or 4.3% compared to the six months ended
June 30, 1997 due mostly to the elimination of selling and marketing expenses
directly related to the dental business partially offset by increased
commissions to independent agents. General and administrative expenses decreased
by $392,000 or 15.6%, primarily the result of cost reductions following the sale
of the dental business.
11
<PAGE> 12
The $74,000 or 20.0% increase in interest income resulted from higher cash and
investment balances. The increase in interest expense of 24.9% or $78,000
resulted primarily from the write-off of unamortized convertible debenture
issuance costs.
Limited income tax provisions were recorded during the six month periods ended
June 30, 1998 and 1997 due to the anticipated utilization of the Company's net
operating loss carryforwards during the periods.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 and December 31, 1997, cash, cash equivalents and short-term
investments totaled $13.2 million and $16.6 million, respectively. Total working
capital decreased to $29.2 million from $31.7 million and the current ratio
decreased to 6.8 from 7.7 at June 30, 1998 and December 31, 1997, respectively.
The decrease in cash, cash equivalents and short-term investments of $3.4
million was primarily the result of the payment of $3.3 million in
merger-related expenses and restructuring charges.
The $13.2 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 expended approximately $1.7 million in July
1998 for the redemption of convertible debentures, and will spend additional
cash in the next several quarters 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 June 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
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the Company's business subjects it to products liability and
related claims from time to time.
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 market
products without the proper regulatory approvals. Cross has been named as a
defendant, among others, in over 750 such lawsuits. None of these cases involve
products manufactured by Cross. 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. 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.
In addition, Cross has eight pending cases claiming products liability for
allegedly defective products manufactured by Cross.
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, in the ordinary course of business, the Company has
been named as a defendant in various other legal proceedings. The Company has
denied liability in all such lawsuits and is vigorously defending the same.
13
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 6, 1998, the Company held its 1998 Annual Meeting of
Shareholders to vote on three proposals. The number of shares
entitled to vote was 7,110,898 of the Company's Common Stock
and 32,906 shares of the Company's Series E Preferred Stock.
The number of shares represented in person or proxy was
6,569,339 shares of common stock and 21,336 shares of Series E
Preferred Stock. The Preferred Stock voted on an as-converted
basis on all matters other than the reincorporation. All
voting information is expressed on an as-converted or
common-equivalent basis.
The following are the voting results of the three proposals:
Approval of the change of the Company's state of incorporation
from California to Delaware:
<TABLE>
<CAPTION>
Percentage as total of
common shares
Number of Votes outstanding
--------------- ----------------------
<S> <C> <C>
For 4,039,450 56.8%
Against 437,464 6.2%
Abstain 8,815 .1%
</TABLE>
In addition, 21,445 common equivalent shares of Series E
Preferred Stock voted for the reincorporation, no common
equivalent shares of Series E Preferred Stock voted against
and no shares abstained from voting.
Election of five members to the Board of Directors of the
Company, for the ensuing year, until their successors are duly
elected and qualified:
<TABLE>
<CAPTION>
Percentage as shares
Affirmative Votes present and voting
----------------- ------------------
<S> <C> <C>
David C. Mercer 6,563,459 99.6%
William A. Eisenecher 6,565,559 99.6%
G. Bradford Jones 6,510,459 98.8%
Guy P. Nohra 6,565,159 99.6%
George W. Smyth, Jr 6,502,459 98.7%
</TABLE>
Ratification and approval of adoption and approval of the
Agreement and Plan of Merger dated as of February 11, 1998, as
amended, between the Company and a wholly owned subsidiary of
the Company ("Sub"), and Cross Medical Products, Inc., a
Delaware corporation ("Cross"), providing for the merger of
Sub with and into Cross:
<TABLE>
<CAPTION>
Percentage as total of
Number of Votes shares outstanding
--------------- ----------------------
<S> <C> <C>
For 4,476,179 62.7%
Against 23,180 .3%
Abstain 7,815 .1%
</TABLE>
14
<PAGE> 15
ITEM 5. OTHER INFORMATION
New SEC rules regarding shareholder proposals became effective
on June 29, 1998. Pursuant to these new rules, if the Company
has not received notice by March 4, 1999, of any matter a
shareholder intends to propose for a vote at the 1999 Annual
Meeting of Shareholders, then a proxy solicited by the Board
of Directors may be voted on such matter in the discretion of
the proxy holder, without discussion of the matter in the
proxy statement soliciting such proxy and without such matter
appearing as a separate item on the proxy card.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
Reference is made to the Exhibit Index on Page 17 hereof.
b. Reports on Form 8-K.
On May 6, 1998, the Company filed a report on Form 8-K with
the Securities and Exchange Commission which described the
completion of the merger whereby Cross became a wholly-owned
subsidiary of the Company. Also, the Form 8-K described the
completion of the reincorporation of the Company from the
State of California to the State of Delaware.
15
<PAGE> 16
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: August 12, 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
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.01 Certificate of Incorporation of Interpore Delaware, Inc.(11)
3.02 Bylaws of Registrant(11)
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(10)
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
10.08 Amendment to the Loan Agreement dated August 11, 1998 among
Registrant, Interpore Orthopaedics, Inc., Cross Medical Products,
Inc. and Silicon Valley Bank
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(4)
10.10 Employee Qualified Stock Purchase Plan(3)
10.11 1995 Stock Option Plan(3)
10.12 Stock Option Plan for Non-Employee Directors of Interpore
International(7)
10.13 Form of Indemnification Agreement(20)
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.14 Asset Purchase Agreement dated April 18, 1997 regarding sale of
assets of Interpore Dental, Inc.(11)
10.15 Agreement and Plan of Merger, dated as of February 11, 1998, by
and among Interpore International, Buckeye International and
Cross Medical Products, Inc. ("Cross")(13)
10.16 Non-Titled Personal Property Security Agreement, dated February
13, 1995, granting Bank One Columbus, N.A. a secruity interest in
all inventory, raw material, work in process, supplies, accounts,
general intangibles, chattel paper, instruments, other forms of
obligations and receivables, goods, equipment, machinery,
supplies and other personal property of the Cross.(12)
10.17 Non-Titled Personal Property Security Agreement, dated February
13, 1995, granting Bank One Columbus, N.A. a security interest in
all inventory, raw materials, work in process, supplies,
accounts, general intangibles, chattel paper, instruments, other
forms of obligations and receivables, goods, equipment,
machinery, supplies and other personal property of Cross.(12)
10.18 Asset Purchase Agreement, dated March 12, 1997, by and among
Cross, Danniger Healthcare, Inc. and OrthoLogic Corp.(13)
10.19 Confidentiality, Assignment and Non-Competition Agreement for Key
Personnel, dated September 10, 1984, between Cross and Edward R.
Funk.(14)
10.20 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.(15)
10.21 Cross Form of Stock Option Agreement Under the Amended and
Restated 1984 Incentive Stock Option Plan.(15)
10.22 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.(15)
10.23 Cross Form of Stock Option Agreement Under the Amended and
Restated 1984 Non-Statutory Stock Option Plan.(15)
10.24 Cross 1994 Stock Option Plan, reserving 600,000 shares of Common
Stock.(16)
10.25 Non-Competition Agreement dated September 6, 1996, between Cross
and Stephen R. Draper.(17)
10.26 Employment Agreement, dated August 15, 1997, between Cross and
Joseph A. Mussey.(18)
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.27 Employment Agreement, dated August 15, 1997, between Cross and
Paul A. Miller.(18)
10.28 Employment Agreement, dated August 15, 1997, between Cross and
Ira Benson.(18)
10.29 Employment Agreement, dated August 15, 1997, between Cross and
Thomas E. Zimmer.(18)
10.30 Employment Agreement, dated August 15, 1997, between Cross and
Philip A. Mellinger.(18)
10.31 Agreement between Dr. Edward Funk and Cross, dated February 11,
1998.(19)
10.32 Supplemental Indenture by and between Interpore International,
Inc. and Cross Medical Products, Inc. and The Fifth Third Bank
11.01 Computations of Net Income per Share
27.01 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 Proxy Statement for the
Company's 1995 Annual Meeting of Shareholders.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(8) Incorporated by reference from the Company's Current Report on Form 8-K
dated May 1, 1997.
19
<PAGE> 20
(9) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1997.
(10) Incorporated by reference from the Company's Current Report on Form 8-K
dated February 11, 1998.
(11) Incorporated by reference from the Company's Registration Statement on Form
S-4, Registration No. 333-49487.
(12) Incorporated by reference from the Cross Annual Report on Form 10-K for the
year ended December 31, 1994.
(13) Incorporated by reference from the Cross Annual Report on Form 10-K for the
year ended December 31, 1996.
(14) Incorporated by reference from the Cross Form 10 filed May 3, 1988.
(15) Incorporated by reference from the Cross Annual Report on Form 10-K for the
year ended December 31, 1992.
(16) Incorporated by reference from the Cross Form 10 filed August 12, 1994.
(17) Incorporated by reference from the Cross Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1996.
(18) Incorporated by reference from the Cross Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1997.
(19) Incorporated by reference from the Cross Annual Report on Form 10-K for the
year ended December 31, 1997.
(20) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1998.
20
<PAGE> 1
- --------------------------------------------------------------------------------
Exhibit 10.07
SILICON VALLEY BANK
AMENDED SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: INTERPORE INTERNATIONAL, INC.
ADDRESS: 181 TECHNOLOGY DR.
IRVINE, CALIFORNIA 92618
BORROWER: INTERPORE ORTHOPAEDICS, INC.
ADDRESS: 181 TECHNOLOGY DR.
IRVINE, CALIFORNIA 92618
BORROWER: CROSS MEDICAL PRODUCTS, INC.
ADDRESS: 181 TECHNOLOGY DR.
IRVINE, CALIFORNIA 92618
DATED: AUGUST 11, 1998
CREDIT LIMIT (Section 1.1): An amount not to exceed $5,000,000 at
any one time outstanding.
LETTER OF CREDIT SUBLIMIT Silicon, in its reasonable discretion,
will from time to time during the term
of this Agreement issue letters of
credit for the account of the Borrower
("Letters of Credit"), in an aggregate
amount, for all Borrowers, at any one
time outstanding not to exceed $500,000,
upon the request of the Borrower,
provided that, on the date the Letters
of Credit are to be issued, Borrower has
available to it Loans in an amount equal
to or greater than the face amount of
the Letters of Credit to be issued.
Prior to the issuance of any Letters of
Credit, Borrower shall execute and
deliver to Silicon Applications for
Letters of Credit and such other
documentation as Silicon shall specify
(the "Letter of Credit Documentation").
Fees for the Letters of Credit shall be
as provided in the Letter of Credit
Documentation. Letters of Credit may
have a maturity date up to twelve months
beyond the Maturity Date in effect from
time to time, provided that if on the
Maturity Date, or on any earlier
effective date of termination, there are
any outstanding letters of credit issued
by Silicon or issued by another
institution based upon an application,
guarantee, indemnity or similar
agreement on the part of Silicon, then
on such date Borrower shall provide to
Silicon cash collateral in an amount
equal to the face amount of all such
letters of credit plus all interest,
fees and cost due or to become due in
connection therewith, to secure all of
the Obligations relating to said letters
of
-1-
<PAGE> 2
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
credit, pursuant to Silicon's then
standard form cash pledge agreement.
The Credit Limit set forth above and the
Loans available under this Agreement at
any time shall be reduced by the face
amount of Letters of Credit from time to
time outstanding.
INTEREST RATE (Section 1.2): A rate equal to the "Prime Rate" in
effect from time to time calculated on
the basis of a 360-day year for the
actual number of days elapsed. "prime
Rate" means the rate announced from time
to time by Silicon as its "prime rate;"
it is a base rate upon which other rates
charged by Silicon are based, and it is
not necessarily the best rate available
at Silicon. The interest rate applicable
to the Obligations shall change on each
date there is a change in the Prime
Rate.
MATURITY DATE JULY 5, 1999.
Section 5.1):
PRIOR NAMES OF BORROWER,
(Section 3.2): REPLAM CORPORATION
TRADE NAMES OF BORROWER,
(Section 3.2): NONE
OTHER LOCATIONS AND ADDRESSES
(Section 3.3): 12651 S. Dixie Hwy, Suite 317, Miami,
FL 33156; 1700 Alma, Suite 260, Plano,
TX 75075; 429 East Columbine, Santa Ana,
CA 92707.
NEGATIVE COVENANTS-EXCEPTIONS Without Silicon's prior written
(Section 4.6): consent, Interpore International may
do the following, provided that no Event
of Default and no event which, with
notice or passage of time or both, would
constitute an Event of default, both
before and after giving effect to the
following, has occurred: (i) merge with
another corporation, provided Interpore
International, Inc. is the surviving
corporation in such merger and the
assets of the corporation acquired in
the merger are not subject to any liens
or encumbrances, except Permitted Liens;
(ii) acquire the assets of another
corporation or entity, provided the
assets acquired are not subject to any
liens or encumbrances, except Permitted
Liens; (iii) enter into an agreement to
borrow money in an amount less than 25%
of the Tangible Net Worth (as defined
below) of Interpore International, Inc.
as of the end of the month prior to the
effective date of the loan agreement and
the date of any borrowing thereunder;
(iv) make loans to, or guaranty
indebtedness of, employees and officers
of the Borrower provided that the
aggregate amount of such indebtedness
and guaranties shall not exceed $100,000
outstanding at any time; and (v)
repurchase stock of Interpore
International in an aggregate amount not
to exceed $2,500,000.
-2-
<PAGE> 3
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
FINANCIAL COVENANTS (Section 4.1): Interpore International, Inc. shall at
all times comply with all of the
following covenants, on a consolidated
basis. Compliance shall be determined
quarterly, except where otherwise
specifically provided below.
QUICK ASSET RATIO: Interpore International, Inc. shall
at all times maintain a ratio of "Quick
Assets" to current liabilities of not
less than 1.75 to 1 .
TANGIBLE NET WORTH Interpore International, Inc. shall
maintain a tangible net worth of not
less than $18,000,000.
DEBT TO TANGIBLE NET WORTH Interpore International, Inc. shall
RATIO: at all times maintain a ratio of total
liabilities to tangible net worth of not
more than 1.0 to 1.
PROFITABILITY Interpore International, Inc. shall not
incur a loss (after taxes) in any fiscal
quarter effective with the fiscal
quarter ending September 30, 1998.
DEFINITIONS: "Tangible net worth" means the excess
of total assets over total liabilities,
determined in accordance with generally
accepted accounting principles,
excluding however all assets which would
be classified as intangible assets under
generally accepted accounting
principles, including without limitation
goodwill, licenses, patents, trademarks,
trade names, copyrights, capitalized
software and organizational costs,
licences and franchises. "Quick Assets"
means cash on hand or on deposit in
banks, readily marketable securities
issued by the United States, readily
marketable commercial paper rated "A-1"
by Standard & Poor's Corporation (or a
similar rating by a similar rating
organization), certificates of deposit
and banker's acceptances, and accounts
receivable (net of allowance for
doubtful accounts).
SUBORDINATED DEBT: "Liabilities" for purposes of the
foregoing covenants do not include
indebtedness which is subordinated to
the indebtedness to Silicon under a
subordination agreement in form
specified by Silicon or by language in
the instrument evidencing the
indebtedness which is acceptable to
Silicon.
OTHER COVENANTS (Section 4.1):
Borrower shall at all times comply with
all of the following additional
covenants:
1. BANKING RELATIONSHIP. Interpore
International shall at all times
maintain its bank accounts and its
primary banking relationship with
Silicon.
2. INDEBTEDNESS. Without limiting any
of the foregoing terms or provisions of
this Agreement, Borrower shall not in
the future incur indebtedness for
borrowed money, except for (i)
indebtedness to Silicon, and (ii)
indebtedness incurred in the future for
the purchase price of or lease of
equipment, provided that no Event of
Default and no event which, with notice
or passage of time or both, would
-3-
<PAGE> 4
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
constitute an Event of Default, both
before and after giving effect to the
incurring of such indebtedness, has
occurred.
3. ACCOUNTS RECEIVABLE AGINGS. If
there are any Loans outstanding as of
the end of any calendar month, within 20
days after the end of such calendar
month Borrower shall provide Silicon
with an aged listing of Borrower's
accounts receivable in form satisfactory
to Silicon.
Borrower: Borrower:
INTERPORE INTERNATIONAL, INC. INTERPORE ORTHOPAEDICS, INC.
By By
------------------------------- -------------------------------
[Vice] President [Vice] President
By By
------------------------------- -------------------------------
[Ass't] Secretary [Ass't] Secretary
Silicon: Borrower:
SILICON VALLEY BANK CROSS MEDICAL PRODUCTS, INC.
By By
------------------------------- -------------------------------
Title Title
---------------------------- -------------------------------
-4-
<PAGE> 1
Exhibit 10.08
SILICON VALLEY BANK
AMENDMENT TO LOAN AGREEMENT
BORROWER: INTERPORE INTERNATIONAL, INC. (SUCCESSOR BY MERGER TO
INTERPORE INTERNATIONAL)
ADDRESS: 181 TECHNOLOGY DR.
IRVINE, CALIFORNIA 92618
BORROWER: INTERPORE ORTHOPAEDICS, INC.
ADDRESS: 181 TECHNOLOGY DR.
IRVINE, CALIFORNIA 92618
BORROWER: CROSS MEDICAL PRODUCTS, INC.
ADDRESS: 181 TECHNOLOGY DR.
IRVINE, CALIFORNIA 92618
DATED: AUGUST 11, 1998
THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY
BANK ("Silicon") and the borrowers named above (jointly and severally, the
"Borrower"). Interpore International, Inc., a Delaware corporation, is the
surviving entity of the merger of Interpore International, the prior borrower
under the Loan Agreement (as defined below), with and into Interpore
International, Inc., a Delaware corporation. Further, Cross Medical Products,
Inc. was added as a borrower pursuant to an assumption agreement executed by
such entity in favor of Silicon Valley Bank.
The Parties agree to amend the Loan and Security Agreement between
them, dated October 24, 1990 (as amended from time to time, the "Loan
Agreement"), as follows. (Capitalized terms used but not defined in this
Amendment, shall have the meanings set forth in the Loan Agreement.)
1 MODIFIED SECTION 3.7. Section 3.7 of the Loan Agreement is hereby
amended in its entirety to read as follows:
"3.7 Financial Condition and Statements. All financial statements now
or in the future delivered to Silicon have been, and will be, prepared
in conformity with generally accepted accounting principles and now and
in the future will completely and accurately reflect the financial
condition of the Borrower, at the times and for the periods therein
stated. Since the last date covered by any such statement, there has
been no material adverse change in the financial condition or business
of the Borrower. The Borrower is now and will continue to be solvent.
The Borrower will provide Silicon: (i) within 10
<PAGE> 2
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
days after the earlier of the date the report 10-Q is filed or is
required to be filed with the Securities and Exchange Commission, such
10-Q report, a quarterly financial statement prepared by the Borrower,
and, for each quarter in which any Loans have been outstanding, a
Compliance Certificate signed by the Chief Financial Officer of the
Borrower, certifying that throughout such period the Borrower was in
full compliance with all of the terms and conditions of this Agreement,
and setting forth calculations showing compliance with the financial
covenants set forth on the Schedule and such other information as
Silicon shall reasonably request; (ii) within 10 days after the earlier
of the date the report 10-K is filed or is required to be filed with
the Securities and Exchange Commission, such 10-K report, and, if any
Loans have been outstanding during the quarter period then ending, a
Compliance Certificate for such period, signed by the Chief Financial
Officer of the Borrower, certifying that throughout such period the
Borrower was in full compliance with all of the terms and conditions of
this Agreement, and setting forth calculations showing compliance with
the financial covenants set forth on the Schedule and such other
information as Silicon shall reasonably request; and (iii) within 90
days following the end of the Borrower's fiscal year, complete annual
financial statements, certified by independent certified public
accountants acceptable to Silicon."
2. ASSUMPTION. Interpore International, Inc., a Delaware corporation,
as successor by merger to Interpore International, a California corporation,
hereby assumes and agrees to pay and perform when due all present and future
indebtedness, liabilities and obligations arising out of the Loan Agreement, the
Cross-Corporate Continuing Guaranty dated October 24, 1990 (the "Guaranty"), and
any and all documents, instruments and agreements relating thereto and, without
limitation of the foregoing, Interpore International, Inc. hereby grants to
Silicon a security interest in all now and existing and hereafter arising
Collateral to secure all Obligations. Further Cross Medical Products, Inc. is
hereby added as a borrower entity under the Guaranty and as a guarantor
thereunder, and agrees to and hereby undertakes the performance of all of the
waivers, consents and other provisions applicable to a guarantor thereunder as
set forth in the Guaranty; Cross Medical Products, Inc. hereby acknowledges that
it has received a copy of the Guaranty and has agreed to and reviewed all of the
provisions thereof.
3. CONDITIONS PRECEDENT TO LINE UTILIZATION. Without limitation of the
terms and conditions of the Loan Agreement regarding the making of Loans, the
following represent specific and additional conditions that are to be satisfied
prior to the making of any Loans hereunder or the issuance of any letters of
credit: (I) Each of Interpore International, Inc. and Cross Medical Products,
Inc. shall (A) execute and deliver to Silicon UCC-1 financing statements, UCC
amendment documentation and other agreements and documentation in order to
perfect the security interest of Silicon in the Collateral in light of the
assumption of the Loan Agreement obligations by each of such entity, (B) cause
to be delivered to Silicon UCC searches and such other lien and encumbrance
searches as Silicon determines are reasonably necessary or desirable in
connection with the foregoing UCC filings, which searches Silicon shall deem
acceptable, and (C) execute and deliver to Silicon such additional documentation
and agreements and take such additional actions as Silicon determines are
necessary or desirable in order to effectuate the purposes of the Loan Agreement
(the types of documentation referred to in (A), (B) and (C) above are
collectively referred to herein as the "Additional Collateral and Loan
Documentation"); and (II) Borrower agrees to cause any and all of its
subsidiaries and affiliates, now existing and hereafter arising (including,
without limitation, Interpore Cross International, Inc.), to execute and deliver
to Silicon such assumption agreements and other amending documentation to add
such entities as borrowers under the Loan Agreement and to cause such entities
to execute and deliver such Additional Collateral and Loan Documentation as
Silicon determines is necessary or desirable in connection therewith.
6
<PAGE> 3
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
4. FEE. Borrower shall pay to Silicon a facility fee in the amount of
0.5% of the amount of each Loan made under the Loan Agreement on or after the
date of this Amendment, until Borrower has paid Silicon an aggregate of $25,000
pursuant to the terms of this paragraph prior to July 5, 1999. Such fee shall be
due and payable at the time that Silicon makes any such Loan, with the
understanding that payment of such fee shall be a condition to the making of any
such Loan. Further, such fee shall be in addition to all interest and all other
fees payable to Silicon and shall be non-refundable.
5. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
6. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and any
prior written amendments to the Loan Agreement signed by Silicon and the
Borrower, and the other written documents and between Silicon and the Borrower
set forth in full all of the representations and agreements of the parties with
respect to the subject matter hereof and supersede all prior discussions,
representations, agreements and understandings between the parties with respect
to the subject hereof. Except as herein expressly amended, all of the terms and
provisions of the Loan Agreement, and all other documents and agreements between
Silicon and the Borrower shall continue in full force and effect and the same
are hereby ratified and confirmed.
BORROWER : SILICON:
INTERPORE INTERNATIONAL, INC. SILICON VALLEY BANK
By By
------------------------------- -------------------------------
PRESIDENT OR VICE PRESIDENT TITLE
----------------------------
By
-------------------------------
SECRETARY OR ASS'T SECRETARY
INTERPORE ORTHOPAEDICS, INC.
By
-------------------------------
PRESIDENT OR VICE PRESIDENT
By
-------------------------------
SECRETARY OR ASS'T SECRETARY
CROSS MEDICAL PRODUCTS, INC.
By
-------------------------------
PRESIDENT OR VICE PRESIDENT
By
-------------------------------
SECRETARY OR ASS'T SECRETARY
7
<PAGE> 1
Exhibit 10.32
SUPPLEMENTAL INDENTURE
by and between
INTERPORE INTERNATIONAL, INC.,
A DELAWARE CORPORATION
CROSS MEDICAL PRODUCTS, INC.,
A DELAWARE CORPORATION
and
THE FIFTH THIRD BANK
AS TRUSTEE
Dated as of May 8, 1998
Relating to:
8.5% Convertible Subordinated Debentures
Due 2003
of
CROSS MEDICAL PRODUCTS, INC.,
a Delaware corporation
<PAGE> 2
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
SUPPLEMENTAL INDENTURE
THIS SUPPLEMENTAL INDENTURE (the "Supplemental Indenture"), dated as of
May 8, 1998, is entered into by and between, INTERPORE INTERNATIONAL, INC., a
Delaware corporation ("Interpore"), CROSS MEDICAL PRODUCTS, INC. (formerly
Danninger Medical Technology, Inc.), a Delaware corporation ("Cross") and FIFTH
THIRD BANK, a banking corporation duly organized and existing under the laws of
the State of Ohio, as trustee (the "Trustee") and supplements and amends the
Indenture, dated as of May 15, 1996, by and between Cross and the Trustee (the
"Indenture").
WITNESSETH:
WHEREAS, pursuant to the Indenture, Cross has issued $5,000,000 of 8.5%
Convertible Subordinated Debentures due 2003 (the "Debentures"); and
WHEREAS, Section 5.09 of the Indenture provides that in the event of
any statutory exchange of securities with another corporation (including any
exchange effected in connection with a merger of a third corporation into
Cross), the holder of each Debenture then outstanding shall have the right
thereafter to convert such Debenture into the kind and amount of securities,
cash or other property which he would have owned or have been entitled to
receive immediately after such consolidation, merger, statutory exchange, sale
or conveyance had such Debenture been converted immediately prior to the
effective date of such consolidation, merger, statutory exchange, sale or
conveyance and that if necessary, appropriate adjustment shall be made to the
application of the provisions of Article Five of the Indenture with respect to
the rights and interests thereafter of the holders of the Debentures, to the end
that the provisions of Article Five of the Indenture shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in relation
to any shares of stock or other securities or property thereafter deliverable on
the conversion of the Debentures and that any such adjustment shall be made and
set forth in a supplemental indenture executed by Cross and the Trustee;
WHEREAS, Section 12.01(b) of the Indenture provides that the Indenture
may be amended without the consent of the holders of the Debentures to make
provision with respect to the conversion rights of the holders of the Debentures
pursuant to Section 5.09 of the Indenture;
WHEREAS, a wholly owned subsidiary of Interpore ("Merger Sub"), has
merged (the "Merger") effective as of May 7, 1998 with and into Cross pursuant
to an Agreement and Plan of Merger, dated February 11, 1998, by and among
Interpore International, a California corporation and the predecessor to
Interpore, Cross and Merger Sub (the "Merger Agreement"); and
WHEREAS, pursuant to the Merger Agreement, (i) Cross became a wholly
owned subsidiary of Interpore and (ii) each issued and outstanding share of
common stock of Cross was converted into the right to receive 1.275 shares of
common stock of Interpore;
9
<PAGE> 3
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
NOW, THEREFORE, the parties hereto agree to amend the Indenture as
follows:
Section 1. Shares Receivable Upon Conversion.
(a) Cross and Interpore hereby agree that the registered
holder of each Debenture shall have the right, subject to the provisions of
Article 5 of the Indenture, to convert the principal amount of any such
Debenture, or any portion of such principal amount which is $1,000 or an
integral multiple thereof, into that number of fully paid and nonassessable
shares of common stock of Interpore, par value $.01 per share, (calculated as to
each conversion to the nearest 1/100th of a share) obtained by dividing the
principal amount of the Debenture or portion thereof to be converted by the
Conversion Price (as defined in the Indenture) and multiplying the resulting
number of shares by 1.275.
(b) The activities specified in Section 5.04 of the Indenture
as requiring an adjustment to the Conversion Price if taken with respect to the
common stock of Cross shall hereafter be deemed to require a corresponding
adjustment to the Conversion Price if taken with respect to the common stock of
Interpore.
(c) The Debentures shall no longer be convertible into shares
of the common stock of Cross.
Section 2. Execution in Several Counterparts. This Supplemental
Indenture may be executed in any number of counterparts, each of which shall for
all purposes be deemed to be an original and all such counterparts shall
together constitute but one and the same instrument.
Section 3. Governing Law. This Supplemental Indenture shall be governed
by and construed in accordance with the laws of the State of Delaware applicable
to contracts made and performed in the State of Delaware.
Section 4. Incorporation By Reference. The parties hereto agree that
the amendments contained in this Supplemental Indenture shall be incorporated by
this reference thereto into the Indenture, which Indenture as so amended shall
serve as the sole operative Indenture in connection with the Debentures.
Section 5. Ratification and Reaffirmation of Indenture. Except as
hereby expressly amended, the Indenture shall remain in full force and effect
and the Indenture, as amended hereby, is ratified and confirmed.
Section 6. Interpretation. In the event of any conflict between the
provisions of the Indenture and the provisions of this Supplemental Indenture,
the provisions of this Supplemental Indenture shall control.
Section 7. Binding Effect. This Supplemental Indenture shall inure to
the benefit of and shall be binding upon Interpore, Cross, the Trustee, the
owners of the Debentures and their respective successors and assigns.
IN WITNESS WHEREOF, INTERPORE and CROSS have caused this Supplemental
Indenture to be signed in each of their names, and FIFTH THIRD BANK, as Trustee,
has caused this Supplemental Indenture to be signed in its name, all as of the
day and year first above written.
10
<PAGE> 4
SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AND SECURITY AGREEMENT
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INTERPORE INTERNATIONAL, INC.,
A DELAWARE CORPORATION
By: /S/ RICHARD L. HARRISON
-------------------------------
Name: Richard L. Harrison
Title: Senior Vice President
CROSS MEDICAL PRODUCTS, INC.,
A DELAWARE CORPORATION
By: /S/ RICHARD L. HARRISON
-------------------------------
Name: Richard L. Harrison
Title: Senior Vice President
FIFTH THIRD BANK, AS TRUSTEE
By: /S/ GREGORY R. HAHN
-------------------------------
Name: Gregory R. Hahn
Title: Trust Officer
11
<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 Six months ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) from continuing operations $ (4,321) $ 106 $ (3,378) $ 188
Net income (loss) from discontinued operations -- (94) -- 2,597
---------- ---------- ---------- ----------
Net income (loss) $ (4,321) $ 12 $ (3,378) $ 2,785
========== ========== ========== ==========
Shares used in computing net income per share basic:
Weighted average common shares outstanding 13,894 13,354 13,853 13,307
Effect of dilutive securities:
Weighted average convertible preferred stock * 77 * 77
Common share equivalents outstanding * 456 * 498
---------- ---------- ---------- ----------
Shares used in computing net income per share - diluted
13,894 13,887 13,853 13,882
========== ========== ========== ==========
Basic earnings per share:
Net income (loss) from continuing operations $ (.31) $ .01 $ (.24) $ .01
Net income (loss) from discontinued operations $ .00 $ (.01) $ .00 $ .20
Net income (loss) $ (.31) $ .00 $ (.24) $ .21
Diluted earnings per share:
Net income (loss) from continuing operations $ (.31) $ .01 $ (.24) $ .01
Net income (loss) from discontinued operations $ .00 $ (.01) $ .00 $ .19
Net income (loss) $ (.31) $ .00 $ (.24) $ .20
</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.
21
<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 June 30, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,243,000
<SECURITIES> 1,998,000
<RECEIVABLES> 7,215,000
<ALLOWANCES> 512,000
<INVENTORY> 11,530,000
<CURRENT-ASSETS> 34,192,000
<PP&E> 3,507,000
<DEPRECIATION> 2,279,000
<TOTAL-ASSETS> 38,971,000
<CURRENT-LIABILITIES> 4,998,000
<BONDS> 4,983,000
0
0
<COMMON> 36,563,000
<OTHER-SE> (7,665,000)
<TOTAL-LIABILITY-AND-EQUITY> 38,971,000
<SALES> 14,703,000
<TOTAL-REVENUES> 14,703,000
<CGS> 4,050,000
<TOTAL-COSTS> 4,050,000
<OTHER-EXPENSES> 14,025,000
<LOSS-PROVISION> 48,000
<INTEREST-EXPENSE> (53,000)
<INCOME-PRETAX> (3,319,000)
<INCOME-TAX> 59,000
<INCOME-CONTINUING> (3,378,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,378,000)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
