<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, 1999
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, 1999, there were 13,524,069 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, 1999
(unaudited) and December 31, 1998 .............................. 3
Condensed Consolidated Statements of Operations (unaudited)
for the three month and nine month periods ended
September 30, 1999 and September 30, 1998 ...................... 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended September 30, 1999 and
September 30, 1998 ............................................. 5
Notes to Condensed Consolidated Financial Statements ............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................ 13
2
<PAGE> 3
INTERPORE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,626 $ 7,908
Short-term investments 3,516 --
Accounts receivable, less allowance for doubtful
accounts of $486 and $506 in 1999 and 1998, respectively 7,657 6,418
Inventories 13,540 12,115
Prepaid expenses 1,590 1,205
Deferred income taxes 1,426 1,426
Other current assets 272 436
-------- --------
Total current assets 34,627 29,508
Property, plant and equipment, net 1,463 1,467
Deferred income taxes 2,559 2,559
Intangible assets, net 382 338
Other assets 244 330
-------- --------
Total assets $ 39,275 $ 34,202
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 15 $ 15
Accounts payable 1,959 609
Accrued compensation and related expenses 1,420 1,010
Accrued royalties 422 300
Reserve for products liability claims 199 232
Accrued disposition costs 142 250
Accrued merger-related expenses and restructuring charges 410 726
Other accrued liabilities 820 873
-------- --------
Total current liabilities 5,387 4,015
-------- --------
Long-term liabilities:
Long-term debt 3,152 3,152
Deferred income taxes 55 55
Obligations under capital leases, net 17 29
-------- --------
Total long-term liabilities 3,224 3,236
-------- --------
Contingencies
Stockholders' equity:
Series E convertible preferred stock, voting, par value
$.01 per share:
Authorized shares - 594,000; issued and outstanding
shares - 31,573 at September 30, 1999 and 32,906 at
December 31, 1998; aggregate liquidation value of $237
at September 30, 1999 and $247 at December 31, 1998 -- --
Preferred stock, par value $.01 per share:
Authorized shares - 4,406,000; outstanding shares - none -- --
Common stock, par value $.01 per share: Authorized shares
- 50,000,000; issued and outstanding shares - 14,116,660
at September 30, 1999 and 14,059,690 at December 31, 1998 141 140
Additional paid-in-capital 44,115 43,962
Accumulated deficit (10,483) (14,042)
-------- --------
33,773 30,060
Less treasury stock, at cost - 605,000 shares at
September 30, 1999 and December 31, 1998 (3,109) (3,109)
-------- --------
Total stockholders' equity 30,664 26,951
-------- --------
Total liabilities and stockholders' equity $ 39,275 $ 34,202
======== ========
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 9,549 $ 7,343 $ 28,177 $ 22,046
Cost of goods sold 2,651 2,130 8,406 6,180
-------- -------- -------- --------
Gross profit 6,898 5,213 19,771 15,866
-------- -------- -------- --------
Operating expenses:
Research and development 1,041 890 3,083 2,702
Selling and marketing 3,508 2,905 10,241 8,610
General and administrative 1,100 1,019 3,236 3,142
Merger-related expenses -- -- -- 3,031
Restructuring charges -- -- -- 1,512
Non-recurring charges -- 381 -- 381
-------- -------- -------- --------
Total operating expenses 5,649 5,195 16,560 19,378
-------- -------- -------- --------
Income (loss) from operations 1,249 18 3,211 (3,512)
-------- -------- -------- --------
Interest income 120 157 314 601
Interest expense (87) (117) (260) (508)
Other income 112 108 294 266
-------- -------- -------- --------
Total interest and other income, net 145 148 348 359
-------- -------- -------- --------
Income (loss) before taxes 1,394 166 3,559 (3,153)
Income tax provision -- -- -- 59
-------- -------- -------- --------
Net income (loss) $ 1,394 $ 166 $ 3,559 $ (3,212)
======== ======== ======== ========
Net income (loss) per share:
Basic $ .10 $ .01 $ .26 $ (.23)
Diluted $ .10 $ .01 $ .26 $ (.23)
Shares used in computing net income (loss)
per share:
Basic 13,512 13,989 13,492 13,898
Diluted 14,473 14,301 14,347 13,898
</TABLE>
See accompanying notes.
4
<PAGE> 5
INTERPORE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,559 $ (3,212)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 639 543
Loss on disposal of property, plant and equipment -- 229
Changes in operating assets and liabilities:
Accounts receivable (1,239) 254
Inventories (1,425) (1,699)
Prepaid expenses (385) (402)
Other assets 250 857
Deferred income taxes -- 28
Accounts payable 1,350 176
Accrued liabilities 22 (551)
-------- --------
Net cash provided by (used in) operating activities 2,771 (3,777)
-------- --------
INVESTING ACTIVITIES
Sales (purchases) of short-term investments, net (3,516) 2,843
Capital expenditures (550) (599)
Expenditures for patent rights (129) (26)
-------- --------
Net cash provided by (used in) investing activities (4,195) 2,218
-------- --------
FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations (12) (1,751)
Proceeds from exercise of stock options 100 650
Proceeds from employee stock purchase plan 54 63
-------- --------
Net cash provided by (used in) financing activities 142 (1,038)
-------- --------
Net decrease in cash and cash equivalents (1,282) (2,597)
Cash and cash equivalents at beginning of period 7,908 11,809
-------- --------
Cash and cash equivalents at end of period $ 6,626 $ 9,212
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
INTERPORE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Interpore International, Inc., doing business as Interpore Cross
International ("Interpore Cross"), is a medical device company that operates in
one business segment: the design, manufacture and marketing of medical products,
including synthetic bone and tissue products and spinal implant devices. The
products are distributed in the United States and internationally.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared 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, 1999 and the consolidated results of
operations and cash flows for the periods ended September 30, 1999 and 1998.
The accompanying condensed consolidated financial statements include the
accounts of Interpore Cross and its subsidiaries after elimination of all
significant intercompany transactions.
The results of operations and cash flows for the periods ended September
30, 1999 are not necessarily indicative of results to be expected for future
quarters or the full year.
The merger of Interpore and Cross has been accounted for as a
pooling-of-interests. Accordingly, financial information for all periods
presented has been restated to include the financial information of each
company.
These consolidated financial statements should be read in conjunction
with the financial statements included in Interpore Cross' Annual Report on Form
10-K for the year ended December 31, 1998, as filed with the Securities and
Exchange Commission.
3. BUSINESS COMBINATION
On May 7, 1998, Interpore International ("Interpore") merged 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. Shareholders of Cross received 1.275 shares of
Interpore common stock for each share of issued and outstanding Cross common
stock. Accordingly, Interpore issued 6.7 million shares of its common stock to
Cross shareholders in exchange for all of the outstanding common stock of Cross.
In addition, approximately 895,000 shares of Interpore Cross common stock were
reserved for issuance upon the exercise of assumed Cross stock options.
6
<PAGE> 7
INTERPORE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
4. INVENTORIES
Inventories are stated at the lower of average cost or market.
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $ 1,255 $ 1,024
Work-in-process 690 279
Finished goods 11,595 10,812
------- -------
$13,540 $12,115
======= =======
</TABLE>
5. CONTINGENCIES
Cross and a number of other spinal implant manufacturers were named as
defendants in various products liability lawsuits alleging injuries from spinal
implants supplied by Cross and others. Over 790 such suits were filed in which a
large number of plaintiffs claimed, 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. In approximately 235 of these cases, which involved products
manufactured by Acromed, another spinal implant manufacturer, Cross was
dismissed as a defendant. In June 1999, the plaintiffs agreed to dismiss Cross
as a defendant in substantially all of the remaining cases and on September 27,
1999, the United States Court of Appeals for the Third Circuit affirmed the
dismissal. Cross remains a defendant in seven pedicle screw conspiracy cases,
none of which involves Cross products, which cases had been remanded to federal
and state courts prior to the agreement with the plaintiffs.
The seven remaining lawsuits are being defended by Cross' insurance
carrier, in some cases under a reservation of rights. Cross maintains claims
made products liability insurance policies with at least $5 million of coverage
both per occurrence and in the aggregate. Interpore Cross and Cross believe that
they have adequate insurance for their businesses, however, there can be no
assurance that the limits 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 Cross 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 cost of
defending litigation or the formal resolution of pending cases or future claims,
whether or not such defense costs, cases or claims are covered by insurance.
Aside from the conspiracy litigation, the nature of Interpore Cross'
business subjects it to products liability and various other legal proceedings
from time to time. In the opinion of management, the amount of ultimate
liability with respect to any known proceedings or claims will not materially
affect the financial position or results of operations of Interpore Cross.
6. LONG-TERM DEBT
The 8.5% Convertible Subordinated Debentures (the "Debentures") due June
1, 2003 are convertible at any time before maturity, unless previously redeemed,
into shares of Interpore Cross common stock at a conversion price of $6.37 per
share. Beginning July 1, 1999 and on July 1 of each succeeding year, Interpore
Cross 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 1999, no Debentures were converted into shares of Interpore Cross
common stock. The fair value of the Debentures approximates the book value at
September 30, 1999 and December 31, 1998.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
Interpore International, Inc. ("Interpore Cross") designs, manufactures
and markets medical products, including synthetic bone and tissue products and
spinal implant devices. Our merger with Cross Medical Products, Inc. ("Cross")
in May 1998 has significantly increased our focus on the spine market, one of
the fastest growing areas within the orthopaedic marketplace. We report our
sales in two product categories: spinal implant products and bone biologics.
In the spinal implant products category, we offer the Synergy(TM) Spinal
System, which is used to facilitate spine fusions in patients suffering from
degenerative conditions and deformities of the spine. These conditions
frequently cause severe pain and loss of muscle function in patients. The
Synergy System is comprised of titanium or stainless steel hooks, rods and
screws and the instruments required for the surgeon to assemble a construct
which restores the natural anatomy, keeping it immobilized while a bone graft
eventually fuses the vertebrae naturally.
Bone biologics is comprised of Pro Osteon(R) bone graft substitute
products, OEM hydroxyapatite products and AGF(TM) (Autologous Growth
Factors(TM)) related products. The bone substitute products are derived from
coral and serve as a lattice for new bone growth when implanted into a bone
defect. The unique, interconnected porous architecture of the product is a key
to its success as a bone graft substitute. Bone graft substitutes such as Pro
Osteon offer distinct advantages over autografts and allografts. In an
autograft, bone is taken from another part of the patient's body, which
frequently creates pain, longer recovery, and risk of other complications for
the patient. An allograft, or bone taken from a cadaver, carries the risk of
implant rejection or disease transmission. Our AGF related products are used to
extract and concentrate growth factors from platelets in the patient's own blood
during the surgical procedure. AGF can be used with a bone graft material, such
as Pro Osteon, to encourage bone growth and improve handling.
Prior to the merger, we distributed our bone biologics products through
employee direct sales representatives and commissioned independent agents in the
U.S., and through stocking distributors outside the U.S. In the U.S. we had been
converting to direct representatives because we believed, with only bone graft
products in our product portfolio, we could get more focused sales time compared
to independent agents carrying other product lines. Cross was distributing its
products in the U.S. solely through independent agents, and internationally
through stocking distributors. In the U.S., both companies' sales forces were
calling directly on the same decision-maker - the orthopaedic/spine surgeon,
providing part of the rationale for the merger. Once the merger was completed,
the respective companies' product portfolios were combined, and as a result we
found we could attract independent agents that desired our complementary product
portfolio and that possessed strong surgeon relationships, an important factor
for competing in this industry. Therefore, we have been increasing our use of
independent agents for the domestic distribution of both bone biologics and
spine products.
Currently, the surgeon is the key decision maker with respect to the
purchase of our products, and the hospital pays our invoices directly. However,
for many other medical device products, the purchasing decision has been assumed
by hospital purchasing departments, buying groups or managed care organizations.
Also, for some other medical device products, insurance companies and Medicare
have refused to reimburse the hospital, or the company directly in the case of
direct-to-insurer billing by the company, and therefore reimbursement becomes an
issue. These factors have not been an issue for us to date. However, in the
future there can be no assurance that the decision-making responsibility will
not shift from the surgeon, or that reimbursement will not become an issue
affecting our revenues. Other factors potentially affecting continued revenue
growth include: the pricing practices of our competitors, competitive new
product introductions, and our ability to continue to attract and retain
qualified direct sales representatives, independent agents, and distributors.
Sales to our OEM customers and our international distributors are affected by
their purchasing practices, and in the case of international sales, by the
financial capacity of our distributors and the economic conditions in their
countries. Continued revenue growth may also depend upon our ability to
successfully introduce new products or product improvements. See "Certain
Business Considerations" in our 1998 Annual Report on Form 10-K.
8
<PAGE> 9
RESULTS OF OPERATIONS
The following table presents our results of operations as percentages:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------------- -------------------------------------
Percentage Percentage
Percentage of net sales change Percentage of net sales change
------------------------------------- -------------------------- ----------
1999 vs. 1999 vs.
1999 1998 1998 1999 1998 1998
------ ----- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 30.0% 100.0% 100.0% 27.8%
Cost of goods sold 27.8% 29.0% 24.5% 29.8% 28.0% 36.0%
----- ----- ---- ----- ----- ----
Gross profit 72.2% 71.0% 32.3% 70.2% 72.0% 24.6%
----- ----- ---- ----- ----- ----
Operating expense:
Research and development 10.9% 12.1% 17.0% 10.9% 12.3% 14.1%
Selling and marketing 36.7% 39.6% 20.8% 36.4% 39.1% 18.9%
General and administrative 11.5% 13.9% 8.0% 11.5% 14.3% 3.0%
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
----- ----- ---- ----- ----- ----
Total operating expenses 59.1% 70.8% 8.7% 58.8% 87.9% (14.5)%
----- ----- ---- ----- ----- ----
Income (loss) from operations 13.1% .2% n/a 11.4% (15.9)% n/a
===== ===== ==== ==== ===== =====
</TABLE>
Three months ended September 30, 1999 and 1998
For the quarter ended September 30, 1999, net sales of $9.5 million were
$2.2 million or 30.0% higher than net sales of $7.3 million for the same period
of 1998.
<TABLE>
<CAPTION>
Three months ended
September 30, Change
-------------------------- ------------------------
1999 1998 Amount %
------ ------ ------ ----
<S> <C> <C> <C> <C>
Spinal implant product sales $5,053 $3,502 $1,551 44.3%
Bone biologics product sales 4,496 3,841 655 17.1%
------ ------ ------ ----
Total net sales $9,549 $7,343 $2,206 30.0%
====== ====== ====== ====
</TABLE>
Sales of spinal implant products increased in the quarter ended
September 30, 1999 by $1.6 million or 44.3% to $5.1 million compared to $3.5
million for the quarter ended September 30, 1998. The increase reflects
continued market penetration of the Synergy Spinal System, aided by the improved
distribution and domestic territory coverage following the merger.
Sales of bone biologics products increased by $655,000 or 17.1% to $4.5
million for the three months ended September 30, 1999 compared to $3.8 million
for the three months ended September 30, 1998. Our new AGF related products,
which were launched on a nationwide basis during the second quarter, accounted
for $759,000 of sales of bone biologics products during the third quarter of
1999. Pro Osteon sales decreased by $108,000 or 2.9% versus the same quarter of
1998. OEM bone biologics products, which are dependent upon the ordering
patterns of two customers, remained approximately the same in the third quarter
of 1999 compared to the same quarter of 1998.
Total domestic sales increased 29.6% or $1.8 million to $7.9 million for
the three months ended September 30, 1999 compared to $6.1 million for the same
period of 1998. Total international sales increased $409,000 or 32.1% to $1.7
million for the third quarter of 1999 from $1.3 million for the third quarter of
1998.
9
<PAGE> 10
The gross margin as a percentage of sales for the quarter ended
September 30, 1999 was 72.2% compared to 71.0% for the quarter ended September
30, 1998. Increased sales and improved efficiencies following the consolidation
of facilities in August 1998 have reduced our fixed costs as a percentage of
sales, contributing to the improved gross margin.
Total operating expenses for the quarter ended September 30, 1999
increased by 8.7% or $454,000 to $5.6 million as compared to $5.2 million for
the same quarter of 1998. During the third quarter of 1998, $381,000 of
non-recurring charges were recorded. Excluding these charges, operating expenses
for the quarter ended September 30, 1999 increased by $835,000 or 17.3%, but
decreased as a percentage of sales from 65.6% in the third quarter of 1998 to
59.1% in the third quarter of 1999. Research and development expenses increased
by 17.0% or $151,000 due primarily to salaries for newly hired engineers for
spinal implant product development projects. Selling and marketing expenses
increased 20.8% or $603,000 compared to the third quarter of 1998 primarily due
to increased commissions on higher sales. General and administrative expenses
increased by 8.0% or $81,000.
Net interest and other income was approximately the same in both the
third quarter of 1999 and the third quarter of 1998, as a reduction in interest
income was mostly offset by reduced interest expense. The decrease in interest
income was caused by lower average cash, cash equivalents and short-term
investments in the third quarter of 1999 compared to the third quarter of 1998
due primarily to the $3.1 million repurchase of our common stock in the fourth
quarter of 1998, partially offset by increasing cash and short-term investment
balances generated from cash flows during 1999. Interest expense was lower in
the 1999 period due primarily to the redemption of convertible debentures during
1998.
No income tax provisions were recorded in the third quarter of 1999 and
the third quarter of 1998 due to the utilization of net operating loss
carryforwards.
Nine months ended September 30, 1999 and 1998
For the nine months ended September 30, 1999, net sales of $28.2 million
were $6.1 million or 27.8% higher than net sales of $22.0 million for the same
period of 1998.
<TABLE>
<CAPTION>
Nine months ended
September 30, Change
--------------------------- ---------------
1999 1998 Amount %
------- ------- ------ ----
<S> <C> <C> <C> <C>
Spinal implant product sales $15,172 $11,157 $4,015 36.0%
Bone biologics product sales 13,005 10,889 2,116 19.4%
------- ------- ------ ----
Total net sales $28,177 $22,046 $6,131 27.8%
======= ======= ====== ====
</TABLE>
Sales of spinal implant products increased in the nine months ended
September 30, 1999 by $4.0 million or 36.0% to $15.2 million compared to $11.2
million for the nine months ended September 30, 1998. The increase reflects
continued market penetration of the Synergy Spinal System, aided by the improved
distribution and domestic territory coverage following the merger.
Sales of bone biologics products increased by $2.1 million or 19.4% to
$13.0 million for the nine months ended September 30, 1999 compared to $10.9
million for the nine months ended September 30, 1998. AGF related products
accounted for $1.6 million of the increase in sales of bone biologics products.
Sales of OEM bone biologics products increased by $377,000 or 109% in the nine
months ended of September 30, 1999 compared to the same period of 1998, and Pro
Osteon sales increased by $98,000 or .9% versus the same period of 1998.
Total domestic sales increased 31.2% or $5.2 million to $22.0 million
for the nine months ended September 30, 1999 compared to $16.8 million for the
same period of 1998. Total international sales increased $895,000 or 17.1% to
$6.1 million for the first nine months of 1999 from $5.2 million for the first
nine months of 1998.
10
<PAGE> 11
For the nine months ended September 30, 1999, the gross margin was 70.2%
of sales compared to 72.0% of sales for the nine months ended September 30,
1998. The gross margin for the 1998 period was higher largely due to favorable
manufacturing variances at Cross during the first quarter of 1998. Additionally,
spinal implant products have lower gross margins than our bone biologics
products, and the comparatively higher growth in sales of spinal implant
products versus bone biologics products reduced the weighted average gross
margin on total sales.
Total operating expenses for the nine months ended September 30, 1999
decreased by 14.5% or $2.8 million to $16.6 million as compared to $19.4 million
for the same period of 1998. Excluding $4.9 million of merger-related expenses,
restructuring charges and non-recurring charges in the first nine months of
1998, operating expenses increased 14.6% or $2.1 million but decreased as a
percentage of sales to 58.8% from 65.6%. Research and development expenses
increased by 14.1% or $381,000 due primarily to salaries for newly hired
engineers for spinal implant product development projects. Selling and marketing
expenses increased 18.9% or $1.6 million compared to the first nine months of
1998 primarily due to increased commissions on higher sales and the hiring of
additional sales and marketing staff. General and administrative expenses
increased 3.0% or $94,000 between the two periods. There were no merger-related
expenses, restructuring charges or non-recurring charges during the first nine
months of 1999.
Total interest and other income decreased slightly from $359,000 to
$348,000, as reduced interest income on lower cash, cash equivalents and
short-term investments balances in 1999 was mostly offset by reduced interest
expense. Interest expense was higher in the 1998 period due primarily to the
write-off of prepaid debt issuance costs associated with convertible debentures
which were redeemed during the period along with a subsequent reduction of
interest expense on the lower outstanding debt. The decrease in interest income
was caused by lower average cash, cash equivalents and short-term investments in
the first nine months of 1999 compared to the same period of 1998 due to the
payment of merger-related expenses, restructuring charges and non-recurring
charges; the repurchase of our common stock; and the redemption of convertible
debentures, all during 1998.
No income tax provision was recorded in the first nine months of 1999
and limited income tax provision was recorded in the first nine months of 1998
due to the utilization of net operating loss carryforwards. In fiscal year 2000,
we expect to begin recording tax provisions because of the depletion of the
valuation allowance against deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, cash, cash equivalents and short-term investments
totaled $10.1 million as compared to $7.9 million as of December 31, 1998. Total
working capital increased to $29.2 million from $25.5 million and the current
ratio decreased to 6.4 at September 30, 1999 from 7.3 at December 31, 1998.
Our $10.1 million of cash, cash equivalents and short-term investments
at September 30, 1999 is available to support the continued investment in the
development of our business, including the development or acquisition of new
bone biologic and spinal implant products, and possible acquisitions of
technologies or businesses. We have a $5 million revolving line of credit that
had no amount outstanding at September 30, 1999 and which expires in June 2000.
We believe we currently possess sufficient resources to meet the cash
requirements of our operations for at least the next year. However, from time to
time we examine potential acquisitions, business combinations and joint venture
arrangements, some of which may require the expenditure of cash. If we require
additional capital to consummate any such transactions or for other purposes,
there can be no assurance that we will be able to raise the additional capital
on satisfactory terms, if at all.
At September 30, 1999, there were no material commitments for capital
expenditures.
11
<PAGE> 12
IMPACT OF YEAR 2000
Year 2000 problems are 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.
State of Readiness
We have reviewed our software, hardware, vendors and customers
(collectively "Elements") and have determined those which we consider to be
mission critical. For Elements determined to be mission critical, we have been
obtaining assurances of Year 2000 compliance. The assurances are in the form of
vendor or customer certifications, Company-administered testing efforts, or a
combination of certain assurances. We have tested all critical software and
hardware systems and have determined that all are Year 2000 compliant. To date,
we have not needed to implement any major system or software replacements.
Vendor certifications have been received from all critical vendors, and all have
indicated that they are either currently compliant or will be compliant by
December 31, 1999. The process of obtaining customer certifications is ongoing,
but we do not expect a significant response rate.
In conclusion, we expect to be materially Year 2000 compliant by
December 31, 1999, however, we have no way of ensuring that all mission critical
vendors or customers will be Year 2000 compliant or that their certification
statements are factual, and their non-compliance or inability to become
compliant on a timely basis could materially impact our operations or financial
condition.
Costs to Address Our Year 2000 Issues
To date, we have not incurred any material direct costs associated with
Year 2000 issues. We do not believe that we will need to replace any material
non-compliant systems or hire any Year 2000 solution providers. Therefore, we
estimate that future costs to address Year 2000 issues will not be material.
Risks of Our Year 2000 Issues
We have yet to identify any mission critical Element that we expect to
not be Year 2000 compliant. In the process of evaluating Elements, we are
relying on third party certifications of Year 2000 compliance. In the event that
mission critical Elements fail to be compliant, we could experience a material
disruption in operations, including, but not limited to: interruption in supply
of parts from vendors, inability to deliver products to customers or to produce
products on schedule, or failure of financial systems, all of which could
materially affect our business and cause a loss of customers.
Contingency Plans
As our assessment continues, if it is determined that any mission
critical Elements are likely not to be Year 2000 compliant, we believe we have
adequate computer file backup procedures and manual operating procedures that
will enable us to continue the critical processes of our business.
- ------------------
The quarterly results contained herein are unaudited and reflect certain
assumptions of management that may change. Results of the quarter may not be
representative of results for future quarters or indicative of our financial
results for the year. Certain statements in this Quarterly Report on Form 10-Q
are forward-looking and may involve risks and uncertainties, including, but not
limited to: product demand and market acceptance risks; risks related to the
development of future products; risk that we will not receive additional
regulatory approval of products; and the impact of competitive products.
Additional information on factors that could affect our financial results and
growth prospects is disclosed in reports we file from time to time with the
Securities and Exchange Commission, including in the "Certain Business
Considerations Section" of our Annual Report on Form 10-K.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
Reference is made to the Exhibit Index on Page 15 hereof.
b. Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter ended
September 30, 1999.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: November 5, 1999 INTERPORE INTERNATIONAL, INC.
(Registrant)
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
14
<PAGE> 15
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.01 Certificate of Incorporation of Interpore International, Inc. as
amended (1)
3.02 Bylaws of Registrant (1)
3.03 Amendment Number One to Bylaws (17)
4.01 Rights Agreement dated November 19, 1998, between Interpore
International, Inc. and U.S. Stock Transfer Corporation, which
includes the form of Certificate of Determination of the Series A
Junior Participating Preferred Stock of Interpore International, Inc.
as Exhibit A, the form of Right Certificate as Exhibit B and the
Summary of Rights to Purchase Preferred Shares as Exhibit C. (2)
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 (3)
10.02 Cancellation and Release Agreement dated March 1, 1993 among
Registrant, Interpore Orthopaedics, Inc., Pfizer, Inc. and Howmedica,
Inc. (3)
10.03 Series E Preferred Stock and Common Stock Warrant Purchase Agreement
dated December 19, 1991 (3)
10.04 Series E Preferred Stock Purchase Agreement dated October 30, 1992 (3)
10.05 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 (4)
10.06 Amended and Restated Loan and Security Agreement dated June 22, 1999
among Registrant, Interpore Orthopaedics, Inc., Cross Medical
Products, Inc., Interpore Cross International, Inc. and Silicon Valley
Bank (20)
10.07 Amended and Restated Stock Option Plan dated March 19, 1991 (6), First
Amendment to the Amended and Restated Stock Option Plan, effective
October 15, 1991 (3); Amendment to the Amended and Restated Stock
Option Plan dated September 17, 1994 (7)
10.08 1995 Stock Option Plan (8)
10.09 Stock Option Plan for Non-Employee Directors of Interpore
International (9)
10.10 Danninger Medical Technology, Inc. Amended and Restated 1984
Non-Statutory Stock Option Plan (10)
10.11 Danninger Medical Technology, Inc. Amended and Restated 1984 Incentive
Stock Option Plan (10)
10.12 Cross Medical Products, Inc. Amended and Restated 1994 Stock Option
Plan (10)
10.13 Asset Purchase Agreement dated March 12, 1997, among Cross Medical
Products, Inc., Danninger Healthcare, Inc. and OrthoLogic Corp. (11)
10.14 Indenture concerning 8.5% Convertible Subordinated Debentures between
Cross Medical Products, Inc. and Fifth Third Bank (12)
10.15 Supplemental Indenture between Interpore International, Inc., Cross
Medical Products, Inc. and Fifth Third Bank (5)
10.16 Form of Indemnification Agreement (13)
10.17 Schedule of Parties to Form of Indemnification Agreement (14)
10.18 Non-Competition Agreement dated September 6, 1996 between Cross
Medical Products, Inc. and Stephen R. Draper (15)
10.19 Agreement between Dr. Edward Funk and Cross Medical Products, Inc.
dated February 11, 1998 (16)
15
<PAGE> 16
EXHIBIT INDEX (Continued)
Exhibit
Number Description
- ------- -----------
10.20 Form of Employment Agreement dated August 17, 1998 between Interpore
International, Inc. and its executive officers (14)
10.21 Schedule of Parties to Form of Employment Agreement dated August 17,
1998 (14)
10.22 1999 Consultants Stock Option Plan (18)
10.23 Amended and Restated Employee Qualified Stock Purchase Plan dated
November 13, 1998 (19)
11.01 Computations of Net Income per Share
27.01 Financial Data Schedule
- ---------------
(1) Incorporated by reference from our Registration Statement on Form S-4,
Registration No. 333-49487.
(2) Incorporated by reference from our Current Report on Form 8-K dated
December 1, 1998.
(3) Incorporated by reference from our Registration Statement on Form S-1,
Registration No. 33-69872.
(4) Incorporated by reference from our Current Report on Form 8-K dated
February 11, 1998.
(5) Incorporated by reference from our Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998.
(6) Incorporated by reference from our Registration Statement on Form S-8,
Registration No. 33-77426.
(7) Incorporated by reference from our Registration Statement on Form S-8,
Registration No. 33-86290.
(8) Incorporated by reference from our Proxy Statement for the 1994 Annual
Meeting of Shareholders.
(9) Incorporated by reference from our Proxy Statement for the 1995 Annual
Meeting of Shareholders.
(10) Incorporated by reference from our Registration Statement on Form S-8,
Registration No. 333-53775.
(11) Incorporated by reference from the Cross Medical Products, Inc. Annual
Report on Form 10-K for the year ended December 31, 1996.
(12) Incorporated by reference from the Cross Medical Products, Inc.
Registration Statement on Form S-2, Registration No. 333-02273.
(13) Incorporated by reference from our Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1998.
(14) Incorporated by reference from our Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1998.
(15) Incorporated by reference from the Cross Medical Products, Inc. Quarterly
Report on Form 10-Q for the fiscal year ended September 30, 1996.
(16) Incorporated by reference from the Cross Medical Products, Inc. Annual
Report on Form 10-K for the year ended December 31, 1997.
(17) Incorporated by reference from our Annual Report on Form 10-K for the year
ended December 31, 1998.
(18) Incorporated by reference from our Proxy Statement for the 1999 Annual
Meeting of Stockholders.
(19) Incorporated by reference from our Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1999.
(20) Incorporated by reference from our Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1999.
16
<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,
------------------------ -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) used in the calculation of
basic earnings per share $ 1,394 $ 166 $ 3,559 $ (3,212)
Interest on Convertible Subordinated Debentures 66 * 200 *
-------- -------- -------- --------
Net income (loss) used in calculation of diluted
earnings per share $ 1,460 $ 166 $ 3,759 $ (3,212)
======== ======== ======== ========
Shares used in computing net income (loss)
per share basic:
Weighted average common shares outstanding 13,512 13,989 13,492 13,898
Effect of dilutive securities:
Weighted average convertible preferred stock 32 33 32 *
Shares issuable pursuant to stock option plans 434 279 328 *
Shares issuable under the Convertible
Subordinated Debentures 495 * 495 *
-------- -------- -------- --------
Shares used in computing net income (loss) per
share - diluted 14,473 14,301 14,347 13,898
======== ======== ======== ========
Net income (loss) per share - basic $ .10 $ .01 $ .26 $ (.23)
Net income (loss) per share - diluted $ .10 $ .01 $ .26 $ (.23)
</TABLE>
- ------------
* Effect of potentially dilutive securities would have been anti-dilutive,
accordingly, the amounts are excluded from the calculation of diluted earnings
per share. Shares issuable from the convertible subordianted 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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,626,000
<SECURITIES> 3,516,000
<RECEIVABLES> 7,657,000
<ALLOWANCES> 486,000
<INVENTORY> 13,540,000
<CURRENT-ASSETS> 34,627,000
<PP&E> 4,618,000
<DEPRECIATION> 3,155,000
<TOTAL-ASSETS> 39,275,000
<CURRENT-LIABILITIES> 5,387,000
<BONDS> 3,152,000
0
0
<COMMON> 141,000
<OTHER-SE> 30,523,000
<TOTAL-LIABILITY-AND-EQUITY> 39,275,000
<SALES> 28,177,000
<TOTAL-REVENUES> 28,177,000
<CGS> 8,406,000
<TOTAL-COSTS> 8,406,000
<OTHER-EXPENSES> 16,266,000
<LOSS-PROVISION> 90,000
<INTEREST-EXPENSE> (54,000)
<INCOME-PRETAX> 3,559,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,559,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,559,000
<EPS-BASIC> .26
<EPS-DILUTED> .26
</TABLE>
