<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, 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 August 6, 1999, there were 14,116,660 shares of the registrant's
common stock issued and outstanding.
<PAGE> 2
INTERPORE INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page(s)
-------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1999 (unaudited) and December 31, 1998 ................................. 3
Condensed Consolidated Statements of Operations (unaudited)
for the three month and six month periods ended
June 30, 1999 and June 30, 1998 ................................................. 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the six month periods ended June 30,
1999 and June 30, 1998 .......................................................... 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 4. Submission of Matters to a Vote of Security Holders .................................. 14
Item 6. Exhibits and Reports on Form 8-K ..................................................... 14
</TABLE>
2
<PAGE> 3
INTERPORE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,662 $ 7,908
Short-term investments 2,019 -
Accounts receivable, less allowance for doubtful accounts of
$461 and $506 in 1999 and 1998, respectively 8,224 6,418
Inventories 12,330 12,115
Prepaid expenses 1,837 1,205
Deferred income taxes 1,426 1,426
Other current assets 254 436
------------ ------------
Total current assets 32,752 29,508
Property, plant and equipment, net 1,561 1,467
Deferred income taxes 2,559 2,559
Intangible assets, net 362 338
Other assets 306 330
------------ ------------
Total assets $ 37,540 $ 34,202
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Current portion of capital lease obligations $ 15 $ 15
Accounts payable 1,379 609
Accrued compensation and related expenses 1,191 1,010
Accrued royalties 403 300
Reserve for products liability claims 192 232
Accrued disposition costs 174 250
Accrued merger-related expenses and restructuring charges 509 726
Other accrued liabilities 1,179 873
------------ ------------
Total current liabilities 5,042 4,015
------------ ------------
Long-term liabilities:
Long-term debt 3,152 3,152
Deferred income taxes 55 55
Obligations under capital leases, net 21 29
------------ ------------
Total long-term liabilities 3,228 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 June 30, 1999 and
32,906 at December 31, 1998; aggregate liquidation value of $237 at June 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 - 14,116,662 at June 30, 1999 and 14,059,690 at December 31,
1998 141 140
Additional paid-in-capital 44,115 43,962
Accumulated deficit (11,877) (14,042)
------------ ------------
32,379 30,060
Less treasury stock, at cost - 605,000 shares at June 30, 1999 and December
31, 1998
(3,109) (3,109)
------------ ------------
Total stockholders' equity 29,270 26,951
------------ ------------
Total liabilities and stockholders' equity $ 37,540 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 9,642 $ 7,333 $ 18,628 $ 14,703
Cost of goods sold 2,946 2,214 5,755 4,050
---------- ---------- ---------- ----------
Gross profit 6,696 5,119 12,873 10,653
---------- ---------- ---------- ----------
Operating expenses:
Research and development 1,130 951 2,042 1,812
Selling and marketing 3,469 2,966 6,733 5,705
General and administrative 1,121 1,087 2,136 2,123
Merger-related expenses - 2,963 - 3,031
Restructuring charges - 1,512 - 1,512
---------- ---------- ---------- ----------
Total operating expenses 5,720 9,479 10,911 14,183
---------- ---------- ---------- ----------
Income (loss) from operations 976 (4,360) 1,962 (3,530)
---------- ---------- ---------- ----------
Interest income 98 204 194 444
Interest expense (88) (258) (173) (391)
Other income 97 93 182 158
---------- ---------- ---------- ----------
Total interest and other income, net 107 39 203 211
---------- ---------- ---------- ----------
Income (loss) before taxes 1,083 (4,321) 2,165 (3,319)
Income tax provision - - - 59
========== ========== ========== ==========
Net income (loss) $ 1,083 $ (4,321) $ 2,165 $ (3,378)
========== ========== ========== ==========
Net income (loss) per share:
Basic $ .08 $ (.31) $ .16 $ (.24)
Diluted $ .08 $ (.31) $ .16 $ (.24)
Shares used in computing net income (loss) per share:
Basic 13,503 13,894 13,497 13,853
Diluted 14,262 13,894 14,279 13,853
</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,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,165 $ (3,378)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 450 348
Loss on disposal of property, plant and equipment - 229
Changes in operating assets and liabilities:
Accounts receivable (1,806) (113)
Inventories (215) (1,156)
Prepaid expenses (632) (781)
Other assets 182 1,013
Deferred income taxes - (111)
Accounts payable 770 462
Accrued liabilities 257 (109)
---------- ----------
Net cash provided by (used in) operating activities 1,171 (3,596)
---------- ----------
INVESTING ACTIVITIES
Sales (purchase) of short-term investments, net (2,019) 2,828
Capital expenditures (464) (234)
Expenditures for patent rights (80) (22)
---------- ----------
Net cash provided by (used in) investing activities (2,563) 2,572
---------- ----------
FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations (8) (87)
Proceeds from exercise of stock options 100 482
Proceeds from employee stock purchase plan 54 63
---------- ----------
Net cash provided by financing activities 146 458
---------- ----------
Net decrease in cash and cash equivalents (1,246) (566)
Cash and cash equivalents at beginning of period 7,908 11,809
========== ==========
Cash and cash equivalents at end of period $ 6,662 $ 11,243
========== ==========
</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 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 June 30, 1999 and the consolidated results of operations
and cash flows for the periods ended June 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 June 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
4. 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,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $ 936 $ 1,024
Work-in-process 503 279
Finished goods 10,891 10,812
============ ============
$ 12,330 $ 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. 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. This
forced the plaintiffs to file individual, rather than class action suits. Over
1,100 such suits were initially filed; however, Cross was dismissed from these
lawsuits for failure of the plaintiffs to state a viable claim. A large number
of plaintiffs filed new lawsuits against Cross and others alleging, in addition
to damages from spinal implants, a conspiracy among manufacturers, physicians
and other spinal implant industry members to defraud the public and market
products without the proper regulatory approvals. Cross was named as a
defendant, among others, in approximately 797 such lawsuits. Interpore Cross
cannot estimate precisely the number of such lawsuits that may eventually be
filed or in how many lawsuits Cross will be named as a defendant. In
approximately 235 of these cases, which involved products manufactured by
Acromed, another spinal implant manufacturer, Cross has been dismissed as a
defendant. Cross has also been dismissed as a defendant from approximately 79
additional cases. Of the remaining conspiracy cases, none involve products
manufactured by Cross. In June 1999, the plaintiffs agreed to dismiss Cross as a
defendant in all but eight of the remaining cases. This agreement awaits ruling
by the court.
The conspiracy cases remain coordinated for pretrial purposes only.
Plaintiffs in the conspiracy 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 are substantial and exceed
the limits of Cross' products liability insurance policies, Interpore Cross
believes that Cross has affirmative defenses, and that these individual lawsuits
are otherwise without merit.
The 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, excluding the
conspiracy litigation, will not materially affect the financial position or
results of operations of Interpore Cross.
7
<PAGE> 8
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 six
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
June 30, 1999 and December 31, 1998.
8
<PAGE> 9
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 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 are comprised of Pro Osteon(R) bone graft substitute
products and OEM hydroxyapatite products. These 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. Bone biologics also includes our recently introduced AGF(TM)
(Autologous Growth Factors(TM)) related products, which can be used with a bone
graft material, such as Pro Osteon, to encourage bone growth. AGF is comprised
of concentrated growth factors derived from platelets in the patient's own blood
during the surgical procedure.
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 expect to continue to increase 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.
9
<PAGE> 10
SIGNIFICANT EVENT
In February 1998, we entered into an agreement to merge with Cross, a
publicly traded Ohio-based worldwide supplier of spinal implant systems used to
treat degenerative conditions and deformities of the spine. The shareholders of
both companies approved the merger on May 6, 1998 and it became effective on May
7, 1998. We exchanged approximately 6.7 million shares of our common stock for
all of the common stock of Cross. We accounted for the merger as a
pooling-of-interests.
RESULTS OF OPERATIONS
The following table presents our results of operations as percentages:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 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% 31.5% 100.0% 100.0% 26.7%
Cost of goods sold 30.6% 30.2% 33.1% 30.9% 27.5% 42.1%
---------- ---------- ---------- ---------- ---------- ----------
Gross profit 69.4% 69.8% 30.8% 69.1% 72.5% 20.8%
---------- ---------- ---------- ---------- ---------- ----------
Operating expense:
Research and development 11.7% 13.0% 18.8% 11.0% 12.3% 12.7%
Selling and marketing 36.0% 40.5% 17.0% 36.1% 38.8% 18.0%
General and administrative 11.6% 14.8% 3.1% 11.5% 14.5% .6%
Merger-related expenses - 40.4% n/a - 20.6% n/a
Restructuring charges - 20.6% n/a - 10.3% n/a
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses 59.3% 129.3% (39.7%) 58.6% 96.5% (23.1%)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations 10.1% (59.5%) n/a 10.5% (24.0%) n/a
========== ========== ========== ========== ========== ==========
</TABLE>
Three months ended June 30, 1999 and 1998
For the quarter ended June 30, 1999, net sales of $9.6 million were $2.3
million or 31.5% higher than net sales of $7.3 million for the same period of
1998.
<TABLE>
<CAPTION>
Three months ended June 30, Change
-------------------------- --------------------------
1999 1998 Amount %
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Spinal implant product sales ... $ 5,276 $ 3,992 $ 1,284 32.2%
Bone biologics product sales ... 4,366 3,341 1,025 30.7%
---------- ---------- ---------- ----------
Total net sales ................ $ 9,642 $ 7,333 $ 2,309 31.5%
========== ========== ========== ==========
</TABLE>
Sales of spinal implant products increased in the quarter ended June 30,
1999 by $1.3 million or 32.2% to $5.3 million compared to $4.0 million for the
quarter ended June 30, 1998. The increase reflects continued market penetration
of the Synergy Spinal System, aided by the improved distribution and greater
domestic territory coverage following the merger.
Sales of bone biologics products increased by $1.0 million or 30.7% to
$4.4 million for the three months ended June 30, 1999 compared to $3.3 million
for the three months ended June 30, 1998. Our new AGF related products, used to
collect and concentrate growth factors from the patient's blood, were launched
on a nationwide basis during the quarter and accounted for $563,000 of the
increase in sales of bone biologics products. Pro Osteon sales increased by
$292,000 or 9.1% versus the same quarter of 1998. OEM bone biologics products,
which are
10
<PAGE> 11
dependent upon the ordering patterns of two customers, increased by $170,000 or
147% in the second quarter of 1999 compared to the same quarter of 1998.
Total domestic sales of bone biologics and spinal implant products
increased 35.5% or $1.9 million to $7.3 million for the three months ended June
30, 1999 compared to $5.4 million for the same period of 1998. International
sales increased $390,000 or 20.2% to $2.3 million for the second quarter of 1999
from $1.9 million for the second quarter of 1998.
The gross margin as percentage of sales for the quarter ended June 30,
1999 was 69.4%, approximately the same as the 69.8% gross margin for the quarter
ended June 30, 1998.
Total operating expenses for the quarter ended June 30, 1999 decreased
by 39.7% or $3.8 million to $5.7 million as compared to $9.5 million for the
same quarter of 1998 due to $4.5 million of merger-related expenses and
restructuring charges recorded in the quarter ended June 30, 1998. There were no
merger-related expenses or restructuring charges during the second quarter of
1999. Excluding these charges, operating expenses increased by $716,000 or 14.3%
but decreased as a percentage of sales from 68.2% in the second quarter of 1998
to 59.3% in the second quarter of 1999. Research and development expenses
increased by 18.8% or $179,000 due primarily to the hiring of personnel for
spinal implant product development projects. Selling and marketing expenses
increased $503,000 or 17.0% compared to the second quarter of 1998 primarily due
to increased commissions on higher sales. General and administrative expenses
increased by 3.1% or $34,000.
The $68,000 or 174.4% increase in net interest and other income relates
to a reduction in interest expense partially offset by reduced interest income.
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 second
quarter of 1999 compared to the second quarter 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
during 1998.
No income tax provisions were recorded in the second quarter of 1999 and
the second quarter of 1998 due to the utilization of net operating loss
carryforwards.
Six months ended June 30, 1999 and 1998
For the six months ended June 30, 1999, net sales of $18.6 million were
$3.9 million or 26.7% higher than net sales of $14.7 million for the same period
of 1998.
<TABLE>
<CAPTION>
Six months ended June 30, Change
--------------------------- ---------------------------
1999 1998 Amount %
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Spinal implant product sales ... $ 10,119 $ 7,655 $ 2,464 32.2%
Bone biologics product sales ... 8,509 7,048 1,461 20.7%
========== ========== ========== ==========
Total net sales ................ $ 18,628 $ 14,703 $ 3,925 26.7%
========== ========== ========== ==========
</TABLE>
Sales of spinal implant products increased in the six months ended June
30, 1999 by $2.5 million or 32.2% to $10.1 million compared to $7.7 million for
the six months ended June 30, 1998. The increase reflects continued market
penetration of the Synergy Spinal System, aided by the improved distribution and
greater domestic territory coverage following the merger.
11
<PAGE> 12
Sales of bone biologics products increased by $1.5 million or 20.7% to
$8.5 million for the six months ended June 30, 1999 compared to $7.0 million for
the six months ended June 30, 1998. AGF related products accounted for $882,000
of the increase in sales of bone biologics products. Sales of OEM bone biologics
products increased by $373,000 or 167% in the six months ended of June 30, 1999
compared to the same period of 1998, and Pro Osteon sales increased by $206,000
or 3.0% versus the same period of 1998.
Total domestic sales of bone biologics and spinal implant products
increased 32.1% or $3.4 million to $14.2 million for the six months ended June
30, 1999 compared to $10.7 million for the same period of 1998. International
sales increased $486,000 or 12.2% to $4.5 million for the first six months of
1999 from $4.0 million for the first six months of 1998.
For the six months ended June 30, 1999, the gross margin was 69.1% of
sales compared to 72.5% of sales for the six months ended June 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 six months ended June 30, 1999
decreased by 23.1% or $3.3 million to $10.9 million as compared to $14.2 million
for the same period of 1998. Excluding $4.5 million of merger related expenses
and restructuring charges in the first six months of 1998, operating expenses
increased 13.2% or $1.3 million but decreased as a percentage of sales to 58.6%
from 65.6%. Research and development expenses increased by 12.7% or $230,000 due
primarily to the hiring of personnel for spinal implant product development
projects. Selling and marketing expenses increased $1.0 million or 18.0%
compared to the first six months of 1998 primarily due to increased commissions
on higher sales. General and administrative expenses remained relatively
unchanged between the two periods. There were no merger-related expenses or
non-recurring charges during the first half of 1999.
Total interest and other income remained fairly level 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 six 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 during 1998.
No income tax provision was recorded in the first six months of 1999 and
limited income tax provision was recorded in the first six months of 1998 due to
the utilization of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, cash, cash equivalents and short-term investments
totaled $8.7 million as compared to $7.9 million as of December 31, 1998. Total
working capital increased to $27.7 million from $25.5 million and the current
ratio decreased to 6.5 at June 30, 1999 from 7.3 at December 31, 1998.
Our $8.7 million of cash, cash equivalents and short-term investments at
June 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 June 30, 1999 and which expires in June 2000.
At June 30, 1999, there were no material commitments for capital
expenditures.
We believe we currently possess sufficient resources to meet the cash
requirements of our operations for at least the next year.
12
<PAGE> 13
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. If not
corrected, many computer applications could fail or create erroneous results by
not recognizing "00" to mean the year 2000.
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 are in the
process of obtaining assurances of Year 2000 compliance. The assurances being
sought are in the form of vendor or customer certifications, identification of
alternatives, Company-administered testing efforts, or a combination of certain
assurances. We have tested critical software and hardware systems and have not
determined any to be non-compliant. The process of obtaining vendor and customer
certifications is partially complete, and we have not yet identified any
critical vendor or customer that does not expect to be compliant. To date, we
have not needed to implement any major system or software replacements. 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, and their inability to become compliant on a timely basis
could materially impact our operations or financial condition.
Costs to Address Our Year 2000 Issues
Through June 30, 1999, we have not incurred any material direct costs
associated with Year 2000 issues. While the process of evaluating Elements is
not complete, 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 continuing process of evaluating Elements, we
will have to rely 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
We have not established a contingency plan relative to Year 2000 issues.
As our assessment continues, if it is determined that any mission critical
Elements are likely not to be Year 2000 compliant, we will develop a contingency
plan.
- --------------
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.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 21, 1999, Interpore Cross held its 1999 Annual Meeting of Stockholders to
vote on three proposals. The number of shares entitled to vote was 13,491,028 of
the Interpore Cross' Common Stock and 31,573 shares of Interpore Cross' Series E
Preferred Stock. The number of shares represented in person was 11,808,996
shares of Common Stock and Series E Preferred Stock. The Preferred Stock voted
on an as-converted basis on all matters. All voting information is expressed on
an as-converted or common-equivalent basis.
The following are the voting results of the three proposals:
PROPOSAL ONE: Election of two Class I members of the Board of
Directors of Interpore Cross to serve until the Annual
Meeting of Stockholders in the year 2002 or until their
successors are duly elected and qualified:
<TABLE>
<CAPTION>
Percentage of shares
Nominee Number of votes present and voting
------- --------------- --------------------
<S> <C> <C>
G. Bradford Jones 11,587,860 98%
Robert J. Williams 11,587,660 98%
</TABLE>
PROPOSAL TWO: Ratification of the approval of the amendment and
restatement of the Employee Qualified Stock Purchase
Plan.
<TABLE>
<CAPTION>
Percentage of
Number of votes shares outstanding
--------------- ------------------
<S> <C> <C>
For: 10,833,852 80%
Against: 921,232 7%
Abstain: 53,912 0%
</TABLE>
PROPOSAL THREE: Ratification and approval of adoption of the Interpore
Cross International 1999 Consultants Stock Option Plan
<TABLE>
<CAPTION>
Percentage of
Number of votes shares outstanding
--------------- ------------------
<S> <C> <C>
For: 10,685,637 79%
Against: 1,021,930 7%
Abstain: 101,429 1%
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
Reference is made to the Exhibit Index on Page 16 hereof.
b. Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter
ended June 30, 1999.
14
<PAGE> 15
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: August 6, 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
15
<PAGE> 16
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
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)
16
<PAGE> 17
Exhibit
Number Description
- ------- -----------
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)
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.
17
<PAGE> 1
Exhibit 10.06
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
Exhibit 10.06 - Page 1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1 ACCOUNTING AND OTHER TERMS ......................................................................................4
2 LOAN AND TERMS OF PAYMENT........................................................................................4
2.1 Credit Extensions......................................................................................4
2.2 Interest Rate, Payments................................................................................5
2.3 Fees...................................................................................................5
3 CONDITIONS OF LOANS..............................................................................................5
3.1 Conditions Precedent to Initial Credit Extension.......................................................5
3.2 Conditions Precedent to all Credit Extensions..........................................................5
4 CREATION OF SECURITY INTEREST....................................................................................6
4.1 Grant of Security Interest.............................................................................6
5 REPRESENTATIONS AND WARRANTIES...................................................................................6
5.1 Due Organization and Authorization.....................................................................6
5.2 Collateral.............................................................................................6
5.3 Litigation.............................................................................................6
5.4 No Material Adverse Change in Financial Statements.....................................................6
5.5 Solvency...............................................................................................6
5.6 Regulatory Compliance..................................................................................7
5.7 Subsidiaries...........................................................................................7
5.8 Full Disclosure........................................................................................7
6 AFFIRMATIVE COVENANTS............................................................................................7
6.1 Government Compliance..................................................................................7
6.2 Financial Statements, Reports, Certificates............................................................7
6.3 Inventory; Returns.....................................................................................8
6.4 Taxes..................................................................................................8
6.5 Insurance..............................................................................................8
6.6 Primary Accounts.......................................................................................8
6.7 Financial Covenants....................................................................................8
6.8 Further Assurances.....................................................................................8
7 NEGATIVE COVENANTS...............................................................................................8
7.1 Dispositions...........................................................................................8
7.2 Changes in Business, Ownership, Management or Business Locations.......................................9
7.3 Mergers or Acquisitions................................................................................9
7.4 Indebtedness...........................................................................................9
7.5 Encumbrance............................................................................................9
7.6 Distributions; Investments.............................................................................9
7.7 Transactions with Affiliates...........................................................................9
7.8 Subordinated Debt......................................................................................9
7.9 Compliance.............................................................................................9
8 EVENTS OF DEFAULT................................................................................................10
8.1 Payment Default........................................................................................10
8.2 Covenant Default.......................................................................................10
8.3 Material Adverse Change................................................................................10
8.4 Attachment.............................................................................................10
8.5 Insolvency.............................................................................................10
</TABLE>
Exhibit 10.06 - Page 2
<PAGE> 3
<TABLE>
<S> <C> <C>
8.6 Other Agreements.......................................................................................10
8.7 Judgments..............................................................................................11
8.8 Misrepresentations.....................................................................................11
9 BANK'S RIGHTS AND REMEDIES.......................................................................................11
9.1 Rights and Remedies....................................................................................11
9.2 Power of Attorney......................................................................................11
9.3 Accounts Collection....................................................................................12
9.4 Bank Expenses..........................................................................................12
9.5 Bank's Liability for Collateral........................................................................12
9.6 Remedies Cumulative....................................................................................12
9.7 Demand Waiver..........................................................................................12
10 NOTICES AND WAIVERS..............................................................................................12
10.1 Notices................................................................................................12
10.2 Subrogation and Similar Rights.........................................................................13
10.3 Waivers of Notice......................................................................................13
10.4 Subrogation Defenses...................................................................................13
10.5 Right to Settle, Release...............................................................................14
11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER......................................................................14
12 GENERAL PROVISIONS...............................................................................................14
12.1 Successors and Assigns.................................................................................14
12.2 Indemnification........................................................................................14
12.3 Time of Essence........................................................................................14
12.4 Severability of Provision..............................................................................15
12.5 Amendments in Writing, Integration.....................................................................15
12.6 Counterparts...........................................................................................15
12.7 Survival...............................................................................................15
12.8 Confidentiality........................................................................................15
12.9 Effect of Amendment and Restatement....................................................................15
12.10 Attorneys' Fees, Costs and Expenses. ..................................................................15
13 DEFINITIONS......................................................................................................16
13.1 Definitions............................................................................................16
</TABLE>
Exhibit 10.06 - Page 3
<PAGE> 4
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated June 22,
1999, between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive,
Santa Clara, California 95054 with a loan production office located at 38
Technology Drive, Suite 150, Irvine, California 92618 and INTERPORE
INTERNATIONAL, INC. ("Interpore"), INTERPORE ORTHOPAEDICS, INC., CROSS MEDICAL
PRODUCTS, INC. and INTERPORE CROSS INTERNATIONAL, INC. (collectively, the
"Borrower").
RECITALS
A. Bank and Interpore are parties to that certain Loan and Security
Agreement dated October 24, 1990, together with all Schedules thereto, as
amended (collectively, the "Original Agreement"). Subsequently, pursuant to
certain Amendments to Loan Agreements, the additional coborrowers became parties
to the Loan Agreement.
B. Borrower and Bank desire in this Agreement to set forth their
agreement with respect to a working capital loan and to amend and restate in its
entirety without novation the Original Agreement in accordance with the
provisions herein.
AGREEMENT
The parties agree as follows:
1 ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be construed
following GAAP. Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation," in this or any Loan Document.
2 LOAN AND TERMS OF PAYMENT
2.1 CREDIT EXTENSIONS.
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions.
2.1.1 REVOLVING ADVANCES.
(a) Bank will make Advances not exceeding (i) the Committed
Revolving Line, minus (ii) the amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit). Amounts borrowed under
this Section may be repaid and reborrowed during the term of this Agreement.
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit B. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to such reliance.
(c) The Committed Revolving Line terminates on the Revolving
Maturity Date, when all Advances are immediately payable.
Exhibit 10.06 - Page 4
<PAGE> 5
2.1.2 LETTERS OF CREDIT.
Bank will issue or have issued Letters of Credit for Borrower's account
not exceeding (i) the Committed Revolving Line minus (ii) the outstanding
principal balance of the Advances; however, the face amount of outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit and any
Letter of Credit Reserve) may not exceed $500,000. Each Letter of Credit will
have an expiry date of no later than 180 days after the Revolving Maturity Date,
but Borrower's reimbursement obligation will be secured by cash on terms
acceptable to Bank at any time after the Revolving Maturity Date if the term of
this Agreement is not extended by Bank.
2.2 INTEREST RATE, PAYMENTS.
(a) Interest Rate. At Borrower's option, Advances accrue interest on
the outstanding principal balance at a variable per annum rate equal to the
Prime Rate or a fixed rate equal to 225 basis points above the Libor Rate as
defined in the Libor Supplement. If Borrower elects the fixed rate option a
Prepayment Fee shall apply to any prepayment of the Advances. After an Event of
Default, Obligations accrue interest at 5 percent above the rate effective
immediately before the Event of Default. The interest rate increases or
decreases when the Prime Rate changes. Interest is computed on a 360 day year
for the actual number of days elapsed.
(b) Payments. Interest due on the Committed Revolving Line is
payable on the 22nd of each month. Bank may debit any of Borrower's deposit
accounts including Account Number _____________________________ for principal
and interest payments owing or any amounts Borrower owes Bank. Bank will
promptly notify Borrower when it debits Borrower's accounts. These debitsare not
a set-off. Payments received after 12:00 noon Pacific time are considered
received at the opening of business on the next Business Day. When a payment is
due on a day that is not a Business Day, the payment is due the next Business
Day and additional fees or interest accrue.
2.3 FEES.
Borrower will pay:
(a) Bank Expenses. All Bank Expenses (including reasonable
attorneys' fees and reasonable expenses) incurred through and after the date of
this Agreement, are payable when due; and
(b) Advance Fee. An advance fee (the "Advance Fee") equal to .5%
(one-half of one percent) of the total Advance not to exceed $25,000, which
Advance Fee shall be due and payable at the time of each Advance request.
3 CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.
Bank's obligation to make the initial Credit Extension is subject to the
condition precedent that it receive the agreements, documents and fees it
requires.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be
materially true on the date of the Payment/Advance Form and on the effective
date of each Credit Extension and no Event of Default may have occurred and be
continuing, or result from the Credit Extension. Each Credit Extension is
Borrower's representation and warranty on that date that the representations and
warranties of Section 5 remain true.
Exhibit 10.06 - Page 5
<PAGE> 6
4 CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and performance
of each of Borrower's duties under the Loan Documents. Except for Permitted
Liens, any security interest will be a first priority security interest in the
Collateral. Bank may place a "hold" on any deposit account pledged as
Collateral. If this Agreement is terminated, Bank's lien and security interest
in the Collateral will continue until Borrower fully satisfies its Obligations.
5 REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in
its state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified, except where the failure to do so could
not reasonably be expected to cause a Material Adverse Change.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause reasonably be expected to cause a
Material Adverse Change.
5.2 COLLATERAL.
Borrower has good title to the Collateral, free of Liens except
Permitted Liens. All Inventory is in all material respects of good and
marketable quality, free from material defects.
5.3 LITIGATION.
Except as shown in the Schedule or in the Borrower's filings with the
Securities and Exchange Commission, there are no actions or proceedings pending
or, to the knowledge or Borrower's Responsible Officers and legal counsel,
threatened by or against Borrower or any Subsidiary in which an adverse decision
could reasonably be expected to cause a Material Adverse Change.
5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 SOLVENCY.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
Exhibit 10.06 - Page 6
<PAGE> 7
5.6 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has
complied in all material respects with the Federal Fair Labor Standards Act.
Borrower has not violated any laws, ordinances or rules, the violation of which
could reasonably be expected to cause a Material Adverse Change. None of
Borrower's or any Subsidiary's properties or assets has been used by Borrower or
any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous substance
other than legally. Borrower and each Subsidiary has timely filed all required
tax returns and paid, or made adequate provision to pay, all material taxes,
except those being contested in good faith with adequate reserves under GAAP.
Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all government authorities that are necessary to continue its business as
currently conducted, except where the failure to do so could not reasonably be
expected to cause a Material Adverse Change.
5.7 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
5.8 FULL DISCLOSURE.
No written representation, warranty or other statement of Borrower in
any certificate or written statement given to Bank (taken together with all such
written certificates and written statements to Bank) contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained in the certificates or statements not misleading. It
being recognized by Bank that the projections and forecasts provided by Borrower
in good faith and based upon reasonable assumptions are not viewed as facts and
that actual results during the period or periods covered by such projections and
forecasts may differ from the projected and forecasted results.
6 AFFIRMATIVE COVENANTS
Borrower will do all of the following:
6.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and
good standing in its jurisdiction of formation and maintain qualification in
each jurisdiction in which the failure to so qualify would reasonably be
expected to cause a material adverse effect on Borrower's business or
operations. Borrower will comply, and have each Subsidiary comply, with all
laws, ordinances and regulations to which it is subject, noncompliance with
which could have a material adverse effect on Borrower's business or operations
or would reasonably be expected to cause a Material Adverse Change.
6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower will deliver to Bank: (i) within 10 days of filing,
copies of all statements, reports and notices made available to Borrower's
security holders or to any holders of Subordinated Debt and all reports on Form
10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (ii) a
prompt report of any legal actions pending or threatened against Borrower or any
Subsidiary that could result in damages or costs to Borrower or any Subsidiary
of $100,000 or more; and (iii) budgets, sales projections, operating plans or
other financial information Bank reasonably requests.
(b) Within 55 days after the last day of each quarter, together with
its 10Q, Borrower will deliver to Bank a Compliance Certificate signed by a
Responsible Officer in the form of Exhibit C.
Exhibit 10.06 - Page 7
<PAGE> 8
(c) Bank has the right to audit Borrower's Collateral at Borrower's
expense at such times as an Event of Default has occurred and is continuing.
6.3 INVENTORY; RETURNS.
Borrower will keep all Inventory in good and marketable condition, free
from material defects. Returns and allowances between Borrower and its account
debtors will follow Borrower's customary practices as they exist at execution of
this Agreement. Borrower must promptly notify Bank of all returns (excluding
exchanges), recoveries, disputes and claims, that involve more than $100,000
when there are outstanding Advances.
6.4 TAXES.
Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal, state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.
6.5 INSURANCE.
Borrower will keep its business and the Collateral insured for risks and
in amounts, as Bank may reasonably request. Insurance policies will be in a
form, with companies, and in amounts that are satisfactory to Bank. All property
policies will have a lender's loss payable endorsement showing Bank as an
additional loss payee and all liability policies will show the Bank as an
additional insured and provide that the insurer must give Bank at least 20 days
notice before canceling its policy. At Bank's request, Borrower will deliver
certified copies of policies and evidence of all premium payments. Proceeds
payable under any policy will, at Bank's option, be payable to Bank on account
of the Obligations.
6.6 PRIMARY ACCOUNTS.
Borrower will maintain its primary depository and operating accounts
with Bank.
6.7 FINANCIAL COVENANTS.
Borrower will maintain as of the last day of each quarter:
(i) Quick Ratio. A ratio of Quick Assets to Current Liabilities of
at least 1.75 to 1.00.
(ii) Profitability. Borrower will have a minimum net profit of $1 for
each quarter.
6.8 FURTHER ASSURANCES.
Borrower will execute any further instruments and take further action as
Bank reasonably requests to perfect or continue Bank's security interest in the
Collateral or to effect the purposes of this Agreement.
7 NEGATIVE COVENANTS
Borrower will not do any of the following without Bank's prior written
consent, which will not be unreasonably withheld:
7.1 DISPOSITIONS.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than Transfers (i) of Inventory in the ordinary
course of business; (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business; or (iii) of worn-out or obsolete Equipment.
Exhibit 10.06 - Page 8
<PAGE> 9
7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.
Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or reasonably related
thereto or have a material change in its ownership (other than the sale of
Borrower's equity securities in a public offering or to venture capital
investors approved by Bank) of greater than 25%. Borrower will not, without at
least 30 days prior written notice, relocate its chief executive office.
7.3 MERGERS OR ACQUISITIONS.
Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, except where (i) no Event of Default has occurred
and is continuing or would result from such action during the term of this
Agreement and result in a decrease of more than 25% of Tangible Net Worth. A
Subsidiary may merge or consolidate into another Subsidiary or into Borrower.
7.4 INDEBTEDNESS.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
7.5 ENCUMBRANCE.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here, subject to Permitted Liens.
7.6 DISTRIBUTIONS; INVESTMENTS.
Directly or indirectly acquire or own any Person, or make any Investment
in any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so. Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock. Notwithstanding the foregoing,
Borrower may repurchase its stock in an amount not to exceed $4,000,000 per
fiscal year.
7.7 TRANSACTIONS WITH AFFILIATES.
Directly or indirectly enter or permit any material transaction with any
Affiliate, other than transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person.
7.8 SUBORDINATED DEBT.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
7.9 COMPLIANCE.
Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Credit Extension for that purpose; fail to meet the minimum
funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair
Labor Standards Act or violate any other law or regulation, if the violation
could reasonable be expected to have a material adverse effect on Borrower's
business or operations or would reasonably be expected to cause a Material
Adverse Change, or permit any of its Subsidiaries to do so.
Exhibit 10.06 - Page 9
<PAGE> 10
8 EVENTS OF DEFAULT
Any one of the following is an Event of Default:
8.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations within 3 days after
their due date. During the additional period the failure to cure the default is
not an Event of Default (but no Credit Extension will be made during the cure
period);
8.2 COVENANT DEFAULT.
If Borrower does not perform any obligation in Section 6 or violates any
covenant in Section 7 or does not perform or observe any other material term,
condition or covenant in this Agreement, any Loan Documents, or in any agreement
between Borrower and Bank and as to any default under a term, condition or
covenant that can be cured, has not cured the default within 10 days after it
occurs, or if the default cannot be cured within 10 days or cannot be cured
after Borrower's attempts within 10 day period, and the default may be cured
within a reasonable time, then Borrower has an additional period (of not more
than 30 days) to attempt to cure the default. During the additional time, the
failure to cure the default is not an Event of Default (but no Credit Extensions
will be made during the cure period);
8.3 MATERIAL ADVERSE CHANGE.
(i) If there occurs a material impairment in the perfection or priority
of the Bank's security interest in the Collateral or in the value of such
Collateral (other than normal depreciation) which is not covered by adequate
insurance or (ii) if the Bank determines, based upon information available to it
and in its reasonable judgment, that there is a reasonable likelihood that
Borrower will fail to comply with one or more of the financial covenants in
Section 6 during the next succeeding financial reporting period.
8.4 ATTACHMENT.
If any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);
8.5 INSOLVENCY.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
8.6 OTHER AGREEMENTS.
If there is a default in any agreement between Borrower and a third
party that gives the third party the right to accelerate any Indebtedness
exceeding $100,000 or that could cause a Material Adverse Change;
Exhibit 10.06 - Page 10
<PAGE> 11
8.7 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Credit
Extensions will be made before the judgment is stayed or satisfied); or
8.8 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
9 BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES.
When an Event of Default occurs and continues Bank may, without notice
or demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an
Event of Default described in Section 8.5 occurs all Obligations are immediately
due and payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;
(e) Apply to the Obligations any (i) balances and deposits of
Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or
the account of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell the Collateral; and
(g) Dispose of the Collateral according to the Code.
9.2 POWER OF ATTORNEY.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name
on any checks or other forms of payment or security; (ii) sign Borrower's name
on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits. Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and powers,
coupled with an interest, are irrevocable until all Obligations have been fully
repaid and performed and Bank's obligation to provide Credit Extensions
terminates.
Exhibit 10.06 - Page 11
<PAGE> 12
9.3 ACCOUNTS COLLECTION.
When an Event of Default occurs and continues, Bank may notify any
Person owing Borrower money of Bank's security interest in the funds and verify
the amount of the Account. Borrower must collect all payments in trust for Bank
and, if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons, Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.
9.5 BANK'S LIABILITY FOR COLLATERAL.
If Bank complies with reasonable banking practices and Section 9-207 of
the Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any
loss or damage to the Collateral; (c) any diminution in the value of the
Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or
other person. Borrower bears all risk of loss, damage or destruction of the
Collateral.
9.6 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
under the Code, by law, or in equity. Bank's exercise of one right or remedy is
not an election, and Bank's waiver of any Event of Default is not a continuing
waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is
effective unless signed by Bank and then is only effective for the specific
instance and purpose for which it was given.
9.7 DEMAND WAIVER.
Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10 NOTICES AND WAIVERS
10.1 NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its address set
forth below:
Exhibit 10.06 - Page 12
<PAGE> 13
If to Borrower Interpore International, Inc.,
Interpore Orthopaedics, Inc., Cross Medical
Products, Inc., and Interpore Cross
International, Inc.
181 Technology Drive
Irvine, CA 92618
Attn: Richard Harrison
FAX: 949 453-1884
If to Bank Silicon Valley Bank
38 Technology Drive, Suite 150 Irvine, CA 92618
Attn: Gary Reagan
FAX: 949-789-1930
10.2 SUBROGATION AND SIMILAR RIGHTS.
Notwithstanding any other provision of this Agreement or any other Loan
Document, each Borrower irrevocably waives all rights that it may have at law or
in equity (including, without limitation, any law subrogating the Borrower to
the rights of Bank under the Loan Documents) to seek contribution,
indemnification, or any other form of reimbursement from any other Borrower, or
any other Person now or hereafter primarily or secondarily liable for any of the
Obligations, for any payment made by the Borrower with respect to the
Obligations in connection with the Loan Documents or otherwise and all rights
that it might have to benefit from, or to participate in, any security for the
Obligations as a result of any payment made by the Borrower with respect to the
Obligations in connection with the Loan Documents or otherwise. Any agreement
providing for indemnification, reimbursement or any other arrangement prohibited
under this Section 10.2 shall be null and void. If any payment is made to a
Borrower in contravention of this Section 10.2, such Borrower shall hold such
payment in trust for Bank and such payment shall be promptly delivered to Bank
for application to the Obligations, whether matured or unmatured.
10.3 WAIVERS OF NOTICE.
Each Borrower waives notice of acceptance hereof; notice of the
existence, creation or acquisition of any of the Obligations; notice of an Event
of Default; notice of the amount of the Obligations outstanding at any time;
notice of intent to accelerate; notice of acceleration; notice of any adverse
change in the financial condition of any other Borrower or of any other fact
that might increase the Borrower's risk; presentment for payment; demand;
protest and notice thereof as to any instrument; default; and all other notices
and demands to which the Borrower would otherwise be entitled. Each Borrower
waives any defense arising from any defense of any other Borrower, or by reason
of the cessation from any cause whatsoever of the liability of any other
Borrower. Bank's failure at any time to require strict performance by any
Borrower of any provision of the Loan Documents shall not waive, alter or
diminish any right of Bank thereafter to demand strict compliance and
performance therewith. Nothing contained herein shall prevent Bank from
foreclosing on the Lien of any deed of trust, mortgage or other security
instrument, or exercising any rights available thereunder, and the exercise of
any such rights shall not constitute a legal or equitable discharge of any
Borrower. Each Borrower also waives any defense arising from any act or omission
of Bank that changes the scope of the Borrower's risks hereunder. Each Borrower
hereby waives any right to assert against Bank any defense (legal or equitable),
setoff, counterclaim, or claims that such Borrower individually may now or
hereafter have against another Borrower or any other Person liable to Borrower
with respect to the Obligations in any manner or whatsoever.
10.4 SUBROGATION DEFENSES.
Each Borrower hereby waives any defense based on impairment or
destruction of its subrogation or other rights against any other Borrower and
waives all benefits which might otherwise be available to it under California
Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2848, 2850, 2899 and 3433 and
California Code of Civil Procedure Sections 580a, 580b, 580d and 726, as those
statutory provisions are now in effect and hereafter amended, and under any
other similar statutes now and hereafter in effect.
Exhibit 10.06 - Page 13
<PAGE> 14
10.5 RIGHT TO SETTLE, RELEASE.
(a) The liability of Borrowers hereunder shall not be diminished by
(i) any agreement, understanding or representation that any of the Obligations
is or was to be guaranteed by another Person or secured by other property, or
(ii) any release or unenforceability, whether partial or total, or rights, if
any, which Borrower may now or hereafter have against any other Person,
including another Borrower, or property with respect to any of the Obligations.
(b) Without notice to any Borrower and without affecting the
liability of any Borrower hereunder, Bank may (i) compromise, settle, renew,
extend the time for payment, change the manner or terms of payment, discharge
the performance of, decline to enforce, or release all or any of the Obligations
with respect to a Borrower, (ii) grant other indulgences to a Borrower in
respect of the Obligations, (iii) modify in any manner any documents, relating
to the Obligations with respect to a Borrower, (iv) release, surrender or
exchange any deposits or other property securing the Obligations, whether
pledged by a Borrower or any other Person, or (v) compromise, settle renew, or
extend the time for payment, discharge the performance of, decline to enforce,
or release all or any obligations of any guarantor, endorser or other Person who
is now or may hereafter be liable with respect to any of the Obligations.
11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER
California law governs the Loan Documents without regard to principles
of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Orange County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
12 GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
12.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement.
Exhibit 10.06 - Page 14
<PAGE> 15
12.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other provision
in determining the enforceability of any provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing and signed by
Borrower and Bank. This Agreement represents the entire agreement about this
subject matter, and supersedes prior negotiations or agreements. All agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of this Agreement merge into this Agreement and
the Loan Documents.
12.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
12.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.
12.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information that
either: (a) is in the public domain or in Bank's possession when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank; or (b) is
disclosed to Bank by a third party, if Bank does not know that the third party
is prohibited from disclosing the information.
12.9 EFFECT OF AMENDMENT AND RESTATEMENT.
This Agreement is intended to and does completely amend and restate,
without novation, the Original Agreement. All credit extensions or loans
outstanding under the Original Agreement are and shall continue to be
outstanding under this Agreement. All security interests granted under the
Original Agreement are hereby confirmed and ratified and shall continue to
secure all Obligations under this Agreement.
12.10 ATTORNEYS' FEES, COSTS AND EXPENSES.
In any action or proceeding between Borrower and Bank arising out of the
Loan Documents, the prevailing party will be entitled to recover its reasonable
attorneys' fees and other reasonable costs and expenses incurred, in addition to
any other relief to which it may be entitled.
Exhibit 10.06 - Page 15
<PAGE> 16
13 DEFINITIONS
13.1 DEFINITIONS.
In this Agreement:
"ACCOUNTS" are all existing and later arising accounts, contract rights,
and other obligations owed Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"ADVANCE" or "ADVANCES" is a loan advance (or advances) under the
Committed Revolving Line.
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs and
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"BORROWER'S BOOKS" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs or
any equipment containing the information.
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"CLOSING DATE" is the date of this Agreement.
"CODE" is the California Uniform Commercial Code. "Collateral" is the
property described on Exhibit A.
"COMMITTED REVOLVING LINE" is an Advance of up to $5,000,000.
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"CREDIT EXTENSION" is each Advance, Letter of Credit, or any other
extension of credit by Bank for Borrower's benefit.
"CURRENT LIABILITIES" are the aggregate amount of Borrower's Total
Liabilities which mature within one (1) year.
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
Exhibit 10.06 - Page 16
<PAGE> 17
"ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"LETTER OF CREDIT" is defined in Section 2.1.2.
"LIBOR SUPPLEMENT" is attached hereto as Exhibit A-1. "Libor Rate" is
described in the Libor Supplement.
"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"MATERIAL ADVERSE CHANGE" is defined in Section 8.3.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including cash management services,
letters of credit and foreign exchange contracts, if any and including interest
accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Bank.
"ORIGINAL AGREEMENT" has the meaning set forth in recital paragraph A.
"PERMITTED INDEBTEDNESS" is:
(a) Borrower's indebtedness to Bank under this Agreement or any
other Loan Document;
(b) Indebtedness existing on the Closing Date and shown on the
Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course
of business; and
(e) Indebtedness secured by Permitted Liens.
Exhibit 10.06 - Page 17
<PAGE> 18
"PERMITTED INVESTMENTS" are:
(a) Investments shown on the Schedule and existing on the Closing
Date; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue.
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges
or levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by
Borrower or its Subsidiaries incurred for financing the acquisition of the
Equipment, or (ii) existing on equipment when acquired, if the Lien is confined
to the property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business and any interest or title of a lessor,
licensor or under any lease or license, if the leases, subleases, licenses and
sublicenses permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"PREPAYMENT FEE" is a fee on any portion of the Obligations with a fixed
interest rate (the "Fixed Obligations") paid before the payment due date. "Base
Interest Rate" means Bank's initial cost of funding the Fixed Obligations. The
Prepayment Fee is calculated as follows: First, Bank determines a "Current
Market Rate" based on what the Bank would receive if it loaned the remaining
amount on the prepayment date in a wholesale funding market matching maturity,
remaining principal and interest amounts and principal and interest payment
dates (the aggregate payments received are the "Current Market Rate Amount").
Bank may select any wholesale funding market rate as the Current Market Rate.
Second, Bank will take the prepayment amount and calculate the present value of
each remaining principal and interest payment which, without prepayment, the
Bank would have received during the term of the Fixed Obligations using the Base
Interest Rate. The sum of the present value calculations is the "Mark to Market
Amount." Third, the Bank will subtract the Mark to Market Amount from the
Current Market Rate Amount. Any amount greater than zero is the Prepayment Fee.
"PRIME RATE" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.
"QUICK ASSETS" is, on any date, the Borrower's consolidated,
unrestricted cash, cash equivalents, net billed accounts receivable and
investments with maturities of fewer than 12 months determined according to
GAAP.
Exhibit 10.06 - Page 18
<PAGE> 19
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" is June 21, 2000.
"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.
"TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities.
"TOTAL LIABILITIES" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
BORROWER:
Interpore International, Inc.
By:____________________________________
Title:_________________________________
Interpore Orthopaedics, Inc.
By:____________________________________
Title:_________________________________
Cross Medical Products, Inc.
By:____________________________________
Title:_________________________________
Exhibit 10.06 - Page 19
<PAGE> 20
Interpore Cross International, Inc.
By:____________________________________
Title:_________________________________
BANK:
SILICON VALLEY BANK
By:____________________________________
Title:_________________________________
Exhibit 10.06 - Page 20
<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,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) used in the calculation of basic
earnings per share $ 1,083 $ (4,321) $ 2,165 $ (3,378)
Interest on Convertible Subordinated Debentures 67 * 134 *
----------- ----------- ----------- -----------
Net income (loss) used in calculation of diluted
earnings per share $ 1,150 $ (4,321) $ 2,299 $ (3,378)
=========== =========== =========== ===========
Shares used in computing net income (loss) per share - basic:
Weighted average common shares outstanding 13,503 13,894 13,497 13,853
Effect of dilutive securities:
Weighted average convertible preferred stock 32 * 32 *
Shares issuable pursuant to stock option plans 232 * 255 *
Shares issuable under the Convertible Subordinated
Debentures 495 * 495 *
----------- ----------- ----------- -----------
Shares used in computing net income (loss) per share -
diluted 14,262 13,894 14,279 13,853
=========== =========== =========== ===========
Net income (loss) per share - basic $ .08 $ (.31) $ .16 $ (.24)
Net income (loss) per share - diluted $ .08 $ (.31) $ .16 $ (.24)
</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 subordinated debentures were
excluded from the calculation of diluted earnings per share because their effect
would have been anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX
MONTH PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,662,000
<SECURITIES> 2,019,000
<RECEIVABLES> 8,224,000
<ALLOWANCES> 461,000
<INVENTORY> 12,330,000
<CURRENT-ASSETS> 32,752,000
<PP&E> 4,532,000
<DEPRECIATION> 2,971,000
<TOTAL-ASSETS> 37,540,000
<CURRENT-LIABILITIES> 5,042,000
<BONDS> 3,152,000
0
0
<COMMON> 141,000
<OTHER-SE> 29,129,000
<TOTAL-LIABILITY-AND-EQUITY> 37,540,000
<SALES> 18,628,000
<TOTAL-REVENUES> 18,628,000
<CGS> 5,755,000
<TOTAL-COSTS> 5,755,000
<OTHER-EXPENSES> 10,729,000
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> (21,000)
<INCOME-PRETAX> 2,165,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,165,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,165,000
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
