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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, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-22598
INTERPORE INTERNATIONAL
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3043318
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
181 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (714) 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, 1996, there were 7,086,599 shares of the registrant's
common stock issued and outstanding.
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Interpore International
Index
PART I. FINANCIAL INFORMATION Page(s)
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1996 (unaudited) and December 31, 1995 . . . . . . . . . . . 3
Condensed Consolidated Statements of Income (unaudited)
for the three month and six month periods ended June 30, 1996 and
June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six month periods ended June 30, 1996 and
June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 10
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Interpore International
Condensed Consolidated Balance Sheets
(in thousands, except share data)
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,857 $ 3,694
Short-term investments 7,965 7,935
Accounts receivable, less allowance for
doubtful accounts of $525 and $523 in
1996 and 1995, respectively 3,608 3,175
Inventories 3,868 3,757
Prepaid expenses 568 480
Deferred income taxes 596 596
Other current assets 90 438
-------- --------
Total current assets 19,552 20,075
Property, plant and equipment, net 765 699
Deferred income taxes 904 904
Other assets 29 27
-------- --------
Total assets $ 21,250 $21,705
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 338 $ 860
Accrued compensation and related expenses 464 374
Accrued sales taxes 350 374
Accrued distributor returns 20 411
Other accrued liabilities 495 438
Current portion of long-term debt 120 113
-------- --------
Total current liabilities 1,787 2,570
-------- --------
Long-term debt 16 78
Contingencies
Shareholders' equity:
Series E preferred stock, voting, no par value:
Authorized, issued and outstanding shares --
225,487 at June 30, 1996 and 240,505 at
December 31, 1995; liquidation value of
$1,691 and June 30, 1996 and $1,804 at
December 31, 1995 1,425 1,520
Preferred stock: Authorized shares --
296,358; issued and outstanding shares --
none -- --
Common stock, no par value: Authorized shares --
20,000,000; issued and outstanding shares --
7,029,280 at June 30, 1996 and 6,958,642 at
December 31, 1995 35,774 35,581
Accumulated deficit (17,752) (18,044)
-------- --------
Total shareholders' equity 19,447 19,057
-------- --------
Total liabilities and shareholders' equity $ 21,250 $ 21,705
======== ========
See accompanying notes.
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Interpore International
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1996 1995 1996 1995
------- ------- ------- -------
Net sales $ 4,892 $ 4,301 $ 9,888 $ 8,549
Cost of goods sold 1,197 995 2,528 2,094
Royalty expense 75 43 150 150
------- ------- ------- -------
Gross profit 3,620 3,263 7,210 6,305
------- ------- ------- -------
Operating expenses:
Research and development 550 503 1,050 995
Selling and marketing 2,569 1,865 4,956 3,539
General and administrative 552 580 1,251 1,171
------- ------- ------- -------
Total operating expenses 3,671 2,948 7,257 5,705
------- ------- ------- -------
Income (loss) from operations (51) 315 (47) 600
------- ------- ------- -------
Interest income 134 168 274 341
Interest expense (13) (13) (22) (28)
Other income 47 27 87 41
------- ------- ------- -------
Total interest and other income, net 168 182 339 354
------- ------- ------- -------
Income before taxes 117 497 292 954
Provision for income taxes - 49 - 68
------- ------- ------- -------
Net income $ 117 $ 448 $ 292 $ 886
======= ======= ======= =======
Net income per share $ .02 $ .06 $ .04 $ .12
======= ======= ======= =======
Shares used in computing net income
per share 7,632 7,537 7,565 7,563
======= ======= ======= =======
See accompanying notes.
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Interpore International
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
SIX MONTHS ENDED JUNE 30,
-----------------------------
1996 1995
--------- ---------
OPERATING ACTIVITIES
Net income $ 292 $ 886
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 183 164
Changes in operating assets and liabilities:
Accounts receivable (433) 504
Inventories (111) (687)
Prepaid expenses (88) (434)
Other assets 346 (46)
Accounts payable (522) (393)
Accrued liabilities (268) (331)
--------- ---------
Net cash used in operating activities (601) (337)
--------- ---------
INVESTING ACTIVITIES
Sales (purchases) of short-term investments, net (30) 1,982
Capital expenditures (249) (128)
--------- ---------
Net cash provided by (used in) investing activities (279) 1,854
--------- ---------
FINANCING ACTIVITIES
Repurchase of common stock - (228)
Proceeds from exercise of stock options 75 69
Proceeds from employee stock purchase plan 23 21
Repayments of notes payable - (79)
Repayment of lease financing (55) (48)
--------- ---------
Net cash provided by (used in) financing activities 43 (265)
--------- ---------
Net increase (decrease) in cash and cash equivalents (837) 1,252
Cash and cash equivalents at beginning of period 3,694 6,410
--------- ---------
Cash and cash equivalents at end of period $ 2,857 $ 7,662
========= =========
See accompanying notes.
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Interpore International
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Interpore International (the "Company") without audit,
pursuant to Securities and Exchange Commission regulations. In the opinion of
management, the unaudited financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the consolidated financial position at June 30, 1996 and the consolidated
statements of income for the three month and six month periods ended June 30,
1996 and 1995, and the consolidated statements of cash flows for the six month
periods ended June 30, 1996 and 1995.
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, Interpore Orthopaedics, Inc. and Interpore
Dental, Inc., after elimination of all significant intercompany transactions.
The statements of income and cash flows for the 1996 interim periods are not
necessarily indicative of results to be expected for the full year.
These consolidated financial statements should be read in conjunction with the
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, as filed with the Securities and Exchange
Commission.
2. INVENTORIES
Inventories are stated at the lower of average cost or market and consist of
the following (in thousands):
June 30, December 31,
1996 1995
--------- ------------
Raw materials $ 776 $ 854
Work-in-process 570 523
Finished goods 2,522 2,380
------ ------
$3,868 $3,757
====== ======
3. SHAREHOLDERS' EQUITY
During the six month period ended June 30, 1996, 15,018 shares of Series E
preferred stock were converted into 15,106 shares of the Company's common
stock.
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4. CONTINGENCIES
In the ordinary course of its business, the Company is subject to legal
proceedings, claims and liabilities, including product liability matters. In
the opinion of management, the amount of ultimate liability with respect to any
known proceedings or claims will not materially affect the financial position
or results of operations of the Company.
5. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1996, the Company adopted the Statement of Financial Accounting
Standards No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. The adoption of SFAS 121
had no impact on the Company's financial condition or results of operations.
In October 1995, Statement of Financial Accounting Standards No. 123 (SFAS
123), Accounting for Stock-Based Compensation was issued and is effective for
1996. The Company intends to continue to account for employee stock options
in accordance with APB Opinion No. 25 and will make the pro forma disclosure
required by SFAS 123 in its 1996 annual financial statements. Accordingly, the
adoption of the standard will have no effect on the Company's financial
position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table presents the Company's results of operations as
percentages:
Three months ended June 30, Six months ended June 30,
------------------------------- ------------------------------
1996 vs. 1996 vs.
1996 1995 1995 1996 1995 1995
------ ------ ------ ------ ------ ------
Net sales 100.0% 100.0% 13.7% 100.0% 100.0% 15.7%
Cost of goods sold 24.5% 23.1% 20.3% 25.6% 24.5% 20.1%
Royalty expense 1.5% 1.0% 74.4% 1.5% 1.8% 0.0%
------ ------ ------ ------ ------ ------
Gross profit 74.0% 75.9% 10.9% 72.9% 73.7% 14.4%
------ ------ ------ ------ ------ ------
Operating expense:
Research and development 11.2% 11.7% 9.3% 10.6% 11.6% 5.5%
Selling and marketing 52.5% 43.4% 37.8% 50.1% 41.4% 40.0%
General and administrative 11.3% 13.5% (4.8%) 12.7% 13.7% 6.8%
------ ------ ------ ------ ------ ------
Total operating expenses 75.0% 68.6% 24.5% 73.4% 66.7% 27.2%
------ ------ ------ ------ ------ ------
Income from operations (1.0%) 7.3% n/a (0.5%) 7.0% n/a
====== ====== ====== ====== ====== ======
For the quarter ended June 30, 1996, net sales of $4.9 million were $591,000 or
13.7% higher than sales of $4.3 million for the same period of 1995. Sales of
orthopaedic products, primarily Pro Osteon(R) bone graft substitute material
for orthopaedic applications, increased by $720,000 or 35.4% to $2.8 million
compared to $2.0 million for the second quarter of 1995. Sales of the
Company's oral/maxillofacial products (titanium dental implant systems and
Interpore 200(R) Porous Hydroxyapatite for dental use) declined by $72,000 or
3.7% from $2.0 million to $1.9 million. Sales of the Company's hydroxyapatite
orbital implants, which are entirely dependent on the requirements of a single
customer, decreased by 18.5% to $251,000 versus $308,000 for the second quarter
of 1995.
For the first six months of 1996, net sales of $9.9 million were $1.3 million
or 15.7% higher than sales of $8.5 million for the same period of 1995. Sales
of orthopaedic products increased by $1.7 million or 44.3% to $5.6 million
compared to $3.9 million for the six month period of 1995. Sales of the
Company's oral/maxillofacial products declined by $385,000 or 9.2% from $4.2
million to $3.8 million. Sales of the Company's hydroxyapatite orbital
implants increased by 2.7% to $503,000 versus $490,000 for the same period of
1995.
During 1995, the Company restructured its distribution channels for the sale of
Pro Osteon. Distribution agreements with certain domestic distributors that
were not achieving satisfactory market penetration were terminated, and direct
sales representatives were recruited and hired for the respective territories.
Additionally, in the first quarter of 1996, the Company established an
international sales management group and hired three experienced managers with
the responsibility for building an organization of independent dealers
internationally. Pro Osteon sales through direct sales representatives for the
first six months of 1996 increased by 238% over the same period of 1995, and
international sales of Pro Osteon grew by 79%. This growth was partially
offset by a 7% decrease in Pro Osteon sales to domestic distributors.
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The Company's sales of oral/maxillofacial products have declined since the
first quarter of 1995 due to continued strong competition in this slow growth
market along with the lack of major new dental product introductions. In late
1995, the Company introduced the Smooth Staple Implant(R) System, and during
the first quarter of 1996 introduced the IMZ(R) Bone Tack System. Sales of
these products in 1996 helped to partially offset the sales decline in the
other dental products.
The gross margins as percentages of sales for the quarters ended June 30, 1996
and 1995 were 74.0% and 75.9%, respectively. For the six month periods ended
June 30, 1996 and 1995, the gross margin percentages were 72.9% and 73.7%.
Total operating expenses for the quarter ended June 30, 1996 increased by 24.5%
or $723,000 as compared to the same quarter of 1995. Research and development
expenses increased 9.3% or $47,000 but continue to reflect approximately 11% of
sales. Selling and marketing expenses increased 37.8% or $704,000 mostly
related to costs and travel expenses associated with the direct sales
organization for the orthopaedic division and costs of the international sales
management group. General and administrative expenses decreased 4.8% or
$28,000.
For the six months ended June 30, 1996, total operating expenses increased by
27.2% or $1.6 million as compared to the same period of 1995. Research and
development expenses increased 5.5% or $55,000, selling and marketing expenses
increased 40.0% or $1,417,000, and general and administrative expenses
increased 6.8% or $80,000. Most of the increase in selling and marketing
expenses was related to the direct and international sales organizations. The
general and administrative expense increase reflects an accrual for the
Company's annual incentive plan.
No income tax provision was recorded during the first six months of 1996 due to
the anticipated realization and recognition of the Company's net operating loss
carryforwards during 1996. The Company's effective tax rate for the first six
months of 1995 was 10%, representing federal alternative minimum tax and state
income tax for that period.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996 and December 31, 1995, cash, cash equivalents and short-term
investments totaled $10.8 million and $11.6 million, respectively. Total
working capital increased from $17.5 million to $17.8 million and the current
ratio improved to 10.9 as of June 30, 1996 versus 7.8 as of December 31, 1995.
The $10.8 million total of cash and cash equivalents and short-term investments
remains available to support the Company's continued investment in the
development of its business, including the pursuit of FDA approvals for
additional indications for the use of Pro Osteon, development or acquisition of
new bone graft products or complementary products, possible acquisitions of
businesses, and continued development of the direct sales organization in the
orthopaedic division. Additionally, in July 1996, the Company's revolving line
of credit was extended in the increased amount of $5 million, maturing in July
1997. There was no amount outstanding at June 30, 1996 under the line of
credit.
The Company believes it currently possesses sufficient resources to meet the
cash requirements of its operations for at least the next year.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 29, 1996, the Company held its 1996 Annual Meeting of
Shareholders to elect the Company's board of directors. The number
of shares entitled to vote was 7,247,301, and the number of shares
represented in person or by proxy was 5,669,522.
Each of the current directors was re-elected. Messrs. Eisenecher,
Nohra and Smyth each received 5,641,966 affirmative votes with
27,556 votes withheld. Mr. Jones received 5,626,966 affirmative
votes with 42,656 votes withheld. Mr. Mercer received 5,641,502
affirmative votes with 28,020 votes withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a. Exhibits.
Reference is made to the Exhibit Index on Page 12 hereof.
b. Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter ended
June 30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: August 9, 1996 INTERPORE INTERNATIONAL
(Registrant)
By: /s/ David C. Mercer
-------------------------------------
David C. Mercer,
President and Chief Executive Officer
By: /s/ Richard L. Harrison
------------------------------------
Richard L. Harrison
Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ----
3.01 Third Amended and Restated Articles of Incorporation of Registrant,
executed on December 9, 1991 1
3.02 First Amendment to the Third Amended and Restated Articles of
Incorporation of Registrant, executed on April 22, 1992 1
3.03 Second Amendment to Third Amended and Restated Articles of Incorporation
of Registrant, executed on November 30, 1993 5
3.04 Bylaws of Registrant dated October 24, 1983 1
3.05 Third Amendment to Third Amended and Restated Articles of Incorporation
of Registrant, executed on November 30, 1993 5
4.01 Rights Agreement dated August 29, 1995 6
4.02 First Amendment to the Rights Agreement, executed on November 1, 1995 8
10.01 Revised License Agreement dated March 12, 1984, between Registrant and
Research Corporation Technologies, Inc., as amended by a First Amendment
dated December 7, 1984, and as further amended by a Fourth Amendment
dated July 22, 1988 1
10.02 Single Tenant Lease dated July 25, 1991 between Registrant and The Irvine
Company 1
10.03 Koll Business Center Lease between Registrant and Airport Industrial
Park 1
10.04 Master Lease Agreement dated March 10, 1993 between Registrant and
Comdisco, Inc. 1
10.05 Asset Purchase Agreement dated March 1, 1993 regarding sale of assets of
Interpore Orthopaedics, Inc. to Applied Epigenetics, Inc. 1
10.06 Cancellation and Release Agreement dated March 1, 1993 among Registrant,
Interpore Orthopaedics, Inc., Pfizer, Inc. and Howmedica, Inc. 1
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Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ----
10.07 Series E Preferred Stock and Common Stock Warrant Purchase Agreement
dated December 19, 1991 1
10.08 Series E Preferred Stock Purchase Agreement dated October 30, 1992 1
10.09 Amended Schedule to Loan and Security Agreement dated July 25, 1996 among
Registrant, Interpore Orthopaedics, Inc. and Silicon Valley Bank
10.10 Amendment to the Loan Agreement dated July 25, 1996 among Registrant,
Interpore Orthopaedics, Inc. and Silicon Valley Bank
10.11 Amended and Restated Stock Option Plan dated March 19, 1991 2, First
Amendment to the Amended and Restated Stock Option Plan, effective
October 15, 1991 1; Amendment to the Amended and Restated Stock Option
Plan dated September 17, 1994 4
10.12 Employee Qualified Stock Purchase Plan 3
10.13 1995 Stock Option Plan 3
10.14 Stock Option Plan for Non-Employee Directors of Interpore International 7
10.15 Form of Indemnification Agreement 1
11.01 Computations of Net Income per Share
27.01 Financial Data Schedule
- -----------------------------
1 Incorporated by reference from the Company's Registration Statement on
Form S-1, Registration No. 33-69872.
2 Incorporated by reference from the Company's Registration Statement on
Form S-8, Registration No. 33-77426.
3 Incorporated by reference from the Company's Proxy Statement for the
Company's 1994 Annual Meeting of Shareholders.
4 Incorporated by reference from the Company's Registration Statement on
Form S-8, Registration No. 33-86290.
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5 Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1994.
6 Incorporated by reference from the Company's Current Report on Form
8-K dated August 29, 1995.
7 Incorporated by reference from the Company's Proxy Statement for the
Company's 1995 Annual Meeting of Shareholders.
8 Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
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