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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-22958
INTERPORE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3043318
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
181 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618-2402
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 453-3200
not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 5, 1998, there were 14,019,659 shares of the registrant's
common stock issued and outstanding.
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Interpore International, Inc.
Index
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 (unaudited) and December 31, 1997 ....... 3
Condensed Consolidated Statements of Operations (unaudited)
for the three month and nine month periods ended
September 30, 1998 and September 30, 1997 .................. 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended September 30, 1998 and
September 30, 1997 ......................................... 5
Notes to Condensed Consolidated Financial Statements ........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 15
Item 6. Exhibits and Reports on Form 8-K .............................. 16
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Interpore International, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,212 $ 11,809
Short-term investments 1,983 4,826
Accounts receivable, less allowance for doubtful
accounts of $485 and $370 in 1998 and 1997,
respectively 6,336 6,590
Inventories 12,073 10,374
Prepaid expenses 840 438
Deferred income taxes 1,426 1,454
Other current assets 246 963
-------- --------
Total current assets 32,116 36,454
Property, plant and equipment, net 1,425 1,550
Deferred income taxes 2,639 2,639
Other assets 733 895
-------- --------
Total assets $ 36,913 $ 41,538
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease
obligations $ 15 $ 95
Accounts payable 1,270 1,094
Accrued compensation and related expenses 740 758
Accrued disposition costs 253 610
Accrued merger-related expenses and restructuring charges 860 -
Accrued income taxes - 1,067
Other accrued liabilities 1,132 1,101
-------- --------
Total current liabilities 4,270 4,725
-------- --------
Long-term liabilities:
Long-term debt 3,322 5,080
Deferred income taxes 55 55
Obligations under capital leases, net 34 44
-------- --------
Total long-term liabilities 3,411 5,179
-------- --------
Contingencies
Shareholders' equity:
Series E convertible preferred stock, voting, par value - -
$.01 per share: Authorized shares - 594,000; issued and
outstanding shares - 32,906 at September 30, 1998 and
December 31, 1997; aggregate liquidation value of $247
at September 30, 1998 and December 31, 1997
Preferred stock, par value $.01 per share: Authorized - -
shares 4,406,000; outstanding shares - none
Common stock, par value $.01 per share: Authorized shares 140 138
- 50,000,000; issued and outstanding shares - 14,019,663
at September 30, 1998 and 13,765,538 at December 31, 1997
Additional paid-in-capital 43,922 43,114
Accumulated deficit (14,830) (11,618)
-------- --------
Total shareholders' equity 29,232 31,634
-------- --------
Total liabilities and shareholders' equity $ 36,913 $ 41,538
======== ========
See accompanying notes.
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Interpore International, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net sales $ 7,343 $ 7,191 $ 22,046 $ 21,722
Cost of goods sold 2,130 2,390 6,180 6,417
-------- -------- -------- --------
Gross profit 5,213 4,801 15,866 15,305
-------- -------- -------- --------
Operating expenses:
Research and development 890 811 2,702 2,300
Selling and marketing 2,905 2,593 8,610 8,556
General and administrative 1,019 1,061 3,142 3,576
Merger-related expenses - - 3,031 -
Restructuring charges - - 1,512 -
Non-recurring charges 381 - 381 -
Loss on sale of dental business - - - 617
-------- -------- -------- --------
Total operating expenses 5,195 4,465 19,378 15,049
-------- -------- -------- --------
Income (loss) from operations 18 336 (3,512) 256
-------- -------- -------- --------
Interest income 157 246 601 616
Interest expense (117) (140) (508) (453)
Other income 108 62 266 236
-------- -------- -------- --------
Total interest and other income, net 148 168 359 399
-------- -------- -------- --------
Income (loss) before taxes 166 504 (3,153) 655
Income tax provision (benefit) - (30) 59 (67)
-------- -------- -------- --------
Net income (loss) from continuing operations 166 534 (3,212) 722
Net income from discontinued operations - - - 2,597
-------- -------- -------- --------
Net income (loss) $ 166 $ 534 $ (3,212) $ 3,319
======== ======== ======== ========
Basic earnings per share:
Net income (loss) from continuing operations $ .01 $ .04 $ (.23) $ .05
Net income from discontinued operations $ .00 $ .00 $ .00 $ .20
Net income (loss) $ .01 $ .04 $ (.23) $ .25
Shares used in computing earnings per share 13,989 13,476 13,898 13,365
Diluted earnings per share:
Net income (loss) from continuing operations $ .01 $ .04 $ (.23) $ .05
Net income from discontinued operations $ .00 $ .00 $ .00 $ .19
Net income (loss) $ .01 $ .04 $ (.23) $ .24
Shares used in computing earnings per share 14,301 14,142 13,898 13,955
See accompanying notes.
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Interpore International, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
-------- --------
OPERATING ACTIVITIES
Net cash used in continuing operations $ (3,777) $ (2,250)
Net cash provided by discontinued operations - 175
-------- --------
Net cash used in operating activities (3,777) (2,075)
-------- --------
INVESTING ACTIVITIES
Expenditures for intangible assets (26) (48)
Sales (purchases) of short-term investments, net 2,843 (556)
Purchases of property, plant and equipment (599) (475)
Proceeds from sale of dental business, net - 741
-------- --------
Net cash provided by (used in) continuing operations 2,218 (338)
Net cash used in discontinued operations - (91)
Proceeds from sale of recovery products segment - 8,177
-------- --------
Net cash provided by investing activities 2,218 7,748
-------- --------
FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations (1,751) (1,659)
Proceeds from exercise of stock options 650 261
Proceeds from employee stock purchase plan 63 42
Proceeds from the sale of common stock - 2,242
-------- --------
Net cash provided by (used in) continuing operations (1,038) 886
Net cash used in discontinued operations - (197)
-------- --------
Net cash provided by (used in) financing activites (1,038) 689
-------- --------
Net increase (decrease) in cash and cash equivalents (2,597) 6,362
Cash and cash equivalents at beginning of period 11,809 6,328
-------- --------
Cash and cash equivalents at end of period $ 9,212 $ 12,690
======== ========
See accompanying notes.
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Interpore International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Interpore International, Inc. (the "Company") is a medical device company that
operates in one business segment: the design, manufacture and marketing of
synthetic bone and tissue products and spinal implant devices. The Company
distributes these products in the United States and internationally.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by Interpore International, Inc. (the "Company") without audit,
pursuant to Securities and Exchange Commission regulations. In the opinion of
management, the accompanying condensed consolidated financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the consolidated financial position at September 30, 1998 and the
results of operations and cash flows for the three month and nine month periods
ended September 30, 1998 and 1997.
The accompanying condensed consolidated financial statements include the
accounts of the Company and its subsidiaries, including Interpore Orthopaedics,
Inc., Interpore Cross International, Inc. and Cross Medical Products, Inc.
("Cross"), after elimination of all significant intercompany transactions.
The results of operations and cash flows for the three month and nine month
periods ended September 30, 1998 are not necessarily indicative of results to be
expected for the full year.
These consolidated financial statements should be read in conjunction with the
financial statements included in the Company's and Cross' Annual Reports on Form
10-K for the year ended December 31, 1997, as filed with the Securities and
Exchange Commission.
3. INVENTORIES
Inventories are stated at the lower of average cost or market. Inventories are
comprised of the following (in thousands):
September 30, December 31,
1998 1997
------------- ------------
Raw materials $ 663 $ 737
Work-in-process 197 227
Finished goods 11,213 9,410
------- -------
$12,073 $10,374
======= =======
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4. CONTINGENCIES
The Company's subsidiary, Cross Medical Products, Inc. ("Cross") and other
spinal implant manufacturers were named as defendants in various purported class
action products liability lawsuits alleging that the plaintiffs were injured by
spinal implants supplied by Cross and others. All such lawsuits were
consolidated for pretrial proceedings in the Federal District Court for the
Eastern District of Pennsylvania and, on February 22, 1995, class certification
was denied. The federal court lawsuits will remain coordinated for further
pretrial purposes, but are individual lawsuits. In response to the denial of
class certification, a large number of additional individual lawsuits have been
filed alleging, in addition to damages from spinal implants, a conspiracy among
manufacturers, physicians and other spinal implant industry members to defraud
the public and market products without the proper regulatory approvals. Cross
was named as a defendant, among others, in over 750 such lawsuits. In
approximately 230 of these cases, which involved products manufactured by
Acromed, another spinal implant manufacturer, Cross has been dismissed as a
defendant. In addition, Cross has recently been dismissed as a defendant from
approximately 38 additional cases. Of the remaining cases, approximately six
involve products manufactured by Cross, in which cases the Company is vigorously
defending itself. Cross cannot estimate precisely at this time the number of
such lawsuits that may eventually be filed. Most of the lawsuits are pending in
federal courts and are in preliminary stages. The Federal District Court
recently dismissed certain claims regarding conspiracy to violate certain
federal regulations, a decision which is currently being appealed to the Court
of Appeals of the Third Circuit. The plaintiffs have withdrawn their other
claims pending resolution of this appeal. Discovery proceedings, including the
taking of depositions, have commenced in certain of the lawsuits. Plaintiffs in
these cases typically seek relief in the form of monetary damages, often in
unspecified amounts. While the aggregate monetary damages eventually sought in
all of such individual actions is substantial and exceeds the limits of the
Company's products liability insurance policies, the Company believes that it
has affirmative defenses, including, without limitation, preemption, and that
these individual lawsuits are otherwise without merit.
The class action lawsuits and the individual products liability cases are being
defended by the Company's insurance carrier, in some cases under a reservation
of rights. The Company maintains claims made products liability insurance
policies with at least $5 million of coverage both per occurrence and in the
aggregate. The Company believes that it has adequate insurance for its business,
however, there can be no assurance that the $5 million per policy year limit of
coverage will be sufficient to cover the cost of defending all lawsuits or the
payment of any amounts that may be paid in satisfaction of any settlements or
judgments. Further, there can be no assurance that the Company will continue to
be able to obtain sufficient amounts of products liability insurance coverage at
commercially reasonable premiums. Future operating results could be materially
adversely affected by the formal resolution of pending cases or future claims,
whether or not such cases or claims are covered by insurance.
In addition to the above, the nature of the Company's business subjects it to
products liability and various other legal proceedings from time to time. At
September 30, the Company was party to one business litigation. The Company has
denied liability in this matter and is vigorously defending the same.
5. LONG-TERM DEBT
Long-term debt at September 30, 1998 consists of $3,322,000 of Convertible
Subordinated Debentures (the "Debentures") at 8.5% due June 1, 2003. The
Debentures are convertible at any time before maturity, unless previously
redeemed, into shares of the Company's common stock at a conversion price
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of $6.37 per share (the "Conversion Price)". Pursuant to the terms of the
underlying indenture, upon the merger of Cross with the Company, Debenture
holders were allowed to request redemption until June 26, 1998 at 101% of the
principal amount thereof, plus accrued interest. Requests for redemption
totaling $1.7 million were made, and redemption took place in July 1998.
Beginning July 1, 1999 and on July 1 of each succeeding year, the Company will
be obligated to redeem any Debentures tendered by June 1, 1999 or June 1 of any
succeeding year, respectively, at 100% of the principal amount thereof plus
accrued interest, subject to an annual limitation of $25,000 per holder and an
annual aggregate limitation of $262,500. During the first nine months of 1998,
$97,000 of Debentures were converted into 15,221 shares of the Company's common
stock.
6. BUSINESS COMBINATION
In February 1998, the Company entered into an agreement to merge with Cross
Medical Products, Inc. ("Cross"), a publicly traded Ohio-based worldwide
supplier of spinal implant systems used to treat degenerative conditions and
deformities of the spine. The merger was approved by the shareholders of both
companies on May 6, 1998 and became effective on May 7, 1998. Approximately 6.7
million shares of the Company's common stock were issued in exchange for all of
the common stock of Cross. The merger has been accounted for as a
pooling-of-interests. During the second quarter, the Company recorded
merger-related expenses and restructuring charges of $3.0 million and $1.5
million, respectively. The merger-related expenses included legal, accounting
and administrative costs incurred in connection with the merger of the Company
and Cross. The restructuring charges were associated with the closing of the
Dublin, Ohio facility and included severance benefits for employees not
remaining with the Company, the write-off of fixed assets which were not being
transferred to the Company's Irvine, California headquarters, and the accrual of
remaining lease payments for the Dublin facility. During the third quarter of
1998, the Company recorded $381,000 of non-recurring charges related to the
relocation of assets and employees from the Dublin, Ohio facility to the Irvine,
California headquarters.
In February 1998, the Board of Directors of the Company approved a proposal for
the Company to reincorporate from California to Delaware. The proposed
reincorporation was approved by the Company's shareholders and was completed on
May 6, 1998. In connection with the reincorporation, the Company's name was
changed from Interpore International to Interpore International, Inc.
7. SALE OF ASSETS
In April 1997, the Company entered into a definitive agreement for the sale of
its dental implant business. In May 1997, the sale was completed, and the
Company received an initial cash payment of $1.5 million. A deferred cash
payment of $749,000 was received in March 1998. The transaction, including
associated costs, resulted in a net charge of $617,000 in the second quarter of
1997.
8. SALE OF RECOVERY PRODUCTS SEGMENT
On March 12, 1997, Cross Medical Products, Inc. entered into an agreement to
sell its recovery products segment for approximately $8.2 million in cash and
the assumption of approximately $5.0 million of debt and other liabilities. The
buyer also acquired 38,250 shares of the Company's common stock for $242,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
Interpore International, Inc. (the "Company") is a medical device company that
operates in one business segment: the design, manufacte and marketing of
synthetic bone and tissue products and spinal implant devices. The Company
distributes these products in the United States and internationally.
SIGNIFICANT EVENTS
In February 1998, the Company entered into an agreement to merge with Cross
Medical Products, Inc. ("Cross"), a publicly traded Ohio-based worldwide
supplier of spinal implant systems used to treat degenerative conditions and
deformities of the spine. The merger was approved by the shareholders of both
companies on May 6, 1998 and became effective on May 7, 1998. Approximately 6.7
million shares of the Company's common stock were exchanged for all of the
common stock of Cross. The merger has been accounted for as a
pooling-of-interests.
In February 1998, the Board of Directors of the Company approved a proposal for
the Company to reincorporate from California to Delaware. The proposed
reincorporation was approved by the Company's shareholders and was completed on
May 6, 1998. In connection with the reincorporation, the Company's name was
changed from Interpore International to Interpore International, Inc.
In April 1997, the Company entered into a definitive agreement for the sale of
its dental business to Steri-Oss Inc. of Yorba Linda, California. In May 1997,
the sale was completed, and the Company received an initial cash payment of $1.5
million. A deferred cash payment of $749,000 was received in March 1998. As part
of the transaction, the Company and Steri-Oss negotiated a distribution
agreement whereby the Company manufactures and provides Interpore 200(R) Porous
Hydroxyapatite Bone Void Filler ("Interpore 200") for distribution by Steri-Oss
in the dental market. The transaction, including associated costs, resulted in a
net charge of $617,000, which was recorded in the quarter ended June 30, 1997.
On March 12, 1997, Cross entered into an agreement to sell its recovery products
segment for approximately $8.2 million in cash and the assumption of
approximately $5.0 million of debt and other liabilities. The buyer also
acquired 38,250 shares of the Company's common stock for $242,000.
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RESULTS OF OPERATIONS
The following table presents the Company's results of operations as percentages:
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
Increase Increase
1998 1997 (decrease) 1998 1997 (decrease)
------ ------ ---------- ------ ------ ----------
Net sales 100.0% 100.0% 2.1% 100.0% 100.0% 1.5%
Cost of goods sold 29.0% 33.2% (10.8%) 28.0% 29.5% (3.7%)
----- ----- ----- ----- ----- -----
Gross profit 71.0% 66.8% 8.6% 72.0% 70.5% 3.7%
----- ----- ----- ----- ----- -----
Operating expense:
Research and development 12.1% 11.3% 9.7% 12.3% 10.6% 17.5%
Selling and marketing 39.6% 36.1% 12.0% 39.1% 39.4% .6%
General and administrative 13.9% 14.7% (4.0%) 14.3% 16.5% (12.1%)
Merger-related expenses - - n/a 13.7% - n/a
Restructuring charges - - n/a 6.8% - n/a
Non-recurring charges 5.2% - n/a 1.7% - n/a
Loss on sale of dental business - - n/a - 2.8% n/a
----- ----- ----- ----- ----- -----
Total operating expenses 70.8% 62.1% 16.3% 87.9% 69.3% 28.8%
----- ----- ----- ----- ----- -----
Income (loss) from operations .2% 4.7% (94.6%) (15.9%) 1.2% n/a
===== ===== ===== ===== ===== =====
Three months ended September 30, 1998 and 1997
For the quarter ended September 30, 1998, net sales of $7.3 million were
$152,000 or 2.1% greater than sales of $7.2 million for the same period of 1997.
Three months ended
September 30, Change
------------------ -----------------
1998 1997 Amount %
------ ------ ------ ------
Bone biologics product sales $3,841 $3,501 $ 340 9.7%
Spinal implant product sales 3,502 3,690 (188) (5.1%)
------ ------ ------ -----
Total sales.............. $7,343 $7,191 $ 152 2.1%
====== ====== ====== =====
Sales of bone biologics products, which include Pro Osteon(R) bone graft
substitute material, OEM orbital implants and OEM bone graft products for the
dental marketplace, increased in the quarter ended September 30, 1998 by
$340,000 or 9.7% to $3.8 million compared to $3.5 million for the third quarter
of 1997. This increase is attributable primarily to a $532,000 increase in Pro
Osteon(R) product sales partially offset by a $192,000 decrease in OEM sales.
Sales of spinal implant products, primarily the Synergy(TM) Spinal System,
decreased in the quarter ended September 30, 1998 by $188,000 or 5.1% to $3.5
million compared to $3.7 million for the third quarter of 1997. While domestic
sales of spinal implant products increased by 36% in the third quarter compared
to the same period a year ago, this increase was more than offset by decreased
international sales and instrument set revenues.
Total domestic sales for the quarter ended September 30, 1998 increased by
$661,000 or 12.2% to $6.1 million from $5.4 million for the quarter ended
September 30, 1997. Total international sales decreased $509,000 or 28.5% to
$1.3 million in the third quarter of 1998 compared with $1.8 million for the
same quarter of 1997.
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The gross margins as percentages of sales for the quarters ended September 30,
1998 and 1997 were 71.0% and 66.8%, respectively. The increase primarily
reflects the comparatively greater percentage of bone biologics products sales
in the 1998 period which have a higher gross margin than spinal implant
products. Additionally, higher margin domestic sales represented a greater
portion of total sales in the 1998 quarter than in the 1997 quarter.
Total operating expenses for the quarter ended September 30, 1998 increased by
$730,000 as compared to the same quarter of 1997. Excluding $381,000 of
non-recurring charges related to the closing of the Company's Dublin, Ohio
facility, operating expenses increased by $349,000 or 7.8%. Research and
development expenses increased by 9.7% or $79,000 primarily due to increased
development efforts related to the Company's spinal implant products. Selling
and marketing expenses increased $312,000 or 12.0% compared to the third quarter
of 1997 due primarily to commissions on incremental domestic sales. General and
administrative expenses decreased by 4.0%, primarily as a result of reduced
costs following the merger of the Company with Cross.
The $20,000 decrease in net interest and other income primarily relates to a
reduction in interest income due to lower cash, cash equivalents and short-term
investments. This decrease was partially offset by a decline in interest expense
due to the redemption of $1.7 million of debentures in July 1998 and higher
royalty income.
No income tax provision was recorded during the third quarter of 1998 due to the
utilization of the Company's net operating loss carryforwards during the period.
Nine months ended September 30, 1998 and 1997
For the nine months ended September 30, 1998, net sales of $22.0 million were
$324,000 or 1.5% greater than sales of $21.7 million for the same period of
1997.
Nine months ended
September 30, Change
-------------------- --------------------
1998 1997 Amount %
------- ------- ------- ------
Bone biologics product sales $10,889 $10,520 $ 369 3.5%
Spinal implant product sales 11,157 9,496 1,661 17.5%
------- ------- ------- ------
Sub-total................ 22,046 20,016 2,030 10.1%
Dental product sales........ - 1,706 (1,706) (100.0%)
------- ------- ------- ------
Total sales.............. $22,046 $21,722 $ 324 1.5%
======= ======= ======= ======
Sales of bone biologics products, which include Pro Osteon(R) bone graft
substitute material, OEM orbital implants and OEM bone graft products for the
dental marketplace, increased $369,000 or 3.5% to $10.9 million for the nine
months ended September 30, 1998 compared to $10.5 million for the same period of
1997. Sales of spinal implant products, primarily the Synergy(TM) Spinal System,
increased in the nine months ended September 30, 1998 by $1.7 million or 17.5%
to $11.2 million compared to $9.5 million for the nine months ended September
30, 1997, primarily due to increasing market penetration of the Synergy(TM)
Spinal System.
Domestic sales of bone biologics and spinal products increased by 10.8% or $1.6
million to $16.8 million for the nine months ended September 30, 1998 compared
to $15.2 million for the same period of 1997. International sales increased by
$393,000 or 8.1% to $5.2 million for the nine month period ended September 30,
1998 from $4.9 million for the same period of 1997.
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There were no dental product sales in the nine month period ended September 30,
1998, reflecting the Company's sale of its dental business in May 1997.
The gross margin for the nine months ended September 30, 1998 improved to 72.0%
from 70.5% for the same period of 1997. Revenues from spinal instrument sets,
which are sold at a price approximating cost, were significantly lower in the
1998 period. Also, in 1998 domestic bone biologics dealers, which in the past
purchased Pro Osteon(R) at a discount from list price, were converted into
commissioned agents, effectively eliminating the discount.
Total operating expenses for the nine months ended September 30, 1998 increased
by $4.3 million as compared to the same period of 1997 due to $4.9 million of
merger-related expenses, restructuring charges and non-recurring charges.
Excluding these charges and the 1997 loss on the sale of the dental business,
total operating expenses remained relatively level between the two nine month
periods. Research and development expenses increased by 17.5% or $402,000 as a
result primarily of increased spinal product development efforts. Selling and
marketing expenses increased slightly compared to the nine months ended
September 30, 1997 due primarily to increased commissions on higher domestic
sales offset by the elimination of selling and marketing expenses directly
related to the dental business. General and administrative expenses decreased by
$434,000 or 12.1%, primarily the result of cost reductions following the sale of
the dental business and a reduction in products liability insurance costs.
The $40,000 or 10.0% decrease in net interest and other income resulted
primarily from the write-off of unamortized convertible debenture issuance costs
associated with the $1.7 million redemption of debentures in July 1998.
Limited income tax provisions were recorded during the nine month periods ended
September 30, 1998 and 1997 due to the utilization of the Company's net
operating loss carryforwards during the periods.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 and December 31, 1997, cash, cash equivalents and
short-term investments totaled $11.2 million and $16.6 million, respectively.
The decrease in cash, cash equivalents and short-term investments of $5.4
million was primarily the result of the payment of $4.0 million in
merger-related expenses, restructuring charges and non-recurring charges. Also,
the Company expended approximately $1.7 million in July 1998 for the redemption
of convertible debentures. Accordingly, total working capital decreased to $27.8
million from $31.7 million and the current ratio decreased to 7.5 from 7.7 at
September 30, 1998 and December 31, 1997, respectively.
The $11.2 million total of cash, cash equivalents and short-term investments
remains available to support the Company's continued investment in the
development of its business, including the pursuit of regulatory approvals for
additional indications for the use of Pro Osteon, development or acquisition of
new bone biologic and spinal implant products, and possible acquisitions of
businesses. In addition, the Company will spend additional cash in the fourth
quarter for remaining merger-related expenses and restructuring activities. The
Company has a $5 million revolving line of credit which expires in July 1999 and
which had no amount outstanding at September 30, 1998.
The Company believes it currently possesses sufficient resources to meet the
cash requirements of its operations for at least the next year.
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IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. If not corrected, many
computer applications could fail or create erroneous results by not recognizing
"00" to mean the year 2000. Interpore uses only third party software, and in its
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 reported
on its initial assessment of software used by the company.
State of Readiness
In its initial assessment, Interpore contacted the authors of its critical
software programs and determined that each was either already Year 2000
compliant or expected to be Year 2000 compliant by December 31, 1999. Currently,
the Company is in the process of evaluating its remaining software as well as
hardware, vendors and customers (collectively, "Elements") to determine those
which it considers to be mission critical. For Elements determined to be mission
critical, the Company will seek to obtain assurances of Year 2000 compliance.
The assurances will be in the form of vendor or customer certifications,
identification of alternatives, company-administered testing efforts, or a
combination of certain assurances. The Company has no way of ensuring that
mission critical vendors or customers will be Year 2000 compliant, and their
inability to become compliant on a timely basis could materially impact the
Company.
Costs to Address the Company's Year 2000 Issues
Through September 30, 1998, Interpore has not incurred any direct costs
associated with Year 2000 issues. Certain costs associated with the
consolidation of operations following the Company's recent merger with Cross
resulted in obtaining software/hardware that is Year 2000 compliant. While the
process of evaluating Elements is not complete, at this time, the Company does
not have any reason to believe that it will need to replace any material
non-compliant systems or to hire any Year 2000 solution providers. Therefore, at
this time, Interpore estimates that future costs to address Year 2000 issues
should not be material.
Risks of the Company's Year 2000 Issues
The SEC Rules require a reasonable description of our most reasonably likely
worst case Year 2000 scenarios. The Company has yet to identify any mission
critical Element that it expects to not be Year 2000 compliant. Therefore, the
Company is unable to describe a most reasonably likely worst case Year 2000
scenario. In the future, as the Company completes its evaluation of mission
critical Elements, it will address its ability to determine reasonably likely
worst case scenarios
The Company's Contingency Plans
The Company has not yet established a contingency plan relative to Year 2000
issues. As the Company's assessment continues, it will evaluate the likely worst
case scenarios and determine whether a contingency plan is feasible and
cost-justified.
Certain statements in this description of Year 2000 issues are forward-looking
and may involve risks and uncertainties, including, but not limited to: the
ability to identify mission critical Elements, the ability to identify
alternatives to mission critical Elements, estimated future costs, and probable
outcomes.
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Certain statements in this Quarterly Report on Form 10-Q are forward-looking and
may involve risks and uncertainties, including, but not limited to: risks that
the bone biologics and spinal systems businesses cannot be successfully or
timely integrated; product demand, competition and market acceptance risks;
risks related to product liability and other litigation; risks related to the
development of future products and the successful completion of clinical
studies; risk that the company will not receive regulatory approval of new
products; and the impact of competitive products. Additional information on
factors that could affect the Company's reports filed from time to time with the
Securities and Exchange Commissions.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's subsidiary, Cross Medical Products, Inc. ("Cross") and other
spinal implant manufacturers were named as defendants in various purported class
action products liability lawsuits alleging that the plaintiffs were injured by
spinal implants supplied by Cross and others. All such lawsuits were
consolidated for pretrial proceedings in the Federal District Court for the
Eastern District of Pennsylvania and, on February 22, 1995, class certification
was denied. The federal court lawsuits will remain coordinated for further
pretrial purposes, but are individual lawsuits. In response to the denial of
class certification, a large number of additional individual lawsuits have been
filed alleging, in addition to damages from spinal implants, a conspiracy among
manufacturers, physicians and other spinal implant industry members to defraud
the public and market products without the proper regulatory approvals. Cross
was named as a defendant, among others, in over 750 such lawsuits. In
approximately 230 of these cases, which involved products manufactured by
Acromed, another spinal implant manufacturer, Cross has been dismissed as a
defendant. In addition, Cross has recently been dismissed as a defendant from
approximately 38 additional cases. Of the remaining cases, approximately six
involve products manufactured by Cross, in which cases the Company is vigorously
defending itself. Cross cannot estimate precisely at this time the number of
such lawsuits that may eventually be filed. Most of the lawsuits are pending in
federal courts and are in preliminary stages. The Federal District Court
recently dismissed certain claims regarding conspiracy to violate certain
federal regulations, a decision which is currently being appealed to the Court
of Appeals of the Third Circuit. The plaintiffs have withdrawn their other
claims pending resolution of this appeal. Discovery proceedings, including the
taking of depositions, have commenced in certain of the lawsuits. Plaintiffs in
these cases typically seek relief in the form of monetary damages, often in
unspecified amounts. While the aggregate monetary damages eventually sought in
all of such individual actions is substantial and exceeds the limits of the
Company's products liability insurance policies, the Company believes that it
has affirmative defenses, including, without limitation, preemption, and that
these individual lawsuits are otherwise without merit.
The class action lawsuits and the individual products liability cases are being
defended by the Company's insurance carrier, in some cases under a reservation
of rights. The Company maintains claims made products liability insurance
policies with at least $5 million of coverage both per occurrence and in the
aggregate. The Company believes that it has adequate insurance for its business,
however, there can be no assurance that the $5 million per policy year limit of
coverage will be sufficient to cover the cost of defending all lawsuits or the
payment of any amounts that may be paid in satisfaction of any settlements or
judgments. Further, there can be no assurance that the Company will continue to
be able to obtain sufficient amounts of products liability insurance coverage at
commercially reasonable premiums. Future operating results could be materially
adversely affected by the formal resolution of pending cases or future claims,
whether or not such cases or claims are covered by insurance.
In addition to the above, the nature of the Company's business subjects
it to products liability and various other legal proceedings from time to time.
At September 30, the Company was party to one business litigation. The Company
has denied liability in this matter and is vigorously defending the same.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
Reference is made to the Exhibit Index on Page 18 hereof.
b. Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter ended
September 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this quarterly report on Form 10-Q to be signed on its behalf by
the undersigned, thereunto duly authorized.
DATE: November 10, 1998 INTERPORE INTERNATIONAL, INC.
By: /s/ David C. Mercer
-------------------------------------
David C. Mercer,
Chairman and Chief Executive Officer
By: /s/ Richard L. Harrison
-------------------------------------
Richard L. Harrison
Sr. Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.01 Certificate of Incorporation of Interpore Delaware, Inc.(6)
3.02 Bylaws of Registrant(6)
10.01 Revised License Agreement dated March 12, 1984, between
Registrant and Research Corporation Technologies, Inc., as
amended by a First Amendment dated December 7, 1984, and as
further amended by a Fourth Amendment dated July 22, 1988(1)
10.02 Single Tenant Lease dated July 25, 1991 between Registrant and
The Irvine Company as amended by a Third Amendment to Lease
dated December 11, 1996(5)
10.03 Asset Purchase Agreement dated March 1, 1993 regarding sale of assets of
Interpore Orthopaedics, Inc. to Applied Epigenetics, Inc.(1)
10.04 Cancellation and Release Agreement dated March 1, 1993 among Registrant,
Interpore Orthopaedics, Inc., Pfizer, Inc. and Howmedica, Inc.(1)
10.05 Series E Preferred Stock and Common Stock Warrant Purchase Agreement dated
December 19, 1991(1)
10.06 Series E Preferred Stock Purchase Agreement dated October 30, 1992(1)
10.07 Amended Schedule to Loan and Security Agreement dated August 11, 1998 among
Registrant, Interpore Orthopaedics, Inc., Cross Medical Products, Inc. and
Silicon Valley Bank(14)
10.08 Amendment to the Loan Agreement dated August 11, 1998 among Registrant,
Interpore Orthopaedics, Inc., Cross Medical Products, Inc. and Silicon Valley
Bank(14)
10.09 Amended and Restated Stock Option Plan dated March 19, 1991(2),
First Amendment to the Amended and Restated Stock Option Plan,
effective October 15, 1991(1); Amendment to the Amended and
Restated Stock Option Plan dated September 17, 1994(3)
10.10 Employee Qualified Stock Purchase Plan(2)
10.11 1995 Stock Option Plan(2)
10.12 Stock Option Plan for Non-Employee Directors of Interpore International(4)
10.13 Form of Indemnification Agreement(13)
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Exhibit
Number Description
------- -----------
10.14 Schedule of parties to Form of Indemnification Agreement
10.15 Asset Purchase Agreement dated April 18, 1997 regarding sale of assets of
Interpore Dental, Inc.(6)
10.16 Agreement and Plan of Merger, dated as of February 11, 1998, by
and among Interpore International, Buckeye International and
Cross Medical Products, Inc. ("Cross")(8)
10.17 Asset Purchase Agreement, dated March 12, 1997, by and among Cross, Danninger
Healthcare, Inc. and OrthoLogic Corp.(8)
10.18 Cross Amended and Restated 1984 Incentive Stock Option Plan,
reserving 750,000 shares of Common Stock, as amended by the
Board of Directors of Cross on April 2, 1992.(9)
10.19 Cross Amended and Restated 1984 Non-Statutory Stock Option Plan, reserving
300,000 shares of Common Stock, as amended by the Board of Directors on April
2, 1992.(9)
10.20 Cross 1994 Stock Option Plan, reserving 600,000 shares of Common Stock.(10)
10.21 Indenture concerning 8.5% Convertible Subordinated Debentures by and between
Cross and The Fifth Third Bank(7)
10.22 Non-Competition Agreement dated September 6, 1996, between Cross and Stephen
R. Draper.(11)
10.23 Agreement between Dr. Edward Funk and Cross, dated February 11, 1998.(12)
10.24 Supplemental Indenture by and between Interpore International, Inc. and Cross
Medical Products, Inc. and The Fifth Third Bank.(14)
10.25 Form of Employment Agreement, dated August 17, 1998, between Interpore
International, Inc., and executive officers of the companies.
10.26 Schedule of parties to form of Employment Agreement dated August 17, 1998.
11.01 Computations of Net Income per Share
27.01 Financial Data Schedule
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(1) Incorporated by reference from the Company's Registration Statement on
Form S-1, Registration No. 33-69872.
(2) Incorporated by reference from the Company's Proxy Statement for the
Company's 1994 Annual Meeting of Shareholders.
(3) Incorporated by reference from the Company's Registration Statement on
Form S-8, Registration No. 33-86290.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
(5) Incorporated by reference from the Company's Current Report on Form 8-K
dated February 11, 1998.
(6) Incorporated by reference from the Company's Registration Statement on
Form S-4, Registration No. 333-49487.
(7) Incorporated by reference from the Cross Registration Statement on
Form S-2 filed April 4, 1996.
(8) Incorporated by reference from the Cross Annual Report on Form 10-K for
the year ended December 31, 1996.
(9) Incorporated by reference from the Cross Annual Report on Form 10-K for
the year ended December 31, 1992.
(10) Incorporated by reference from the Cross Form 10 filed August 12, 1994.
(11) Incorporated by reference from the Cross Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1996.
(12) Incorporated by reference from the Cross Annual Report on Form 10-K for
the year ended December 31, 1997.
(13) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1998.
(14) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1998.
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