SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-22958
INTERPORE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3043318
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
181 Technology Drive, Irvine, California 92618-2402
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 453-3200
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of November 8, 2001, there were 16,845,958 shares of the registrant's
common stock issued and outstanding.
Interpore International, Inc.
Index
PART I. FINANCIAL INFORMATION Page(s)
-------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 2000 and September 30, 2001 (unaudited)..................... 3
Condensed Consolidated Statements of Income (unaudited) for the
three and nine month periods ended September 30, 2000 and
September 30, 2001........................................................ 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
nine month periods ended September 30, 2000 and September 30, 2001........ 5
Notes to Condensed Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 15
Item 6. Exhibits and Reports on Form 8-K............................................... 15
2
Interpore International, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
December 31, September 30,
2000 2001
------------- -------------
Assets (unaudited)
Current assets:
Cash and cash equivalents.................................................... $ 14,610 $ 7,928
Accounts receivable, less allowance for doubtful accounts
of $461 and $454 in 2000 and 2001, respectively............................ 9,536 10,301
Inventories.................................................................. 12,485 15,076
Prepaid expenses............................................................. 1,091 1,943
Deferred income taxes........................................................ 2,088 2,088
Other current assets......................................................... 102 48
--------- ---------
Total current assets............................................................ 39,912 37,384
Property, plant and equipment, net.............................................. 1,509 1,787
Deferred income taxes........................................................... 1,598 1,598
Intangible assets, net.......................................................... 2,143 22,116
Other assets.................................................................... 71 49
--------- ---------
Total assets.................................................................... $ 45,233 $ 62,934
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable............................................................. $ 886 $ 990
Accrued compensation and related expenses.................................... 1,347 1,769
Accrued royalties............................................................ 372 492
Income taxes payable......................................................... 188 1,202
Other accrued liabilities.................................................... 582 960
--------- ---------
Total current liabilities....................................................... 3,375 5,413
--------- ---------
Commitments and contingencies
Stockholders' equity:
Series E convertible preferred stock, voting, par value $.01 per share:
Authorized shares - 594,000; issued and outstanding shares - none.......... - -
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 - 15,026,302 at December 31, 2000 and
17,442,959 at September 30, 2001........................................... 150 174
Additional paid-in-capital................................................... 49,928 62,520
Accumulated deficit.......................................................... (5,111) (2,064)
--------- ---------
44,967 60,630
Less treasury stock, at cost - 605,000 shares at December 31, 2000 and
September 30, 2001......................................................... (3,109) (3,109)
--------- ---------
Total stockholders' equity...................................................... 41,858 57,521
--------- ---------
Total liabilities and stockholders' equity...................................... $ 45,233 $ 62,934
========= =========
See accompanying notes.
3
Interpore International, Inc.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------------- -------------------------
2000 2001 2000 2001
--------- --------- --------- ---------
Net sales $ 10,613 $ 12,230 $ 33,386 $ 36,527
Cost of goods sold 3,119 3,457 10,116 10,542
--------- --------- --------- ---------
Gross profit 7,494 8,773 23,270 25,985
--------- --------- --------- ---------
Operating expenses:
Research and development 1,346 1,600 3,825 4,886
Selling and marketing 3,738 4,588 11,525 13,118
General and administrative 953 1,487 3,049 3,858
Non-recurring charges - - 268 -
--------- --------- --------- ---------
Total operating expenses 6,037 7,675 18,667 21,862
--------- --------- --------- ---------
Income from operations 1,457 1,098 4,603 4,123
--------- --------- --------- ---------
Interest income 191 80 483 433
Interest expense (7) (7) (152) (13)
Other income 117 151 317 412
--------- --------- --------- ---------
Total interest and other income, net 301 224 648 832
--------- --------- --------- ---------
Income before taxes 1,758 1,322 5,251 4,955
Income tax provision 580 509 1,942 1,908
--------- --------- --------- ---------
Net income $ 1,178 $ 813 $ 3,309 $ 3,047
========= ========= ========= =========
Net income per share:
Basic $ .08 $ .05 $ .24 $ .20
Diluted $ .08 $ .05 $ .22 $ .20
Shares used in computing net income per share:
Basic 14,237 16,436 13,920 15,096
Diluted 15,189 17,020 15,335 15,388
See accompanying notes.
4
Interpore International, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine months ended September 30,
-----------------------------------
2000 2001
---------- ----------
Cash flows from operating activities
Net income $ 3,309 $ 3,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 733 731
Changes in operating assets and liabilities:
Accounts receivable 268 (315)
Inventories 653 (2,021)
Prepaid expenses (568) (543)
Other assets 90 76
Accounts payable and accrued liabilities 262 1,534
---------- ----------
Net cash provided by operating activities 4,747 2,509
---------- ----------
Cash flows from investing activities
Net cash paid for American OsteoMedix Corporation - (8,413)
Sales of short-term investments 3,463 -
Capital expenditures (657) (738)
Expenditures for patent rights and other intangible assets (102) (73)
---------- ----------
Net cash provided by (used in) investing activities 2,704 (9,224)
---------- ----------
Cash flows from financing activities
Repayment of long-term debt and capital lease obligations (169) (10)
Proceeds from exercise of stock options 1,302 3
Proceeds from employee stock purchase plan 37 40
---------- ----------
Net cash provided by financing activities 1,170 33
---------- ----------
Net increase (decrease) in cash and cash equivalents 8,621 (6,682)
Cash and cash equivalents at beginning of period 6,315 14,610
---------- ----------
Cash and cash equivalents at end of period $ 14,936 $ 7,928
========== ==========
See accompanying notes.
5
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 together with its subsidiaries, unless the context implies
otherwise ("Interpore Cross"), operates in one business segment: the design,
manufacture and marketing of medical devices for the orthopedic marketplace.
Our products are distributed in the United States and internationally.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared 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, 2001 and the consolidated results of operations and cash flows for
the periods ended September 30, 2000 and 2001.
The accompanying condensed consolidated financial statements include the
accounts of Interpore Cross and its subsidiaries after elimination of all
significant intercompany transactions.
The results of operations and cash flows for the periods ended September
30, 2001 are not necessarily indicative of results to be expected for future
quarters or the full year.
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, 2000, as filed with the Securities and Exchange
Commission.
6
Per Share Information
Basic earnings per share is calculated by dividing net earnings by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the assumed conversion of all dilutive securities,
consisting of employee stock options, convertible securities and warrants. The
following table presents the computation of net income per share (in thousands,
except per share data):
Three months ended Nine months ended
September 30, September 30,
------------------------- ------------------------
2000 2001 2000 2001
------- ------- ------- -------
Net income used in the calculation of basic earnings per share $ 1,178 $ 813 $ 3,309 $ 3,047
Interest on Convertible Subordinated Debentures - - 70 -
------- ------- ------- -------
Net income used in calculation of diluted earnings per share $ 1,178 $ 813 $ 3,379 $ 2,234
======= ======= ======= =======
Shares used in computing net income per share - basic:
Weighted average common shares outstanding 14,237 16,436 13,920 15,096
Effect of dilutive securities:
Weighted average convertible preferred stock/(1)/ - - 8 -
Shares issuable pursuant to stock option plans 882 584 1,088 292
Shares issuable under the Convertible Subordinated
Debentures 70 - 319 -
------- ------- ------- -------
Shares used in computing net income per share - diluted 15,189 17,020 15,335 15,388
======= ======= ======= =======
Net income per share - basic $ .08 $ .05 $ .24 $ .20
Net income per share - diluted $ .08 $ .05 $ .22 $ .20
_____________________
/(1)/ On March 1, 2000, all of the outstanding Series E Preferred Stock
converted into common stock. As of August 1, 2000, all of the Convertible
Subordinated Debentures had either been redeemed or converted into common stock.
3. Inventories
Inventories are stated at the lower of first-in, first-out average cost or
market. Inventories are comprised of the following (in thousands):
December 31, September 30,
2000 2001
-------------- ---------------
Raw materials $ 1,202 $ 1,421
Work-in-process 575 925
Finished goods 10,708 12,730
--------- ---------
$ 12,485 $ 15,076
========= =========
7
4. Contingencies
On September 5, 2000, our wholly-owned subsidiary, Cross Medical Products,
Inc. ("Cross"), filed suit in the U.S. District Court, Central District of
California, against DePuy AcroMed, Inc., a Johnson & Johnson company and
Biedermann Motech GmbH, which alleges that DePuy AcroMed has infringed and
continues to infringe Cross' U.S. Patent Nos. 5,466,237 and 5,474,555. These
patents relate to the VLS or Variable Locking Screw technology embodied in
certain components of our Synergy Spinal System. The Complaint seeks damages
for willful past and continuing infringement of the patents. The Complaint also
seeks a declaratory judgment against DePuy AcroMed and Biedermann Motech that
Cross is not infringing Biedermann Motech's patent no. 5,207,678. DePuy AcroMed
has responded to the Complaint alleging that Cross' patents are invalid and
unenforceable, and alleging that it does not infringe.
On May 21, 2001, the Court dismissed Cross' declaratory judgment claim,
ruling that Biedermann Motech is not subject to personal jurisdiction in
California and is indispensable to the claim. Cross is exploring strategies in
response to this ruling.
The Court has set trial for May 2002, and the parties are currently
involved in discovery.
Aside from the patent litigation, the nature of our business subjects us to
product liability and various other legal proceedings from time to time. We are
currently involved in legal proceedings incidental to the normal conduct of our
business. We do not believe that any liabilities relating to the legal
proceedings to which we are a party are likely to be, individually or in the
aggregate, material to our consolidated financial condition or results of
operations.
5. Comprehensive Income
Total comprehensive income represents the net change in stockholders'
equity during a period from sources other than transactions with stockholders
and as such, includes net income. The components of comprehensive income, net
of related tax, are as follows (in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2000 2001 2000 2001
-------- ------- -------- --------
Net income $ 1,178 $ 813 $ 3,309 $ 3,047
Reclassification adjustment related to short-term investments - - 4 -
-------- ------- -------- --------
Comprehensive income $ 1,178 $ 813 $ 3,313 $ 3,047
======== ======= ======== ========
6. Non-recurring Charges
During the second quarter of 2000, a non-recurring charge of $268,000 was
recorded in connection with the withdrawal of a proposed secondary public stock
offering.
8
7. Acquisition
On July 10, 2001, Interpore Cross completed the acquisition of American
OsteoMedix Corporation ("AOM"), a developer and marketer of minimally invasive
surgery products. The initial transaction value was $21 million, including
approximately $8 million in cash and approximately 2.4 million shares of
Interpore Cross common stock valued at $12 million. In addition to the initial
consideration, there is contingent cash consideration of up to $5 million based
upon the attainment of certain AOM product systems sales goals through 2005.
The transaction has been accounted for using the purchase method of accounting.
Results of operations of AOM are included in Interpore Cross' consolidated
results of operations beginning on July 10, 2001. Approximately $20 million of
the purchase price was allocated to goodwill.
8. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations and No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 addresses financial
accounting and reporting for business combination and requires all business
combinations to be accounted for using the purchase method. SFAS No. 141 is
effective for any business combinations initiated after June 30, 2001. SFAS No.
142, effective for Interpore Cross on January 1, 2002, addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. Goodwill and other intangible assets with indefinite
lives will no longer be amortized but instead will be subject to impairment
tests at least annually. In July 2001, with the acquisition of AOM, Interpore
Cross has adopted SFAS No. 141 and SFAS No. 142.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Description of Business
Our revenues are generated from the sale of products in three principal
categories--spinal products, orthobiologic products and minimally invasive
surgery products. Our spinal products consist of titanium or stainless steel
hooks, rods, plates, spacers and screws and related instruments required for the
surgeon to assemble a construct which restores the natural anatomy of the spine,
keeping it immobilized while a bone graft eventually fuses the vertebrae. Our
orthobiologic products consist of synthetic bone graft substitute materials and
products used to derive Autologous Growth Factors(TM) (AGF(TM)). AGF
fibrinogen-rich extract is used to provide faster, more complete bone growth and
enhance the performance of our bone graft products. Our minimally invasive
surgery products consist of instruments and devices used to deliver materials
into bony structures in a minimally invasive procedure. The products in this
category were obtained in our recent acquisition of American OsteoMedix
Corporation ("AOM").
All of our operations are located in the United States, however, we sell
our products to customers both within and outside the United States. Within the
United States, we distribute our products primarily through independent agents.
These independent agents provide a delivery and consultative service to our
surgeon and hospital customers and receive commissions based on sales in their
territories. The commissions are reflected in our income statement within
selling and marketing expense.
For our spinal products, we invoice hospitals directly following a surgical
procedure in which our products are used. Our spinal products are made
available to hospitals from consignment inventories maintained by our larger
independent agents, or from loaner implant sets that we ship from our facility.
For our orthobiologic and minimally invasive surgery products, we generally ship
directly to hospitals from our facility, and we invoice hospitals upon shipment.
Outside the United States, we sell our products directly to distributors
who maintain an inventory of our products. We record revenue at the time of
shipment to the distributor at prices reflecting a discount from our U.S. list
prices. The distributors service the surgeons and hospitals, deliver products
and invoice hospitals directly at prices determined by the distributors.
Because our revenues from U.S. hospitals are primarily at list price, and
our revenues from international distributors are at a discount to U.S. list
prices, our overall gross margin is subject to fluctuation based on our domestic
versus international sales mix, with domestic gross margins being somewhat
higher than international gross margins. Additionally, the mix between spinal
products sales and orthobiologic products sales also affects our gross margins,
with higher margins in orthobiologics.
Recent Event
On July 10, 2001, Interpore Cross completed the acquisition of American
OsteoMedix Corporation ("AOM"), a developer and marketer of minimally invasive
surgery products. The initial transaction value was $21 million, including
approximately $8 million in cash and approximately 2.4 million shares of
Interpore Cross common stock valued at $12 million. In addition to the initial
consideration, there is contingent cash consideration of up to $5 million based
upon the attainment of certain AOM product systems sales goals through 2005.
The transaction has been accounted for using the purchase method of accounting.
Results of operations of AOM are included in Interpore Cross' consolidated
results of operations beginning on July 10, 2001. Approximately $20 million of
the purchase price was allocated to goodwill.
10
Results of Operations
The following table presents our results of operations as percentages:
Three months ended September 30, Nine months ended September 30,
-------------------------------------- -------------------------------------
Percentage Percentage
Percentage of net sales change Percentage of net sales change
----------------------- ----------- ----------------------- ----------
2001 vs. 2001 vs.
2000 2001 2000 2000 2001 2000
-------- --------- ---------- --------- --------- ----------
Net sales 100.0% 100.0% 15.3% 100.0% 100.0% 9.4%
Cost of goods sold 29.4% 28.3% 10.8% 30.3% 28.9% 4.2%
-------- --------- ---------- --------- --------- ----------
Gross profit 70.6% 71.7% 17.1% 69.7% 71.1% 11.7%
-------- --------- ---------- --------- --------- ----------
Operating expense:
Research and development 12.7% 13.1% 18.9% 11.5% 13.4% 27.7%
Selling and marketing 35.2% 37.5% 22.7% 34.5% 35.9% 13.8%
General and administrative 9.0% 12.1% 56.0% 9.1% 10.5% 26.5%
Non-recurring charges - - n/a .8% - n/a
-------- --------- ---------- --------- --------- ----------
Total operating expenses 56.9% 62.7% 27.1% 55.9% 59.8% 17.1%
-------- --------- ---------- --------- --------- ----------
Income from operations 13.7% 9.0% (24.6%) 13.8% 11.3% (10.4%)
======== ========= ========== ========= ========= ==========
Three months ended September 30, 2000 and 2001
- ----------------------------------------------
For the quarter ended September 30, 2001, sales of $12.2 million were $1.6
million or 15.3% higher than net sales of $10.6 million for the same period of
2000.
Three months ended September 30, Change
--------------------------------- -----------------------
2000 2001 Amount %
---------- ----------- ---------- ----------
Spinal product sales................... $ 5,439 $ 6,969 $ 1,530 28.1%
Orthobiologic product sales............ 5,174 4,651 (523) (10.1%)
Minimally invasive surgery
product sales....................... - 610 610 n/a
---------- ----------- ---------- ----------
Total sales...................... $ 10,613 $ 12,230 $ 1,617 15.3%
========== =========== ========== ==========
Sales of spinal products increased in the quarter ended September 30, 2001
by $1.5 million or 28.1% to $7.0 million, compared to $5.4 million for the
quarter ended September 30, 2000. The increase is attributable to increased
sales of our base spinal products, primarily the Synergy Spinal System, and
sales of our recently released C-Tek(TM) Anterior Cervical Plate System.
Sales of orthobiologic products decreased by $523,000 or 10.1% to $4.6
million for the three months ended September 30, 2001, compared to $5.2 million
for the three months ended September 30, 2000. Sales of our synthetic bone graft
products decreased by 9% versus the third quarter of 2000, continuing a
quarterly trend that has ranged from 5% to 10% during this year. In 2000, sales
of synthetic bone graft products decreased by 7% compared to 1999. We believe
that the decreased sales of synthetic bone graft products have resulted from the
intentional focus of our distribution resources on the spinal surgery market.
While this focus has benefited our spinal product sales, we believe that it has
negatively impacted our sales of synthetic bone graft products into the non-
spinal orthopedic marketplace. We have initiated discussions with third parties
regarding the potential distribution of our synthetic bone graft products into
the non-spinal orthopedic marketplace, but there can be no assurance that our
efforts will be successful. Therefore, we expect that our synthetic bone graft
products will continue to experience similar sales decreases for at least the
next year. Additionally, sales of our AGF-related products reflected the first
quarterly decrease in sales since their introduction in 1999. We believe that
increased competition together with the cancellation of elective surgeries
following the terrorist attack in September were primarily responsible for the
sales decrease.
11
Sales of minimally invasive surgery products were $610,000 for the quarter
ended September 30, 2001. These products were acquired as part of the AOM
acquisition and accordingly, no sales were recorded during 2000.
Total domestic sales of spinal products, orthobiologic products and
minimally invasive surgery products increased 11.2% or $1.0 million to $10.0
million for the three months ended September 30, 2001, compared to $9.0 million
for the same period of 2000. International sales of $2.2 million for the third
quarter of 2001 were higher by $614,000 or 37.3% compared to $1.6 million for
the third quarter of 2000.
For the quarter ended September 30, 2001, the gross margin was 71.7% of
sales compared to 70.6% of sales for the quarter ended September 30, 2000. This
improvement primarily related to operating efficiencies.
Total operating expenses for the quarter ended September 30, 2001 increased
by 27.1% or approximately $1.7 million to $7.7 million, compared to $6.0 million
for the same quarter of 2000. Expenses related to the operations of AOM are
included in the current quarter and account for $589,000 of this increase. As a
percentage of sales, total operating expenses increased from 56.9% in the third
quarter of 2000 to 62.7% in the third quarter of 2001. Research and development
expenses increased by 18.9% or $254,000 due primarily to efforts related to the
development of potential new products and expenses related to AOM. Selling and
marketing expenses increased 22.7% or $850,000 compared to the third quarter of
2000 primarily due to commissions on increased sales and expenses related to
AOM. General and administrative expenses increased by 56.0% or $534,000,
primarily the result of legal expenses associated with the DePuy AcroMed
litigation and expenses related to AOM.
Total interest and other income decreased $77,000 or 25.6%, to $224,000 for
the quarter ended September 30, 2001, compared to $301,000 during the same
period of 2000. Lower interest income resulted from comparatively lower
interest rates and the decreased cash and cash equivalents associated with the
approximately $8 million of cash used in connection with the acquisition of AOM
in July 2001.
The effective tax rates for the third quarters of 2001 and 2000 were 38.5%
and 33.0%, respectively. The third quarter 2000 effective tax rate served to
adjust the 2000 year-to-date effective tax rate to 37.3%.
Nine months ended September 30, 2000 and 2001
- ---------------------------------------------
For the nine months ended September 30, 2001, sales of $36.5 million were
$3.1 million or 9.4% higher than net sales of $33.4 million for the same period
of 2000.
Nine months ended September 30, Change
------------------------------- -------------------------------
2000 2001 Amount %
--------- --------- -------- ---------
Spinal product sales................. $ 18,049 $ 21,057 $ 3,008 16.7%
Orthobiologic product sales.......... 15,337 14,860 (477) (3.1%)
Minimally invasive surgical
product sales..................... - 610 610 n/a
--------- --------- -------- ---------
Total sales................ $ 33,386 $ 36,527 $ 3,141 9.4%
========= ========= ======== =========
Sales of spinal products increased in the nine month period ended September
30, 2001 by $3.0 million or 16.7% to $21.0 million, compared to $18.1 million
for the nine month period ended September 30, 2000. The majority of the
increase resulted from sales of our new C-Tek Anterior Cervical Plate System.
Sales of orthobiologic products decreased by $477,000 or 3.1% to $14.9
million for the nine months ended September 30, 2001. A decrease in sales of
synthetic bone products was partially offset by increased sales of AGF related
products.
Sales of minimally invasive surgery products were $610,000, all of which
occurred in the quarter ended September 30, 2001.
12
Total domestic sales of spinal implant products, orthobiologic products and
minimally invasive surgery products increased 7.4% or $2.0 to $28.7 million for
the nine months ended September 30, 2001, compared to $26.7 million for the same
period of 2000. International sales of $7.8 million for the nine months ended
September 30, 2001 were higher by $1.2 million or 17.4% compared to $6.7 million
during the same period of 2000.
For the nine months ended September 30, 2001, the gross margin was 71.1% of
sales compared to 69.7% of sales for the nine months ended September 30, 2000.
This improvement primarily related to higher average selling prices for our
spinal products and operating efficiencies.
Total operating expenses for the nine months ended September 30, 2001
increased by 17.1% or $3.2 million to $21.9 million, compared to $18.7 million
for the same period of 2000. Expenses related to operations acquired in the AOM
transaction accounted for $589,000 of this increase. As a percentage of sales,
total operating expenses increased from 55.9% in the first nine months of 2000
to 59.8% in the first nine months of 2001. Research and development expenses
increased by 27.7% or $1.1 million due primarily to efforts related to the
development of potential new products. Selling and marketing expenses increased
13.8% or $1.6 million compared to the nine months ended September 30, 2000
primarily due to commissions on increased sales and increased net expenses
related to our symposiums. General and administrative expenses increased 26.5%
or $809,000, primarily as the result of legal expenses associated with the DePuy
AcroMed litigation.
Total interest and other income increased $184,000 or 28.4%, to $832,000
for the nine months ended September 30, 2001, compared to $648,000 during the
same period of 2000 primarily as the result of lower interest expense from the
elimination of long-term debt and increased royalty income.
The effective tax rates for the first nine months of 2001 and 2000 were
38.5% and 37.0%, respectively.
Liquidity and Capital Resources
In the first nine months of 2001, our operations generated positive cash
flow of approximately $2.5 million. On July 10, 2001, we used approximately $8
million of our cash in connection with the acquisition of AOM. We invest our
excess cash in U.S. Treasury securities and high-grade marketable securities.
At September 30, 2001, cash, cash equivalents and short-term investments totaled
$7.9 million, down $6.7 million from $14.6 million at December 31, 2000. We
also have a $5.0 million revolving line of credit available to us that had no
amount outstanding at September 30, 2001 and which expires in June 2002.
We believe we currently possess sufficient resources to meet the cash
requirements of our operations for at least the next year. We have used and may
continue to use our cash, our common stock, or a combination of both to pay for
purchased technologies, product lines, mergers and acquisitions. We also intend
to continue to invest in the development of our business. Some of these
activities may require cash in excess of that which we currently possess, and we
can give no assurance that we will be able to raise the additional capital on
satisfactory terms, if at all.
At September 30, 2001, we had no material commitments for capital
expenditures.
13
Cautionary Note Regarding Forward-Looking Statements
We caution the reader that certain important factors may affect our actual
results and could cause such results to differ materially from any forward-
looking statement which may have been deemed to have been made in this report or
which are otherwise made by us or on our behalf. For this purpose any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as "may", "will", "expect", "believe",
"anticipate", "intend", "could", "would", "estimate", "continue" or "pursue",
or the negative other variations thereof or comparable terminology are intended
to identify forward-looking statements.
Forward-looking statements involve risks and uncertainties that cannot be
predicted or quantified and, consequently, actual results may differ materially
from those expressed or implied by such forward-looking statements. Such risks
and uncertainties include, among other things:
. the success of our product development activities and uncertainties related
to the timing or outcome of such activities;
. the timing with which regulatory authorizations and product introduction
may be achieved, if at all;
. our ability to adequately protect our technology and enforce our
intellectual property rights;
. our success in acquiring or licensing proprietary technologies that are
necessary for our product development activities;
. the outcome of litigation involving Interpore Cross (including patent,
trademark and copyright litigation), and the costs, expenses and possible
diversion of management's time and attention arising from such litigation;
. our ability to obtain and maintain a sufficient supply of products to meet
market demand in a timely manner;
. our ability to timely and cost effectively integrate into our operations
the companies that we acquire, including AOM;
. our dependence on single source suppliers and the risks associated with a
production interruption or shipment delays at such suppliers;
. the scope, outcome and timeliness of any governmental, court or other
regulatory action (including, without limitation, the scope, outcome or
timeliness of any inspection or other action of the FDA);
. the availability on commercially reasonable terms of raw materials and
other third party sourced products;
. our exposure to product liability and other lawsuits and contingencies;
. our successful compliance with extensive, costly, complex and evolving
governmental regulations and restrictions;
. market acceptance of and continued demand for our products and the impact
of competitive products and pricing; and
. other risks and uncertainties detailed herein and from time to time in our
Securities and Exchange Commission filings.
The information contained in this report is as of September 30, 2001,
unless expressly stated as of another date. We undertake no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise. We also may make additional
disclosures in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K that we may file from time to time with the
Securities and Exchange Commission. Please also note that we provide a
cautionary discussion of risks and uncertainties under the section entitled
"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31,
2000. These are factors that we think could cause our actual results to differ
materially from expected results. Other factors besides those listed here could
also adversely affect us. This discussion is provided as permitted by the
Private Securities Litigation Reform Act of 1995.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk for changes in interest rates related
primarily to our cash and cash equivalent balances and marketable securities.
However, as all of our investments are in short-term instruments, we believe
that we have no material market risk exposure.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 5, 2000, our wholly-owned subsidiary, Cross Medical Products,
Inc. ("Cross"), filed suit in the U.S. District Court, Central District of
California, against DePuy AcroMed, Inc., a Johnson & Johnson company and
Biedermann Motech GmbH, which alleges that DePuy AcroMed has infringed and
continues to infringe Cross' U.S. Patent Nos. 5,466,237 and 5,474,555. These
patents relate to the VLS(TM) or Variable Locking Screw technology embodied in
certain components of our Synergy(TM) Spinal System. The Complaint seeks damages
for willful past and continuing infringement of the patents. The Complaint also
seeks a declaratory judgment against DePuy AcroMed and Biedermann Motech that
Cross is not infringing Biedermann Motech's patent no. 5,207,678. DePuy AcroMed
has responded to the Complaint alleging that Cross' patents are invalid and
unenforceable, and alleging that it does not infringe.
On May 21, 2001, the Court dismissed Cross' declaratory judgment claim,
ruling that Biedermann Motech is not subject to personal jurisdiction in
California and is indispensable to the claim. Cross is exploring strategies in
response to this ruling.
The Court has set trial for May 2002, and the parties are currently
involved in discovery.
Aside from the patent litigation, the nature of our business subjects us to
product liability and various other legal proceedings from time to time. We are
currently involved in legal proceedings incidental to the normal conduct of our
business. We do not believe that any liabilities relating to the legal
proceedings to which we are a party are likely to be, individually or in the
aggregate, material to our consolidated financial condition or results of
operations.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
None.
b. Reports on Form 8-K.
On July 24, 2001, the Company filed a report on Form 8-K with the
Securities and Exchange Commission describing the acquisition of
American OsteoMedix Corporation. This Form 8-K was amended on August
21, 2001 to include the historical financial statements of American
OsteoMedix Corporation and unaudited pro forma financial information.
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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: November 8, 2001 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
16