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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended: December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO .
Commission File No. 0-22958
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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
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
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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 preceding 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 3, 2000, the aggregate market value of voting stock of Interpore
International, Inc. held by non-affiliates was $114,361,000 based upon the
closing price of such stock on The Nasdaq Stock Market. The number of shares of
common stock outstanding as of that date was 13,750,282.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Joint Proxy Statement for the 2000 Annual Meeting of
Shareholders of Interpore International, Inc. are incorporated by this
reference into Part III as set forth herein.
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PART I
Item 1. Business
Overview
Prior to our merger with Cross, Interpore International developed and
marketed a line of synthetic bone graft materials. In May 1998 we merged with
Cross, a company offering a broad line of spinal implants. Our merger with
Cross created a medical device company with a complementary combination of
spinal implant and orthobiologic technologies, an expanded product portfolio
and distribution channels specifically addressing the spinal surgery market.
Our combined product portfolio addresses two of the fastest growing areas in
the medical device industry--spinal implants and orthobiologics.
In the spinal implant product category, we offer the Synergy Spinal System
which is used in spine fusion procedures. Our current product offering is
applicable to lumbar and thoracic fusions, which represent over 58% of spine
fusion procedures. We believe our Synergy Spinal System enhancements, cervical
devices and spine cages, which are in late stage development, will provide us
with the products necessary to address the remaining spine fusion procedures
that utilize spinal implants.
Our principal orthobiologic offering includes synthetic bone graft products
and AGF related products. Our Pro Osteon products are implanted in a bone
deficit and provide a matrix that facilitates new bone ingrowth. Pro Osteon was
the first synthetic bone graft substitute to obtain FDA approval for orthopedic
applications. We estimate that it has been used in more than 150,000 patients
since its introduction. Our BonePlast is a resorbable bone void filler that is
replaced by the patient's own bone during the healing process. We commercially
launched our AGF related products in the second quarter of 1999 and estimate
that approximately 5,000 patients have been treated with AGF since the
beginning of 1999. AGF is a concentrate of growth factors derived from
platelets in a patient's own blood which is used to accelerate bone repair. We
believe AGF will have application in a wide variety of bone and soft tissue
procedures.
Virtually all spine fusion procedures require the use of a bone graft and a
majority of these procedures also use spinal implants. AGF can be applied
wherever bone grafts are used. We offer three distinct product lines which can
be used in combination for spinal fusions: spinal implants, synthetic bone
graft materials and products used to derive growth factors. Because spine
surgeons are the primary customers for each of our product lines, we believe
our complementary product portfolio provides substantial cross selling
opportunities to our distribution network. We plan to develop and commercialize
new products which will allow us to offer our customers a more comprehensive
solution for spine fusion procedures.
Spine Anatomy
The spinal column consists of 24 separate bones called vertebrae that are
connected together to permit a normal range of motion. The spinal cord, the
body's central nerve column, is enclosed within the spinal column. Vertebrae
are paired into what are called motion segments that move by means of three
joints: two facet joints and one spinal disc. The typical spine, as it relates
to spinal implants, is made up of the following four main regions:
. Cervical vertebrae are the first seven vertebrae in the neck;
. Thoracic vertebrae are the next twelve vertebrae in the chest or rib
cage;
. Lumbar vertebrae are the next five vertebrae in the lower back; and
. The sacrum.
Spine Disorders
The following are the four major categories of spine disorders:
. Degenerative conditions. Degenerative conditions in the facet joints and
disc can result in instability and impingement on the nerve roots as
they exit the spinal canal, causing back pain or radiating pain in the
arms or legs.
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. Deformities. Deformities, such as scoliosis, are deviations in the
normal curvature and alignment of the spine. Deformities range in
severity from cosmetic issues through varying levels of pain, discomfort
or reduced function.
. Trauma. Trauma, or injuries to the spine, if not corrected, can result
in instability, pain, damage to the spinal cord and/or nerve roots,
paralysis and deformity.
. Tumors. Tumors in the spine typically occur in the vertebral body and
eventually result in fracture of the vertebral body, causing
instability, pain and deformity.
Surgical Treatment of Spine Disorders
The prescribed treatment for spine disorders depends on the severity and
duration of the disorder and the success or failure of non-operative therapies.
Non-operative therapies include bed rest, medication, lifestyle modification,
exercise, physical therapy, chiropractic care and steroid injections. However,
non-operative treatment options are not effective in many cases, and we
estimate that over 500,000 patients undergo spinal surgery, such as spine
fusions and spinal discectomies, each year in the United States.
Advanced cases of spine disorders can require that surgeons remove all or
part of a damaged disc and/or fuse two or more adjoining vertebrae together. A
fusion involves the placement of bone graft material between two vertebrae and
may involve the use of spinal implants to immobilize the vertebrae while they
fuse together. The bone graft is intended to provide a matrix that facilitates
new bone ingrowth. Complete formation of new bone may take six to eighteen
months. For many years, surgeons have sought a means to increase the rate of
new bone formation at a surgical site. However, until recently, no growth
inducing agents were commercially available.
We estimate that approximately 42% of the spine fusion procedures are
performed in the cervical spine, approximately 52% are performed in the lumbar
spine, and approximately 6% are performed in the thoracic spine. Our current
spinal implants address the lumbar and thoracic regions of the spine.
Spinal Implant Market Overview
The number of spine fusion procedures performed annually in the United
States is estimated to exceed 260,000. In 1998, the U.S. market for spinal
implants, one of the fastest-growing markets in the medical device industry,
grew over 25%, and sales exceeded $670 million. We believe that the number of
spine fusion procedures will continue to grow, primarily as a result of
demonstrated better outcomes, surgeons' familiarity with spinal implants and
the overall aging of the population.
Our Spinal Implant Products
Synergy Spinal System. Our Synergy Spinal System consists of rods, hooks and
screws that are attached to vertebrae adjacent to an injured or defective area
of the spine. Our system is a "universal" implant system that allows surgeons
to treat both the thoracic and lumbar portions of the spine.
We believe our Synergy Spinal System offers a number of benefits, including
the following:
. Ease of Use. Our Synergy Spinal System was engineered to be easy for
surgeons to use, reducing surgical time and requiring less manipulation.
The screws and hooks are top tightening, the rods do not require pre-
loading of additional components, and all implants allow for free rod
rotation.
. Our patented variable locking screw design allows the surgeon to angle
and tighten screws in any plane, reducing the amount of required rod
bending and facilitating rod placement.
. The patented design of the external hexagonal head of our double hex
set screw shears off at a predetermined torque, allowing the surgeon
to consistently tighten screws to the right tension. However, an
internal hexagonal cavity remains to allow the surgeon to remove the
set screw if necessary.
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. Universal Application. Synergy implants come in various sizes and types
to meet the surgeon's preferences and the patient's anatomy, providing a
secure anatomic fit for virtually any pathology. The Synergy Spinal
System does not require that surgeons follow a single surgical protocol,
but provides several options, and can be used in both anterior and
posterior applications, in both adults and children.
. Smaller and Stronger. We offer Synergy implants in either nitrogen-
strengthened stainless steel or titanium. The strength of the Synergy
implants provides resistance to fatigue and allows the implants to be
produced smaller than competing products. Titanium implants are
preferred in many foreign markets and are being used increasingly in the
United States because titanium allows magnetic resonance imaging of the
spinal area.
. Low Profile. Profile describes the prominence of implants above the
normal bony surfaces of the spine. The Synergy Spinal System was
designed to minimize the height and bulk of its implants, reducing the
risk of irritation, inflammation and infection for the patient. It is
consistently ranked as having one of the lowest profiles of commonly
available spinal implant systems.
Our Spinal Implant Products in Late Stages of Development
We continue to expand and enhance our spinal implant product line and are in
the late stages of developing:
. Cervical Implants. Implants are in development that will be applicable
to the cervical region of the spine, an area not currently addressed by
the Synergy Spinal System. We plan to submit a 510(k) application for
our cervical implants in mid-2000.
. Synergy Low Back Improvements. Planned improvements to our Synergy
Spinal System include screw and nut designs intended to reduce the space
taken up by screws along a rod, making the system easier to use in the
lower back. We have received 510(k) clearance for these improvements and
are in the process of commercially releasing the products.
. Corpectomy Cage. We have developed an expandable titanium cage intended
to replace one or two vertebral bodies in the cervical spine that have
been removed because of tumor. We have received a Humanitarian Device
Exemption from the FDA for the cervical version of our Telescopic Plate
Spacer (TPS(TM)). We are developing a version of the TPS for use in the
lumbar and thoracic regions of the spine, and plan to seek FDA approval
later in 2000.
Other products that we are currently developing are described in "Research
and Development."
Description of Orthobiologics
Orthobiologic products are used to replace bone damaged due to degenerative
conditions, deformities, trauma or tumors, or to provide supplemental bone
required in spine fusion procedures or in revision total joint procedures.
There are three types of orthobiologic products:
. Osteoconductive materials, which act as a scaffold for bone and tissue
growth while healing occurs;
. Osteoinductive materials, which promote or stimulate bone or tissue
growth; and
. Combination materials with both osteoconductive and osteoinductive
characteristics.
Bone is a composite material made up of bone cells and ceramic particles.
Bone continuously remodels itself, thereby repairing the small imperfections
formed due to everyday activity. Bone will often spontaneously repair minor
fractures without surgical intervention. However, major skeletal deficiencies
from trauma, spinal instability, degenerative conditions and tumor will
frequently require a surgical procedure involving bone graft.
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Bone Grafts. Bone grafts are used in 400,000 to 500,000 procedures annually
in the United States. They are used for a wide variety of indications including
spine fusions, total joint surgery, maxillofacial applications and other
surgical procedures. There are currently three major categories of bone grafts:
autograft, allograft, and synthetic bone graft substitutes. We estimate that
more than half of the bone graft procedures performed in the United States are
autograft procedures, with the remaining procedures divided approximately
equally between allografts and synthetic bone graft substitutes.
Autograft bone is bone harvested from another part of the patient's
skeleton, typically the iliac crest or hip. Once harvested, the bone is grafted
to the site of the bone deficit. Harvesting bone typically requires a second
surgical procedure, increases total operating time and expense, and can lead to
complications such as infection, chronic pain, deformity and excess blood loss.
Autograft bone can have both osteoinductive and osteoconductive properties.
Allograft bone is bone obtained from a cadaver and is available in a variety
of forms, including chips, paste, blocks, gels and putties. While allograft
bone is available from numerous bone banks, its use carries risks of implant
rejection and transmission of infectious agents such as hepatitis B and HIV.
Also, allograft bone is not always readily available due to the storage,
processing and donor screening required, and patients are often reluctant to
have allograft implanted in their bodies. Allograft bone can have
osteoconductive and osteoinductive properties, however, we believe growth
factors may be destroyed in commonly used sterilization procedures.
Synthetic bone graft substitutes are artificially produced and can be used
as bone substitutes in place of autograft or allograft or mixed with autograft
or allograft. Synthetic bone graft substitutes are available in a wide range of
forms, including granules, blocks, strips, gels, slurries and injectable bone
graft cements. Synthetic bone graft substitutes generally have osteoconductive
properties.
Growth Factors. Specific proteins, called growth factors, regulate bone
generation by stimulating either the formation of new bone cells or the
replication of existing cells. We believe that the combination of growth
factors with bone grafts is the next major advancement in bone grafting. To
derive growth factors, a number of methods are under development, including
recombinant DNA technology and advanced filtration technologies. With
recombinant DNA technology, the desired human growth protein gene is introduced
into a production host, usually an animal, bacterial or yeast cell, and the
host makes the human protein along with its own. These proteins are then
concentrated and made into a usable form. Using filtration methods, the human
growth factor proteins are removed from the patient's own blood. These proteins
can be concentrated and combined with any of the three major categories of bone
graft.
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Our Orthobiologic Products
Bone Graft Substitutes. Our Pro Osteon bone graft substitute products are
derived from the exoskeleton of two specific genera of coral and chemically
converted into a material with porosity, architecture and chemical composition
similar to that of human bone, using our proprietary manufacturing process. Due
to its structure, the graft provides a matrix that facilitates new bone
ingrowth. Our BonePlast bone void filler is a calcium sulfate (plaster-of-
paris) material that resorbs and is replaced with bone during the healing
process. Our line of osteoconductive bone graft products and, in the case of
Pro Osteon 200R, products awaiting regulatory approval, includes:
U.S. Regulatory
Product Description Indication Status
- ----------------------- -------------------- -------------------- --------------------
Pro Osteon 500 Bone graft Repair skeletal PMA approved in
(hydroxyapatite) substitute. 500 defects in 1992.
micron pore size extremities.
blocks and granules.
Pro Osteon 500R Patented resorbable Repair all skeletal 510(k) cleared in
(hydroxyapatite/calcium bone graft defects, including 1998.
carbonate composite) substitute. 500 spine.
micron pore size
granules.
Pro Osteon 200/ Bone graft Repair skeletal 510(k) cleared in
Interpore 200 substitute. 200 defects in 1985.
(hydroxyapatite) micron pore size oral/maxillofacial
blocks and granules. areas.
BonePlast (calcium Fast resorbing, Fill voids in bone. 510(k) cleared in
sulfate) moldable bone void Used in extremities, 1999.
filler. spine and pelvis.
Pro Osteon 200R Patented resorbable Proposed for repair 510(k) submitted in
(hydroxyapatite/calcium bone graft of skeletal defects 2000.
carbonate composite) substitute. 200 in oral/
micron pore size maxillofacial areas.
granules.
Our Pro Osteon and BonePlast products compare favorably with autograft,
allograft and other synthetic bone grafts used today. Our products:
. Eliminate morbidity and cost associated with autograft harvesting;
. Eliminate disease transmission and host rejection risk;
. Require no special handling or storage conditions;
. Can be prepared simultaneously with surgery;
. Contain no fillers such as glycerol, which can inhibit bone growth;
. Are easily shaped by surgeons to fill bone voids; and
. Can be easily combined with AGF.
AGF (Autologous Growth Factors). AGF is a concentrate of growth factors
derived from platelets in a patient's blood which is used to encourage more
complete and rapid bone growth in bone defects. We were the first to market
FDA-cleared devices that extract and concentrate autologous growth factors
intraoperatively to levels shown in studies to stimulate bone growth. Our two
key products used to collect AGF are the UltraConcentrator Permeability
Hemodialyzer and the Automated Processor. Cleared via the 510(k) pathway in the
fourth quarter of 1998, these products are used to produce a concentrated
growth factor "gel" from platelets in the patient's own blood. Our AGF related
products were commercially launched in June 1999, and we estimate that
approximately 5,000 patients have been treated with AGF since the beginning of
1999.
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In the AGF collection process, blood from the patient is separated into
different component layers using a device called a cell washer, which is
routinely available in the operating room during spine fusion and revision
total joint replacement procedures. The layer of platelet-rich plasma is then
processed using a proprietary filtering technology which super-concentrates the
platelets, releasing fibrinogen and a "cocktail" of growth factors, including
Platelet-Derived Growth Factor and Transforming Growth Factor Beta. With the
addition of thrombin, the fibrinogen is converted into fibrin, giving AGF a
gel-like consistency. AGF can be combined directly with a bone graft material,
such as our Pro Osteon and BonePlast products, as well as autograft and
allograft, and placed at the bone graft site.
We believe that AGF provides the surgeon with the growth factors desired for
faster and more complete bone graft healing that may be safer and more
economical than synthetic growth factors being developed by other companies due
to factors which include the following:
. Many surgeons prefer autologous solutions, such as AGF, that are derived
from the patient's own tissue;
. AGF's gel-like consistency discourages migration from the bone defect
site to other areas in the body;
. Using the patient's own growth factors eliminates dosage concerns; and
. Lower cost than that anticipated for competitive products under
development.
Business Strategy
Our goal is to establish a leadership position in the development of
products for the surgical treatment of spine disorders. In order to achieve
this goal, we are undertaking the following strategies:
Expand and Enhance our Spinal Implant Product Portfolio. We currently offer
products targeted at the thoracic and lumbar regions of the spine. Spinal
procedures often involve treatments in multiple regions of the spine including
the cervical region. We are enhancing our product portfolio through the
development of Synergy Spinal System improvements, cervical devices and spine
cages. This will allow us to offer physicians a comprehensive surgical
solution. We plan to invest significant resources in research and development
in an effort to introduce technological advancements in the spinal market. We
will also consider the acquisition of companies and products to complement our
current product platform.
Capitalize on "First to Market" with our AGF Technology. Our AGF related
products received market clearance in December 1998 and were nationally
launched in June 1999. Other synthetically derived growth factors are being
developed and are in late stages of clinical trials or the Premarket Approval
process, but none are yet approved for use in the United States. We plan to
capitalize on our position as the first company making growth factors available
domestically by increasing the number of our field technical specialists,
increasing product promotion, and conducting numerous clinical studies to prove
the effectiveness of AGF.
Continue to Expand and Strengthen our Distribution Network. In the United
States, we have selected independent agents as the primary channel to
distribute our product portfolio. Other companies in our industry are
attempting to transition from independent agents to a direct sales force. We
have been the beneficiary of such transitions, as many highly qualified agents
prefer to remain independent and find our product offering attractive. We
intend to attract and retain independent agents who have many years of
experience selling spinal products and strong relationships with spine surgeons
and can distribute both of our product lines. Our product offering presents
cross-selling opportunities for our distribution network. We provide extensive
technical training programs on new and current products and demonstrate how
these products can be used in combination. We believe these efforts will enable
us to further penetrate the spine market.
Expand our Clinical Leadership Base. We intend to increase market awareness
of our products through a combination of symposia, VIP tours and extensive
training and education programs for leading spine surgeons and key opinion
leaders. We also intend to enlist these leading physicians in various studies
involving our products. Upon completion of these studies, we will seek to
publish the results in well-known industry journals.
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Research and Development.
As of March 1, 2000, our research and development department consisted of 24
full-time employees. We also engage outside consultants and academic research
facilities for assistance with our new product development and will license
technology from third parties under appropriate circumstances. We plan to
continue to use outside resources for product research. In 1992, we formed the
Synergy System Advisors, a group of prominent spine surgeons, that assisted in
the development of the Synergy Spinal System. We have agreements with the
advisors under which we pay royalties ranging from 5% to 7% of net revenues
generated from the sale of certain products within the Synergy Spinal System.
Our expenditures for research and development were $3.2 million in 1997, $3.7
million in 1998 and $4.2 million in 1999.
Additional spinal implant and orthobiologic products which we currently
have under development include:
. Additional Cervical Implants. These include an occipital-cervical plate
which will allow surgeons to extend constructs of implants to the skull
from the cervical region of the spine, and a cervical plate spacer, a
single implant to replace the use of a separate spacer and plate in
cases where a discectomy is performed. We expect to submit 510(k)
applications for these products by year-end 2000.
. Geo(TM) Structure. This unique titanium spacer has a geometric design
which provides very high strength with a minimum amount of metal in the
implant. This design will allow the surgeon to place a larger quantity
of graft material at the graft site, which increases the probability of
a successful fusion. It will also allow better radiographic
visualization of the graft site postoperatively for better assessment of
fusion. We expect to submit a 510(k) application for this product by
year-end 2000.
. Intervertebral Cages. We are currently conducting mechanical testing on
several alternative designs. Our objective is to develop a cage which
would be a stand-alone device, expandable to optimize anatomic fit, and
radiolucent. Intervertebral cages are currently Class III devices, and
would require PMA approval.
. Artificial Disc. Our simple design, with no moving parts, could allow a
surgeon to replace a diseased disc while maintaining motion of the spine
in the affected segment, eliminating the need for fusion. We expect to
begin animal studies on this device later this year.
. Applications of BonePlast for Vertebroplasty. Vertebroplasty is a
treatment for compression fractures of the vertebrae, a common
occurrence among osteoporotic patients. In a vertebroplasty, material is
inserted into the vertebral body to restore the height of the vertebra
and reduce pain. BonePlast could potentially be used to perform this
procedure in a minimally-invasive manner. We are currently conducting
feasibility studies in this area.
. Polymer-reinforced Pro Osteon Material. We have development efforts
underway for a polymer-reinforced Pro Osteon material. We believe that
increasing the strength of our resorbable version of Pro Osteon in
various configurations, combined with AGF, holds promise for potential
use as a natural, resorbable alternative to titanium and composite
spinal implants currently available in the market. Such a product would
be several years from the market, if developed at all.
We currently have a number of prospective randomized clinical studies
underway at a variety of institutions to demonstrate the efficacy of our AGF-
related products for multiple indications.
Intellectual Property
As part of our ongoing research, development and manufacturing activities,
we have a policy of seeking patent protection. Patents relating to particular
products, uses or procedures, however, do not preclude other manufacturers
from employing alternative processes or from successfully marketing substitute
products. We believe that although patents often are necessary to protect our
technology and products, the lengthy FDA approval process and certain
manufacturing processes are more significant barriers to entry. Moreover, much
of the proprietary technology and manufacturing processes developed by us
reside in our key scientific and
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technical personnel and such technology and processes are not easily
transferable to other scientific and technical personnel. The loss of the
services of key scientific, technical and manufacturing personnel could have a
material adverse effect on our business and results of operations.
Spinal Implant Products. We own eight U.S. patents related to various
aspects of our spinal implant products, including the bone anchor, the
rod/anchor interface, instrumentation and transverse connectors. We have four
U.S. patents pending concerning enhancements to our Synergy Spinal System and
for several new products.
Orthobiologic Products. We own eleven U.S. patents related to our
orthobiologic products. Of these, two relate to our Pro Osteon 500R resorbable
bone graft substitute, and three are for our AGF related products. We have two
U.S. patents pending, and one relates to our polymer-reinforced Pro Osteon
material.
In the fourth quarter of 1999, we purchased all of the intellectual property
of Quantic Biomedical, Inc. Quantic previously had licensed to us the right to
design, manufacture and market orthopedic products incorporating technology to
produce AGF. We acquired this technology in order to preserve our access to all
markets for our AGF related products.
We require our employees, consultants and advisors to execute nondisclosure
agreements in connection with their employment, consulting or advisory
relationships with us. We also require our employees, consultants and some
advisors to agree to disclose and assign to us all inventions conceived during
the work day, using our property or which relate to our business. Despite any
measures taken to protect our intellectual property, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that
we regard as proprietary. Finally, our competitors may independently develop
similar technologies.
Our trademarks include "Interpore(R)," "Cross Medical(R)," "Cross(R)," "Pro
Osteon(R)," "Pro Osteon 500(R)," "Interpore 200(R)," "AGF(TM)," "Autologous
Growth Factors(TM)," "Synergy(TM)," "BonePlast(TM)," "TPS(TM)," "Geo(TM)
Structure," and "Integral(TM)."
Customers, Sales and Marketing
The decision to use our products is made by the orthopedic surgeon or the
neurosurgeon. We direct our domestic marketing efforts to the approximately
14,000 practicing orthopedic surgeons in the United States in private practice,
hospitals and orthopedic treatment centers. Of the 14,000 practicing orthopedic
surgeons, we estimate there are over 2,000 fellowship trained spine surgeons.
In addition to the orthopedic surgeons, we estimate that there are over 1,000
neurosurgeons performing spine fusion procedures that utilize implants.
Our domestic sales organization consists of a combination of independent
agents and direct sales representatives. As of March 3, 2000, we had contracts
with 43 independent agents which employed approximately 135 sales
representatives and we employed six direct sales representatives. We are
decreasing our reliance on direct sales representatives and are increasing our
reliance on independent sales agents because
we believe we can attract independent agents that desire our complementary
product portfolio and that possess strong surgeon relationships, an important
factor for competing in our industry. The domestic sales organization is
managed by a Vice President of North American Sales and five division managers
manage the domestic sales organization. We invoice hospitals directly,
generally at list prices, and pay commissions to the agents and direct sales
representatives. We provide consignment inventories to our independent agents,
direct sales representatives and hospitals. We select agent organizations and
direct sales representatives for their expertise in spinal implant, orthopedic
or medical device sales, their reputation within the surgeon community and
their sales coverage within a geographic area. Each agent organization and
direct sales representative is given an exclusive sales territory for some or
all of our products and is subject to periodic performance reviews. In
addition, each new independent sales agent and direct sales representative goes
through training programs before initiating sales of our products. We also
require each independent agent and direct sales representative to attend
periodic sales and product training.
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Outside of the United States, we distribute products only through
independent distributors. We have a Vice President of International Sales, one
Latin America sales manager and a European business liaison and have
established distribution arrangements with 54 distributors in 41 countries. Our
international sales represented approximately 24% of sales in 1997, 23% of
sales in 1998 and 22% of sales in 1999. Sales to our international customers
are denominated in U.S. dollars.
In the United States, there are no significant customer concentrations, as
we invoice hospitals directly for product used or shipped. However, in the
international markets, we have two significant distributors that on a combined
basis accounted for approximately 31% of our 1999 international sales and 7% of
our 1999 worldwide sales.
In order to improve shipping efficiencies and service to our international
customers, in January 1998, we entered into an agreement with a contract
warehouse in the Netherlands to ship bone graft products to customers in
countries outside of North America.
We participate in over two dozen professional meetings including the
American Academy of Orthopaedic Surgeons Meeting, the North American Spine
Society Meeting and the Congress of Neurological Surgeons. We also participate
in scientific presentations and professional seminars at hospitals.
Third-Party Reimbursement
We expect that sales volumes and prices of our products will continue to be
dependent in large measure on the availability of reimbursement from third-
party payors. In the United States, our products are purchased by hospitals,
who are reimbursed for the devices provided to their patients by third-party
payors, such as governmental programs (e.g., Medicare and Medicaid), private
insurance plans and managed care programs. These third-party payors may deny
reimbursement if they determine that a device used in a procedure was not used
in accordance with cost-effective treatment methods, as determined by the
third-party payor, or was used for an unapproved indication. Also, third-party
payors are increasingly challenging the prices charged for medical products and
services. In international markets, reimbursement and healthcare payment
systems vary significantly by country and many countries have instituted price
ceilings on specific product lines. There can be no assurance that our products
will be considered cost-effective by third-party payors, that reimbursement
will be available or, if available, that the third-party payors' reimbursement
policies will not adversely affect our ability to sell our products profitably.
Particularly in the United States, third-party payors carefully review, and
increasingly challenge, the prices charged for procedures and medical products.
In addition, an increasing percentage of insured individuals are receiving
their medical care through managed care programs, which monitor and often
require pre-approval of the services that a member will receive. Many managed
care programs are paying their providers on a capitated basis, which puts the
providers at financial risk for the services provided to their patients by
paying them a predetermined payment per member per month. The percentage of
individuals covered by managed care programs is expected to grow in the United
States over the next decade.
We believe that the overall escalating cost of medical products and services
has led to, and will continue to lead to, increased pressures on the healthcare
industry to reduce the costs of products and services. There can be no
assurance that third-party reimbursement and coverage will be available or
adequate, or that future legislation, regulation, or reimbursement policies of
third-party payors will not adversely affect the demand for our products in
development or our ability to sell these products on a profitable basis. The
unavailability or inadequacy of third-party payor coverage or reimbursement
could have a material adverse effect on our business, operating results and
financial condition.
9
Manufacturing
Spinal Implants. Implantable grade stainless steel and titanium bar stocks
are the primary raw materials used to manufacture our spinal implants. We
purchase and inventory these materials, which are available from several
sources and currently have a purchase order lead time of approximately two
months, so that we can best control the quality and consistency of material
used to manufacture our spinal implant products. We resell the raw material to
our contracted outside vendors for the manufacture of our spinal implants based
on our specifications. Following the receipt of product at our facility, we
conduct inspection, packaging and labeling operations. Our spinal implant
products are distributed in a non-sterile condition, which is customary in the
spinal implant market.
Orthobiologics. Coral is the primary raw material used to manufacture our
Pro Osteon products. The coral used in our products is sourced from two genera
located in a wide variety of geographic locations. We presently harvest coral
in tropical areas of the Pacific and Indian Oceans. We believe we have an
adequate supply of coral for the foreseeable future. Coral is covered under an
international treaty entitled Convention on International Trade of Endangered
Species of Wild Fauna and Flora, which regulates the import/export of raw coral
and products derived therefrom in approximately 140 nations around the world.
To date, the limitations
imposed by this treaty have not affected our ability to source raw coral. The
manufacturing process for our Pro Osteon line of bone graft substitute products
involves coral qualification and cutting, hydrothermal conversion, testing,
packaging and sterilization of the product, all of which, with the exception of
sterilization, are performed at our facilities.
Some of the products and materials supplied by our vendors are currently
sole-sourced, but we believe that we could locate alternative vendors for
supply of these components. However, the UltraConcentrator, one of our products
used to collect AGF, is manufactured under an exclusive supply agreement with a
vendor that itself has a sole source of supply of the contained filter
material. Although the filter material is not readily available through
alternative sources, we believe that there are suppliers that could supply
alternate materials with probable equivalent function. In the event that a re-
engineering of the product were necessary due to an interruption in supply from
our current vendor, delays in product availability could occur and significant
costs could be incurred, either of which could have a material adverse effect
on our operations.
Competition
Spinal Implant Market. Many companies compete in the spinal implant market
and competition is intense. We believe that our largest competitors in the
United States offering spinal implants are Medtronic Sofamor Danek USA, DePuy
Acromed, Inc., a Johnson & Johnson company, and SYNTHES-STRATEC, Inc., each of
which has substantially greater sales and financial resources than we do.
Medtronic Sofamor Danek, in particular, has a broader spinal implant line.
Other companies have developed and are marketing products based on technologies
that are different from ours, including spine fusion cages, spinal implants
designed to be used with minimally invasive or laparoscopic surgery, and
allograft bone dowels.
Orthopedic Bone Graft Substitute Market. Our synthetic bone products compete
with natural bone obtained from autograft procedures, which is the physician's
"gold standard," with allograft bone obtained from cadavers and with other
synthetic bone products. Autograft and allograft bone have been used for graft
material for a much longer period than synthetic bone graft materials, and in
order to maintain and increase our future sales of our synthetic bone graft
products, we will have to continue to demonstrate to the medical community the
surgical and patient advantages, safety, efficacy, cost effectiveness and
clinical results of our synthetic bone graft products. Competitive bone
substitute products include: Grafton(R) demineralized bone products from
Osteotech, DynaGraft demineralized bone products from GenSci Regeneration
Technologies, OsteoSet(TM) calcium sulfate from Wright Medical Technology, as
well as other bone substitute products used in non-orthopedic applications.
Several other companies are pursuing additional synthetic bone graft materials
for orthopedic applications which could ultimately compete with our synthetic
bone graft products in the United States.
10
Growth Factors. There is significant development activity ongoing that, if
successful, would potentially produce products competitive with our AGF
technology. Creative Biomolecules has a recombinant human bone morphogenetic
protein (OP-1), which is in human clinical studies under an FDA-approved
Investigational Device Exemption. Genetics Institute, Inc. has a recombinant
human bone morphogenetic protein (rhBMP-2) in human clinical studies. Sulzer
Orthopedics Biologics, a subsidiary of SulzerMedica of Switzerland, has an
extract of bovine (cow)-derived bone growth protein that is in preclinical
animal studies and may be in clinical evaluation.
We compete in all of our markets primarily on the basis of product
performance and price, as well as customer loyalty and service.
Government Regulation
Our products are regulated by the FDA under the federal Food, Drug and
Cosmetic Act, as well as other federal, state and local governmental
authorities and similar regulatory agencies in other countries. The FDA permits
commercial distribution of a new medical device only after the FDA has cleared
a 510(k) premarket
notification or has approved a Premarket Approval application for such medical
device. In general, the FDA will clear marketing of a medical device through
the 510(k) premarket notification process if it is demonstrated that the new
product is substantially equivalent, in terms of safety and intended use to
certain 510(k) cleared products which are already commercially available and
legally sold on the market.
The Premarket Approval process is lengthier and more burdensome than the
510(k) premarket notification process. The Premarket Approval process generally
requires detailed animal and clinical studies, as well as manufacturing data
and other information. If clinical studies are required by the FDA, an
Investigational Device Exemption is also required. An Investigational Device
Exemption restricts the investigational use of the device to a limited number
of investigational sites, investigators and patients. Its purpose is to prove
safety and efficacy of the device. FDA approval of a Premarket Approval
application indicates that the FDA concurs that a device has been
scientifically proven, through the completion and submission of animal data, a
completed Investigational Device Exemption and other pertinent information, to
be safe and effective for its intended use.
Our Synergy Spinal System received 510(k) marketing clearance from the FDA.
We received 510(k) clearance from the FDA to market the anterior portion of the
Synergy Spinal System in October 1994 and for the posterior portion of the
system in July 1995. In September 1996, we developed a titanium version of the
Synergy Spinal Implant System for international distribution. We received FDA
marketing clearance for the anterior portion of the titanium version in October
1995 and the posterior portion in January 1997.
In March 2000, the Food and Drug Administration approved a Humanitarian
Device Exemption (HDE) for the cervical version of our corpectomy cage, the
Telescopic Plate Spacer (TPS). An HDE is designed to encourage the discovery
and use of devices intended to benefit patients in the treatment or diagnosis
of diseases or conditions that affect or are manifested in fewer than 4000
individuals in the United States per year. In the case of the TPS cage, the
approved indication is for the replacement of normal body structures following
a vertebrectomy or corpectomy of the spine for metastatic disease in the
cervical or cervical-thoracic spine.
In October 1992, we received FDA approval to market Pro Osteon 500 for
certain defects in the wide part of long bones. We subsequently received FDA
approval to market it in granular forms and a wide variety of block
configurations up to 30 cc's in total volume, and for additional indications
including the treatment of cysts and tumors in long bones. Our Pro Osteon 200
and Interpore 200 were cleared for marketing for certain oral surgery,
periodontal defects, craniofacial and orthognathic indications through 510(k)
premarket notifications.
In July 1997, the FDA cleared the use of a competitive synthetic bone graft
substitute product with a 510(k). Prior to clearance of this device, companies
were required to obtain marketing approval from the FDA for bone graft
substitutes via the Premarket Approval process. It is possible that some
clearances of other bone
11
graft substitute products may now be obtained through the less burdensome
510(k) premarket notification process. This may increase competition. In
September 1998, we received a 510(k) clearance from the FDA for our Pro Osteon
500R resorbable bone graft substitute product. The approved indications include
use in bony voids or gaps of the skeletal system, such as the extremities,
spine and pelvis.
In September, 1999, we received FDA 510(k) clearance for our BonePlast bone
void filler for use in the extremities, spine and pelvis.
In December 1998, we received FDA 510(k) clearances for the two key products
used to collect AGF, the UltraConcentrator Permeability Hemodialyzer and the
Automated Processor.
Other FDA requirements govern product labeling and prohibit a manufacturer
from marketing an approved device for unapproved applications. If the FDA
believes that a manufacturer is not in compliance with the law, it can
institute proceedings to detain or seize products, issue a recall, enjoin
future violations and assess civil and criminal penalties against the
manufacturer, its officers and employees.
We are registered as a medical device manufacturer with the FDA, with state
agencies such as the Food and Drug Branch of the California Department of
Health Services and with the European Community. These agencies inspect our
facilities from time to time to determine whether we are in compliance with
various regulations relating to medical device manufacturing, including the
FDA's Quality System Regulations and ISO 9001, which govern design,
manufacturing, testing, quality control, sterilization and labeling of medical
devices. We believe we are in compliance with the regulations established by
these agencies applicable to our business. The European Community Notified
Body, the FDA and the California Department of Health Services have inspected
our manufacturing facilities and quality assurance procedures in the past and
we expect them to continue to do so in the future.
With respect to our bone graft substitute products, we must also comply with
the requirements of the Convention on International Trade of Endangered Species
of Wild Fauna and Flora, or CITES. This is an international agreement signed by
approximately 140 nations which regulates the import and export of products
which are derived from endangered wildlife. Although the coral we use is not an
endangered species, all harvested coral is subject to regulation under CITES.
As a result, we must register and obtain licensure from the U.S. Department of
Fish and Wildlife for both the import of raw coral and the export of finished
product. We maintain several years' supply of coral to minimize the risk of
supply interruptions. Because each shipment of product exported outside of the
United States or its possessions requires individual permitting, and also to
improve shipping efficiencies and service to our international customers, we
entered into an agreement with a contract warehouse in the Netherlands for the
purpose of international distribution of our products.
We must also comply with registration requirements of foreign governments
and with import and export regulations when distributing our products to
foreign nations. Each foreign country's regulatory requirements for product
approval and distribution are unique and may require the expenditure of
substantial time, resources and effort to obtain and maintain approvals for
marketing. In September 1995, we received approval to use the "CE" mark for our
entire line of orthopedic and oral/maxillofacial synthetic bone graft
materials. We received approval to use the "CE" mark for our spinal implant
systems in 1998. The CE mark indicates that the products are approved for sale
within 18 countries in the European Community and European Free Trade
Association and that we are in compliance with the ISO 9001 and EN 46001
standards which govern medical device manufacturers that are marketing products
in Europe. The CE mark is now also accepted by several countries outside of the
European Community.
Employees
As of March 1, 2000, we had 122 full-time employees, of whom 38 were engaged
in marketing and sales, 31 in manufacturing, 16 in regulatory affairs and
quality assurance, 13 in general administration and finance
12
and 24 in research and development. None of these employees is represented by a
union, and we have never experienced a work stoppage. We consider our relations
with our employees to be good.
Certain Business Considerations
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. Actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed below
and elsewhere in this Annual Report on Form 10-K.
We are dependent on a few products which may be rendered obsolete.
We anticipate that most of our revenue growth in the future, if any, will
come from our spinal implant products and from our orthobiologic products.
There can be no assurance that we will be successful in increasing sales of our
current product offering. Additionally, there can be no assurance that our
efforts to develop new products will be successful. If our development efforts
are successful, there can be no assurance that we will be successful in
marketing and selling our new products. Moreover, our competitors may develop
and successfully commercialize medical devices that directly or indirectly
accomplish what our products are designed to accomplish in a superior and less
expensive manner. If our competitors' products prove to be more successful than
ours, our products could be rendered obsolete. As a result, we may not be able
to produce sufficient sales to maintain profitability.
If we fail to compete successfully against existing or potential competitors,
our operating results may be adversely affected.
Our principal global competitors with respect to our spinal implant product
line are Medtronic Sofamor Danek USA, DePuy Acromed, Inc., a Johnson & Johnson
company, and SYNTHES-STRATEC, Inc. Our principal global competitors with
respect to our orthobiologic products include Osteotech, Inc., GenSci
Regeneration Technologies and Wright Medical Technology. Many of these
companies have broader product lines than we do. Many potential customers have
relationships with our competitors that could make it difficult for us to
continue to penetrate the markets for our products. In addition, many of our
competitors have significantly greater resources than we do. Accordingly, they
could substantially increase the resources they devote to the development and
marketing of products that are competitive with ours.
We may not be able to develop new products that will be accepted by the market.
Our future growth will be dependent on our ability to develop and introduce
new products, including enhancements to our existing products. We cannot assure
you that we will be able to successfully develop or market new products or that
any of our future products will be accepted by our customers. If we do not
develop new products in time to meet market demand or if there is insufficient
demand for these products, our revenues and profitability may be adversely
affected.
The long-term efficacy and market acceptance of AGF is uncertain.
Because our AGF related products were introduced only recently under a
510(k) clearance, we lack long-term clinical data regarding the efficacy and
long-term results of AGF. To date, we have completed no long-term clinical
studies of AGF. If long-term studies or clinical experience indicate that
procedures involving AGF do not provide patients with improved clinical
outcomes, anticipated sales of our AGF related products may never materialize.
Our success in selling our AGF related products will depend, in large part, on
the medical community's acceptance of AGF. The medical community's acceptance
of AGF will depend upon our ability to demonstrate the efficacy of AGF and its
advantages, favorable clinical performance and cost-effectiveness. We cannot
predict whether the medical community will accept AGF or, if accepted, the
extent of its use. If long-term studies or clinical experience indicate that
AGF causes negative effects, we could be subject to significant
13
liability. Our strategy to increase sales of AGF is to market these products
primarily to our spinal implant customers. There is no assurance that the
strategy will work, however, and no assurance that sales of our AGF related
products will increase.
We face risks related to the upgrading and expansion of our distribution
network.
We have recently made significant changes to our domestic distribution
network for the sale of our products. We have decreased the number of direct
sales representatives and increased the number of and expanded the territories
of independent agents. We expect to continue to increase our reliance on
independent agents for the domestic distribution of both orthobiologic and
spinal implant products. Independent commissioned sales agents may represent
other medical devices for a variety of manufacturers and may not dedicate
enough time or attention to selling our products. Furthermore, we expend
significant resources to train and educate new independent agents about our
products and our marketing programs. Our ability to increase our use of
independent sales agents has been aided by some of our competitors' replacement
of independent agents with direct sales representatives. However, our
competitors may not continue to utilize direct sales representatives and we can
therefore give no assurance that we will continue to be able to attract new or
retain our current independent sales agents. There can be no assurance that we
will be able to develop an effective distribution network or that our sales
force will be able to continue to increase sales or maintain current sales
levels of our products.
Product introductions or modifications may be delayed or canceled as a result
of the FDA regulatory process, which could cause our sales to decline.
The medical devices we manufacture and market are subject to rigorous
regulation by the FDA and numerous other federal, state and foreign
governmental authorities. Our failure to comply with such regulations could
lead to the imposition of injunctions, suspensions or loss of regulatory
approvals, product recalls, termination of distribution, or product seizures.
In the most egregious cases, criminal sanctions or closure of our manufacturing
facility are possible. The process of obtaining regulatory approvals to market
a medical device, particularly from the FDA, can be costly and time-consuming,
and there can be no assurance that such approvals will be granted on a timely
basis, if at all. The regulatory process may delay the marketing of new
products for lengthy periods and impose substantial additional costs or it may
prevent the introduction of new products altogether. In particular, the FDA
permits commercial distribution of a new medical device only after the FDA has
cleared a 510(k) premarket notification or has approved a Premarket Approval
application, or PMA, for such device. The FDA will clear marketing of a medical
device through the 510(k) process if it is demonstrated that the new product is
substantially equivalent to other 510(k)-cleared products. The PMA approval
process is more costly, lengthy and uncertain than the 510(k) premarket
notification process. There can be no assurance that any new products we
develop will be subject to the shorter 510(k) clearance process and therefore
significant delays in the introduction of any new products that we develop may
occur. We anticipate that our products that are in final development will be
eligible for the 510(k) premarket notification process. If the FDA does not
clear marketing of our products in final development through the 510(k)
clearance process, we will be forced to comply with the PMA approval process in
order to obtain FDA approval for these products. If we choose to go through the
PMA approval process, there will be significant costs and delays in the
introduction of our new products, if they are approved at all. Moreover,
foreign governmental authorities have become increasingly stringent and we may
be subject to more rigorous regulation by foreign governmental authorities in
the future. Any inability or failure of our foreign independent distributors to
comply with the varying regulations or the imposition of new regulations could
restrict such distributors' ability to sell our products internationally and
thereby adversely affect our business. All products and manufacturing
facilities are subject to continual review and periodic inspection by the FDA.
The discovery of previously unknown problems with our company or our products
or facilities may result in product labeling restrictions, recall, or
withdrawal of the products from the market. In addition, the FDA actively
enforces regulations prohibiting the promotion of medical devices for
unapproved indications. If the FDA determines that we have marketed our
products for off-label use, we could be subject to fines, injunctions or other
penalties.
14
We may be subject to product liability claims and our limited product liability
insurance may not be sufficient to cover the claims, or we may be required to
recall our products.
We manufacture medical devices that are used on patients in surgical
procedures, and we may be subject to product liability claims and product
recalls. The spinal implant industry has been historically litigious and we
face an inherent business risk of financial exposure to product liability
claims. Since our spinal products are often implanted in the human body,
manufacturing errors or design defects could result in injury or death to the
patient, and could result in a recall of our products and substantial monetary
damages. Prior to our merger with Cross, Cross had been named as a defendant in
approximately 800 cases alleging principally that it had participated in an
industry-wide conspiracy to market pedicle screw implants for off-label use,
although none of the four remaining conspiracy lawsuits involve any of our
products. Any product liability claim brought against us, with or without
merit, could result in an increase to our product liability insurance premiums
or our inability to secure coverage in the future. We would also have to pay
any amount awarded by a court in excess of our policy limits. In addition, any
recall of our products, whether initiated by us or by a regulatory agency, may
result in adverse publicity for us that could have a material adverse effect on
our business, financial condition and results of operations. Our product
liability insurance policies have various exclusions, and we may be subject to
a product liability claim or recall for which we have no insurance coverage, in
which case we may have to pay the entire amount of the award or costs of the
recall. Finally, product liability insurance is expensive and may not be
available in the future on acceptable terms, or at all.
We may face challenges to our patents and proprietary rights.
We rely on a combination of patents, trade secrets and nondisclosure
agreements to protect our proprietary intellectual property. Our patent
positions and those of other medical device companies are uncertain and involve
complex and evolving legal and factual questions. There can be no assurance
that pending patent applications will result in issued patents, that patents
issued to or licensed by us will not be challenged or circumvented by
competitors or that such patents will be found to be valid or sufficiently
broad to protect our technology or to provide us with any competitive
advantage. Third parties could also obtain patents that may require licensing
for the conduct of our business, and there can be no assurance that the
required licenses would be available. We also rely on nondisclosure agreements
with certain employees, consultants and other parties to protect, in part,
trade secrets and other proprietary technology. There can be no assurance that
these agreements will not be breached, that we will have adequate remedies for
any breach, that others will not independently develop substantially equivalent
proprietary information or that third parties will not otherwise gain access to
our trade secrets and proprietary knowledge. If our intellectual property is
not adequately protected, our competitors could use the intellectual property
that we have developed to enhance their products and compete more directly with
us, which could result in a decrease in our market share and profits.
The medical product industry is characterized by frequent and substantial
intellectual property litigation and competitors may resort to intellectual
property litigation as a means of competition. Intellectual property litigation
is complex and expensive, and the outcome of such litigation is difficult to
predict. Any future litigation, regardless of the outcome, could result in
substantial expense and significant diversion of the efforts of our technical
and management personnel. Litigation may also be necessary to enforce our
patents and license agreements, to protect our trade secrets or know-how or to
determine the enforceability, scope and validity of the proprietary rights of
others. An adverse determination in any such proceeding could subject us to
significant liabilities to third parties, or require us to seek licenses from
third parties or pay royalties that may be substantial. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing or selling certain of
our products which in turn would have a material adverse effect on our
business, financial condition and results of operations.
Possible denial of third-party reimbursement could materially adversely affect
our future business, results of operations and financial condition.
In the United States, our products are purchased by hospitals, who are
reimbursed for the devices provided to their patients by third-party payors,
such as governmental programs (e.g., Medicare and Medicaid), private
15
insurance plans and managed care programs. These third-party payors may deny
reimbursement if they determine that a device used in a procedure was not used
in accordance with cost-effective treatment methods, as determined by the
third-party payor, or was used for an unapproved indication. Also, third-party
payors are increasingly challenging the prices charged for medical products and
services. In international markets, reimbursement and healthcare payment
systems vary significantly by country and many countries have instituted price
ceilings on specific product lines. There can be no assurance that our products
will be considered cost-effective by third-party payors, that reimbursement
will be available or, if available, that the third-party payors' reimbursement
policies will not adversely affect our ability to sell our products profitably.
We are dependent on our suppliers and the loss of any of these suppliers could
adversely affect our business.
We do not machine the components for our spinal implants or instruments;
rather, we are dependent upon several suppliers for the machining of such
components. Also, the UltraConcentrator(TM), one of our products used to
collect AGF, is manufactured under an exclusive supply agreement with a vendor
that itself has a sole source of supply for filter material, a key component of
the UltraConcentrator. In the event that we are unable to obtain components for
any of our products, or obtain such components on commercially reasonable
terms, we may not be able to manufacture or distribute our products on a timely
and competitive basis, or at all. Any delays in product availability or costs
incurred in locating alternative suppliers could have a material adverse effect
on our operations.
The harvesting of coral is subject to regulation which could affect our ability
to obtain sufficient quantities of coral in the future.
The harvesting and import of the coral used for our coral-based
orthobiologic products must comply with the requirements of the Convention on
International Trade of Endangered Species of Wild Fauna and Flora. As a result,
we must register and obtain licensure from the U.S. Department of Fish and
Wildlife for both the import of raw coral and the export of finished product.
In the future, regulations could make the import or export of coral or coral-
derived products prohibitive and could interrupt our ability to supply product.
We cannot assure you that our supply of raw coral is sufficient, that we will
be able to obtain sufficient quantities of coral in the future or that future
regulations will not prohibit its use altogether.
Our business could be materially adversely impacted by risks inherent in
international markets.
In 1999, approximately 22% of our sales were generated outside the United
States. We expect that such sales will continue to account for a significant
portion of our revenue in the future. Our international sales subject us to
other inherent risks, including the following:
. fluctuations in currency exchange rates;
. regulatory, product approval and reimbursement requirements;
. tariffs and other trade barriers;
. greater difficulty in accounts receivable collection and longer
collection periods;
. difficulties and costs of managing foreign distributors;
. reduced protection for intellectual property rights in some countries;
. burdens of complying with a wide variety of foreign laws;
. the impact of recessions in economies outside the United States;
. political and economic instability; and
. seasonal reductions in business activity during the summer months in
Europe and other parts of the world.
16
If we fail to successfully market and sell our products in international
markets, our business, financial condition, results of operations, and cash
flows could be materially and adversely affected.
Future acquisitions could adversely affect our operations or financial results.
From time to time, we consider acquisition of technology product lines or
businesses to supplement our current product offering. Any such future
acquisitions involve risks such as the following:
. we may be exposed to unknown liabilities of acquired companies;
. our acquisition and integration costs may be higher than we anticipated
and may cause our quarterly and annual operating results to fluctuate;
. we may experience difficulty and expense in assimilating the operations
and personnel of the acquired businesses, disrupting our business and
diverting management's time and attention; and
. our relationships with key customers of acquired businesses may be
impaired, due to changes in management and ownership of the acquired
businesses.
Item 2. Properties
We are headquartered in Irvine, California where we lease a 35,528 square
foot facility. The annual average lease expense over the ten year term of the
lease, which expires January 31, 2003, is $387,000. The lease provides a right
to extend the term for an additional five years at the fair market lease rate
of the facility on the extension date, but not less than the rate we paid
during the month immediately preceding the commencement of the extension
period. We also lease a 2,700 square foot warehouse facility in Santa Ana,
California, a 4,274 square foot facility in Irvine, California to provide
additional warehousing, laboratory and office space, an 1,800 square foot
prototype machine shop in Irvine, California and a sales office with
approximately 200 square feet in Miami, Florida. We believe our current
facilities will be adequate to serve our operational needs through 2000.
We also lease a 27,680 square foot facility in Dublin, Ohio that is vacant.
The lease term began on April 1, 1996 and terminates on June 1, 2001.
17
Item 3. Legal Proceedings
Cross Medical Products and a number of other spinal implant manufacturers
were named as defendants in various products liability lawsuits alleging
injuries from spinal implants supplied by Cross and others. Approximately 800
such suits were filed in which a large number of plaintiffs claimed, in
addition to damages from spinal implants, a conspiracy among manufacturers,
physicians and other spinal implant industry members to defraud the public and
market products without the proper regulatory approvals. We have been dismissed
as a defendant from all but four of the pedicle screw conspiracy cases, none of
which involves our products.
Aside from the pedicle screw conspiracy litigation, the nature of our
business subjects us to products 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 4. Submission of Matters to a Vote of Security Holders
None.
18
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Our common stock commenced trading on the Nasdaq National Market under the
symbol "BONZ" on December 20, 1993. The following table sets forth, for the
periods indicated, the intra-day high and low sales prices per share of common
stock on the Nasdaq National Market:
High Low
------ -----
Year Ended December 31, 1998
First Quarter..................................................... $ 9.13 $5.50
Second Quarter.................................................... $ 7.75 $5.00
Third Quarter..................................................... $ 5.50 $3.69
Fourth Quarter.................................................... $ 6.13 $2.38
Year Ended December 31, 1999
First Quarter..................................................... $ 5.97 $4.06
Second Quarter.................................................... $ 5.38 $3.88
Third Quarter..................................................... $ 8.25 $4.13
Fourth Quarter.................................................... $ 8.00 $4.94
Year Ended December 31, 2000
First Quarter through March 13, 2000.............................. $14.25 $7.63
On March 3, 2000, the closing sale price for our common stock as reported on
The Nasdaq National Market was $12.50. The number of record holders of our
common stock as of March 3, 2000 was 611.
We currently do not pay any dividends on our preferred or common stock and
our Board of Directors has no present intention to pay cash dividends. The
Board of Directors intends to use any earnings for the development and
expansion of the business.
19
Item 6. Selected Financial Data
The table below, presents the selected consolidated financial data of
Interpore International, Inc. This information has been prepared using the
consolidated financial statements of Interpore International, Inc. as of and
for the years ended December 31, 1995, 1996, 1997, 1998 and 1999. Interpore
International, Inc. and Cross Medical Products, Inc. merged in May 1998. The
merger was accounted for as a pooling-of-interests. Accordingly, data as of and
for the years ended December 31, 1995, 1996 and 1997 have been restated to
include the financial information of both companies.
Year ended December 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- -------
(in thousands, except per share data)
Statement of Operations
Data:
Net sales............... $21,194(/1/) $28,489(/1/) $28,429(/1/) $ 30,209 $38,856
Cost of goods sold...... 6,793 9,497 9,110(/2/) 8,552 11,645
------- ------- ------- -------- -------
Gross profit.......... 14,401 18,992 19,319 21,657 27,211
Total operating
expenses............... 16,415 19,396 20,095(/1/) 24,528(/3/) 22,521
------- ------- ------- -------- -------
Income (loss) from
operations........... (2,014) (404) (776) (2,871) 4,690
Total interest and other
income, net............ 560 324 566 506 515
------- ------- ------- -------- -------
Income (loss) before
taxes.................. (1,454) (80) (210) (2,365) 5,205
Income tax provision
(benefit)(/4/)......... (2,050) (788) (2,119) 59 407
------- ------- ------- -------- -------
Income (loss) from
continuing
operations........... $ 596 $ 708 $1,909 $(2,424) $4,798
======= ======= ======= ======== =======
Income (loss) from con-
tinuing operations
per share:
Basic................. $ 0.05 $ 0.05 $ 0.14 $ (0.17) $ 0.36
Diluted............... $ 0.04 $ 0.05 $ 0.14 $ (0.17) $ 0.35
Shares used in computing
income (loss) from
continuing operations
per share:
Basic................. 12,695 13,080 13,460 13,904 13,506
Diluted............... 13,478 14,530 14,111 13,904 13,876
As of December 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- -------
Balance Sheet Data:
Total cash, cash
equivalents and short-
term investments....... $11,629 $10,480 $16,590 $ 7,908 $ 9,774
Total assets............ 31,203 39,869 41,483 34,147 40,793
Short-term obligations.. 3,194 1,664 95 15 15
Long-term obligations... 85 5,482 5,124 3,181 3,165
Total stockholders'
equity................. 22,579 24,179 31,634 26,951 33,237
- -------------------------------
(/1/)Our dental implant business was sold in May 1997. The transaction,
including associated costs, resulted in a net charge to operating expenses of
$617,000 in 1997. Net sales from the dental business were approximately $8.1
million, $7.1 million and $1.7 million in 1995, 1996 and 1997, respectively.
(/2/)In 1997, we recognized an inventory valuation adjustment of $925,000 for
inventory made obsolete by our Synergy Spinal System enhancements.
(/3/)Amount includes $5.0 million of non-recurring charges related to the May
1998 merger with Cross, the subsequent restructuring associated with the
closing of the Dublin, Ohio facility and the relocation of employees and
assets from Dublin to Irvine, California.
(/4/)In 1995, 1996, 1997, 1998 and 1999, we recognized deferred tax assets of
$1.6 million, $683,000, $2.0 million, $211,000 and $1.6 million, respectively,
which had previously been fully reserved in accordance with Statement of
Financial Accounting Standards No. 109.
20
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Financial Overview
Our revenues are generated from the sale of products in two principal
product categories--spinal implant products and orthobiologic products. Our
spinal implant products consist of titanium or stainless steel hooks, rods 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 AGF.
AGF is used to provide faster, more complete bone growth and enhance the
performance of our bone graft products.
In May 1998, Interpore International, Inc. merged with Cross Medical
Products, Inc., combining Interpore's orthobiologics expertise and product
offering with Cross' spinal implant expertise and products. The merger was
accounted for as a pooling-of-interests, and all financial information related
to periods prior to the merger has been restated to reflect the financial
information of both companies as if we had always been a combined entity.
All of our operations are located in the United States, however, we sell our
products to customers both within and outside the United States. In 1999, our
domestic sales were 78% of total sales and our international sales were 22% of
total sales. 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 implant products, we invoice hospitals directly following a
surgical procedure in which our products are used. Our spinal implant 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 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 generally ranging from 40% to 70% of 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 gross margins are 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
implant sales and orthobiologic sales also affects our gross margins, with
higher margins in orthobiologics.
Financial Trends
We experienced operating losses in the years 1995 through 1998. Factors
contributing to the losses through 1997 include our significant investment in
the development of our spinal implant business and declining sales and
profitability in our former dental implant business, which was sold in May
1997. The $776,000 loss from operations in 1997 included a $617,000 loss on the
sale of our dental implant business and a $925,000 unfavorable adjustment for
inventory made obsolete by our Synergy Spinal System enhancements. In 1998, we
had a $2.9 million operating loss which included approximately $5 million in
non-recurring charges, including charges related to our merger with Cross.
However, without the non-recurring charges, we would have had operating profit
of $2.1 million in 1998, representing 7% of sales.
21
In 1999, our revenue grew by 29%, and we had an operating profit of $4.7
million, or 12% of sales. We believe the improved performance was primarily the
result of the following:
. The successful recruiting of more experienced independent agents and
sales managers from our larger spinal implant competitors, which
improved our revenue growth rate;
. Incremental profit from increased revenues, including over $2.8 million
in sales of newly-introduced AGF related products; and
. Cost reductions and operating efficiencies resulting from the
consolidation of operations following the merger of Interpore and Cross.
Despite our operating losses in the years 1995 through 1997, we reported
positive income from continuing operations. This resulted from the recognition
of deferred tax assets which had previously been fully reserved in accordance
with Statement of Financial Accounting Standards No. 109. In 1998, despite a
pre-tax loss, taxable income was recognized as a result of some disallowed
merger cost deductions. This coupled with the reduction of the valuation
allowance resulted in a net tax provision of $59,000. In 1999, our increased
profitability eliminated the remaining valuation allowance against our deferred
tax assets. This resulted in the need to record an income tax provision for the
quarter and year ended December 31, 1999, and we expect to record tax
provisions going forward. Therefore, the recording of tax provisions will
negatively affect net income for the year 2000 in comparison to 1999. Had we
recorded an income tax provision in 1999 at an effective tax rate of 39%, our
diluted earnings per share would have been $0.23 versus the $0.35 that we
reported.
All of the information set forth above relates to our continuing operations.
However, discontinued operations contributed significantly to net income in
1996 and 1997. Income from discontinued operations was $1.2 million in 1996 and
$2.5 million in 1997, including a $2.2 million gain on the sale of our recovery
products segment in March 1997.
Results of Operations
The following table presents our results of operations as percentages:
Percentage Change
Percentage of Net Sales -----------------
Year ended December 31,
------------------------- 1998 vs. 1999 vs.
1997 1998 1999 1997 1998
-------- -------- ------- -------- --------
Net sales.......................... 100.0% 100.0% 100.0% 6.3% 28.6%
Cost of goods sold................. 32.0% 28.3% 30.0% (6.1%) 36.2%
-------- -------- ------- ------- ------
Gross profit..................... 68.0% 71.7% 70.0% 12.1% 25.7%
-------- -------- ------- ------- ------
Operating expenses:
Research and development......... 11.3% 12.1% 10.7% 13.4% 14.9%
Selling and marketing............ 40.7% 39.1% 36.0% 2.2% 18.2%
General and administrative....... 16.5% 13.4% 11.2% (13.8%) 7.8%
Merger-related expenses.......... -- 10.0% -- -- --
Restructuring charges............ -- 5.0% -- -- --
Non-recurring charges............ -- 1.6% -- -- --
Loss on sale of dental business.. 2.2% -- -- -- --
-------- -------- ------- ------- ------
Total operating expenses....... 70.7% 81.2% 57.9% 22.1% (8.2%)
-------- -------- ------- ------- ------
Income (loss) from
operations.................. (2.7%) (9.5%) 12.1% -- --
======== ======== ======= ======= ======
22
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
For the year ended December 31, 1999, sales of $38.9 million were $8.6
million, or 28.6%, higher than sales of $30.2 million for the previous year.
The following table presents sales by category (in thousands):
Year ended December 31, Change
----------------------- --------------
1998 1999 Amount Percent
----------- ----------- ------ -------
Spinal implant product sales............. $ 15,367 $ 20,807 $5,440 35.4%
Orthobiologic product sales.............. 14,842 18,049 3,207 21.6%
----------- ----------- ------ -----
Total sales............................ $ 30,209 $ 38,856 $8,647 28.6%
=========== =========== ====== =====
Sales of spinal implant products increased in the year ended December 31,
1999 by $5.4 million, or 35.4%, to $20.8 million, compared to $15.4 million for
the year ended December 31, 1998. The increase reflects continued market
penetration of the Synergy Spinal System, aided by improved distribution and
territory coverage.
Sales of orthobiologic products increased by $3.2 million, or 21.6%, to
$18.0 million for the year ended December 31, 1999, compared to $14.8 million
for the year ended December 31, 1998. Our new AGF related products, which were
launched on a nationwide basis during the second quarter of 1999, accounted for
$2.8 million of orthobiologic products sales during 1999. Sales of synthetic
bone products remained relatively level for the two periods.
Total domestic sales of spinal products and orthobiologic products increased
30.2%, or $7.0 million, to $30.1 million for the year ended December 31, 1999,
compared to $23.1 million for the same period of 1998. International sales
increased $1.6 million, or 23.4%, to $8.7 million for the twelve months ended
December 31, 1999, compared to $7.1 million for the same period of 1998.
For the year ended December 31, 1999, gross margin as a percentage of sales
was 70.0%, compared to 71.7% for the year ended December 31, 1998. Spine
products sales, which have a lower gross margin than orthobiologic products
sales, comprised a greater percentage of total sales in 1999 than in 1998.
Total operating expenses for the year ended December 31, 1999 decreased by
$2.0 million, or 8.2%, to $22.5 million, compared to total operating expenses
of $24.5 million during the same period of 1998. Excluding merger related
expenses, restructuring charges and non-recurring charges recorded in 1998,
operating expenses increased $3.0 million, or 15.4%, but decreased as a
percentage of sales from 64.6% in 1998 to 57.9% in 1999. Research and
development expenses increased by 14.9%, or $542,000, in 1999 due primarily to
salaries for additional engineers hired for spinal implant development
projects. Selling and marketing expenses in 1999 increased $2.2 million, or
18.2%, compared to 1998, primarily due to increased commissions on higher
domestic sales in 1999 and the hiring of additional sales and marketing staff.
General and administrative expenses increased by $316,000, or 7.8%, in 1999,
primarily as the result of increased corporate bonus expense and higher product
liability insurance premiums resulting from increased sales offset partially by
a decrease in property taxes resulting from the closure of the Ohio facility.
Total interest and other income were approximately the same in the two
periods, as reduced interest income on lower average cash, cash equivalents and
short-term investments balances in 1999 was mostly offset by reduced interest
expense. We had lower average cash, cash equivalents and short-term investments
balances in 1999 compared to 1998 due to the payment of merger-related
expenses, restructuring charges and non-recurring charges, the repurchase of
605,000 shares of our common stock and the redemption of convertible
debentures. Interest expense was lower in 1999 than in 1998 due primarily to
the write-off of prepaid debt issuance costs associated with convertible
debentures which were redeemed during 1998. This redemption also lowered
interest expense in 1999.
23
In 1998, despite a pre-tax loss, taxable income was recognized as a result
of some disallowed merger cost deductions. This coupled with the reduction of
the valuation allowance resulted in a net tax provision of $59,000. In 1999,
our increased profitability eliminated the remaining valuation allowance
against our deferred tax assets. This resulted in the need to record an income
tax provision for the year ended December 31, 1999 at an effective tax rate of
approximately 7.8%. We expect to record an income tax provision in 2000.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
For the year ended December 31, 1998, net sales of $30.2 million were $1.8
million, or 6.3%, higher than net sales of $28.4 million for the previous year.
However, 1997 included $1.7 million of sales from the dental business which was
sold in May 1997. Excluding dental products, net sales increased $3.5 million,
or 13.0%, in 1998 compared to 1997. The following table presents sales by
category (in thousands):
Year ended
December 31, Change
--------------- ----------------
1997 1998 Amount Percent
------- ------- ------- --------
Spinal implant product sales................... $12,918 $15,367 $2,449 19.0%
Orthobiologic product sales.................... 13,805 14,842 1,037 7.5%
------- ------- ------- --------
Sub-total.................................... 26,723 30,209 3,486 13.0%
Dental product sales........................... 1,706 -- (1,706) (100.0%)
------- ------- ------- --------
Total sales.................................. $28,429 $30,209 $1,780 6.3%
======= ======= ======= ========
Sales of spinal implant products increased in the year ended December 31,
1998 by $2.4 million, or 19.0%, to $15.4 million, compared to $12.9 million for
the year ended December 31, 1997. The increase reflects continued market
penetration of this relatively new system, aided by the improved distribution
and greater domestic territory coverage following the merger.
Sales of orthobiologic products increased by $1.0 million, or 7.5%, to $14.8
million for the year ended December 31, 1998, compared to $13.8 million for the
year ended December 31, 1997. Pro Osteon sales increased by $1.7 million, due
to the introduction of the resorbable version, Pro Osteon 500R, in the fourth
quarter of 1998, along with improved distribution following the merger and
resultant consolidation of sales forces. OEM sales, which are dependent upon
the ordering patterns of two customers, decreased by $624,000 in 1998 versus
1997.
Total domestic sales of spinal products and orthobiologics increased 15.6%,
or $3.1 million, to $23.1 million for the year ended December 31, 1998,
compared to $20.0 million for the same period of 1997. International sales
increased $363,000, or 5.4%, to $7.1 million for the twelve months ended
December 31, 1998, from $6.7 million for the same period of 1997.
For the year ended December 31, 1998, gross margin as a percentage of sales
was 71.7%, compared to 68.0% for the year ended December 31, 1997. The 1997
gross margin was lower as a result of an inventory valuation adjustment of
$925,000 that was recognized for inventory made obsolete by our Synergy Spinal
System enhancements. Additionally, domestic sales, which have a higher gross
margin than international sales, comprised a greater percentage of total sales
in 1998 than in 1997.
Total operating expenses for the year ended December 31, 1998 increased by
$4.4 million, or 22.1%, to $24.5 million, compared to total operating expenses
of $20.1 million during the same period of 1997. The increase in operating
expenses was primarily due to $5.0 million of merger-related expenses,
restructuring charges and non-recurring charges incurred in 1998. Excluding
these charges and the 1997 loss on the sale of the dental business, total
operating expenses remained relatively level between the two periods. Research
and development expenses increased by 13.4%, or $430,000, in 1998 as a result
of increased spinal product
24
development efforts and increased regulatory expenses related to obtaining FDA
clearances for Pro Osteon 500R and AGF related products. Selling and marketing
expenses in 1998 increased $251,000, or 2.2%, compared to 1997 due primarily to
increased commissions on higher domestic sales in 1998, offset partially by the
elimination of selling and marketing expenses related to the dental business.
General and administrative expenses decreased by $648,000, or 13.8%, in 1998,
primarily as the result of cost reductions following the sale of the dental
business and the merger with Cross.
The $60,000, or 10.6%, decrease in net interest and other income relates to
a reduction in interest income due to lower cash, cash equivalents and short-
term investments. The decrease was partially offset by increased royalty
income.
In 1998, despite a pre-tax loss, taxable income was recognized as a result
of some disallowed merger cost deductions. This coupled with the reduction of
the valuation allowance resulted in a net tax provision of $59,000. In 1997 an
income tax benefit was recognized as a result of reducing the valuation
allowance against the deferred tax assets.
Liquidity and Capital Resources
In 1999, our operations generated positive cash flow of approximately $2.9
million. We invest our excess cash in U.S. Treasury securities and high-grade
marketable securities. At December 31, 1999, cash, cash equivalents and short-
term investments totaled $9.8 million, up $1.9 million from $7.9 million at
December 31, 1998. We also have a $5.0 million revolving line of credit
available to us that had no amount outstanding at December 31, 1999 and which
expires in June 2000. We currently intend to seek an extension of that
facility.
Other significant sources of cash in the past included $8.2 million in
proceeds from the sale of our recovery products segment in 1997 and $1.5
million in net proceeds in 1997 and 1998 from the sale of our dental business.
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. In 1998, we merged with Cross and exchanged approximately 6.7
million shares of our common stock for all of the outstanding common stock of
Cross. In 1999, we purchased all of the intellectual property of Quantic
Biomedical, Inc., which included all of the AGF patents and technology, for
$500,000 in cash, 100,000 unregistered shares of our common stock and warrants
to purchase 200,000 shares of our common stock.
We believe we currently possess sufficient resources to meet the cash
requirements of our operations for at least the next year. However, some of the
aforementioned 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 December 31, 1999, we had no material commitments for capital
expenditures.
Impact of Year 2000
Year 2000 problems are the result of computer programs being written using
two digits rather than four to define the applicable year. If not corrected,
many computer applications could fail or create erroneous results by not
recognizing "00" to mean the year 2000.
In 1999, we completed our testing of all critical software and hardware
systems and determined that all are Year 2000 compliant. Vendor certifications
were received from all critical vendors indicating that they were either
currently compliant or that they would be compliant by December 31, 1999. To
date, we have not needed to implement any major system or software replacements
due to the Year 2000 issue. We have not incurred and do not expect to incur any
material direct costs associated with Year 2000 issues.
25
We have not experienced and do not expect to experience any significant Year
2000 problems or interruptions. We cannot assure you that mission critical
vendors and customers will not incur a Year 2000 problem or interruption, but
we believe we have adequate computer file backup procedures and manual
operating procedures that will enable us to continue the critical processes of
our business.
Item 7a. 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.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Supplementary Data of Interpore Cross are
listed and included under Item 14 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
There is hereby incorporated herein by reference the information appearing
under the caption "Proposal to Elect Interpore Cross' Directors" of Interpore
Cross' definitive Proxy Statement for its 2000 Annual Meeting to be filed with
the Securities and Exchange Commission on or before April 30, 2000.
Item 11. Executive Compensation
There is hereby incorporated herein by reference the information appearing
under the caption "Proposal to Elect Interpore Cross' Directors--Executive
Compensation" of Interpore Cross' definitive Proxy Statement for its 2000
Annual Meeting to be filed with the Securities and Exchange Commission on or
before April 30, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
There is hereby incorporated herein by reference the information appearing
under the caption "Ownership of Interpore Cross Stock" of Interpore Cross'
definitive Proxy Statement for its 2000 Annual Meeting to be filed with the
Securities and Exchange Commission on or before April 30, 2000.
Item 13. Certain Relationships and Related Transactions
There is hereby incorporated herein by reference the information appearing
under the caption "Certain Relationships and Related Transactions of Interpore
Cross" of Interpore Cross' definitive Proxy Statement for its 2000 Annual
Meeting to be filed with the Securities and Exchange Commission on or before
April 30, 2000.
26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1)The following financial statements are referenced in Part II Item 8
and submitted herewith:
Page
Number
------
Report of Independent Auditors.................................. F-2
Report of Independent Accountants............................... F-3
Consolidated Balance Sheets at December 31, 1998 and 1999....... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999............................... F-5
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1997, 1998 and 1999......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999............................... F-7
Notes to Consolidated Financial Statements...................... F-8
(2) The following financial statement schedule for the years ended
December 31, 1997, 1998 and 1999 is submitted herewith:
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or
the required information is presented in the financial statements or
notes thereto.
(3) The list of exhibits contained in the Index to Exhibits is
submitted herewith.
(b) Reports on Form 8-K
None.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INTERPORE INTERNATIONAL, INC.
/s/ David C. Mercer
By: _________________________________
David C. Mercer
Chairman and Chief Executive
Officer
Date: March 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Title Date
----- ----
/s/ David C. Mercer Chairman of the Board, Chief March 14, 2000
______________________________________ Executive Officer and Director
David C. Mercer (Principal Executive Officer)
/s/ Joseph A. Mussey President, Chief Operating March 14, 2000
______________________________________ Officer and Director
Joseph A. Mussey
/s/ Richard L. Harrison Sr. Vice President--Finance, March 14, 2000
______________________________________ Chief Financial Officer and
Richard L. Harrison Secretary (Principal Financial
and Accounting Officer)
/s/ William A. Eisenecher Director March 14, 2000
______________________________________
William A. Eisenecher
/s/ Daniel A. Funk, M.D. Director March 14, 2000
______________________________________
Daniel A. Funk, M.D.
/s/ G. Bradford Jones Director March 14, 2000
______________________________________
G. Bradford Jones
/s/ Robert J. Williams Director March 14, 2000
______________________________________
Robert J. Williams
28
INTERPORE INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors........................................... F-2
Report of Independent Accountants........................................ F-3
Consolidated Balance Sheets at December 31, 1998 and 1999................ F-4
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999..................................................... F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1998 and 1999........................................ F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999..................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
Schedule II--Valuation and Qualifying Accounts........................... F-23
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Interpore International, Inc.
We have audited the accompanying consolidated balance sheets of Interpore
International, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the schedule based on our audits. We did not audit the financial
statements and schedule of Cross Medical Products, Inc., which statements
reflect total assets of $18,762,000 as of December 31, 1997, and total revenues
of $12,918,000 for the year ended December 31, 1997. Those statements and
schedule were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the data included for Cross Medical
Products, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Interpore International, Inc.
at December 31, 1998 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
February 4, 2000 except
for the first paragraph
of note 6, as to which
the date is March 1,
2000
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Cross Medical Products, Inc. and Subsidiary
We have audited the consolidated statements of income, shareholders' equity,
and cash flows of Cross Medical Products, Inc. and Subsidiary (formerly
Danninger Medical Technology, Inc. and Subsidiaries) (the Company) for the year
ended December 31, 1997. We have also audited the financial statement schedule
for the year ended December 31, 1997, listed in the index at Item 14(a) of this
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations, cash flows, and
changes in shareholders' equity of Cross Medical Products, Inc. and Subsidiary
for the year ended December 31, 1997 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule for the year ended December 31, 1997 referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PricewaterhouseCoopers L.L.P.
Coopers & Lybrand L.L.P.
Columbus, Ohio
February 4, 1998, except
for Note 11 to the
consolidated financial
statements for which the
date is February 11, 1998
F-3
INTERPORE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
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1998 1999
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Assets
Current assets:
Cash and cash equivalents................................ $ 7,908 $ 6,315
Short-term investments................................... -- 3,459
Accounts receivable, less allowance for doubtful accounts
of $506 and $516 in 1998 and 1999, respectively......... 6,418 8,887
Inventories.............................................. 12,115 13,070
Prepaid expenses......................................... 1,205 995
Deferred income taxes.................................... 1,426 1,750
Other current assets..................................... 436 129
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Total current assets...................................... 29,508 34,605
Property, plant and equipment, net........................ 1,467 1,349
Deferred income taxes..................................... 2,504 2,333
Intangible assets, net.................................... 338 2,274
Other assets.............................................. 330 232
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Total assets.............................................. $ 34,147 $ 40,793
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Liabilities and stockholders' equity
Current liabilities:
Current portion of capital lease obligations............. $ 15 $ 15
Accounts payable......................................... 609 1,046
Accrued compensation and related expenses................ 1,010 1,615
Accrued royalties........................................ 300 339
Reserve for products liability claims.................... 232 183
Accrued disposition costs................................ 250 118
Accrued merger-related expenses and restructuring
charges................................................. 726 324
Income taxes payable..................................... -- 326
Other accrued liabilities................................ 873 425
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Total current liabilities................................. 4,015 4,391
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Long-term obligations:
Long-term debt........................................... 3,152 3,152
Obligations under capital leases, net.................... 29 13
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Total long-term obligations............................... 3,181 3,165