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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

Commission File No. 0-22958

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

          As of May 9, 2003, there were 17,396,326 shares of the registrant’s common stock issued and outstanding.

Interpore International, Inc.

Index

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Interpore International, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)

See accompanying notes.

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Interpore International, Inc.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)

See accompanying notes.

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Interpore International, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

See accompanying notes.

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Interpore International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2003
(unaudited)

1.   Organization and Description of Business

          Interpore International, Inc. (“Interpore”), together with its subsidiaries unless the context implies otherwise, operates in one business segment: the design, manufacture and marketing of medical devices for the orthopedic marketplace.   Interpore’s products are distributed in the United States and internationally. 

2.   Basis of Presentation

          The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to Securities and Exchange Commission regulations.  In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position at March 31, 2003 and the consolidated results of operations and cash flows for the three month periods ended March 31, 2002 and 2003.

          The accompanying condensed consolidated financial statements include the accounts of Interpore and its subsidiaries after elimination of all significant intercompany transactions. 

          The results of operations and cash flows for the three months ended March 31, 2003 are not necessarily indicative of results to be expected for future quarters or the full year.

          These consolidated financial statements should be read in conjunction with the financial statements included in Interpore’s Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission.

3.   Per Share Information

          Basic earnings per share (EPS) is calculated by dividing net income by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the assumed conversion of all dilutive securities, consisting of employee stock options and warrants.  The following table presents the computation of net income per share (in thousands, except per share data):

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4.   Inventories

          Inventories are stated at the lower of first-in, first-out average cost or market.  Inventories are comprised of the following (in thousands):

5.   Stock Option Plans

          Interpore accounts for stock compensation to employees using the intrinsic value method provided for by Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees and related interpretations.  Interpore applies APB 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. 

          Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if Interpore had accounted for employee stock options under the fair value method of SFAS 123.  The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: a risk-free interest rate of 3% in 2002 and 2003, a volatility factor of the expected market price of Interpore common stock of .73 in 2002 and in 2003, a weighted-average expected life of the options of six years, and no dividend yield. 

          The following table illustrates the effect on net income per share, had compensation expense for the employee stock-based plans been recorded based on the fair value method under SFAS 123 (in thousands, except per share data):

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6.   Commitments and Contingencies

     Cross Medical Products v. DePuy AcroMed, Inc.

          On September 5, 2000, Interpore’s wholly-owned subsidiary, Cross Medical Products, Inc. (“Cross”), filed suit in the U.S. District Court, Central District of California, against DePuy AcroMed, Inc., a Johnson & Johnson company and Biedermann Motech GmbH, which suit alleged that DePuy AcroMed had infringed and continued to infringe Cross’ U.S. Patent Nos. 5,466,237 and 5,474,555.  These patents relate to screw technology embodied in certain components of the SYNERGY Spinal System.  The complaint sought damages for willful past and continuing infringement of the patents.  The Complaint also sought a declaratory judgment against DePuy AcroMed and Biedermann Motech that Cross was not infringing Biedermann Motech’s Patent No. 5,207,678.  DePuy AcroMed responded to the Complaint alleging that Cross’ patents are invalid and unenforceable, and alleging that it did not infringe.

          On January 24, 2003, the parties settled this case.  In connection with the confidential settlement agreement entered into between the parties, DePuy AcroMed paid Cross $15 million and agreed to pay a royalty on future sales of certain of DePuy AcroMed’s products.  The $15 million settlement was recorded as other income in the quarter ended March 31, 2003.  As required by the settlement agreement, the parties filed a request to dismiss the lawsuit, which request was granted on February 7, 2003.

     Interpore Cross v. Biomet, Inc.

          On December 20, 2002, in response to allegations by Biomet, Inc. of misappropriation of certain trade secrets by Interpore’s wholly-owned subsidiary Interpore Cross International, Inc. (“Interpore Cross”) and its employee, Jens Peter Timm (a former employee of Biomet), Interpore, Interpore Cross, Cross and Mr. Timm filed a complaint for declaratory relief in the United States District Court for the Central District of California.  The complaint sought a declaration as to Interpore Cross’s rights in its GEO STRUCTURE device and all related products and technology.  On February 14, 2003, the Court dismissed the complaint without prejudice based on its findings that the declaratory relief action was unnecessary because there was no threat of imminent or inevitable litigation at the time the complaint was filed.

          On January 16, 2003, Biomet filed an action in the United States District Court for the Northern District of Indiana, South Bend Division, against Interpore, Interpore Cross, Cross and Mr. Timm.  The complaint asserted claims alleging causes of action for declaration of patent ownership, constructive trust, patent infringement, misappropriation of trade secrets and unjust enrichment.  Biomet seeks an equitable ownership interest in Interpore Cross’s U.S. Patent Number 6,206,924 (the “‘924 patent”), a constructive trust over the proceeds of any products relating to the ‘924 patent, including the GEO STRUCTURE device, an injunction against infringement of the ‘924 patent, damages (including treble damages for willful conduct) and attorneys’ fees.  Biomet is claiming damages (before trebling) in excess of one million dollars. 

          In response to Biomet’s complaint Interpore filed three separate motions on March 10, 2003:  a motion to dismiss for lack of personal jurisdiction on behalf of Interpore and Cross; a motion to transfer venue to California; a motion to strike the request for monetary damages for patent infringement and a motion for a more definite statement as to the allegedly misappropriated trade secrets.  As of March 20, 2003, no date has been set for the hearing. 

          Interpore is unable at this time to predict the outcome of the litigation with Biomet. As of this date, Interpore does not believe that this litigation could reasonably be expected to have a material adverse effect on its business or financial condition. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in Interpore’s assumptions or the effectiveness of Interpore’s strategies related to these proceedings.

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     Cross Medical Products v. Medtronic Sofamor Danek

          On May 1, 2003, Cross filed an amended complaint in the United States District Court for the Central District of California against Medtronic Sofamor Danek, Inc. and Medtronic Sofamor Danek USA, Inc. (collectively, “Medtronic”), which complaint alleges that Medtronic has infringed and continues to infringe Cross’ U.S. Patent Nos. 5,466,237, 5,474,555 and 5,624,442.  These patents relate to technology embodied in certain components of the SYNERGY Spinal System.  The complaint seeks damages for willful past and continuing infringement of the patents.  The complaint also seeks a declaratory judgment against Medtronic that Cross is not infringing U.S. Patent Nos. 5,591,165, 4,641,636, 4,815,453 and 5,005,562.  Cross expects Medtronic to respond to the complaint on or before May 22, 2003.  Cross is unable at this time to predict the outcome of this litigation.

          Aside from these matters, the nature of Interpore’s business subjects it to product liability and various other legal proceedings from time to time.  Interpore is currently involved in legal proceedings incidental to the normal conduct of our business.  Interpore does not believe that any liabilities relating to the legal proceedings to which it is a party are likely to be, individually or in the aggregate, material to Interpore’s consolidated financial condition or results of operations.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Overview

          Our revenues are generated from the sale of medical devices in three principal categories—spinal implant products, orthobiologic products and minimally invasive surgery (M.I.S.) products.  Our spinal implant products consist of titanium or stainless steel hooks, rods, plates, spacers and screws and related instruments required for the surgeon to assemble a construct which restores the natural anatomy of the spine, keeping it immobilized while a bone graft eventually fuses the vertebrae.  Our orthobiologic products consist of bone graft substitute materials and products used to derive Autologous Growth Factors® (AGF®).  AGF fibrinogen-rich extract is used to provide faster, more complete bone growth and enhance the performance of our bone graft products.  Our M.I.S. products consist of instruments and devices used to deliver biocompatible materials into bony structures in a minimally invasive procedure. 

          All of our operations are located in the United States; however, we sell our products to customers both within and outside the United States.  Within the United States, we distribute our products through independent agencies and direct sales representatives.  The independent agencies and our direct sales representatives provide delivery and consultative services 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 and M.I.S. products, we invoice hospitals directly following a surgical procedure in which our products are used.  These products are made available to hospitals from consignment inventories maintained by our independent agencies and direct sales representatives, 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 reflecting a discount from our U.S. list prices.  The distributors provide service to the surgeons and hospitals, deliver products and invoice hospitals directly at prices determined by the distributors. 

          Because our revenues from U.S. hospitals are primarily at list price, and our revenues from international distributors are at a discount to U.S. list prices, our overall gross margin is subject to fluctuation based on our domestic versus international sales mix, with domestic gross margins being somewhat higher than international gross margins.  Additionally, the mix between spinal implant products sales and orthobiologic products sales also affects our gross margins, with higher margins in orthobiologics. 

Critical Accounting Policies and Estimates

          Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  On an on-going basis, we evaluate our estimates including those related to product returns, bad debts, inventories, intangible assets, income taxes and litigation.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

          We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements: 

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Results of Operations

          The following table presents our results of operations as percentages:

          For the quarter ended March 31, 2003, sales of $15.8 million were $2.0 million or 14.7% higher than net sales of $13.8 million for the same period of 2002.   The following table presents sales by category (in thousands):

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          Sales of spinal implant products for the quarter ended March 31, 2003 increased by $2.1 million or 25.4% to $10.4 million, compared to $8.3 million for the quarter ended March 31, 2002.  The increase is attributable to increased sales of the SYNERGY™ Spinal System, increased sales of our C-TEK® Anterior Cervical Plate System and sales of our recently released GEO STRUCTURE™ Device. 

          Sales of orthobiologic products decreased by $177,000, or 3.8%, to $4.5 million for the quarter ended March 31, 2003, compared to $4.7 million for the quarter ended March 31, 2002.  We believe that the decline in sales of our orthobiologic products has resulted primarily from the focus of our independent sales agencies on the spinal implant market.  To combat the decline in sales of our orthobiologic products, our strategy has been to introduce new orthobiologic products and to expand the direct sales force specifically responsible for sales of our orthobiologic products.

          To that end, in 2002 we introduced our INTERGRO™ allograft putty product, and in the first quarter of 2003 we began initial shipments of  ACCESS™, our improved AGF processing system, into the international marketplace.  Sales of INTERGRO and ACCESS in the first quarter of 2003 partially offset the decline in sales of our other orthobiologic products, resulting in an overall decline in sales of orthobiologic products of 3.8%.  This represents a significant improvement over the average 10% quarterly orthobiologic products sales decline experienced in each of the four quarters of 2002 as compared to the same quarters in 2001.  We anticipate that these strategic efforts may continue to reduce the decline in sales of our orthobiologic products; however, we cannot assure you that INTERGRO will achieve market acceptance, that we will be able to successfully introduce ACCESS or that our efforts to reverse the sales trend will be successful.

          Sales of M.I.S. products increased by $103,000, or 12.0%, to $962,000 for the quarter ended March 31, 2003, compared to $859,000 for the quarter ended March 31, 2002. 

          Domestic sales of all product categories increased $1.6 million, or 14.1%, to $12.7 million for the quarter ended March 31, 2003, compared to $11.1 million for the same period of 2002.  International sales for the quarter ended March 31, 2003 increased by 17.2%, or $454,000, to $3.1 million from $2.6 million for the quarter ended March 31, 2002.

          For the quarter ended March 31, 2003, gross profit was 71.7% of sales compared to 73.1% of sales for the quarter ended March 31, 2002.  The increase as a percentage of sales represented by spinal implant products and the initial sales of ACCESS processors, both of which have lower gross margins than our synthetic bone graft products, was the primary cause of our slightly lower overall gross margin for the quarter.  

          Total operating expenses for the quarter ended March 31, 2003 increased by $692,000, or 7.5%, to $9.9 million, compared to $9.2 million for the same quarter of 2002.  However, as a percentage of sales, total operating expenses decreased from 66.6% in the first quarter of 2002 to 62.5% in the first quarter of 2003, primarily the result of decreased legal expenses associated with the DePuy AcroMed litigation which was settled in the first quarter of 2003.  Research and development expenses increased by $131,000 or 6.8%, due primarily to efforts related to the development of potential new products.  Selling and marketing expenses increased $715,000 or 13.4% compared to the first quarter of 2002 primarily due to commissions on increased sales and our investment in additional direct sales personnel for our orthobiologic and M.I.S. products.  General and administrative expenses decreased by $154,000 or 8.0%, primarily as a result of decreased legal expenses associated with the DePuy AcroMed litigation.

          Total interest and other income increased to $15.3 million for the quarter ended March 31, 2003, compared to $159,000 during the same period of 2002.  Other income includes a $15 million payment from DePuy AcroMed, received in January 2003, in settlement of patent litigation.

          The effective tax rates for the first quarters of 2002 and 2003 were 38.5% and 40.0%, respectively.

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Liquidity and Capital Resources

          At March 31, 2003, cash, cash equivalents and short-term investments totaled $11.9 million, an increase of $10.1 million from $1.8 million at December 31, 2002.  We have a $10.0 million secured revolving bank line of credit which expires in June 2005.  At December 31, 2002, we had borrowed approximately $5.8 million under this facility to fund our 2002 working capital needs, which were driven primarily by significant investments in inventories to support new product launches.  On January 27, 2003, we received a $15 million payment from DePuy AcroMed in settlement of patent litigation, some of which was used to pay off the outstanding balance on our line of credit.  Additionally, the settlement agreement provides that DePuy AcroMed will pay us a royalty on all licensed spinal implants it sells in the U.S. after January 27, 2003. 

          We plan to continue making significant investments in initial inventory levels for new products.  We also intend to continue to invest in the development of our business.  In addition, we will use a significant amount of cash to pay estimated income taxes, much of which are related to the receipt of the $15 million payment from DePuy AcroMed.  We believe we currently possess sufficient resources, including our revolving bank line of credit, to meet the cash requirements of our operations for at least the next year.  In addition, 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.  Some of these activities may require resources in excess of those which we currently possess, and we cannot assure you that we will be able to raise additional capital on satisfactory terms, if at all.

          At March 31, 2003, we had no material commitments for capital expenditures.

Cautionary Note Regarding Forward-Looking Statements

          Investors are cautioned that certain statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q, or which are otherwise made by us or on our behalf are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, which include words such as “believes,” “plans,” “anticipates,” “estimates,” “expects” or similar expressions.  In addition, any statements concerning future financial performance, ongoing business strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements.  Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our company, economic and market factors and the industry in which we do business, among other things.  These statements are not guaranties of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

          Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors.  Factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements, include, but are not limited to those discussed below and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2002.

We are dependent on a few products which may be rendered obsolete. 

          A majority of our revenue currently comes from sales of our SYNERGY, C-TEK and PRO OSTEON® products.  We cannot assure you that we will continue to market these products successfully or that we will be able to increase sales of these products in the future.  Any significant diminished sales of our SYNERGY, C-TEK or PRO OSTEON products would adversely affect our business and results of operations.

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If we fail to compete successfully against existing or potential competitors, our operating results may be adversely affected. 

          The market for our products is intensely competitive, subject to change and significantly affected by new product introductions and other market activities of industry participants.  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 DePuy AcroMed, Medtronic Sofamor Danek USA, Osteotech, Inc., Orthovita, GenSci Regeneration Sciences, Regeneration Technologies and Wright Medical Technology.  Our principal competitor with respect to our minimally invasive surgery products is Kyphon Inc.  We compete in all of our markets primarily on the basis of product performance and price, as well as customer loyalty and service.  Many of our competitors have greater resources for product development, sales and marketing and patent litigation than we do.  Accordingly, they could substantially increase the resources they devote to the development and marketing of products that are competitive with ours.  Many of our potential customers have existing relationships with our competitors that could make it difficult for us to continue to penetrate the markets for our products.  Additionally, several of our competitors have broader product lines that we do.  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.  If we fail to compete successfully against our existing or potential competitors, our operating results may be adversely affected.

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 success of any new product offerings or enhancements to existing product offerings will depend on several factors, including our ability to:

          In addition, we have spent and expect to continue to spend significant cash on the development, product launch and continued marketing of new products, and if there is insufficient demand for these new products, our cash flow could suffer and our liquidity would be adversely affected.

The long-term efficacy and market acceptance of AGF is uncertain. 

          Our AGF related products were introduced under a 510(k) clearance, and we lack published long-term clinical data regarding the efficacy and long-term results 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.  The medical community’s acceptance of AGF will also depend upon our ability to introduce

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ACCESS, a new processing system for AGF that greatly simplifies the process for collecting AGF from a patient’s blood.  We cannot predict whether the medical community will accept AGF or ACCESS or, if accepted, the extent of the medical community’s use of these products.  If long-term studies or clinical experience indicate that AGF causes negative effects, we could be subject to significant liability. 

Our minimally invasive surgery products business may not achieve the growth we expect and our profitability could be adversely affected.

          To date, our M.I.S. revenues have been below our expectations.  To address this, we are investing significantly in the hiring and training of a group of direct sales representatives that will be dedicated primarily to the sale of our M.I.S. products.  We believe that these efforts may allow us to achieve the expected growth in M.I.S. revenues.  However, we cannot assure you that our efforts will be successful.  The creation of a direct sales force is very expensive, and if this sales force does not achieve the expected growth in M.I.S. revenues, our profitability could be materially and adversely affected.

We face risks related to the maintenance, upgrading and expansion of our domestic distribution network. 

          In domestic markets, we primarily use independent sales agents for the distribution of our spinal implant products and orthobiologic products.  However, because of the agents’ focus on selling only to spinal surgeons, our orthobiologic products sales have suffered.  Therefore, we have created an initial direct sales force to distribute our orthobiologic products in certain underperforming territories, and we plan to significantly increase this sales force in the future.  However, we cannot assure you that we will be successful in our efforts to identify and hire qualified candidates for these positions, or that such candidates, upon their hiring, will be successful in distributing our orthobiologic products.  Additionally, this effort requires a substantial investment and our profitability could be adversely affected as a result.

          We expect to continue to rely primarily on independent agencies for the domestic distribution of our spinal implant products.  Independent commissioned sales agencies 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 agencies about our products and our marketing programs.  Our ability to recruit independent sales agencies has been aided by some of our competitors’ replacement of independent agencies with direct sales representatives.  However, our competitors may not continue to utilize direct sales representatives and we cannot assure you that we will continue to be able to attract new or retain our current independent sales agencies.  We also cannot assure you that we will be able to develop an effective distribution network or that our independent agencies will be able to continue to increase sales or maintain current sales levels of our products.

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.  We cannot assure you 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.  We cannot assure you 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. 

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          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.  We are currently responding to a claim in which a third party is asserting an ownership interest in our GEO STRUCTURE device and its underlying patent, among other things, based on alleged misappropriation of trade secrets.  We cannot assure you that we will be successful in defending against these claims.  This and any future litigation, regardless of the outcome, could result in substantial expense and significant diversion of the efforts of our technical and management personnel.  Additionally, 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.  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.  We recently filed suit against another medical device manufacturer claiming that certain of its products infringe several of our spinal implant patents and seeking a declaratory judgment that our products do not infringe its patents.  This and any future litigation to protect or enforce our proprietary rights could result in substantial expense and significant diversion of management’s attention from our business.

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 facilities are possible.  The process of obtaining regulatory approvals to market a medical device, particularly from the FDA, can be costly and time-consuming, and we cannot assure you 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.  We cannot assure you 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 most of 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. 

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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 most of our products are 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.  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. 

Possible denial of third-party reimbursement could have a material adverse effect on our future business, results of operations and financial condition. 

          In the United States, our products are purchased by hospitals that 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 addition, we believe the increasing emphasis on managed care in the United States may put pressure on the prices and usage of our products, which may adversely affect product sales.  In international markets, reimbursement and healthcare payment systems vary significantly by country and many countries have instituted price ceilings on specific product lines.  We cannot assure you 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 them could adversely affect our business. 

          We do not manufacture the components for our spinal implants or instruments or minimally invasive surgery products; rather, we are dependent upon several suppliers for the manufacturing of such components.  Also, the specialized filter material contained in our UltraConcentrator was sole-sourced from a vendor that no longer supplies the material.  Although we have not identified any alternate vendors of the filter material, we have a several year supply of the material in inventory and we believe there are suppliers that could supply alternate materials which may have equivalent function.  In the event that a re-engineering of the product were necessary due to a conversion to an alternate material, delays in product availability could occur and significant costs could be incurred, either of which 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. 

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Our business could be materially adversely impacted by risks inherent in international markets. 

          In 2002, approximately 18% 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:

          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. 

          The information contained in this report is as of March 31, 2003, unless expressly stated as of another date.  We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.  We also may make additional disclosures in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we may file from time to time with the Securities and Exchange Commission.  Please also note that we provide a cautionary discussion of risks and uncertainties under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2002.  These are factors that we think could cause our actual results to differ materially from expected results.  Other factors besides those listed here could also adversely affect us.  This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

          We are exposed to market risk for changes in interest rates related primarily to our cash and cash equivalent balances and marketable securities.  However, as all of our investments are in short-term instruments, we believe that we have no material market risk exposure.  All of our international sales are denominated in U.S. dollars, and accordingly, we believe we have no material foreign currency exchange rate risk.

Item 4.    Controls and Procedures

          We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide

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only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

          Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

          There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

PART II -           OTHER INFORMATION

Item 1.                Legal Proceedings

     Cross Medical Products v. DePuy AcroMed, Inc.

          On September 5, 2000, Interpore’s wholly-owned subsidiary, Cross Medical Products, Inc. (“Cross”), filed suit in the U.S. District Court, Central District of California, against DePuy AcroMed, Inc., a Johnson & Johnson company and Biedermann Motech GmbH, which suit alleged that DePuy AcroMed had infringed and continued to infringe Cross’ U.S. Patent Nos. 5,466,237 and 5,474,555.  These patents relate to screw technology embodied in certain components of the SYNERGY Spinal System.  The complaint sought damages for willful past and continuing infringement of the patents.  The Complaint also sought a declaratory judgment against DePuy AcroMed and Biedermann Motech that Cross was not infringing Biedermann Motech’s Patent No. 5,207,678.  DePuy AcroMed responded to the Complaint alleging that Cross’ patents are invalid and unenforceable, and alleging that it did not infringe.

          On January 24, 2003, the parties settled this case.  In connection with the confidential settlement agreement entered into between the parties, DePuy AcroMed paid Cross $15 million and agreed to pay a royalty on future sales of certain of DePuy AcroMed’s products.  The $15 million settlement was recorded as other income in the quarter ended March 31, 2003.  As required by the settlement agreement, the parties filed a request to dismiss the lawsuit, which request was granted on February 7, 2003.

     Interpore Cross v. Biomet, Inc.

          On December 20, 2002, in response to allegations by Biomet, Inc. of misappropriation of certain trade secrets by Interpore’s wholly-owned subsidiary Interpore Cross International, Inc. (“Interpore Cross”) and its employee, Jens Peter Timm (a former employee of Biomet), Interpore, Interpore Cross, Cross and Mr. Timm filed a complaint for declaratory relief in the United States District Court for the Central District of California.  The complaint sought a declaration as to Interpore Cross’s rights in its GEO STRUCTURE device and all related products and technology.  On February 14, 2003, the Court dismissed the complaint without prejudice based on its findings that the declaratory relief action was unnecessary because there was no threat of imminent or inevitable litigation at the time the complaint was filed.

          On January 16, 2003, Biomet filed an action in the United States District Court for the Northern District of Indiana, South Bend Division, against Interpore, Interpore Cross, Cross and Mr. Timm.  The complaint asserted claims alleging causes of action for declaration of patent ownership, constructive trust, patent infringement, misappropriation of trade secrets and unjust enrichment.  Biomet seeks an equitable ownership interest in Interpore Cross’s U.S. Patent Number 6,206,924 (the “‘924 patent”), a constructive trust over the proceeds of any products relating to the ‘924 patent, including the GEO STRUCTURE device, an injunction against infringement of the ‘924 patent, damages (including treble damages for willful conduct) and attorneys’ fees.  Biomet is claiming damages (before trebling) in excess of one million dollars.

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          In response to Biomet’s complaint Interpore filed three separate motions on March 10, 2003:  a motion to dismiss for lack of personal jurisdiction on behalf of Interpore and Cross; a motion to transfer venue to California; a motion to strike the request for monetary damages for patent infringement and a motion for a more definite statement as to the allegedly misappropriated trade secrets.  As of March 20, 2003, no date has been set for the hearing. 

          Interpore is unable at this time to predict the outcome of the litigation with Biomet. As of this date, Interpore does not believe that this litigation could reasonably be expected to have a material adverse effect on its business or financial condition. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in Interpore’s assumptions or the effectiveness of Interpore’s strategies related to these proceedings.

     Cross Medical Products v. Medtronic Sofamor Danek

          On May 1, 2003, Cross filed an amended complaint in the United States District Court for the Central District of California against Medtronic Sofamor Danek, Inc. and Medtronic Sofamor Danek USA, Inc. (collectively, “Medtronic”), which complaint alleges that Medtronic has infringed and continues to infringe Cross’ U.S. Patent Nos. 5,466,237, 5,474,555 and 5,624,442.  These patents relate to technology embodied in certain components of the SYNERGY Spinal System.  The complaint seeks damages for willful past and continuing infringement of the patents.  The complaint also seeks a declaratory judgment against Medtronic that Cross is not infringing U.S. Patent Nos. 5,591,165, 4,641,636, 4,815,453 and 5,005,562.  Cross expects Medtronic to respond to the complaint on or before May 22, 2003.  Cross is unable at this time to predict the outcome of this litigation.

          Aside from these matters, the nature of Interpore’s business subjects it to product liability and various other legal proceedings from time to time.  Interpore is currently involved in legal proceedings incidental to the normal conduct of our business.  Interpore does not believe that any liabilities relating to the legal proceedings to which it is a party are likely to be, individually or in the aggregate, material to Interpore’s consolidated financial condition or results of operations. 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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INTERPORE INTERNATIONAL, INC.

Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification

I, David C. Mercer, certify that:

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INTERPORE INTERNATIONAL INC.

Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification

I, Richard L. Harrison, certify that:

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