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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-22598
INTERPORE INTERNATIONAL
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3043318
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
181 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618-2402
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (714) 453-3200
not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
As of August 6, 1997, there were 6,989,429 shares of the registrant's
common stock issued and outstanding.
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Interpore International
Index
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1997 (unaudited) and December 31, 1996 ................. 3
Condensed Consolidated Statements of Income (unaudited)
for the three month and six month periods ended
June 30, 1997 and June 30, 1996 ................................. 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the six month periods ended June 30, 1997
and June 30, 1996 ............................................... 5
Notes to Condensed Consolidated Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ................. 11
Item 6. Exhibits and Reports on Form 8-K .................................... 11
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Interpore International
Condensed Consolidated Balance Sheets
(in thousands, except share data)
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,536 $ 6,112
Short-term investments 3,107 4,220
Accounts receivable, less allowance for doubtful accounts of
$206 and $339 in 1997 and 1996, respectively 2,464 3,771
Inventories 1,836 3,462
Prepaid expenses 423 436
Deferred income taxes 596 596
Other current assets 805 107
-------- --------
Total current assets 18,767 18,704
Property, plant and equipment, net 502 688
Deferred income taxes 904 904
Other assets 22 27
======== ========
Total assets $ 20,195 $ 20,323
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 188 $ 629
Accrued compensation and related expenses 675 591
Accrued sales taxes 243 252
Deferred rent payable 60 103
Other accrued liabilities 130 212
Current portion of long-term debt - 5
-------- --------
Total current liabilities 1,296 1,792
-------- --------
Contingencies
Shareholders' equity:
Series E convertible preferred stock, voting, no par value:
Authorized, issued and outstanding shares - 76,593 at June
30, 1997 and December 31, 1996; aggregate liquidation value
of $574 at June 30, 1997 and December 31, 1996 484 484
Preferred stock: Authorized shares - 296,358; issued and
outstanding shares - none - -
Common stock, no par value: Authorized shares - 20,000,000;
issued and outstanding shares - 6,985,829 at June 30, 1997
and 6,945,447 at December 31, 1996 35,522 35,433
Accumulated deficit (17,107) (17,386)
-------- --------
Total shareholders' equity 18,899 18,531
======== ========
Total liabilities and shareholders' equity $ 20,195 $ 20,323
======== ========
See accompanying notes.
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Interpore International
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1997 1996 1997 1996
------ ------ ------ ------
Net sales $4,000 $4,892 $8,725 $9,888
Cost of goods sold 729 1,197 1,998 2,528
Royalty expense 18 75 52 150
------ ------ ------ ------
Gross profit 3,253 3,620 6,675 7,210
------ ------ ------ ------
Operating expenses:
Research and development 497 550 1,026 1,050
Selling and marketing 1,801 2,569 4,048 4,956
General and administrative 567 552 1,186 1,251
Loss on sale of dental business 617 - 617 -
------ ------ ------ ------
Total operating expenses 3,482 3,671 6,877 7,257
------ ------ ------ ------
Loss from operations (229) (51) (202) (47)
------ ------ ------ ------
Interest income 175 134 314 274
Interest expense (3) (13) (7) (22)
Other income 77 47 174 87
------ ------ ------ ------
Total interest and other income, net 249 168 481 339
------ ------ ------ ------
Income before taxes 20 117 279 292
Provision for income taxes - - - -
====== ====== ====== ======
Net income $ 20 $ 117 $ 279 $ 292
====== ====== ====== ======
Net income per share $ .00 $ .02 $ .04 $ .04
====== ====== ====== ======
Shares used in computing net income
per share $7,279 $7,632 $7,290 $7,565
====== ====== ====== ======
See accompanying notes.
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Interpore International
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
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OPERATING ACTIVITIES
Net income $ 279 $ 292
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 187 183
Loss on sale of dental business 617 -
Changes in operating assets and liabilities:
Accounts receivable 415 (433)
Inventories 122 (111)
Prepaid expenses (55) (88
Other assets 31 346
Accounts payable (31) (522)
Accrued liabilities 2 (268)
------ ------
Net cash provided by (used in) operating activities 1,567 (601)
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INVESTING ACTIVITIES
Sales of short-term investments, net 1,113 (30)
Proceeds from sale of dental business, net 689 -
Capital expenditures (29) (249)
------ ------
Net cash provided by (used in) investing activities 1,773 (279)
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FINANCING ACTIVITIES
Proceeds from exercise of stock options 47 75
Proceeds from employee stock purchase plan 42 23
Repayment of lease financing (5) (55)
------ ------
Net cash provided by financing activities 84 43
------ ------
Net increase (decrease) in cash and cash equivalents 3,424 (837)
Cash and cash equivalents at beginning of period 6,112 3,694
====== ======
Cash and cash equivalents at end of period $9,536 $2,857
====== ======
See accompanying notes.
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Interpore International
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by Interpore International (the "Company") without audit, pursuant to
Securities and Exchange Commission regulations. In the opinion of management,
the unaudited financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the consolidated
financial position at June 30, 1997 and the consolidated statements of income
for the three month and six month periods ended June 30, 1997 and 1996, and the
consolidated statements of cash flows for the six month periods ended June 30,
1997 and 1996.
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, Interpore Orthopaedics, Inc. and Interpore Dental,
Inc., after elimination of all significant intercompany transactions.
The statements of income and cash flows for the 1997 interim periods are not
necessarily indicative of results to be expected for the full year.
These consolidated financial statements should be read in conjunction with the
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, as filed with the Securities and Exchange
Commission.
2. INVENTORIES
Inventories are stated at the lower of average cost or market and consist of the
following (in thousands):
June 30, December 31,
1997 1996
-------- ------------
Raw materials $ 562 $ 692
Work-in-process 258 385
Finished goods 1,016 2,385
------ ------
$1,836 $3,462
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3. CONTINGENCIES
In the ordinary course of its business, the Company is subject to legal
proceedings, claims and liabilities, including product liability matters. In the
opinion of management, the amount of ultimate liability with respect to any
known proceedings or claims will not materially affect the financial position or
results of operations of the Company.
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4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, FASB Statement of Financial Accounting Standards No. 128 (SFAS
128) was issued and is effective for interim and annual periods ending after
December 15, 1997. SFAS 128 requires presentation of both basic and dilutive
earnings per share. Management believes that basic and dilutive earnings per
share will not differ materially from the earnings per share amounts in the
accompanying statements of income.
5. SALE OF ASSETS
In April 1997, the Company entered into a definitive agreement for the sale of
its dental implant business to Steri-Oss Inc. of Yorba Linda, California. In May
1997, the sale was completed, and the Company received an initial cash payment
of $1.5 million. A deferred cash payment of $749,000, subject to certain
purchase price adjustments, is due in January 1998. The transaction, including
associated costs, resulted in a net charge of $617,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
SIGNIFICANT EVENT
In April 1997, the Company entered into a definitive agreement for the sale of
its dental business to Steri-Oss Inc. of Yorba Linda, California. In May 1997,
the sale was completed, and the Company received an initial cash payment of $1.5
million. A deferred cash payment of up to $749,000, subject to certain purchase
price adjustments, is due in January 1998. As part of the transaction, the
Company and Steri-Oss negotiated a distribution agreement whereby the Company
will manufacture and provide Interpore 200 Porous Hydroxyapatite for
distribution by Steri-Oss. The transaction, including associated costs, resulted
in a net charge of $617,000 which was recorded in the quarter ended June 30,
1997.
RESULTS OF OPERATIONS
The following table presents the Company's results of operations as percentages:
Three months ended June 30, Six months ended June 30,
------------------------------- -------------------------------
1997 vs. 1997 vs.
1997 1996 1996 1997 1996 1996
------ ------ ------- ------ ------ -------
Total net sales 100.0% 100.0% (18.2)% 100.0% 100.0% (11.8)%
Cost of goods sold 18.2% 24.5% (39.1)% 22.9% 25.6% (21.0)%
Royalty expense .5% 1.5% (76.0)% .6% 1.5% (65.3)%
------ ------ ------- ------ ------ -------
Gross profit 81.3% 74.0% (10.1)% 76.5% 72.9% (7.4)%
------ ------ ------- ------ ------ -------
Operating expense:
Research and development 12.4% 11.2% (9.6)% 11.8% 10.6% (2.3)%
Selling and marketing 45.0% 52.5% (29.9)% 46.4% 50.1% (18.3)%
General and administrative 14.2% 11.3% 2.7% 13.5% 12.7% (5.2)%
Loss on sale of dental business 15.4% .0% n/a 7.1% .0% n/a
------ ------ ------- ------ ------ -------
Total operating expenses 87.0% 75.0% (5.1)% 78.8% 73.4% (5.2)%
------ ------ ------- ------ ------ -------
Loss from operations (5.7)% (1.0)% n/a (2.3)% (.5)% n/a
====== ====== ======= ====== ====== =======
For the quarter ended June 30, 1997, net sales of $4.0 million were $892,000 or
18.2% lower than sales of $4.9 million for the same period of 1996. The
following table presents sales by category for the three month periods ended
June 30:
(in thousands) 1997 1996 Change Change %
------ ------ ------- --------
Orthopaedic product sales $3,279 $2,754 $ 525 19.1%
OEM product sales 459 251 208 82.9%
------ ------ ------- -------
Sub-total 3,738 3,005 733 24.4%
Dental product sales 262 1,887 (1,625) (86.1)%
------ ------ ------- -------
Total sales $4,000 $4,892 $ (892) (18.2)%
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Sales of orthopaedic products, primarily Pro Osteon(R) bone graft substitute
material for orthopaedic applications, increased in the quarter ended June 30,
1997 by $525,000 or 19.1% to $3.3 million compared to $2.8 million for the first
quarter of 1996. Domestic sales during the first quarter of 1997 through direct
sales representatives increased 54.7% while sales through distributors decreased
29.9% compared to the same quarter of 1996. Increasing direct representative
sales and declining domestic distributor sales has generally been the trend
since the Company created a domestic direct sales force and terminated
distribution agreements with certain domestic distributors that were not
achieving satisfactory market penetration. The Company continues to evaluate
distributor territories on a case-by-case basis, and will consider additional
distributor terminations with replacement by direct sales representatives in
markets where penetration is not satisfactory. International sales through
distributors increased 119.1% between the respective quarters.
Sales of the Company's OEM products, which consist mostly of porous
hydroxyapatite material for dental applications and for orbital implants,
increased by 82.9% in the quarter ended June 30, 1997 to $459,000 versus
$251,000 for the second quarter of 1996. The increase reflects product purchased
by Steri-Oss pursuant to the distribution agreement that was entered into in
connection with the sale of the Company's dental implant business to Steri-Oss.
The decline in sales of the Company's dental products (titanium dental implant
systems and Interpore 200(R) Porous Hydroxyapatite ("IP200") for dental use)
reflects the discontinuance of dental sales effective April 18, 1997. Sales of
IP200 to Steri-Oss subsequent to the sale of the dental business are now
classified as OEM product sales.
For the first six months of 1997, net sales of $8.7 million were $1.2 million or
11.8% lower than sales of $9.9 million for the same period of 1996. The
following table presents sales by category for the six month periods ended June
30:
(in thousands) 1997 1996 Change Change %
------ ------ ------- --------
Orthopaedic product sales $6,337 $5,574 $ 763 13.7%
OEM product sales 682 503 179 35.6%
------ ------ ------- -------
Sub-total 7,019 6,077 942 15.5%
Dental product sales 1,706 3,811 (2,105) (55.2)%
------ ------ ------- -------
Total sales $8,725 $9,888 $(1,163) (11.8)%
====== ====== ======= =======
Sales of orthopaedic products increased for the six months ended June 30, 1997
by $763,000 or 13.7% to $6.3 million compared to $5.6 million for the same
period of 1996. Domestic sales during the first half of 1997 through direct
sales representatives increased 50.6% while sales through distributors decreased
32.2% compared to the first half of 1996. International sales increased 169.0%
between the respective periods.
Sales of the Company's OEM products increased by 35.6% to $682,000 for the six
month period ended June 30, 1997 versus $503,000 for the six month period of
1996.
The decrease in sales of the Company's dental products from $3.8 million to $1.7
million, a 55.2% decrease, reflects the discontinuance of dental sales effective
April 18, 1997.
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The gross margins as percentages of sales for the quarter ended June 30, 1997
improved to 81.3% from 74.0% for the quarter ended June 30, 1996. Gross margin
percentages for the six month periods ended June 30, 1997 and 1996 were 76.5%
and 72.9%, respectively. The improved gross margins reflect the discontinuance
of dental product sales which had lower gross margins than the Company's
remaining orthopaedic and OEM products.
Total operating expenses for the quarter ended June 30, 1997 decreased by 5.1%
or $189,000 as compared to the same quarter of 1996. Research and development
expenses decreased by 9.6% or $53,000, and selling and marketing expenses
decreased by 29.9% or $768,000 versus the same quarter of 1996. Selling and
marketing expenses directly related to the dental business declined by $821,000,
while selling and marketing expenses in the orthopaedic business increased by
$53,000, mostly the result of commissions on increased sales through the direct
sales force. The decreases in research and development and selling and marketing
expenses were partially offset by the $617,000 loss recorded on the sale of the
dental business
For the six month period ended June 30, 1997, total operating expenses decreased
by 5.2% or $380,000 to $6.9 million from $7.3 million for the six months ended
June 30, 1996. Research and development expenses remained relatively constant.
Selling and marketing expenses decreased by $908,000 or 18.3%. Selling and
marketing expenses directly related to the dental business declined by $974,000,
while selling and marketing expenses in the orthopaedic business increased by
$66,000, mostly the result of commissions on increased sales through the direct
sales force. General and administrative expenses decreased 5.2% as a result of
lower professional fees and other overhead expenses, partly the result of the
sale of the dental business. The decreases in operating expenses were partially
offset by the $617,000 loss recorded on the sale of the dental business.
No income tax provision was recorded during the six month periods ended June 30,
1997 and 1996 due to the anticipated utilization of the Company's net operating
loss carryforwards during the two periods.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997 and December 31, 1996, cash, cash equivalents and short-term
investments totaled $12.6 million and $10.3 million, respectively. This increase
of $2.3 million was the result of the net proceeds from the sale of the dental
business and positive cash flow from operations in the first half of 1997. Total
working capital increased to $17.5 million at June 30, 1997 from $16.9 million
at December 31, 1996 and the current ratio improved from 10.4 to 14.5.
The $12.6 million total of cash, cash equivalents and short-term investments
remains available to support the Company's continued investment in the
development of its business, including the pursuit of FDA approvals for
additional indications for the use of Pro Osteon, development or acquisition of
new bone graft products or complementary products, and possible acquisitions of
businesses. Additionally, the Company has a $5 million revolving line of credit
which expires in July 1998 and which had no amount outstanding at June 30, 1997.
The Company believes it currently possesses sufficient resources to meet the
cash requirements of its operations for at least the next year.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 29, 1997, the Company held its 1997 Annual Meeting of
Shareholders to elect the Company's board of directors. The
number of shares entitled to vote was 7,033,502 and the number
of shares represented in person or proxy was 5,762,748.
Each of the current directors was re-elected. The number of
shares cast for each of the directors was as follows:
Name Affirmative Votes Votes Withheld
---- ----------------- --------------
Mr. Eisenecher 5,747,320 15,428
Mr. Jones 5,713,070 49,678
Mr. Mercer 5,748,419 14,329
Mr. Nohra 5,749,320 13,428
Mr. Smyth 5,726,070 36,678
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a. Exhibits.
Reference is made to the Exhibit Index on Page 13 hereof.
b. Reports on Form 8-K.
On May 1, 1997, the Company filed a report on Form 8-K with
the Securities and Exchange Commission describing the sale of
certain assets of Interpore Dental, Inc., a wholly-owned
subsidiary of the Company, to Steri-Oss Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 11, 1997 INTERPORE INTERNATIONAL
(Registrant)
By: /s/ DAVID C. MERCER
-------------------------------------
David C. Mercer,
President and Chief Executive Officer
By: /s/ RICHARD L. HARRISON
-------------------------------------
Richard L. Harrison
Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ------------
3.01 Third Amended and Restated Articles of Incorporation of Registrant, executed
on December 9, 1991(1)
3.02 First Amendment to the Third Amended and Restated Articles of Incorporation
of Registrant, executed on April 22, 1992(1)
3.03 Second Amendment to Third Amended and Restated Articles of Incorporation of
Registrant, executed on November 30, 1993(5)
3.04 Bylaws of Registrant dated October 24, 1983(1)
3.05 Third Amendment to Third Amended and Restated Articles of Incorporation of
Registrant, executed on November 30, 1993(5)
4.01 Rights Agreement dated August 29, 1995(6)
4.02 First Amendment to the Rights Agreement, executed on November 1, 1995(8)
10.01 Revised License Agreement dated March 12, 1984, between Registrant and
Research Corporation Technologies, Inc., as amended by a First Amendment
dated December 7, 1984, and as further amended by a Fourth Amendment dated
July 22, 1988(1)
10.02 Single Tenant Lease dated July 25, 1991 between Registrant and The Irvine
Company(1) as amended by a Third Amendment to Lease dated December 11, 1996(10)
10.03 Asset Purchase Agreement dated March 1, 1993 regarding sale of assets of
Interpore Orthopaedics, Inc. to Applied Epigenetics, Inc.(1)
10.04 Cancellation and Release Agreement dated March 1, 1993 among Registrant,
Interpore Orthopaedics, Inc., Pfizer, Inc. and Howmedica, Inc.(1)
10.05 Series E Preferred Stock and Common Stock Warrant Purchase Agreement dated
December 19, 1991(1)
10.06 Series E Preferred Stock Purchase Agreement dated October 30, 1992(1)
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Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ------------
10.07 Amended Schedule to Loan and Security Agreement dated July 25, 1996 among
Registrant, Interpore Orthopaedics, Inc. and Silicon Valley Bank(9)
10.08 Amendment to the Loan Agreement dated July 6, 1997 among Registrant,
Interpore Orthopaedics, Inc. and Silicon Valley Bank
10.09 Amended and Restated Stock Option Plan dated March 19, 1991(2), First
Amendment to the Amended and Restated Stock Option Plan, effective October
15, 1991(1); Amendment to the Amended and Restated Stock Option Plan dated
September 17, 1994(4)
10.10 Employee Qualified Stock Purchase Plan(3)
10.11 1995 Stock Option Plan(3)
10.12 Stock Option Plan for Non-Employee Directors of Interpore International(7)
10.13 Form of Indemnification Agreement(1)
10.14 Asset Purchase Agreement dated April 18, 1997 regarding sale of assets of
Interpore Dental, Inc. to Steri-Oss Inc.(11)
11.01 Computations of Net Income per Share
27.01 Financial Data Schedule
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(1) Incorporated by reference from the Company's Registration Statement on
Form S-1, Registration No. 33-69872.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-8, Registration No. 33-77426.
(3) Incorporated by reference from the Company's Proxy Statement for the
Company's 1994 Annual Meeting of Shareholders.
(4) Incorporated by reference from the Company's Registration Statement on
Form S-8, Registration No. 33-86290.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
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(6) Incorporated by reference from the Company's Current Report on Form 8-K
dated August 29, 1995.
(7) Incorporated by reference from the Company's Proxy Statement for the
Company's 1995 Annual Meeting of Shareholders.
(8) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
(9) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1996.
(10) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
(11) Incorporated by reference from the Company's Current Report on Form 8-K
dated May 1, 1997.
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