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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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. 0-22958
INTERPORE INTERNATIONAL
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3043318
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
181 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618-2402
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (714) 453-3200
not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 7, 1997, there were 7,092,286 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
September 30, 1997 (unaudited) and December 31, 1996 ............... 3
Condensed Consolidated Statements of Income (unaudited)
for the three month and nine month periods ended
September 30, 1997 and September 30, 1996 .......................... 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended September 30, 1997 and
September 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 6. Exhibits and Reports on Form 8-K ................................... 12
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INTERPORE INTERNATIONAL
Condensed Consolidated Balance Sheets
(in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,043 $ 6,112
Short-term investments 3,276 4,220
Accounts receivable, less allowance for
doubtful accounts of $211 and $339 in 1997
and 1996, respectively 2,206 3,771
Inventories 1,774 3,462
Prepaid expenses 456 436
Deferred income taxes 596 596
Other current assets 765 107
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Total current assets 19,116 18,704
Property, plant and equipment, net 544 688
Deferred income taxes 904 904
Other assets 22 27
-------- --------
Total assets $ 20,586 $ 20,323
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 133 $ 629
Accrued compensation and related expenses 667 591
Accrued sales taxes 194 252
Deferred rent payable 38 103
Other accrued liabilities 22 212
Current portion of long-term debt -- 5
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Total current liabilities 1,054 1,792
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Contingencies
Shareholders' equity:
Series E convertible preferred stock, voting, no par value:
Authorized, issued and outstanding shares - 75,259 at
September 30, 1997 and 76,593 at December 31, 1996;
aggregate liquidation value of $564 at September 30, 1997
and $574 at December 31, 1996 476 484
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 - 7,007,771 at September 30,
1997 and 6,945,447 at December 31, 1996 35,586 35,433
Accumulated deficit (16,530) (17,386)
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Total shareholders' equity 19,532 18,531
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Total liabilities and shareholders' equity $ 20,586 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- --------------------
1997 1996 1997 1996
------ ------ ------- -------
Net sales $3,501 $4,733 $12,226 $14,621
Cost of goods sold 619 1,325 2,617 3,853
Royalty expense 2 56 54 206
------ ------ ------- -------
Gross profit 2,880 3,352 9,555 10,562
------ ------ ------- -------
Operating expenses:
Research and development 473 460 1,499 1,510
Selling and marketing 1,572 2,342 5,620 7,298
General and administrative 501 614 1,687 1,865
Loss on sale of dental business -- -- 617 -
------ ------ ------- -------
Total operating expenses 2,546 3,416 9,423 10,673
------ ------ ------- -------
Income (loss) from operations 334 (64) 132 (111)
------ ------ ------- -------
Interest income 182 132 496 406
Interest expense (1) (3) (8) (25)
Other income 62 62 236 149
------ ------ ------- -------
Total interest and other income, net 243 191 724 530
------ ------ ------- -------
Income before taxes 577 127 856 419
Provision for income taxes -- -- -- --
------ ------ ------- -------
Net income $ 577 $ 127 $ 856 $ 419
====== ====== ======= =======
Net income per share $ .08 $ .02 $ .12 $ .06
====== ====== ======= =======
Shares used in computing net income
per share 7,406 7,430 7,322 7,522
====== ====== ======= =======
See accompanying notes.
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INTERPORE INTERNATIONAL
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
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OPERATING ACTIVITIES
Net income $ 856 $ 419
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 268 276
Loss on sale of dental business 617 --
Changes in operating assets and liabilities:
Accounts receivable 621 136
Inventories 184 (47)
Prepaid expenses (88) 44
Other assets 71 282
Accounts payable (86) (453)
Accrued liabilities (185) (292)
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Net cash provided by operating activities 2,258 365
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INVESTING ACTIVITIES
Sales of short-term investments, net 944 2,749
Proceeds from sale of dental business, net 741 -
Capital expenditures (152) (276)
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Net cash provided by investing activities 1,533 2,473
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FINANCING ACTIVITIES
Repurchase of common stock -- (910)
Proceeds from exercise of stock options 103 75
Proceeds from employee stock purchase plan 42 23
Repayment of lease financing (5) (84)
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Net cash provided by (used in) financing activities 140 (896)
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Net increase in cash and cash equivalents 3,931 1,942
Cash and cash equivalents at beginning of period 6,112 3,694
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Cash and cash equivalents at end of period $10,043 $5,636
======= ======
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 September 30, 1997 and the consolidated statements of
income for the three month and nine month periods ended September 30, 1997 and
1996, and the consolidated statements of cash flows for the nine month periods
ended September 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):
September 30, December 31,
1997 1996
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Raw materials $ 530 $ 692
Work-in-process 315 385
Finished goods 929 2,385
====== ======
$1,774 $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(R) Porous Hydroxyapatite ("IP200")
for distribution by Steri-Oss in the dental market. The transaction, including
associated costs, resulted in a net charge of $617,000 which was recorded in the
quarter ended June 30, 1997.
RESULTS OF OPERATIONS
The following table presents the Company's results of operations as percentages:
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
1997 vs. 1997 vs.
1997 1996 1996 1997 1996 1996
------ ------ -------- ------ ------ -------
Total net sales 100.0% 100.0% (26.0%) 100.0% 100.0% (16.4%)
Cost of goods sold 17.7% 28.0% (53.3%) 21.4% 26.4% (32.1%)
Royalty expense .1% 1.2% (96.4%) .4% 1.4% (73.8%)
------ ------ ------- ------ ------ -------
Gross profit 82.2% 70.8% (14.1%) 78.2% 72.2% (9.5%)
------ ------ ------- ------ ------ -------
Operating expense:
Research and development 13.5% 9.7% 2.8% 12.3% 10.3% (.7%)
Selling and marketing 44.9% 49.5% (32.9%) 46.0% 49.9% (23.0%)
General and administrative 14.3% 13.0% (18.4%) 13.8% 12.8% (9.5%)
Loss on sale of dental business .0% .0% n/a 5.0% .0% n/a
------ ------ ------- ------ ------ --------
Total operating expenses 72.7% 72.2% (25.5%) 77.1% 73.0% (11.7%)
------ ------ ------- ------ ------ --------
Income (loss) from operations 9.5% (1.4%) n/a 1.1% (.8%) n/a
====== ======= ======= ====== ====== =======
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For the quarter ended September 30, 1997, net sales of $3.5 million were $1.2
million or 26.0% lower than sales of $4.7 million for the same period of 1996.
The following table presents sales by category:
Three months ended
September 30, Increase (decrease)
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(in thousands) 1997 1996 Amount %
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Orthopaedic product sales $ 3,188 $ 2,778 $ 410 14.8%
OEM product sales 313 340 (27) (7.9%)
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Sub-total 3,501 3,118 383 12.3%
Dental product sales -- 1,615 (1,615) (100.0%)
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Total sales $ 3,501 $ 4,733 $(1,232) (26.0%)
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Sales of orthopaedic products, primarily Pro Osteon(R) bone graft substitute
material for orthopaedic applications, increased in the quarter ended September
30, 1997 by $410,000 or 14.8% to $3.2 million compared to $2.8 million for the
third quarter of 1996. Domestic sales of orthopaedic products increased 9.3%
during the quarter ended September 30, 1997 compared to the same quarter of
1996. Domestic sales during the third quarter of 1997 through direct sales
representatives increased 24.9% while sales through distributors decreased 14.6%
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 of orthopaedic products,
made exclusively to distributors, increased 87.6% 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,
decreased by 7.9% in the quarter ended September 30, 1997 to $313,000 versus
$340,000 for the third quarter of 1996. OEM product sales in the third quarter
of 1996 included substantial sales of bone graft substitute material for use in
titanium spine cage clinical trials. Partially offsetting this decline were
sales of IP200 to an OEM customer in the 1997 period.
The decline in sales of the Company's dental products (titanium dental implant
systems and IP200 for dental use) reflects the discontinuance of dental product
sales effective April 18, 1997. Sales of IP200 for dental use subsequent to the
sale of the dental business are now classified as OEM product sales.
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For the first nine months of 1997, net sales of $12.2 million were $2.4 million
or 16.4% lower than sales of $14.6 million for the same period of 1996. The
following table presents sales by category:
Nine months ended
September 30, Increase (decrease)
------------------- --------------------
(in thousands) 1997 1996 Amount %
------- ------- -------- ------
Orthopaedic product sales $ 9,525 $ 8,352 $ 1,173 14.0%
OEM product sales 995 843 152 18.0%
------- ------- ------- ------
Sub-total 10,520 9,195 1,325 14.4%
Dental product sales 1,706 5,426 (3,720) (68.6%)
------- ------- ------- ------
Total sales $12,226 $14,621 $(2,395) (16.4%)
======= ======= ======= ======
Sales of orthopaedic products increased for the nine months ended September 30,
1997 by $1.1 million or 14.0% to $9.5 million compared to $8.4 million for the
same period of 1996. Domestic sales of orthopaedic products increased 7.2%
during the nine months ended September 30, 1997 compared to the same nine month
period of 1996. Domestic sales during the first nine months of 1997 through
direct sales representatives increased 40.1% while sales through distributors
decreased 27.4% compared to the first nine months of 1996. International sales
increased 134.1% between the respective periods.
Sales of the Company's OEM products increased by 18.0% to $995,000 for the nine
month period ended September 30, 1997 versus $843,000 for the nine month period
of 1996, reflecting initial stocking orders of IP200 for dental use from an OEM
customer in the second quarter of 1997.
The 68.6% decrease in sales of the Company's dental products from $5.4 million
to $1.7 million reflects the discontinuance of dental product sales effective
April 18, 1997.
The gross margin as a percentage of sales for the quarter ended September 30,
1997 improved to 82.2% from 70.8% for the quarter ended September 30, 1996.
Gross margin percentages for the nine month periods ended September 30, 1997 and
1996 were 78.2% and 72.2%, respectively. The improvements reflect the
discontinuance of dental product sales which had lower gross margins than the
Company's remaining orthopaedic and OEM products, and which also had associated
royalty expenses.
Total operating expenses for the quarter ended September 30, 1997 decreased by
25.5% or $870,000 as compared to the same quarter of 1996. Research and
development expenses remained relatively constant. Selling and marketing
expenses decreased by 32.9% or $770,000 versus the same quarter of 1996. Selling
and marketing expenses directly related to the dental business declined by
$823,000, while selling and marketing expenses in the orthopaedic business
increased by $53,000. General and administrative expenses decreased 18.4% or
113,000, mostly the result of cost reductions following the sale of the dental
business.
For the nine month period ended September 30, 1997, total operating expenses
decreased by 11.7% or $1.3 million to $9.4 million from $10.7 million for the
nine months ended September 30, 1996. Research and development expenses remained
relatively constant. Selling and marketing expenses decreased by $1.7 million or
23.0%. Selling and marketing expenses directly related to the dental business
declined by $1.8 million, while selling and marketing expenses in the
orthopaedic business increased by $119,000, mostly the result of commissions on
increased sales through the direct sales force and increased expenses related to
company funded symposia. General and administrative expenses
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decreased 9.5% or 178,000, mostly the result of cost reductions related to 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.
The increase in interest income resulted from higher cash and investments
balances while the increase in other income primarily relates to higher royalty
income.
No income tax provision was recorded during the nine month periods ended
September 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 September 30, 1997 and December 31, 1996, cash, cash equivalents and
short-term investments totaled $13.3 million and $10.3 million, respectively.
The increase of $3.0 million was the result of the net proceeds from the sale of
the dental business and positive cash flow from operations in the first nine
months of 1997. Total working capital increased to $18.1 million at September
30, 1997 from $16.9 million at December 31, 1996 and the current ratio improved
from 10.4 to 18.1.
The $13.3 million total of cash, cash equivalents and short-term investments
remains available to support the Company's continued investment in the
development of its business, including the pursuit of regulatory approvals for
additional indications for the use of Pro Osteon, development or acquisition of
new bone 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 September 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
Reference is made to the Exhibit Index on Page 14 hereof.
b. Reports on Form 8-K.
On July 1, 1997, the Company filed a report on Form 8-K/A with
the Securities and Exchange Commission which amended the Form
8-K filed on May 14, 1997 describing the sale of certain
assets of Interpore Dental, Inc., a wholly-owned subsidiary of
the Company, to Steri-Oss Inc. The amended report provided
information required by Item 7 (b), Pro forma financial
information.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: November 11, 1997 INTERPORE INTERNATIONAL
(Registrant)
By: /s/ DAVID C. MERCER
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David C. Mercer,
President and Chief
Executive Officer
By: /s/ RICHARD L. HARRISON
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Richard L. Harrison
Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
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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
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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 (12)
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.
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(5) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
(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.
(12) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1997.
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