SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period from __________________ to _________________
Commission file number 1-6083
NOODLE KIDOODLE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-1771705
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification
Number)
6801 JERICHO TURNPIKE, SYOSSET, NEW YORK 11791
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code (516) 677-0500
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter periods that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirement for the past 90 days. YES X No ___
As of August 16, 1999, there were 7,603,890 outstanding shares of
the issuer's common stock, par value $.001 per share (excluding
903,011 treasury shares).
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TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Page
Item 1. - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
July 31, 1999, August 1, 1998 and January 30, 1999 3
Condensed Consolidated Statements of Operations
Thirteen and Twenty-Six Weeks Ended July 31, 1999
and August 1, 1998 4
Condensed Consolidated Statements of Cash Flows
Twenty-Six Weeks Ended July 31, 1999 and August 1, 1998 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. - Submissions of Matters to a Vote of Security 13
Holders
Item 6. - Exhibits and Reports on Form 8K 13
SIGNATURES 14
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENT
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NOODLE KIDOODLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
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July 31, August 1, January 30,
1999 1998 1999
(In thousands, except share data)
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ASSETS
Current assets:
Cash and cash equivalents $ 170 $ 1,247 $10,188
Merchandise inventories 27,703 21,769 21,074
Prepaid expenses and other current assets 2,700 3,345 3,780
Total Current Assets 30,573 26,361 35,042
Property, plant and equipment - net 25,402 20,449 22,900
Other assets 29 32 20
Total Assets $56,004 $46,842 57,962
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 21 $ 20 $ 21
Revolving credit facility 4,841 - -
Trade accounts payable 9,514 6,245 8,576
Accrued expenses and taxes 6,641 7,324 9,738
Net liabilities of discontinued operations 1,337 1,263 1,303
Total Current Liabilities 22,354 14,852 19,638
Long-term debt 702 724 712
Commitments and contingencies - - -
Stockholders' equity:
Preferred stock-authorized 1,000,000
shares, par value $.001,(none issued) - - -
Common stock-authorized 15,000,000,
par value $.001, issued 8,506,901
shares, respectively 9 9 9
Capital in excess of par value 43,097 43,083 43,087
Accumulated deficit (6,454) (8,073) (1,747)
36,652 35,019 41,349
Less treasury stock, at cost, 903,011,
914,761, and 910,861 shares, respectively 3,704 3,753 3,737
Total Stockholders' Equity 32,948 31,266 37,612
Total Liabilities and Stockholders' Equity $56,004 $46,842 $57,962
See accompanying notes to Condensed Consolidated Financial Statements.
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NOODLE KIDOODLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
(In thousands, except per share data)
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Net sales $20,795 $18,431 $43,685 $36,476
Costs and expenses:
Cost of product sold including
buying and warehousing costs 12,566 11,089 26,466 22,119
Selling and administrative expenses 11,529 8,909 21,632 17,059
24,095 19,998 48,098 39,178
Operating loss (3,300) (1,567) (4,413) (2,702)
Interest income 18 63 98 172
Interest expense (57) (21) (78) (44)
Loss before income tax and cumulative
effect of a change in accounting
principle (3,339) (1,525) (4,393) (2,574)
Income taxes (benefit) - - - -
Loss before cumulative effect of a
change in accounting principle (3,339) (1,525) (4,393) (2,574)
Cumulative effect of a change in
accounting principle - - 314 -
Net loss $(3,339) $(1,525) $(4,707) $(2,574)
Net loss per share basic and diluted:
Before cumulative effect of a change
in accounting principle $ (0.44) $ (0.20) $ (0.58) $ (0.34)
Cumulative effect of a change in
accounting principle - - (0.04) -
Net loss per share $ (0.44) $ (0.20) $ (0.62) $ (0.34)
Weighted average shares outstanding 7,604 7,587 7,601 7,583
See accompanying notes to Condensed Consolidated Financial Statements
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NOODLE KIDODOLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDTED STATEMENTS OF CASH FLOWS
UNAUDITED
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Twenty-Six Weeks Ended
July 31, August 1,
1999 1998
(In thousands)
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Cash flows from operating activities:
Net loss before cumulative effect of a change
in accounting principle $ (4,393) $(2,574)
Adjustments to reconcile to net cash provided
(used):
Depreciation 1,695 1,346
Decrease (increase) in non-cash working capital
accounts:
Merchandise inventories (6,629) (4,948)
Prepaid expenses, taxes and other current assets 766 (321)
Trade accounts payable, accrued expenses and taxes (2,159) (205)
Net cash (used in) continuing operations (10,720) (6,702)
Decrease (increase) in non-cash working capital
accounts and other of discontinued operations 34 90
Net cash provided by (used in) discontinued
operations 34 90
Net cash (used in)operating activities (10,686) (6,612)
Cash flows from investing activities:
Property additions (4,197) (3,281)
Other (9) (9)
Net cash (used in)investing activities (4,206) (3,290)
Cash flows from financing activities:
Net increase in revolving credit facility 4,841 -
Proceeds from exercise of employee stock options 43 59
Reduction of long-term debt (10) (9)
Net cash provided by (used in) financing
activities 4,874 50
Net increase (decrease) in cash and cash equivalents (10,018) (9,852)
Cash and cash equivalents - beginning of period 10,188 11,099
Cash and cash equivalents - end of period $ 170 $ 1,247
Supplemental cash flow information
Interest expense $ 78 $ 44
Income taxes, net - -
See accompanying notes to Condensed Consolidated Financial Statements
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NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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NOTE 1. Basis of presentation.
The accompanying interim unaudited consolidated
financial statements include the accounts of Noodle
Kidoodle, Inc. and subsidiaries (the "Company").
All intercompany accounts and transactions are
eliminated in consolidation.
These financial statements have been prepared in
accordance with generally accepted accounting
principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by
generally accepted accounting principles for
complete financial statements. In the opinion of
management, such interim statements reflect all
adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial
position and the results of operations and cash
flows for the interim periods presented. Due to the
seasonal nature of the Company's business, results
of operations for the interim periods are not
necessarily indicative of the results to be expected
for the full fiscal year. These financial
statements should be read in conjunction with the
audited consolidated financial statements and
footnotes included in the Company's annual Report on
Form 10-K for the year ended January 30, 1999.
NOTE 2. Cash and cash equivalents.
All highly liquid investments with a maturity date
of three months or less are considered to be cash
equivalents. These investments are stated at cost
which approximates market.
NOTE 3. Income taxes.
Income tax provisions are based on estimated annual
effective tax rates. The Company did not record a
tax benefit for the losses for the periods ended
July 31, 1999 and August 1, 1998, respectively,
since the Company has no available tax loss
carrybacks and there are no available tax planning
strategies that would enable the Company to utilize
the tax benefit of the carryforwards,without relying
on future income.
The Company has recorded a 100% valuation allowance
against its deferred tax assets, and management
believes that it is premature to reverse the
allowance at this time.
The Company has available net operating loss
carryforwards of approximately $16.5 million for
income tax purposes.
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NOTE 4. Earnings per share.
The Company calculates earnings per share in
accordance with Statement of Financial Accounting
Standard (SFAS) No. 128, "Earnings per Share." We
use the weighted-average number of common shares
outstanding during each period to compute basic
earnings per common share. Diluted earnings per
share is computed using the weighted-average number
of common shares and dilutive potential common
shares outstanding. Dilutive potential common
shares are additional common shares assumed to be
exercised.
Average common and common equivalent shares
used in computing diluted earnings per share as
a result of applying the treasury stock method to
outstanding employee stock options were as follows:
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
7,770,000 7,697,000 7,811,000 7,683,000
In accordance with FAS 128, as a result of losses
from operations for the quarter and six month period
ended July 31, 1999 and August 1, 1998, the
inclusion of employee stock options were
antidilutive and, therefore, were not utilized in
the computation of diluted earnings per share.
Note 5. Accounting change.
Effective January 31, 1999, the Company adopted
Statement of Position ("SOP") 98-5, "Reporting on
the Costs of Start-Up Activities". The change
involves expensing store pre-opening costs as
incurred. Previously, the Company capitalized such
costs and amortized them over the first twelve
months of a store's operations.
The cumulative effect of the change in accounting
principle resulted in the write-off of $314,000 of
unamortized costs in the first quarter which is
so reflected in the Statement of Operations.
Note 6. Revenue Recognition.
Revenue is recognized at the time that retail sales
are made to customers. Returns and allowances are
recorded at the time returns are received from or
allowances made to customers.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thirteen Weeks Ended July 31, 1999 Compared With
Thirteen Weeks Ended August 1, 1998
Results of Operations
Net sales increased 13.0% to $20.8 million in the thirteen
weeks ended July 31, 1999 from $18.4 million in the
comparable period in the prior year, due to the addition of
two stores in the first quarter, and four stores in the
second quarter of fiscal 2000; two stores in the third
quarter, and three stores in the fourth quarter of last year;
offset by decreases in comparable store sales of 8% in the
quarter. The Company had 32 comparable stores at July 31,
1999. The Company operated 48 Noodle Kidoodle stores at July
31, 1999 compared to 37 Noodle Kidoodle stores at August 1,
1998.
Gross profit (derived from net sales less the cost of product
sold, which includes buying and warehousing costs) increased
12.3% to $8.2 million in the thirteen weeks ended July 31,
1999 from $7.3 million in the comparable period in the prior
year. Gross profit, as a percentage of net sales ("gross
profit percentage") decreased to 39.6% for the second quarter
ended July 31, 1999 from 39.8% in the comparable period in
the prior year, primarily due to favorable product mix
partially offset by increased variable warehousing costs.
Selling and administrative expenses increased $2.6 million to
$11.5 million in the second quarter ended July 31, 1999 from
$8.9 million in the comparable period in the prior year.
Direct store expenses, which consist of payroll, occupancy,
advertising and other store operating costs, increased $2.0
million as a result of a change in store base. Home office
expenses increased $0.5 million, including $0.2 million of
costs this quarter associated with the development of the
noodlekidoodle.com internet site. Store pre-opening costs
increased $0.1 million. Selling and administrative expenses,
as a percent of net sales, increased to 55.4% in the current
quarter ended July 31, 1999 from 48.3% in the comparable
period in the prior year, primarily as a result of the
additional home office costs, the timing of advertising
expenditures, additional new store opening costs, and lower
comparable store sales.
Income tax provisions are based on estimated annual effective
tax rates. The Company did not record a tax benefit for the
losses for the periods ended July 31, 1999 and August 1,
1998, respectively, since the Company has no available tax
losses carrybacks and there are no available tax planning
strategies that would enable the Company to utilize the tax
benefit of the carryforwards, without relying on future
income. The Company has recorded a 100% valuation allowance
against its deferred tax assets, and management believes that
it is premature to reverse the allowance at this time.
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The net loss increased $1.8 million to $3.3 million ($0.44
per share) for the second quarter ended July 31, 1999 from
$1.5 million ($0.20 per share) in the comparable period in
the prior year.
Twenty-Six Weeks Ended July 31, 1999 Compared
with Twenty-Six Weeks Ended August 1, 1998
Net sales increased 19.7% to $43.7 million in the twenty-six
week period ended July 31, 1999 from $36.5 million in the
comparable period in the prior year, primarily due to the
addition of six new stores in the current six month period
and five new stores in the second half of last year offset by
comparable store sales decreases of 2%. The Company had 32
comparable stores at July 31, 1999. The Company operated 48
Noodle Kidoodle stores at July 31, 1999 compared to 37 Noodle
Kidoodle stores at August 1, 1998.
Gross profit (derived from net sales less the cost of product
sold, which includes buying and warehousing costs) increased
19.4% to $17.2 million in the six months period ended July
31, 1999 from $14.4 million in the comparable period in the
prior year. Gross profit percentage remained flat at 39.4%
for the twenty-six week period ended July 31, 1999 and August
1, 1998, respectively.
Selling and administrative expenses increased $4.6 million to
$21.6 million in the twenty-six week period ended July 31,
1999 from $17.0 million in the comparable period in the prior
year. Direct store expenses which consist of payroll,
occupancy, advertising and other store operating costs
increased $4.0 million. Home office expenses increased $0.4
million including $0.2 million of costs associated with the
development of the noodlekidoodle.com internet site. Store
pre-opening costs increased $0.2 million. Selling and
administrative expenses as a percent of net sales increased
to 49.5% in the current six-month period ended July 31, 1999
from 46.8% in the comparable period in the prior year,
primarily as a result of increased home office costs, the
timing of advertising expenditures, additional new store
opening costs and lower comparable store sales.
The cumulative effect of a change in accounting principle of
$314,000 represents the write-off of unamortized pre-opening
costs as a result of adopting SOP 98-5, "Reporting on the
Costs of Start-Up Activities", in the first quarter of
fiscal 2000. This accounting change requires the Company to
expense on a current basis previously capitalized pre-opening
costs.
Income tax provisions are based on estimated annual effective
tax rates. The Company did not record a tax benefit for the
losses for the periods ended July 31, 1999 and August 1,
1998, respectively, since the Company has no available tax
losses carrybacks and there are no available tax planning
strategies that would enable the Company to utilize the tax
benefit of the carryforwards, without relying on future
income. The Company has recorded a 100% valuation allowance
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against its deferred tax assets, and management believes that
it is premature to reverse the allowance at this time.
The net loss increased $2.1 million to $4.7 million ($0.62
per share) for the six-month period ended July 31, 1999 from
$2.6 million ($0.34 per share) in the comparable period in
the prior year. The current six-month period loss includes
the cumulative effect of a change in accounting principle of
$0.3 million ($0.04 per share).
Liquidity and Capital Resources.
During the twenty-six week period ended July 31, 1999 the
Company's operating activities of its continuing operations
used $10.7 million of cash. This use of cash resulted from
the net loss, before the cumulative effect of a change in
accounting principle, of $4.4 million, and an increase in
working capital of $8.0 million, offset by non-cash charges
of $1.7 million. The increase in working capital resulted
primarily from an increased store base and the need for
inventories for the Company's planned store openings for the
remainder of the year. The Company used cash to fund
investing activities of $4.2 million, primarily for the
purchase of fixed assets for new stores. Cash provided from
financing activities was $4.9 million, primarily from
borrowings of $4.8 million under the Company's revolving
credit facility. As a result of the foregoing, cash and cash
equivalents decreased during the period by $10.0 million.
On July 29, 1999 the Company announced its intent to form
noodlekidoodle.com, a joint venture, between the Company and
Daniel Nissan. Following the successful launch of the
website, the joint venture will be 80% owned by the Company
and 20% owned by Daniel Nissan. The Company estimates that
it will invest up to $1 million in the internet venture this
year, of which $0.2 million was charged to expense in the
current quarter.
The Company maintains a revolving credit facility, effective
through June 2000, with The CIT Group/Business Credit, Inc.,
which provides up to $20 million of available borrowings.
This facility may be used for direct borrowings and letters
of credit and may not exceed a certain percentage of, and is
collateralized by, the Company's inventory, receivables and
certain other assets. The agreement provides for an annual
collateral management fee and commitment fee on the unused
portion of the commitment. Outstanding borrowings bear
interest, at the option of the Company, based on the prime
rate or LIBOR. The agreement contains certain covenants
which among other items, limits the payment of cash dividends
when borrowings under the agreement are outstanding. As of
July 31, 1999, the Company had $4.8 million of outstanding
borrowings under the revolving credit facility.
The Company opened six stores during the twenty-six week
period ended July 31, 1999, one in Manhattan, NY, one in
Miami, FL two in Houston, TX, one in Southlake, TX and one in
Plantation, FL. Three additional stores were opened in the
month of August 1999, one in Lincoln, NE, one in Wichita, KS
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and one in Dallas, TX. The Company expects to open six to
eight stores in the next two quarters of fiscal 2000. In
addition, the Company plans to continue to make investments
in its distribution center and for store remodels to improve
operational efficiencies and customer service. The Company
leased a 65,000 square foot distribution facility on July 1,
1999 to support its peak seasonal inventory requirements as a
result of the increased store base.
The Company has available net operating loss carryforwards of
approximately $16.5 million for income tax purposes.
The Company expects to fund its near-term cash requirements
principally from its existing cash balances and by borrowing
under its revolving credit facility. The Company expects to
finance its long-term expansion plan with internally and
externally generated funds, which may include borrowings
under future credit facilities, and through the sale of
equity, equity-related or debt securities. There can be no
assurance that financing will be available in amounts, or at
rates or on terms and conditions acceptable to the Company.
Seasonality
The Company's operations are highly seasonal and a
significant portion of its revenues occur in the fourth
quarter which coincides with the Christmas selling season.
New stores are expected to be opened throughout the year, but
generally before the Christmas selling season, which will
make the Company's fourth quarter revenues an even greater
percentage of total year's revenues. Operations during the
first three quarters are not expected to be profitable for
the foreseeable future.
Year 2000 Compliance
The Company has completed its review of year 2000 ("Y2K")
issues and does not believe that the business impact or cost
of these issues is material. The following areas have been
reviewed:
Corporate Information Systems - All corporate information
systems, both those developed by the Company and critical
systems developed by third parties, have been developed in an
environment and programming language which are not affected
by the year 2000 problem, and no software changes are needed.
In-Store Systems - All in-store and point of sale (POS)
software was developed by an outside software firm which has
provided written assurance of the systems' year 2000
compliance. The Company has tested the systems' Y2K
compliance during the first quarter of calendar 1999 and
found the systems to be Y2K compliant.
Personal Computers - Some personal computers used to run the
Company's in-store POS systems are not year 2000 compliance.
BIOS upgrades for these computers have been obtained at no
cost.
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Embedded Systems - None of the Company's critical operations
are dependent on the embedded systems. Year 2000 compliance
of telephone and alarm systems, which may contain embedded
date-sensitive circuits, will be verified with their
respective vendors by the end of the third quarter of
calendar 1999.
Risk - There can be no assurance that the Company's systems
will be timely converted or that the failure of such systems
to be year 2000 compliant will not have a material adverse
affect on the Company's results of operations, financial
condition or liquidity. Management believes that the risks
associated with the year 2000 problem are minimal. The
greatest risk to the business is the possibility of an
interruption in service from a vendor who is not properly
prepared. Any impact to the business in this "worst case"
scenario would be minimized by the likelihood that it will
occur during the traditionally slower first quarter.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Not applicable.
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PART II - OTHER INFORMATION
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Item 4. - Submission of Matters to a Vote of Security
Holders.
(a) The Annual Meeting of Stockholders of Noodle
Kidoodle, Inc. was held on July 13, 1999.
(b) Election of Directors
Nominees (Class II Directors) Shares For Shares Withheld
Robin Farkas 6,311,276 220,255
Stewart Katz 6,530,337 1,194
Robert Stokvis 6,529,612 1,919
Item 6. - Exhibits and Reports on Form 8-K
(a) The following exhibit is filed as part of this
report:
Exhibit 27 - Financial Data Schedule (SEC/EDGAR
only)
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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.
NOODLE KIDOODLE, INC.
(Registrant)
Date: September 13, 1999 /s/ Stanley Greenman
Stanley Greenman, Chairman
of the Board, Chief
Executive Officer, and
Treasurer
(Principal Executive
Officer)
Date: September 13, 1999 /s/ Kenneth S. Betuker
Kenneth S. Betuker
Vice President, Chief
Financial Officer and
Secretary
(Principal Financial and
Accounting Officer)
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 170
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 27,703
<CURRENT-ASSETS> 30,573
<PP&E> 36,335
<DEPRECIATION> 10,933
<TOTAL-ASSETS> 56,004
<CURRENT-LIABILITIES> 22,354
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 32,939
<TOTAL-LIABILITY-AND-EQUITY> 56,004
<SALES> 43,685
<TOTAL-REVENUES> 43,685
<CGS> 26,466
<TOTAL-COSTS> 26,466
<OTHER-EXPENSES> 21,632
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78
<INCOME-PRETAX> (4,393)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,393)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 314
<NET-INCOME> (4,707)
<EPS-BASIC> (0.62)
<EPS-DILUTED> (0.62)
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