SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22970
NETWORK IMAGING CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 54-1590649
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Huntmar Park Drive, Herndon, Virginia 20170
(Address of principal executive offices)
(703) 478-2260
(Issuer's telephone number)
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 past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 28,794,985 shares of
common stock, $.0001 par value, as of April 23, 1998.
<PAGE>
NETWORK IMAGING CORPORATION
Form 10-Q
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets at March 31, 1998
(unaudited) and December 31, 1997 2
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1998 and 1997 3
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the three months ended March 31, 1998 4
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 12
Item 6. Exhibits and Reports on Form 8-K. 12
<PAGE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 31, December 31,
1998 1997
---------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,811 $ 3,816
Accounts and notes receivable, net 6,149 8,569
Note receivable Dorotech sale -- 7,000
Inventories 796 722
Prepaid expenses and other 986 1,108
--------- ---------
Total current assets 12,742 21,215
Fixed assets, net 2,039 2,165
Long-term notes receivable, net 283 378
Software development costs and
purchased technology, net 2,634 2,490
Goodwill, net 457 499
Other assets 121 113
--------- ---------
Total assets $ 18,276 $ 26,860
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current debt maturities and
obligations under capital leases $ 948 $ 2,479
Accounts payable 2,547 2,037
Accrued compensation and related
expenses 867 1,135
Deferred revenue 4,963 3,334
Other accrued expenses 1,594 2,250
--------- ---------
Total current liabilities 10,919 11,235
Long-term debt and obligations
under capital leases 1,105 1,108
--------- ---------
Total liabilities 12,024 12,343
Commitments
Redeemable Series F preferred stock,
none and 792,186 shares issued
and outstanding -- 6,548
Stockholders' equity:
Preferred stock, $.0001 par value,
20,000,000 shares authorized;
1,614,575 and 1,615,675 shares
issued and outstanding
Common stock, $.0001 par value,
100,000,000 shares authorized;
28,784,985 and 26,236,186 shares
issued and outstanding 3 3
Additional paid-in-capital 133,120 132,403
Accumulated deficit (126,871) (124,437)
--------- ---------
Total stockholders' equity 6,252 7,969
--------- ---------
Total liabilities and
stockholders' equity $ 18,276 $ 26,860
========= =========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended March 31,
1998 1997
------------ ------------
Revenue:
Products $ 3,539 $ 4,259
Services 2,661 4,860
------------ ------------
6,200 9,119
------------ ------------
Costs and expenses:
Cost of products sold 1,815 1,958
Cost of services provided 1,845 3,882
Sales and marketing 2,734 3,612
General and administrative 1,176 1,611
Product development 996 1,042
Gain from extinguishment of debt -- (267)
------------ ------------
8,566 11,838
------------ ------------
Loss before interest income
and income taxes (2,366) (2,719)
Interest income, net (68) 31
------------ ------------
Loss before income taxes (2,434) (2,688)
Income tax benefit -- (6)
------------ ------------
Net loss (2,434) (2,682)
------------ ------------
Preferred stock preferences (337) (976)
------------ ------------
Net loss applicable to
common shares $ (2,771) $ (3,658)
============ ============
Net loss per common share $ (0.10) $ (0.15)
============ ============
Weighted average shares
outstanding 27,488,054 24,463,511
============ ============
The accompanying notes are an integral part of these financial statements.
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<PAGE>
<TABLE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended March 31, 1998
(In thousands, except share amounts)
(Unaudited)
<CAPTION>
Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amt. Shares Amt. capital Deficit Total
---------------------- ------------------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 1,615,575 $ -- 26,236,186 $3 $132,403 ($124,437) $7,969
Issuance of common stock,
net of offering costs of $26 1,108,947 1,049 1,049
Conversion of preferred stock (1,000) 1,449,852 0
Issuance of warrants 5 5
Dividends on preferred stock (337) (337)
Net loss (2,434) (2,434)
---------------------- ------------------------- -------------- -------------- ------------
Balance March 31, 1998 1,614,575 -- 28,794,985 $3 133,120 (126,871) $6,252
====================== ========================= ============== ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months Ended March 31,
1998 1997
----------- -----------
(In thousands)
Cash flows from operating activities:
Net loss $(2,434) $(2,682)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 636 1,338
Other non-cash adjustments 14 --
Changes in assets and liabilities:
Accounts and notes receivable 2,413 (797)
Inventories (74) (66)
Prepaid expenses and other 114 (165)
Accounts payable 511 309
Accrued compensation and
related expenses (268) 343
Accrued expenses, other (967) (754)
Deferred revenues 1,629 2,298
Deferred income taxes -- 15
------- -------
Net cash provided by (used in)
operating activities 1,574 (161)
------- -------
Cash flows from investing activities:
Capitalized software development
and license costs (353) (436)
Purchases of fixed assets (183) (231)
Proceeds from business divestitures,
net of related costs 7,076 42
------- -------
Net cash provided by (used in)
investing activities 6,540 (625)
------- -------
Cash flows from financing
activities:
Proceeds from issuance of
common stock, net 1,049 124
Proceeds from issuance of
preferred stock, net -- (25)
Cash dividends paid on
preferred stock -- (977)
Redemption of Mandatory
Redeemable Preferred Stock (6,548) (3,500)
Redemption of convertible
debentures (1,300) --
Proceeds from borrowings -- 3,500
Principal payments on capital
lease obligations (320) (250)
Principal payments on debt -- (532)
------- -------
Net cash used in financing
activities (7,119) (1,660)
------- -------
Effect of exchange rate changes
on cash and cash equivalents -- (97)
Net increase (decrease) in cash
and cash equivalents 995 (2,543)
Cash and cash equivalents at
beginning of year 3,816 7,601
------- -------
Cash and cash equivalents at March 31, $ 4,811 $ 5,058
======= =======
Supplemental Cash Flow Information:
Interest paid $ 120 $ 72
Income taxes paid $ 155 $ 112
The accompanying notes are an integral part of these financial statements.
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<PAGE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 and 1997
1. BASIS OF PRESENTATION
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 which include
information and note disclosures not included herein. In the opinion of
management all adjustments, which include only those of a normal recurring
nature, necessary to fairly present the Company's financial position, results of
operations and cash flows have been made to the accompanying financial
statements. The results of operations for the three month period ended March 31,
1998 may not be indicative of the results that may be expected for the year
ending December 31, 1998.
2. RETIREMENT OF REDEEMABLE PREFERRED STOCK
During the first quarter of 1998, the Company redeemed the remaining 792,186
shares of Series F Preferred Stock for $6.5 million including outstanding
interest. The $6.5 million payment retired the obligations under the Series F
Stock. The Company used the $7.0 million proceeds received in January 1998 from
the sale of its subsidiary in France, Dorotech, S.A., to finance the buy back of
the Company's Series F Stock.
3. CONVERTIBLE NOTES REDEMPTION
During the first quarter of 1998, the Company redeemed in cash $1.3 million of
the 8% Convertible Notes ("the Notes") due July 8, 2002 and August 20, 2002. At
March 31, 1998, $600,000 of the Notes remained outstanding.
4. ISSUANCE OF COMMON STOCK
During the first quarter of 1998, the Company completed a private placement of
1,108,947 shares of Common Stock, together with warrants to purchase an
additional 50,000 shares of Common Stock, pursuant to Regulation D under the
Securities Act of 1933. Proceeds from the offering were $1.1 million and
offering costs of $26,000. Pursuant to the terms of the private placement, the
Company is obligated to file a registration statement with the Securities and
Exchange Commission to register the shares by August 31, 1998.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements and Certain Risk Factors
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of this Quarterly Report on Form 10-Q contains
certain forward looking statements that are subject to a number of risks and
uncertainties. In addition, the Company may publish or make forward looking
statements from time to time relating to such matters as anticipated financial
performance, business prospects and strategies, sales and marketing efforts,
technological developments, new products, research and development activities,
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results to differ materially from the anticipated
results or other expectations made in the Company's forward looking statements
in this Quarterly Report or elsewhere. The risks and uncertainties of the
Company include those set forth in the Company's Prospectus dated April 6, 1998,
such as the following:
The Company has had net losses in each period of its operations since
its inception, except for one quarter, and it had an accumulated deficit at
December 31, 1997 of $124.4 million. Net losses applicable to Common Stock were
$14.3 million for the twelve months ended December 31, 1997, $21.1 million for
the year ended December 31, 1996, and $34.9 million for the year ended December
31, 1995. Included in those losses were non-recurring charges including in 1995,
non-recurring net charges of $9.3 million in connection with the bankruptcy of
IBZ Digital Production AG ("IBZ"), a company that had been purchased by the
Company as a wholly owned subsidiary, and business divestitures and charges
associated with a delay in the commercial release of the Company's 1View
product, the lead time to close sales and recognize revenues, increasing sales
and marketing efforts and costs associated with product research and
development. See "Description of Network Imaging - Business."
The adverse results of operations that the Company has experienced is
expected to continue at least until the latter part of 1998. The Company
believes that the combination of existing cash, potential future proceeds from
such additional offerings of equity securities as may be required, and any
anticipated cash flows from operations, should provide sufficient resources to
fund its activities through the next twelve months and to maintain net tangible
assets of at least $4 million as required for continued inclusion of the
Company's securities on Nasdaq. Any anticipated cash flows from operations are
largely dependent upon the Company's ability to achieve its sales and gross
profit objectives for its 1View and other products. If the Company is unable to
meet these objectives, it will consider alternative sources of liquidity, such
as additional offerings of equity securities. Although the Company believes that
it can successfully implement its
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<PAGE>
operating plan and, if necessary, raise additional capital, there can be no
assurance that implementation of the plan will be successful or that financing,
if sought, will be available.
The computer industry, including the information access,
imaging and optical disk storage segments, is highly competitive, and is
characterized by rapid and continuous technological change, short product
cycles, frequent product innovations and new product introductions, evolving
industry standards, and changes in customer requirements and preferences. The
Company's future profitability will depend on, among other things, wide-scale
market acceptance of the Company's products, the Company's ability to
demonstrate the potential advantages of its products over other types of similar
products and on the Company's ability to develop in a timely fashion
enhancements to existing products or new products that are responsive to the
demands of the marketplace for information access, imaging and optical disk
storage systems. There can be no assurance that the Company will be able to
market successfully its current products, develop and market enhancements to
existing products or introduce new products. In addition, the Company faces
existing competitors that are larger and more established and have substantially
greater resources than the Company. Because of the rapid expansion of the
information access, imaging and optical disk storage market, the Company will
also face competition from new entrants, possibly including the Company's
customers, suppliers or resellers. Technological advances by any of the
Company's current or future competitors could render obsolete or less
competitive the products being offered by the Company. The Company believes that
the principal competitive factors affecting the market for information access,
imaging and optical disk storage products include effectiveness, scope of
product offerings, technical features, ease of use, reliability, customer
service and support, name recognition, distribution resources and price. Current
and potential competitors have established, or may establish in the future,
strategic alliances to increase their ability to compete for the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances may emerge and rapidly acquire significant market share. Such
competition could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's development of enhancements to existing products and of
new products is subject to the kinds of problems and delays that are routinely
encountered in the development of software. For example, the Company may
experience schedule overruns in software development triggered by factors such
as insufficient staffing or the unavailability of development-related software,
hardware or technologies. Further, during the development of new software
products, or the enhancement of existing products, the Company's development
schedules may be altered as a result of the discovery of software bugs,
performance problems or changes to the product specification in response to
customer requirements, market developments or Company initiated changes. Changes
in product specifications may delay completion of documentation, packaging or
testing, which may, in turn, affect the release schedule of the product. In
connection with complex software products, the technology market may shift
during the
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<PAGE>
development cycle, requiring the Company either to enhance or change a product's
specifications to meet a customer's changing needs. Any of these factors may
cause a product to enter the market behind schedule, which may adversely affect
market acceptance of the product, or place it at a disadvantage to a
competitor's product that has already gained market share or market acceptance
during the delay. The Company does not believe, however, that it is practicable
to quantify the impact that such delays have had or in the future may have on
its operating results. There can be no assurance that the Company will not
experience difficulties that will interrupt the marketing and distribution of
its current products or that the Company will not experience difficulties in the
future that could materially delay or prevent the successful development of
other products.
Results of Operations - Three months ended March 31, 1998 and 1997
Revenues. Total revenues were $6.2 million and $9.1 million
for the three months ended March 31, 1998 and 1997, respectively. The $2.9
million decrease in revenue was the result of decreases in product revenue of
$720,000, or 17%, and a decrease in service revenue of $2.2 million, or 45%. The
decrease in product revenue was primarily attributable to the disposition in
1997 of the Company's subsidiary in France ("Dorotech"), which reduced product
revenues by $1.1 million, offset by an increase of $385,000 in comparative
company product revenues. Similarly, the decrease in service sales of $2.2
million was the result of a $2.5 million decrease due to the disposition of
Dorotech, offset by a $297,000 increase in comparative company revenues. On a
comparative company basis, overall revenues increased $682,000, or 12%, from
$5.5 million for the three months ended March 31, 1997 to $6.2 million for the
same period in 1998.
Profit Margins. Profit margins for product sales decreased 5
percentage points in the first quarter of 1998 over the same period in 1997 as
cost of products increased from 46% to 51% of sales. The decrease in product
sales margins was primarily due to the increased sales mix of hardware sold in
conjunction with the Company's internally developed software products. Profit
margins for service sales increased 11 percentage points for the three months
ended March 31, 1998 as compared to 1997 as the cost of services decreased from
80% to 69% of sales. The increase in service sales margins from 20% to 31% was
due to the Company increasing emphasis on its custom development and
professional services.
Sales and marketing. Sales and marketing expenses were $2.7
million or 44% of revenue, for the three months ended March 31, 1998 compared to
$3.6 million, or 40% of revenue in 1997. The decrease of $878,000, or 24%, was
the result of the Company's disposition of Dorotech during 1997, which reduced
sales and marketing expenses $836,000, and a $42,000 decrease in comparative
company expenses.
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<PAGE>
General and administrative. G&A expenses were $1.2 million or
19% of revenue, for the three months ended March 31, 1998 compared to $1.6
million, or 18% of revenue in 1997. The decrease of $435,000, or 27%, was the
result of the Company's disposition of Dorotech during 1997, which reduced G&A
expenses $391,000, and a $44,000 decrease in comparative company G&A expenses.
Product development. The Company's expenditures on software
research and development activities ("R&D") in the three months ended March 31,
1998 were $1,350,000, of which $354,000 was capitalized and $996,000 was
expensed. Software research and development expenditures for the 1997 period
were $1,478,000, of which $436,000 was capitalized and $1,042,000 was expensed.
The $128,000 decrease in research and development expenditures is attributable
to the Company's 1997 disposition of Dorotech, which reduced R&D expenses
$336,000, offset by a $208,000 increase in comparative company R&D expenses.
Gain on extinguishement of debt. During the first quarter
1997, Dorotech realized a $267,000 gain in connection with the partial
forgiveness of a grant made from a French government agency.
Net loss. The Company's net loss for the three months ended
March 31, 1998 was $2.4 million as compared to $2.7 million for the comparable
period of 1997. The net loss decrease of $248,000 in the first quarter of 1998
as compared to the same period in 1997 is due to the disposition of Dorotech,
which reduced the net loss by $227,000, and a $21,000 decrease in net loss from
the Company's continuing operations.
Net loss applicable to Common Shares. The net loss applicable
to common shares includes adjustments for dividend amounts related to the
Company's preferred stock. The net loss applicable to common shares was $2.8
million, or ($.10) per share, for the three months ended March 31, 1998 as
compared to $3.7 million or ($.15) per share, for the comparable period of 1997.
The decrease in net loss applicable to common shares is attributable to the
decrease in net loss described above and to the decrease in annual Series A
Preferred Stock dividends from $2.00 to $0.84 per share.
Liquidity and Capital Resources
As of March 31, 1998, the Company had $4.8 million in cash and cash
equivalents, as compared to $3.8 million in cash and cash equivalents at
December 31, 1997. Net working capital was $1.8 million at March 31, 1998 and
$10.0 million at December 31, 1997.
For the three months ended March 31, 1998, the $995,000 increase in cash
and cash equivalents resulted from $1.6 million in cash generated by operating
activities and $6.5
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<PAGE>
million provided by investing activities, offset by $7.1 million in cash used to
fund financing activities.
The $1.6 million provided by operating activities arose primarily with
respect to the $2.4 million reduction in accounts and notes receivable and $1.1
million increase in deferred revenues, offset by the $2.5 million net loss in
operations. The $6.5 million provided by investing activities arose primarily
with respect to cash collected from the promissory note received as
consideration for the sale of Dorotech. The $7.1 million in cash used by
financing activities arose primarily from the $6.5 million redemption of the
Company's Series F Preferred Stock.
The adverse results of operations which the Company experienced in 1997
and the first quarter of 1998 are expected to continue, in declining amounts,
ending later in 1998. The Company believes that its existing cash, together with
the anticipated future proceeds from the sale of Series L Convertible Preferred
Stock and any anticipated cash flows from operations, should provide sufficient
resources to fund its activities through the next twelve months and to maintain
net tangible assets of at least $4.0 million, which is required for continued
inclusion of the Company's securities on Nasdaq-NMS. Any anticipated cash flows
from operations are largely dependent upon the Company's ability to achieve its
sales and gross profit objectives for its 1View and other products. If the
Company is unable to meet these objectives, it will consider alternative sources
of liquidity, such as additional offerings of equity securities and/or further
reductions of operating expenses (such as travel, marketing, consulting and
salaries). Although the Company believes that it can successfully implement its
operating plan and, if necessary, raise additional capital, there can be no
assurance that implementation of the plan will be successful or that financing,
if sought, will be available.
Nasdaq has adopted new listing and maintenance requirements which
became effective February 23, 1998. Pursuant to the new requirements, common and
preferred stock trading on Nasdaq must maintain a minimum bid price of $1.00. At
times in 1997 and the first part of 1998, the Company's Common Stock has had a
minimum bid price below $1.00. The Company's Preferred Stock has consistently
traded with a minimum bid price of over $1.00. Although the Company's Common
Stock is currently trading with a minimum bid price above $1.00, there can be no
assurance that the Company's Common Stock will continue to trade with such a
minimum bid price. In the event that the Company's Common Stock has a minimum
bid price below $1.00, the Company believes it can propose and effect a plan to
achieve compliance; however, there can be no assurance that the Company will be
able to stay in compliance with the Nasdaq requirement. While the Company
believes that it can meet Nasdaq's National Market or the requirements of The
Nasdaq Stock Market, any ability to trade on a national exchange could adversely
impact the value of the Company's stock.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not involved in any legal proceedings, other than those
proceedings and matters incidental to the business.
Item 6. Exhibits.
(a) Exhibits
None
(b) Reports on Form 8-K.
None
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<PAGE>
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 hereunto duly authorized.
NETWORK IMAGING CORPORATION
(Registrant)
Date: April 23, 1998 By /s/ James Leto
--------------
James J. Leto
President and Chief Executive
Officer
Date: April 23, 1998 By /s/ Jorge R. Forgues
--------------------
Jorge R. Forgues
Senior Vice President of Finance
and Administration, Chief
Financial Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-Q and is qualified in its entirety by reference to such financial
statements as of and for the year ended March 31, 1998.
</LEGEND>
<CIK> 0000883946
<NAME> NETWORK IMAGING CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,811
<SECURITIES> 0
<RECEIVABLES> 8,443
<ALLOWANCES> (2,011)
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<TOTAL-ASSETS> 18,276
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<SALES> 6,200
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