<PAGE>
<PAGE>
________________________________________________________________________________
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
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 October 4, 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 NUMBER 1-11202
AUTHENTIC FITNESS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4268251
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6040 BANDINI BLVD.
COMMERCE, CALIFORNIA 90040
(Address of registrant's principal executive offices)
(213) 726-1262
(Registrant's telephone number, including area code)
Copies of all communications to:
AUTHENTIC FITNESS CORPORATION
90 PARK AVENUE
NEW YORK, NEW YORK 10016
ATTENTION: GENERAL COUNSEL
------------------------
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 period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x] Yes [ ] No
The number of shares of the registrant's Common Stock outstanding as of November
10, 1997 was: 22,159,530.
________________________________________________________________________________
________________________________________________________________________________
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 4, 1997 JULY 5, 1997
---------------- ----------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................................... $ 857 $ 1,246
Accounts receivable -- net............................................... 69,344 85,240
Accounts receivable from affiliates...................................... 14,484 14,443
Inventories:
Finished goods......................................................... 68,885 57,671
Raw material and work in process....................................... 37,648 28,796
---------------- ----------------
Total inventories................................................... 106,533 86,467
Prepaid expenses......................................................... 8,964 6,119
---------------- ----------------
Total current assets................................................ 200,182 193,515
---------------- ----------------
Property, plant and equipment, (net of accumulated
depreciation of $19,372 and $17,609, respectively).......................... 50,698 52,566
Intangibles and other assets -- net........................................... 74,446 75,791
---------------- ----------------
$325,326 $321,872
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under revolving credit facility................................ $103,653 $ 75,776
Current portion of long-term debt........................................ 6,708 6,751
Accounts payable and accrued liabilities................................. 26,040 33,138
Accounts payable to affiliate............................................ 20,599 22,937
Accrued (prepaid) income taxes........................................... (4,018) 1,795
---------------- ----------------
Total current liabilities........................................... 152,982 140,397
---------------- ----------------
Long-term debt................................................................ 42,567 42,682
Deferred income taxes......................................................... 5,086 5,085
Stockholders' equity:
Preferred Stock; $.01 par value.......................................... -- --
Common Stock; $.001 par value............................................ 23 23
Capital in excess of par value........................................... 160,268 160,186
Cumulative translation adjustment........................................ (737) (741)
Treasury stock, at cost.................................................. (4,108) (1,854)
Accumulated deficit...................................................... (30,755) (23,906)
---------------- ----------------
Total stockholders' equity.......................................... 124,691 133,708
---------------- ----------------
$325,326 $321,872
---------------- ----------------
---------------- ----------------
</TABLE>
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
2
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AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
--------------------------------------
OCTOBER 4, 1997 OCTOBER 5, 1996
---------------- ----------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS
EXCEPT SHARE DATE)
<S> <C> <C>
Net revenues............................................................. $ 36,970 $ 38,665
Cost of goods sold....................................................... 23,900 27,462
---------------- ----------------
Gross profit............................................................. 13,070 11,203
Selling, general and administrative expenses(a).......................... 21,202 20,012
---------------- ----------------
Income (loss) before interest and income taxes........................... (8,132) (8,809)
Interest expense......................................................... 3,096 2,732
---------------- ----------------
Income (loss) before provision for income taxes.......................... (11,228) (11,541)
Provision (benefit) for income taxes..................................... (4,379) --
---------------- ----------------
Net income (loss)........................................................ $ (6,849) $(11,541)
---------------- ----------------
---------------- ----------------
Net income (loss) per common share....................................... $(0.31) $(0.52)
---------------- ----------------
---------------- ----------------
Weighted average number of common shares outstanding..................... 22,243,001 22,333,730
---------------- ----------------
---------------- ----------------
</TABLE>
- ------------
(a) includes non-recurring expense of $1,408,000 in the quarter ended October
4, 1997 related to the write-off of certain assets and other costs
associated with closing the Company's Bally's Fitness Centers stores, as
well as the consolidation of the Company's three California manufacturing
facilities into two facilities.
<TABLE>
<S> <C> <C>
Related party transactions included in the Consolidated Condensed Statement of Operations:
Product sales............................................................................. $ 282 $4,952
Purchases of goods and services........................................................... 970 1,307
Royalties paid or accrued................................................................. 959 848
Interest expense.......................................................................... 1,086 409
</TABLE>
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
3
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<PAGE>
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
------------------------------------
OCTOBER 4, 1997 OCTOBER 5, 1996
---------------- ----------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................ $ (6,849) $(11,541)
Non cash items included in net income (loss):
Depreciation and amortization....................................... 2,584 2,092
Other............................................................... (1,138) 593
Non-recurring item.................................................. 1,408 --
Income taxes............................................................. (5,812) 1,915
Other changes in operating accounts...................................... (14,154) 2,318
---------------- ----------------
Net cash used in operating activities............................... (23,961) (4,623)
---------------- ----------------
Cash flows from investing activities:
Purchase of equipment and other long-term assets......................... (1,416) (6,279)
Other.................................................................... (272) (1,050)
---------------- ----------------
Net cash used in investing activities............................... (1,688) (7,329)
---------------- ----------------
Cash flows from financing activities:
Borrowing (repayments) under revolving credit facility................... 27,877 (33,799)
Net proceeds from the sale of common stock and exercise of stock
options................................................................ 96 --
Repayments of debt....................................................... (158) (158)
Proceeds from issuance of long-term debt................................. -- 50,000
Purchase of treasury stock............................................... (2,254) --
Dividends paid........................................................... (280) (535)
Increase in deferred financing costs..................................... (21) (5,055)
---------------- ----------------
Net cash provided from financing activities......................... 25,260 10,453
---------------- ----------------
Increase (decrease) in cash................................................... (389) (1,499)
Cash at beginning of period................................................... 1,246 1,499
---------------- ----------------
Cash at end of period......................................................... $ 857 $ --
---------------- ----------------
---------------- ----------------
Other changes in operating accounts:
Accounts receivable...................................................... $ 15,855 $ 16,096
Inventories.............................................................. (20,066) (16,591)
Other current assets..................................................... (2,845) 203
Accounts payable and accrued liabilities................................. (7,098) 2,610
---------------- ----------------
$(14,154) $ 2,318
---------------- ----------------
---------------- ----------------
</TABLE>
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
4
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AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The accompanying consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles and
Securities and Exchange Commission rules and regulations for interim financial
information. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, the accompanying
consolidated condensed financial statements contain all of the adjustments (all
of which were of a normal recurring nature) necessary to present fairly the
financial position of the Company as of October 4, 1997 as well as its results
of operations and cash flows for the periods ended October 4, 1997 and October
5, 1996. Operating results for interim periods may not be indicative of results
for the full fiscal year. The consolidated condensed balance sheet as of July 5,
1997 is derived from the audited consolidated balance sheet included in the
Company's Annual Report on Form 10-K for the year then ended. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended July 5, 1997.
2. In May 1997, the Company's Board of Directors approved the Company's
plan to purchase up to $10,000,000 of its Common Stock. As of October 4, 1997,
the Company had purchased 272,200 shares of its Common Stock at an average price
of $15.09 per share for an aggregate purchase price of $4,108,000.
3. During the first quarter of fiscal 1998 the Company, closed its Bally's
Fitness Centers Stores, as well as consolidated its three California
manufacturing facilities into two facilities. These actions resulted in
non-recurring charges of $1,408,000 ($859,000 net of income tax benefits of
$549,000) which have been included in selling, general and administrative
expenses in the first quarter of fiscal 1998.
5
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS (SELECTED DATA)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
--------------------------
OCTOBER 4, OCTOBER 5,
1997, 1996
----------- -----------
(AMOUNTS IN MILLIONS OF
DOLLARS)
<S> <C> <C>
Net revenues................................................................. $37.0 $ 38.7
Cost of goods sold........................................................... 23.9 27.5
----------- -----------
Gross profit................................................................. 13.1 11.2
% to net revenue.......................................................... 35.4% 29.0%
Selling, general and administrative expenses................................. 19.8 20.0
Non-recurring items.......................................................... 1.4 --
----------- -----------
Income (loss) before interest and income taxes............................... (8.1) (8.8)
Interest expense............................................................. 3.1 2.7
Income tax (benefit)......................................................... (4.4) --
----------- -----------
Net (loss)................................................................... (6.8) (11.5)
Pro-forma income tax benefit................................................. -- (4.2)
----------- -----------
Pro-forma net loss........................................................... $(6.8) $ (7.3)
----------- -----------
----------- -----------
</TABLE>
------------------------
Net revenue for the first quarter of fiscal 1998 was $37.0 million compared
to $38.7 million in the first quarter of fiscal 1997. Net revenue for the first
quarter of fiscal 1997 included $5.5 million of net revenues related to the
discontinued skiwear operations. Excluding discontinued skiwear operations, net
revenue increased 11.5%, primarily due to an increase of 21.8% in Authentic
Fitness'r' Retail Division net revenue. Speedo'r' Division net revenue increased
3.8% to $21.2 million in the first quarter of fiscal 1998 from $20.4 million in
the first quarter of fiscal 1997. The Speedo'r' sales mix improved dramatically
as regular price shipments increased approximately 33% compared to last year.
Racing and fitness swimwear increased approximately 37% over last year while
goggles and accessories were up approximately 20%. The Designer Swimwear
Division's net revenue increased to $2.0 million from $1.4 million last year.
Authentic Fitness'r' Retail Division net revenue increased 21.8% to $13.8
million in the first quarter of fiscal 1998 from $11.3 million in the first
quarter of fiscal 1997. At November 10, 1997 the Company had 139 stores open
compared to 104 stores last year. Same store sales for the first quarter of
fiscal 1998 increased 5.6% over the year earlier period.
Gross profit for the first quarter of fiscal 1998 increased to $13.1
million from $11.2 million in the first quarter of fiscal 1997. The increase in
gross profit reflects the better Speedo'r' sales mix, as noted above, and the
increase in Authentic Fitness'r' Retail Division sales. Gross profit as a
percentage of net revenue was 35.4% in the first quarter of fiscal 1998 compared
to 29.0% in the first quarter of fiscal 1997. The increase in gross profit as a
percentage of net revenue reflects the better regular price sales mix in the
Speedo'r' Division, as noted above and the higher level of Authentic Fitness'r'
Retail Division sales which generate a higher gross profit margin than the
wholesale divisions.
Selling, general and administrative expenses decreased to $19. 8 million in
the first quarter of fiscal 1998 from $20.0 million in the first quarter of
fiscal 1997. The decrease in selling, general and administrative expenses
reflects lower marketing and advertising expenses and a reduction in workforce
effected during fiscal 1997, partially offset by higher depreciation and
amortization expenses and higher retail division selling costs.
The Company recorded $1.4 million ($0.9 million net of income tax benefits
of $0.5 million) of non-recurring expenses in the first quarter of fiscal 1998
related to the write-off of certain assets and other
6
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costs associated with closing the Company's Bally's Fitness Center stores, as
well as costs incurred in the consolidation of the Company's three California
manufacturing facilities into two facilities.
Interest expense was $3.1 million in the first quarter of fiscal 1998
compared to $2.7 million in the first quarter of fiscal 1997. The increase of
approximately $400,000 in interest expense compared to last year is primarily a
result of higher borrowing to finance the opening of thirty-five Authentic
Fitness'r' Retail Stores since last year and the associated higher working
capital requirements.
The Company's effective income tax rate for the first quarter of fiscal
1998 was 39%. The Company did not record an income tax benefit in the first
quarter of fiscal 1997.
Net loss for the first quarter of fiscal 1998 was $(6.8) million compared
to a net loss of $(11.5) million in the first quarter of fiscal 1997. The net
loss for the first quarter of fiscal 1997, after giving effect to a pro-forma
income tax benefit of 36%, was $(7.3) million. The improvement in the net loss
reflects the higher operating income partially offset by higher interest
expense, as noted above.
CAPITAL RESOURCES AND LIQUIDITY
On September 6, 1996, the Company entered into a $200 million Credit
Agreement with GE Capital, The Bank of Nova Scotia, Societe Generale and Union
Bank of California (the '$200 Million Credit Agreement'). The $200 Million
Credit Agreement is for a term of five years and provides for a term loan ('Term
Loan') in the amount of $50 million and a revolving loan facility ('Revolving
Loan') in the amount of $150 million. Borrowings under the $200 Million Credit
Agreement accrue interest at the lenders' base rate or at LIBOR plus 1.0%. The
rate of interest payable on outstanding borrowing will be automatically reduced
to as low as LIBOR plus 0.75% based upon improvements in the Company's EBITDA to
debt ratio.
In May 1997, the Company's Board of Directors approved a stock repurchase
program which allows the Company to buy up to $10 million of its outstanding
Common Stock. As of November 10, 1997, the Company had purchased 272,200 shares
of its Common Stock at an average price of $15.09 per share. The aggregate cost
of the shares was $4.1 million.
On August 16, 1995, consistent with the Company's goal of providing
increased shareholder value, the Company declared its first quarterly cash
dividend of 1.25[c] per share, equivalent of an annual rate of 5[c] per share.
The Company has since declared eight successive quarterly cash dividends of
1.25[c] per share. The Company believes that the payment of a regular quarterly
cash dividend helps broaden the Company's shareholder base.
The Company plans to expand its channels of distribution and provide growth
in its operations by opening additional Speedo'r' Authentic Fitness'r' retail
stores. The Company currently has 139 stores open. The cost of leasehold
improvements, fixtures and the additional working capital associated with the
opening of an average new store is expected to be approximately $250,000.
The Company's liquidity requirements arise primarily from its debt service
requirements and the funding of the Company's working capital needs, primarily
inventory and accounts receivable. The Company's borrowing requirements are
seasonal, with peak working capital needs arising at the end of the third
quarter and beginning of the fourth quarter of the fiscal year. The Company
typically generates nearly all of its operating cash flow in the fourth quarter
of the fiscal year reflecting third and fourth quarter shipments and the sale of
inventory built during the first half of the fiscal year. The Company meets its
seasonal working capital needs by utilizing amounts available under its
Revolving Loan.
Cash used in operating activities for the first quarter of fiscal 1998 was
$(24.0) million compared to $(4.6) million in the first quarter of fiscal 1997.
The increase in cash used in operating activities in the first quarter of fiscal
1998 compared to the first quarter of fiscal 1997 primarily reflects income tax
payments of $5.8 million and higher working capital usage. Inventory increased
$20.1 million in the first quarter of fiscal 1998 from year end reflecting the
seasonal increase in inventory to support second and third quarter shipping.
Accounts payable and accrued liabilities decreased $7.1 million in the first
quarter of fiscal 1998 from year end reflecting the timing of certain trade
payments, primarily related to inventory. Cash used in investing activities was
$(1.7) million in the first quarter of fiscal 1998 compared
7
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to $(7.3) million in the first quarter of fiscal 1997. The decrease in cash used
in investing activities reflects lower capital expenditures of $5.6 million due
to the timing of Authentic Fitness'r' retail store openings. Cash provided from
financing activities was $25.3 million in the first quarter of fiscal 1998
compared to $10.5 million in the first quarter of fiscal 1997. Cash provided
from financing activities in the first quarter of fiscal 1998 primarily reflects
seasonal borrowing under the Company's Revolving Loan partially offset by the
repurchase of $2.3 million of the Company's Common Stock. Cash provided from
financing activities in the first quarter of fiscal 1997 primarily reflects the
refinancing of the Company's debt agreements and the payment of related debt
issue costs. The Company's revolving loan balance was $103.7 million at the end
of the first quarter of fiscal 1998. At November 11, 1997 the Company had
approximately $15 million of additional credit available under its Revolving
Loan.
The Company believes that funds available under its $200 Million Credit
Agreement, as noted above, combined with cash flow to be generated from future
operations will be sufficient for the operations of the Company, including debt
service, dividend payments and costs associated with the expansion of its
Authentic Fitness'r' Retail Division for at least the next twelve months.
Although the Company believes that its current credit agreement and cash flow to
be generated from future operations will also be sufficient for its long-term
operations (periods beyond the next twelve months) circumstances may arise that
would require the Company to seek additional financing. In those circumstances
the Company expects to evaluate additional sources of funds, for example, sales
of additional common stock and expanded or additional bank credit facilities.
YEAR 2000 COMPLIANCE
Following a comprehensive study of the Company's current systems and future
requirements, the Company will initiate a program to update or replace existing
capabilities with enhanced hardware and software applications. The objectives of
the new program are to achieve competitive benefits for the Company, as well as
assuring that all systems will meet 'Year 2000' requirements. Implementation of
this program is expected to require expenditures, primarily capital, of
approximately $12 million over the next three years. Funding requirements have
been incorporated into the Company's capital and operating expenditure plans and
are not expected to have a material adverse impact on the Company's financial
condition, results of operations or liquidity.
8
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PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM S-K.
(a) Exhibits
11.1 Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
9
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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.
AUTHENTIC FITNESS CORPORATION
<TABLE>
<S> <C>
Date: November 18, 1997 By: /s/ CHRISTOPHER G. STAFF
........................................................
CHRISTOPHER G. STAFF
PRESIDENT AND CHIEF OPERATING OFFICER
Date: November 18, 1997 By: /s/ WALLIS H. BROOKS
........................................................
WALLIS H. BROOKS
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
</TABLE>
10
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as.... 'r'
<PAGE>
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EXHIBIT 11.1
AUTHENTIC FITNESS CORPORATION
CALCULATION OF NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
---------------------------
OCTOBER 5, OCTOBER 6,
1997 1996
----------- ------------
<S> <C> <C>
Net income (loss).................................................................. $(6,849,000) $(11,541,000)
----------- ------------
----------- ------------
Common stock outstanding:
Common shares outstanding..................................................... 22,419,730 20,524,721
Shares issued due to exercise of options...................................... 3,351 --
Shares issued due to exercise of the Series A Warrant......................... -- 1,809,009
Treasury stock................................................................ (180,080)
Common stock equivalents:
Shares deemed issued for outstanding options using the Treasury Stock
method(1).............................................................. -- --
----------- ------------
Total weighted average common and common stock equivalent shares outstanding....... 22,243,001 22,333,730
----------- ------------
----------- ------------
Net income (loss) per share........................................................ $(0.31) $(0.52)
----------- ------------
----------- ------------
</TABLE>
- ------------
(1) Common stock equivalents are not included in the calculation of weighted
average shares of common stock outstanding as the impact on net income
(loss) per share is anti-dilutive.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AUTHENTIC FITNESS CORPORATION FOR THE QUARTER ENDED
OCTOBER 4, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-04-1998
<PERIOD-START> JUL-06-1997
<PERIOD-END> OCT-04-1997
<CASH> 857
<SECURITIES> 0
<RECEIVABLES> 89,702
<ALLOWANCES> 5,874
<INVENTORY> 106,533
<CURRENT-ASSETS> 325,326
<PP&E> 70,070
<DEPRECIATION> 19,372
<TOTAL-ASSETS> 325,326
<CURRENT-LIABILITIES> 152,982
<BONDS> 42,567
0
0
<COMMON> 23
<OTHER-SE> 124,668
<TOTAL-LIABILITY-AND-EQUITY> 325,326
<SALES> 36,970
<TOTAL-REVENUES> 36,970
<CGS> 23,900
<TOTAL-COSTS> 23,900
<OTHER-EXPENSES> 21,202
<LOSS-PROVISION> 3,308
<INTEREST-EXPENSE> 3,096
<INCOME-PRETAX> (11,228)
<INCOME-TAX> (4,379)
<INCOME-CONTINUING> (6,849)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,849)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
