UNITED STATES 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 May 4, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22834
CELEX GROUP, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 36-3760230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
919 SPRINGER DRIVE 60148
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (708) 953-8440
NONE
(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 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. 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:
CLASS OUTSTANDING AS OF JUNE 1, 1996
Common stock, $0.01 par value 5,230,400
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Comparative Consolidated Balance Sheets ...... 3
Consolidated Income Statements ............. 4
Consolidated Statement of Changes in
Stockholders'Equity ............................. 5
Consolidated Statements of Cash Flows ........ 6
Notes to Consolidated Financial Statements ..... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................. 12
Item 6. Exhibits and Reports on Form 8-K ................... 12
Signatures ......................................... 13
Index to Exhibits................................... 14
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CELEX GROUP, INC.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
(Unaudited)
May 4, February 3,
1996 1996
ASSETS
Current assets:
Cash $1,357,880 $1,229,573
Accounts and notes receivable, net 2,923,801 3,295,819
Inventory, net 8,625,156 9,087,872
Prepaid catalog expenses 3,139,984 3,725,391
Other prepaid expenses 1,169,094 1,067,015
Total current assets 17,215,915 18,405,670
Property & equipment, net 10,440,582 10,615,454
Notes receivable, net 458,437 471,145
Deposits 176,455 172,823
Deferred income taxes 2,150,615 1,600,000
Intangibles & other assets 853,150 901,166
TOTAL ASSETS $ 31,295,154 $32,166,258
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $12,874,117 $1,881,673
Accounts payable 3,992,183 6,652,211
Accrued expenses 1,444,285 1,487,524
Total current liabilities 18,310,585 10,021,408
Long-term debt 114,323 8,528,170
Total liabilities 18,424,908 18,549,578
Minority interest in consolidated
subsidiaries 475,519 583,167
STOCKHOLDERS' EQUITY:
Preferred Stock $.01 par - 1,000,000 shares authorized;
none outstanding
Common stock $.01 par - 20,000,000 shares authorized;
5,216,440 and 5,208,452 shares issued and
outstanding, respectively 52,164 52,085
Common stock warrants 370,000 370,000
Additional paid-in capital 16,349,409 16,301,104
Accumulated deficit (4,319,753) (3,481,754)
Foreign currency translation
adjustment (57,093) (207,922)
Total stockholders' equity 12,394,727 13,033,513
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $31,295,154 $32,166,258
The accompanying notes are an integral part of this statement.
CELEX GROUP, INC.
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
FOR THE QUARTER ENDED*
May 4, April 30,
1996 1995
Net product sales $11,608,239 $10,661,857
Cost of goods sold 4,531,187 6,554,787
Gross profit on product 7,077,052 4,107,070
Fees, royalties & other income 153,301 196,526
Gross margin 7,230,353 4,303,596
Operating expenses 8,161,957 9,789,532
Loss from operations (931,604) (5,485,936)
Other income (expenses):
Minority interest in subsidiaries (22,352) (26,156)
Interest income 6,384 22,360
Interest expense (439,759) (288,686)
Other 10,792 (111,385)
Total otherincome(expense) (444,935) (403,867)
Income(loss) before income taxes (1,376,539) (5,889,803)
Income tax benefit (538,540) 0
Net loss ($837,999) ($5,889,803)
Loss per common share and
common equivalent shares ($0.16) ($1.21)
Weighted average number of common
shares and equivalent shares
outstanding 5,216,000 4,854,000
*NOTE: The Company converted to a 4-5-4 week reporting basis for the
nine-month fiscal period ending February 3, 1996. Therefore, for 1996 the
quarter represents 13 weeks, versus 12 weeks and five days activity for 1995.
The accompanying notes are an integral part of this statement.
CELEX GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Foreign
Common Common Additional Currency Total
Stock Stock Paid-in Retained Translation Stockholders'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT WARRANTS EQUITY
Balance at
February 3,
1996 5,208,452 $52,085 $16,301,104 ($3,481,754)($207,922)$370,000$13,033,513
Net loss
for period (837,999) (837,999)
Foreign
currency
translation
adjustment 150,829 150,829
Common
stock transactions:
Sales of common
shares 7,988 79 48,305 48,384
Balance at
May 4,
1996 5,216,440 $52,164 $16,349,409 ($4,319,753)($57,093)$370,000$12,394,727
The accompanying notes are an integral part of this statement.
CELEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE QUARTER ENDED
May 4, April 30,
1996 1995
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss ($837,999) ($5,889,803)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation expense 396,263 530,948
Amortization expense 25,750 --
Accretion of subordinated note 91,999 --
Deferred income taxes (550,615) (812,593)
(874,602) (6,171,448)
Changes in operating assets and liabilities:
Accounts and notes receivable 393,593 2,496,171
Inventories 462,716 1,933,714
Prepaid catalog expense 585,407 171,170
Other prepaid expenses (102,079) --
Accounts payable (2,660,028) (324,321)
Accrued expenses (43,239) 1,392,799
Other 39,549 554,825
Net cash provided by operating activities (2,198,683) 52,910
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid in acquisitions (126,000)
Purchase of fixed assets (221,394) (689,934)
Net cash used in investing activities (221,394) (815,934)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing common stock, net 48,384 57,017
Proceeds from exercise of stock options
and warrants 156,520
Proceeds from debt borrowings 2,500,000 1,574,676
Repayment of debt (1,450,000)
Net cash provided by financing activities 2,548,384 338,213
NET INCREASE (DECREASE) IN CASH 128,307 (424,811)
Cash at beginning of period 1,229,573 1,603,282
Cash at end of period $1,357,880 $1,178,471
Supplemental disclosure of cash flow information:
Interest paid $216,597 $315,430
Taxes paid 0 $96,720
The accompanying notes are an integral part of this statement.
CELEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION OF UNAUDITED FINANCIAL STATEMENTS:
The consolidated financial statements contained herein have been prepared by
management and are unaudited. The financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Annual Report on Form 10-K of Celex Group, Inc. ("Celex" or the "Company") for
the period ended February 3, 1996.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly the results of
the interim periods presented and all such adjustments are of a normal
recurring nature.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of all subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The results of franchise
operations have not been reflected in the Company's financial statements.
LOSS PER COMMON SHARE - Loss per common and common equivalent shares are
computed by dividing net loss by the weighted average number of common shares
outstanding during each period presented, including common share equivalents
arising from the assumed exercise of stock options and warrants. For the three
months ended May 4, 1996 and April 30, 1995, common stock equivalents have been
excluded from the calculation of earnings per share as the effect of inclusion
is anti-dilutive.
PREPAID CATALOG EXPENSES/ADVERTISING - Effective May 1, 1995, the Company
adopted SOP 93-7, "Reporting on Advertising Costs," which outlines the
accounting for direct marketing advertising costs. The Company expenses the
production costs of advertising as it occurs, except for direct-response
advertising, which is capitalized and amortized over its expected period of
future benefits.
Direct-response advertising consists primarily of catalogs for the Company's
products. The capitalized costs of the advertising are amortized over the
twelve-month period following the date the catalog was mailed.
At May 4, 1996 and February 3, 1996, $3,139,984 and $3,725,391, respectively,
of advertising was reported as assets. Advertising expense was $3,258,351 for
the quarter ended February 3, 1996 and $4,101,681 for the quarter ended April
30, 1995.
CHANGE IN REPORTING PERIOD AND YEAR END - Effective May 1, 1995, the Company
changed its reporting periods to a 4-5-4 week format, a more traditional retail
approach to reporting results. As a result, the financial results for the
second quarter of the current year reflect 13 weeks of activity while the
financial results for the second quarter of the prior year reflect 12 weeks and
five days of activity.
Furthermore, the Company changed its fiscal year end from April 30 to the
Saturday closest to January 31, i.e., February 3, 1996 and February 1, 1997 for
the fiscal 1995 and 1996, respectively. The change was made to conform to
industry reporting practices.
STOCK OPTIONS AND WARRANTS - In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation."
This pronouncement, which becomes effective in the current fiscal year,
establishes financial accounting and reporting standards for stock-based
employee compensation plans. This Standard requires the Company to determine
the fair value of its stock options at the date of grant and either record the
fair value as compensation expense in the financial statements or disclose the
pro-forma impact of such compensation on net income and earnings per share in
the notes to the financial statements. The Company has elected to adopt the
disclosure method of presentation and such disclosures will be made in the year
end financial statements for the fiscal year ending February 1, 1997.
RECLASSIFICATION - Certain balance sheet accounts for the three months ended
April 30, 1995, have been reclassified to conform to the current period's
presentation.
NOTE 3 - INVENTORIES ARE COMPRISED OF THE FOLLOWING:
MAY 4, 1996 FEBRUARY 3, 1996
Finished goods $ 5,568,500 $ 5,705,532
Raw materials 3,268,099 3,533,759
8,836,599 9,239,291
Less-Reserve for obsolescence (211,443) (151,419)
Total $ 8,625,156 $ 9,087,872
NOTE 4 - DEBT:
At May 4, 1996 and February 3, 1996, the Company's notes payable were as
follows:
MAY 4, 1996 FEBRUARY 3,1996
Line of credit facility:
Term loan $ 9,000,000 $ 9,000,000
Revolving credit loan 2,500,000 --
Subordinated Notes (unsecured),
less discount of $215,835 and 1,284,165 1,191,666
$308,334, respectively
Capital lease obligations 169,526 182,639
Other 34,749 35,538
12,988,440 10,409,843
Less - Current portion (12,874,117) (1,881,673)
Total $114,323 $8,528,170
On February 7, 1996, the Credit Agreement was amended to reestablish borrowing
capabilities through May 1, 1996 under the Revolving Loan to the lesser of (a)
75% of eligible receivables and 15% of eligible inventory, or (b) $2,500,000.
Two officers of the Company severally guaranteed borrowings under the loan up
to an aggregate amount of $1,000,000. On February 13, 1996, the Company
borrowed $2,500,000 under the amended Credit Agreement.
The bank further agreed to extend the maturity date of borrowing capability
under both the Term Loan and Revolving Loan to May 1, 1997.
Under the Credit Agreement, as amended, among other things, future
indebtedness, dividends and capital expenditures are restricted.
NOTE 5 - INCOME TAXES:
At February 3, 1996 and May 4, 1996, the net deferred assets were $1,600,000
and $2,150,615, respectively. For the three months ended May 4, 1996, net
deferred assets were increased by the current quarter's net tax benefit.
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company designs, manufactures and markets a diverse range of proprietary
business and personal motivational and self-improvement products, including
books, audio tapes, video tapes, personalized gifts and awards. The Company
sells its products through two primary distribution channels: direct
marketing and retail stores. Sales are also made to wholesale customers.
The Company's products are marketed to a wide range of customers and clients,
including Fortune 500 companies, mid-sized and small companies, corporate
management personnel and retail customers.
Although the Company utilizes multiple marketing channels for its products, the
Company's products have similar purposes and uses in each channel of
distribution and similar opportunities for growth. The profitability varies
among products and marketing channels. The Company utilizes its facilities
interchangeably for each distribution channel. Furthermore, the marketing
channels are directed at a single customer base located primarily in the United
States.
For the quarters ended May 4, 1996 and April 30, 1995, respectively, retail
sales, direct mail sales, and wholesale distribution sales (net product sales -
- - which exclude fees, royalties and other income), accounted for the following
percentages of the Company's net product sales:
FOR THE QUARTER ENDED
May 4, April 30,
1996 1995
Retail 32% 31%
Direct mail 52% 51%
Wholesale distribution* 16% 18%
*Includes sales to franchisees.
Percentages for the quarter ended May 4, 1996 do not differ materially from
the same quarter in the prior year.
The gross profit margins for retail sales attributable to Company-owned
stores are less than gross profit margins for Direct Mail sales due to shipping
costs associated with the retail inventory, as well as differences
in the product mix between the two channels. The gross profit
margin for wholesale distributors and sales to franchisees are lower than
Retail or Direct Marketing, since these sales are made at a discount from the
retail prices.
RESULTS OF OPERATIONS
QUARTER ENDED MAY 4, 1996 COMPARED TO QUARTER ENDED APRIL 30, 1995
Net product sales for the quarter ended May 4, 1996 increased 8.9% to
$11,608,000 compared to $10,662,000 for the three months ended April 30, 1995.
Of the $946,000 net product sales increase, approximately two-thirds of the
increase is attributable to Direct Marketing sales and the balance of the
increase is attributable to Retail sales. Same store sales were basically flat
with a slight decrease of $67,000 for the three months period ending
May 4, 1996, when compared to the same time period in the prior year.
As of May 4, 1996, the Company operated 56 Retail locations compared to 51
locations as of April 30, 1995. Franchise locations increased to 42 locations
from 41 at April 30, 1995. The number of direct mail pieces mailed in the three
months ended May 4, 1996 decreased to approximately 4.1 million from 4.3
million pieces mailed for the same period in the prior year.
Cost of sales as a percentage of net sales was 39% for the three months ended
May 4, 1996 compared to 61% for the same three-month period ended in the
prior year. The decrease in the cost of goods sold percentage from 1996 to the
prior year is primarily the result ofinventory adjustments, directly related to
a fulfillment system failure and other problems which occurred during and
after the Company's peak selling season for the fiscal period ended April
30, 1995. Significant reductions have been made in manufacturing labor and
overhead, as well as streamlining in the Company's order fulfillment system.
Operating expenses for the quarter were 70% of net product sales which
represents a significant improvement over the 92% operating expenses which were
experienced in the same quarter during the prior year.
Interest expense increased from $289,000 for the quarter ended April 30, 1995
to $440,000 for the quarter ended May 4, 1996, an increase of $151,000. This
increase reflects additional borrowings which have occurred subsequent to the
quarter ending April 30, 1995.
The Company's effective income tax rate was 39% for the quarter ended May 4,
1996. The Company recorded a tax benefit associated with the loss before taxes
of $1,377,000.
The net loss for the quarter of $838,000 compares to a net loss of $5,890,000
for the quarter ended April 30, 1995, an improvement of $5,052,000. As a
percentage of sales, net loss decreased from (55.2%) for the quarter ended
April 30, 1995 to (7.2%) for the quarter ended May 4, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ongoing cash requirements are for working capital, capital
expenditures and debt service. The Company expects to rely on cash generated
from operations, supplemented by the Company's revolving credit facility to
fund its principal cash requirements.
The Company believes that its cash flows will be sufficient to enable it to
service its cash requirements in the near term. In the next fiscal year, the
Company will be required to either renegotiate the terms of its Term Loan and
Revolving Loan with its bank or to seek an alternative financing arrangement
with another lender. Such renegotiations must be completed on or before May 1,
1997. See Note 4 to the Notes to Consolidated Financial Statements.
The Company's net working capital decreased from $8,384,262 on February 3,
1996, to ($1,094,670) on May 4, 1996. The current ratio decreased from 1.84:1
on February 3, 1996 to .94:1 on May 4, 1996. The decrease in working capital
is due primarily to the increase in the current portion of long-term debt.
The Company's net property and equipment remained relatively consistent with
February 3, 1996, increasing 1.6% to $10,440,582 at May 4, 1996. The Company
has no major capital commitment as of May 4, 1996
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 29, 1996, Cullman Ventures, Inc. filed a lawsuit in the U.S. District
Court for the Northern District of New York against the Company and one of its
business partners. The complaint alleges trademark infringement dilution,
unfair competition and breach of contract arising out of the use of the names
and trademarks Success and Successories on dated calendar products. The
Company is required to appear and file an answer to the complaint on or before
June 25, 1996. The Company believes the complaint is without merit and intends
to vigorously contest the lawsuit.
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended October 28,
1995.
See Index to Exhibits on Page 14, immediately following the Signature page.
<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 thereunto duly authorized.
CELEX GROUP, INC.
(Registrant)
Date: 6/18/96 By:
James M. Beltrame
President, Chief Operating Officer and Director
(Principal Executive Officer)
Date: 6/18/96 By:
M. Andrew King
Chief Financial Officer
(Principal Financial Officer)
<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 thereunto duly authorized.
CELEX GROUP, INC.
(Registrant)
Date: 6/18/96 By: /S/ JAMES M. BELTRAME
James M. Beltrame
President, Chief Operating Officer and Director
(Principal Executive Officer)
Date: 6/18/96 By: /S/ M. ANDREW KING
M. Andrew King
Chief Financial Officer
(Principal Financial Officer)
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
SEQUENTIAL PAGE
3.1 Articles of Incorporation of Registrant (1)
3.2 By-laws of Registrant (1)
4.1 Specimen Common Stock Certificate (1)
10.1 Form of Franchising Agreement (3)
10.2 Employment Agreement with Arnold M. Anderson dated
February 28, 1993 (1)
10.3 Credit Agreement with Harris Trust and Savings Bank (4)
10.4 Credit Agreement and Guaranty between the Company
and NBD Bank (5)
10.5 First Forbearance Agreement between the Company and NBD Bank (6)
10.6 Amended and Restated Credit Agreement between the Company
and NBD Bank dated as of July 31, 1995 (7)
10.7 Lease Agreements between LaSalle National Trust Bank as Trustee
under
Trust No. 107739 and Celebrating Excellence (4)
10.8 Stock Option Instrument for Arnold M. Anderson dated November 19,
1991 (1)
10.9 Celex Group, Inc. Stock Option Plan (2)
10.10 Joint Venture Agreement with Morrison DFW, Inc. and related
documents (4)
10.11 Indemnification Agreement dated May 26, 1995 between the Company
and Arnold M. Anderson (7)
Indemnification Agreements in the form filed were also entered into
by the
Messrs. James M. Beltrame, Seamas T. Coyle, Timothy C. Dillon,
C. Joseph LaBonte, Steve Larrick, Michael H. McKee, Mervyn C.
Phillips,
Jr., Michael Singletary, Guy E. Snyder and Peter C. Walts
10.12 First Amendment to the Credit Agreement between the Company and
NBD Bank dated as of September 25, 1995 (8)
10.13 Second Amendment to the Credit Agreement between the Company
and NBD Bank dated as of February 7, 1996 (9)
10.14 Form of Subordinated Note, Common Stock Purchase Warrant and
Subordination Agreement relating to issuance of $1,500,000
Subordinated Notes and Warrants to purchase 120,000 shares of the
Company's Common Stock (9)
10.15 Common Stock Option Agreement granted to Arnold M. Anderson
and Incentive Stock Option Agreement granted to Arnold M. Anderson
(9)
10.16 Common Stock Option Agreement granted to James M. Beltrame and
Incentive Stock Option Agreement granted to James M. Beltrame (9)
10.17 Third Amendment to the Credit Agreement between the Company
and NBD Bank dated as of May 2, 1996 (9)
22.1 Subsidiaries (4)
_____________________________
(1) Previously filed with Registration Statement on Form SB-2, No. 33-76530C
filed on August 17, 1993, and incorporated herein by reference.
(2) Previously filed with Amendment Number 1 to the Registration Statement of
Form SB-2, No. 33-67530C filed on September 24, 1993, and incorporated
herein by reference.
(3) Previously filed with Post-effective Amendment Number 1 to the
Registration Statement of Form SB-2, No. 33-67530C filed on January 19,
1994, and incorporated herein by reference.
(4) Previously filed with the Annual Report on Form 10-K for the year ended
April 30, 1994 and incorporated herein by reference.
(5) Previously filed with the Company's Form 10-Q/A-1 for the quarter ended
July 31, 1995 and incorporated herein by reference.
(6) Previously filed with the Company's Form 8-K on June 7, 1995 reporting
Date of Event May 26, 1995, and incorporated herein by reference.
(7) Previously filed with the Annual Report on Form 10-K for the year ended
April 30, 1995, and incorporated herein by reference.
(8) Previously filed with the Company's Form 10-Q for the quarter ended
October 28, 1995, and incorporated herein by reference.
(9) Previously filed with the Company's Annual Report on Form 10-K for the
year ended February 3, 1996, and incorporated herein by reference.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> MAY-04-1996
<CASH> 1,357,880
<SECURITIES> 0
<RECEIVABLES> 2,923,801
<ALLOWANCES> 0
<INVENTORY> 8,625,156
<CURRENT-ASSETS> 17,215,915
<PP&E> 10,440,582
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,295,154
<CURRENT-LIABILITIES> 18,310,585
<BONDS> 0
0
0
<COMMON> 52,169
<OTHER-SE> 12,342,558
<TOTAL-LIABILITY-AND-EQUITY> 31,295,154
<SALES> 11,608,239
<TOTAL-REVENUES> 0
<CGS> 4,531,187
<TOTAL-COSTS> 8,161,957
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<INCOME-PRETAX> (1,376,539)
<INCOME-TAX> (538,540)
<INCOME-CONTINUING> (837,999)
<DISCONTINUED> 0
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