Inrad Optics, Inc. - Quarter Report: 2003 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended   JUNE 30, 2003

 

OR

 

o

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  0-11668

 

INRAD, Inc.

(Exact name of registrant as specified in its charter)

 

 

181 Legrand Avenue, Northvale, NJ  07647

(Address of principal executive offices)

(Zip Code)

 

(201) 767-1910

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and formal 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  ý     No  o

 

Common shares of stock outstanding as of June 30, 2003:

5,307,353

 

 

INRAD, Inc.

 

INDEX

 

Part I.	FINANCIAL INFORMATION
Item 1.			Financial Statements:
			Consolidated Balance Sheets as of June 30, 2003, (unaudited) and December 31, 2002
			Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002 (unaudited)
			Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 (unaudited)
			Notes to Consolidated Financial Statements
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations
			Liquidity and Capital Resources
Part II.	OTHER INFORMATION
Item 6.			Exhibits and Reports on Form 8-K
Signatures

 

 

PART I.     FINANCIAL INFORMATION

 

ITEM 1.          FINANCIAL STATEMENTS

 

INRAD, Inc.
Consolidated Balance Sheets

 

		June 30, 2003			December 31, 2002*
		Unaudited
Assets
Current assets:
Cash and cash equivalents		$	576,725		$	1,155,074
Accounts receivable, net		833,394			1,041,262
Inventories		2,304,510			2,082,932
Unbilled contract costs		266,240			341,541
Other current assets		109,453			80,675
Total current assets		4,090,322			4,701,484
Plant and equipment,
Plant and equipment at cost		9,359,959			9,307,753
Less: Accumulated depreciation and amortization		(6,292,178		)	(6,008,008		)
Total plant and equipment		3,067,781			3,299,745
Precious metals		309,565			309,565
Other assets		200,734			198,131
Total assets		$	7,668,402		$	8,508,925
Liabilities and Shareholders’ Equity
Current liabilities:
Notes payable –bank		$	0		$	751,074
Notes payable –other		49,967			124,917
Current portion of long term debt		0			927,549
Accounts payable and accrued liabilities		415,281			368,337
Current obligations under capital leases		89,124			98,657
Total current liabilities		554,372			2,270,534
Secured Promissory Note		1,700,000			0
Subordinated Convertible Debenture		1,000,000			1,000,000
Capital Lease Obligations		148,326			188,512
Total liabilities		3,402,698			3,459,046
Shareholders’ equity:
10% Convertible preferred stock, Series A, no par value; 500 shares issued and outstanding, respectively		500,000			500,000
10% Convertible preferred stock, Series B, no par value; 2100 shares issued and outstanding, respectively		2,100,000			2,100,000
Common stock: $.01 par value; 15,000,000 shares Authorized; 5,311,953 issued at June 30, 2003 and 5,283,690 issued at December 31, 2002		53,119			52,836
Capital in excess of par value		9,482,263			9,470,676
Common stock dividends due to preferred shareholders		53,600			0
Accumulated deficit		(7,908,328		)	(7,058,683		)
		4,280,654			5,064,829
Less - Common stock in treasury, at cost (4,600 shares at June 30, 2003 and at December 31, 2002)		(14,950		)	(14,950		)
Total shareholders’ equity		4,265,704			5,049,879
Total liabilities and shareholders’ equity		$	7,668,402		$	8,508,925

 

* Derived from Audited Financial Statements

 

See Notes to Consolidated Financial Statements.

 

3

 

INRAD, Inc.

Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended June 30						Six Months Ended June 30
		2003			2002			2003			2002
Revenues:
Product sales		$	1,130,981		$	1,657,964		$	2,321,834		$	2,843,804
Contract R & D		16,136			28,000			26,136			62,625
Total Revenue		1,147,117			1,685,964			2,347,970			2,906,429
Cost and Expenses:
Cost of goods sold		936,300			1,225,727			1,847,239			2,349,584
Contract R & D expenses		8,961			34,562			18,779			84,841
Selling, general & administrative expenses		544,477			550,556			1,093,744			1,044,312
Internal R & D expenses		25,343			28,092			80,911			48,016
Total Cost and Expenses		1,515,081			1,838,937			3,040,673			3,526,753
Operating loss		(367,964		)	(152,973		)	(692,703		)	(620,324		)
Other income (expense):
Interest expense		(71,383		)	(47,355		)	(105,837		)	(63,232		)
Interest & other income, net		1,160			(1,281		)	2,497			5,260
Net loss		(438,187		)	(201,609		)	(796,045		)	(678,296		)
Preferred stock dividends		(53,600		)	(120,600		)	(53,600		)	(120,600		)
Net loss applicable to common shareholders		$	(491,787	)	$	(322,209	)	$	(849,645	)	$	(798,896	)
Net loss per common share - basic and diluted		(.09		)	(.06		)	(.16		)	(.15		)
Weighted average shares outstanding		5,283,690			5,203,290			5,283,690			5,187,976

 

See Notes to Consolidated Financial Statements.

 

4

 

INRAD, INC. AND SUBSIDIARY

 

INRAD, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENT OF SHAREOWNERS’ EQUITY

 

		Common Stock					Preferred Stock (Series A)					Preferred Stock (Series B)					Capital in excess of par value			Deficit			Payable/ Receivable			Treasury Stock			Total Shareowners’ Equity
		Shares		Amount			Shares		Amount			Shares		Amount
Balance, December 31, 2000		4,957,678		49,577			500		500,000			2,100		2,100,000			9,084,898			(5,110,745		)	(220,000		)	(14,950		)	6,388,780
Exercise of Options		29,250		293			—		—			—		—			30,833						—			—			31,126
Exercise of Warrants		51,675		516			—		—			—		—			56,683						—			—			57,199
Dividend on Preferred Stock		92,000		920			—		—			—		—			154,080			(155,000		)				—			—
Subscription received		—		—			—		—			—		—			—						220,000			—			220,000
Contribution		5,000		50			—		—			—		—			4,700						—			—			4,750
Net income for the year		—		—			—  .		—			—		—			—			43,634			—			—			43,634
Balance, December 31, 2001		5,135,603		51,356			500		500,000			2,100		2,100,000			9,331,194			(5,222,111		)	—			(14,950		)	6,745,489
401K contribution		14,087		140													20,222												20,362
Dividend on Preferred Stock		134,000		1,340													119,260			(120,600		)
Net loss for the year																				(1,715,972		)							(1,715,972		)
Balance, December 31, 2002		5,283,690		$	52,836		500		$	500,000		2,100		$	2,100,000		$	9,470,676		$	(7,058,683	)	$	—		$	(14,950	)	$	5,049,879
Stock dividend payable																							53,600						53,600
401K contribution		28,263		283													11,587												11,870
Net loss for the year																				(849,645		)							(849,645		)
Balance,  March 31, 2003		5,311,593		$	53,119		500		$	500,000		2,100		$	2,100,000		$	9,482,263		$	(7,908,328	)	$	53,600		$	(14,950	)	$	4,265,704

 

See notes to consolidated financial statements

 

5

 

INRAD, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

		Six months Ended June 30
		2003			2002
Cash flows from operating activities:
Net loss		$	(796,045	)	$	(678,296	)
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization		284,170			256,177
401K common stock contribution		11,870			20,354
Changes in assets and liabilities:
Accounts receivable		207,868			55,004
Inventories		(221,578		)	141,639
Unbilled contract costs		75,301			43,968
Other current assets		(28,778		)	(38,018		)
Other assets		(2,603		)	616
Accounts payable and accrued liabilities		46,943			(392,587		)
Total adjustments		373,193			87,153
Net cash used in operating activities		(422,852		)	(591,143		)
Cash flows from investing activities:
Capital expenditures		(52,205		)	(174,831		)
Net cash used in investing activities		(52,205		)	(174,831		)
Cash flows from financing activities:
Proceeds from secured promissory note		1,700,000			0
Proceeds from asset based loan		0			1,000,000
Principal payments of notes		(74,950		)	0
Principal payments of bank debt		(1,678,623		)
Principal payments of capital lease obligations		(48,719		)	(53,202		)
Net cash (used in) provided by financing activities		(103,292		)	946,798
Net (decrease) increase in cash and cash equivalents		(578,349		)	180,824
Cash and cash equivalents at beginning of period		1,155,074			548,949
Cash and cash equivalents at end of period		$	576,725		$	729,773

 

See Notes to Consolidated Financial Statements.

 

6

 

INRAD, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1 -SUMMARY OF ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements of INRAD, Inc. (the “Company”) reflect all adjustments, which are of a normal recurring nature, and disclosures which, in the opinion of management, are necessary for a fair statement of results for the interim periods.  It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements as of December 31, 2002 and 2001 and for the years then ended and notes thereto included in the Company’s report on Form 10-K, filed with the Securities and Exchange Commission.

 

Inventory Valuation

 

Inventories are valued on a lower of cost (first-in-first-out basis) or market basis (net realizable value).  Work In Process inventory for the period is stated at actual cost, not in excess of estimated realizable value.

 

Income Taxes

 

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.  Deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.  A valuation allowance is established when deferred tax assets are not likely to be realized.

 

Net Income (Loss) Per Share

 

Basic and diluted net (loss) income per share is computed using the weighted average number of common shares outstanding for the period ended June 30, 2003.  The potential dilutive effect of securities, which are common share equivalents, options, warrants, convertible notes and convertible preferred stock and their associated dividends have been excluded from the diluted computation because their effect is antidilutive.

 

Stock Based Compensation

 

The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation costs for options has been recognized in the financial statements.  The chart below set forth the company’s net loss per share for the six months ended June 30, 2003 and 2002, as reported on a pro forma basis as if the compensation cost of stock options had been determined in accordance with SFAS 123.

 

 

7

 

NOTE 2- CHANGES IN LONG TERM DEBT

 

In January 2003 the Company was in violation of certain financial covenants required under the loan agreements.  As a result Wachovia Bank sold both the asset based loan and working capital revolver to APC Investments.  In June of 2003 the Company paid off the loan held by APC with $1,700,000 in proceeds received from the issuance of a Secured Promissory Note that is held by a major investor in the Company.  The Secured Promissory Note is for a period of  18 months and bears interest at the rate of 6.5% per annum.  The Company currently has a commitment from Valley National Bank for a three-year $1,700,000 Bank Loan payable at the Bank’s Prime Interest Rate, the proceeds of which are intended to repay the Secured Promissory Note. The Bank Loan will be collateralized by a renewable standby letter of credit that will be guaranteed by the Company’s major investor.  The Company’s Board of Directors approved the issuance of 200,000 warrants to the major investor as a fee for the guarantee of the Bank loan. The warrants are exercisable at $0.33 per share, approximately a 20% discount to market, and expire in July 2008. Also, as a result of the loan guarantee, the major investor has a lien on all assets of the Company.

 

Critical Accounting Policies

 

Our significant accounting polices are described in Note 1 of the consolidated financial statements, that were prepared in accordance with accounting principles generally accepted in the United States of America.  In preparing our financial statements we made estimates and judgments that affect the results of our operations and the value of assets and liabilities we report.  Our actual results may differ from these estimates under different assumptions or conditions.

 

For additional information regarding our critical accounting policies and estimates, see the section entitled “Managements Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on form 10-K for the year ended December 31, 2002.

 

ITEM 2.                             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The Company wishes to insure that any forward-looking statements are accompanied by meaningful cautionary statements in order to comply with the terms of the safe harbor provided by the Private Securities Litigation Reform Act of 1995. The events described in the forward-looking statements contained in this Quarterly Report may not occur. Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits of acquisitions to be made by us, projections involving anticipated revenues, earnings, or other aspects of our operating results. The words “may”, “will”, “expect”, “believe”, “anticipate”, “project”, “plan”, “intend”, “estimate”, and “continue”, and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks, and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Actual results may vary from these forward-looking statements for many reasons, including the following factors: adverse changes in economic or industry conditions in general or in the markets served by the Company and its customers, actions by competitors, and inability to add new customers and/or maintain customer relationships.  The foregoing is not intended to be an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by the Company.  Investors are encouraged to review the risk factors set forth in the Company’s most recent Form 10-K as filed with the Securities and Exchange Commission in March 2002. Any one or more of these uncertainties, risks, and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward looking statements, whether from new information, future events, or otherwise.

 

Readers are further cautioned that the Company’s financial results can vary from quarter to quarter, and the financial results for any period may not necessarily be indicative of future results.

 

8

 

The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto presented elsewhere herein.  The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future.

 

RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the Company’s un-audited consolidated financial statements presented elsewhere herein.  The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future.

 

Total Revenues

 

Total sales for the three months ended June 30, 2003 were $1,147,000 as compared with total sales of $1,686,000 for the same three months in 2002; down 32 %. Total sales for the six months ended June 30, 2003 were $2,348,000 as compared with $2,906,000 for the same period last year; down 19%.

 

Product Sales

 

Product sales for the second quarter of 2003 were $1,131,000 vs. $1,658,000 for the second quarter of 2002, a decrease of 32%.  Sales for the first half of FY 2003 totaled $2,322,000 vs. $2,844,000 for the first half of 2002, down 18%.

 

Product sales were 99% of total revenues for both the second quarter and the first half of 2002, reflecting the Company’s strategic refocusing of its resources on product sales vs. R&D services.

 

Product bookings for the second quarter were $1.798,000 vs. $1,330,000 for the same period last year, up 35%. Product bookings for the first half of the year were $2,912,000 vs. $3,280,000 for the same period in 2002, down 11%.

 

The book-to-bill ratio for the second quarter of 2003 was 1.59 compared with 0.80 for the same quarter of 2002. The book-to-bill ratio for the first half of 2003 was 1.25 vs. 1.15 for the first half of 2002.

 

The backlog at June 30, 2003 was down 4% to $1,890,000 as compared to $1,970,000 on June 30, 2002.  The Backlog increased from $1,300,000 on December 31, 2002 primarily due to increased bookings from the laser and research sectors.

 

Cost of Goods Sold

 

For the six-month period ended June 30, 2003, the cost of goods sold as a percentage of product revenues was 79.5% vs. 82.6% for the same period last year. For the full year 2002, the actual cost of good sold percentage was 83.9%. Gross profit margin for the first six months was 20.5%, compared with 17.4% for the first half of 2002.

 

In dollar terms, the cost of goods sold was $1,847,000 for the first half of 2003 compared with $2,349,000 for first half of 2002, down 21%. Product revenues were down 18% year to year for the same period.

 

The decrease in the cost of goods sold percentage in comparison to 2002 was the result of personnel reductions, salary reductions and other cost cutting measures implemented by management.

 

Inventory costs for the year were determined from perpetual inventory records, adjusted to net realizable value.

 

Contract Research and Development

 

Contract research and development revenues were $26,000 for the six months ended June 30, 2003, compared to $63,000 for the six months ended June 30, 2002. Related contract research and development expenditures, including allocated indirect costs, for the six months ended June 30, 2003 were $19,000 compared to $85,000 for the comparable period in 2002. Revenues for the second quarter were $16,000 compared to $28,000 in the second quarter of 2002.    The Company’s backlog of contract R&D was $0 at June 30, 2003, compared with $26,000 at December 31, 2002 and $28,000 at June 30, 2002.

 

The Company expects to continue to selectively seek new government-sponsored programs from time to time, as well as joint programs with certain of its customers, in technical areas related to its core businesses.

 

9

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the current six-month period were $1,094,000 vs. $1,044,000 for the same period in the prior year, up 4.7%.  Second quarter expenses were $554,000 for the current year vs. $551,000 for the second quarter of FY 2002.  The expenses increased due to increases in sales personnel, implemented to expand our customer base, and to advisory services in connection with the company’s acquisition program.

 

Internal Research and Development Expenses

 

Research and development expenses for the quarter ended June 30, 2003 were $25,000 compared to $28,000 for the quarter ended June 30, 2002.  IR&D expenditures for the first half of 2003 were $81,000 compared with $48,000 in the first half of 2002. The increase was the result of efforts made in the development of miniaturized Pockels cells and process improvements in growth of key synthetic crystals.

 

Federal Deferred Tax Benefit

 

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.  Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.  At December 31, 2002, the Company had a net deferred tax asset of approximately $2,700,000, the primary component of which was its significant net operating loss carry forward.  The Company has established a 100% valuation allowance for the  $2,700,000 in the event that the tax asset will not be realized in the future.

 

Interest expense

 

Interest expense for the first half of the year was $106,000 compared to $63,000 incurred in the first half of 2002.  The increase resulted from greater utilization of the Company’s credit lines for working capital purposes.

 

Net Loss

 

Net loss for the six months ended June 30, 2003 was $(796,000) compared to a net loss of $(678,000) vs. the same period in FY 2002. Net loss for the quarters ending June 30 was $(438,000) for FY 2003 and $(202,000) for FY 2002.

 

Loss from operations for the first six months was $(693,000) in 2003 as compared with $(620,000) in 2002.  Second quarter operating loss was $(368,000) in 2002 and $(153,000)  in 2002.

 

Earnings Per Share

 

Basic earnings per share available to common shareholders was calculated by adjusting the net loss by $54,000 in 2003 and by $121,000 in 2002 for the common stock dividend paid on Company preferred stock, divided by the weighted shares outstanding.  Diluted earnings per share for the six months ended June 30, 2003 and June 30, 2002 were not calculated because their effect was anti-dilutive.

 

Liquidity and capital resources

 

Capital expenditures, including purchases and a portion of applicable internal labor and overhead charges, for the six months ended June, 2003 and 2002 were $52,000 and $175,000, respectively.  Capital expenditures for all of 2002 were $554,000.  The amounts represent minimal expenditures for capital equipment, necessitated by the need to conserve cash during the current economic downturn.

 

Management will continue to make investments in capital acquisitions from time to time, both in equipment and acquisition of complementary businesses, to pursue its objective of growth in shareholder value and to maintain a competitive edge in the markets that it serves. The Company believes that it has the financial resources necessary to implement its capital expenditure needs in 2003.

 

During the six month period ended June 30, 2003, cash outflows were funded from cash proceeds from a subordinated convertible promissory note received in 2002.  Where possible, the Company will seek to increase sales, and reduce expenses and cash requirements to improve future operating results and cash flows.  Management expects that cash flow from operations and use of its existing cash reserves, will provide adequate liquidity for the Company’s operations in 2003.  The current six- month period yielded negative cash flow from operations in the amount of $(423,000).  This resulted primarily from losses generated during the period that were offset, to an extent, by reduced working capital requirements.

 

10

 

In January 2003 the Company was in violation of certain financial covenants required under the loan agreements.  As a result Wachovia Bank sold both the asset based loan and working capital revolver to APC Investments.  In June of 2003 the Company paid off the loan held by APC with $1,700,000 in proceeds received from the issuance of a Secured Promissory Note that is held by a major investor in the Company.  The Secured Promissory Note is for a period of  18 months and bears interest at the rate of 6.5% per annum.  The Company currently has a commitment from Valley National Bank for a three-year $1,700,000 Bank Loan payable at the Bank’s Prime Interest Rate, the proceeds of which are intended to repay the Secured Promissory Note. The Bank Loan will be collateralized by a renewable standby letter of credit that will be guaranteed by the Company’s major investor.  The Company’s Board of Directors approved the issuance of 200,000 warrants to the major investor as a fee for the guarantee of the Bank loan. The warrants are exercisable at $0.33 per share, approximately a 20% discount to market, and expire in July 2008. Also, as a result of the loan guarantee, the major investor has a lien on all assets of the Company.

 

11

 

PART II.    OTHER INFORMATION

 

ITEM 4.          CONTROLS AND PROCEDURES

 

Within the 90 days prior to the date of this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation’s periodic SEC filings. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

ITEM 6.                             EXHIBITS AND REPORTS ON FORM 8-K

 

(A)                              Exhibits:

 

11.                                 An exhibit showing the computation of per-share earnings is omitted because the computation can be clearly determined from the material contained in this Quarterly Report on Form 10-Q.

 

(B)                                Reports on Form 8-K:

 

None.

 

12

 

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.

 

 

	INRAD, Inc.
	By:	/s/  Daniel Lehrfeld
		Daniel Lehrfeld
		President and Chief Executive Officer
	By:	/s/  William S. Miraglia
		William S. Miraglia
		Chief Financial Officer

 

 

Date:    August 4, 2003

 

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