10-Q 1 form10q2005-3.htm FORM 10-Q 3RD QUARTER 2005 Form 10-Q 3rd QTR 2005

U.S. 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 September 30, 2005
   
[   ] 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:   0-17893


TELTRONICS, INC
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of Incorporation or organization)
59-2937938
(IRS Employer Identification Number)

2150 Whitfield Industrial Way, Sarasota, Florida 34243
(Address of principal executive offices including zip code)


(941) 753-5000
Issuer's telephone number, including area code

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 by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12-b-2 of the Exchange Act.) Yes [ ] No [ X ]

As of November 14, 2005, there were 8,636,539 shares of the Registrant's Common Stock, par value $.001, outstanding.

Exhibit index appears on page 13.


TABLE OF CONTENTS

    PAGE
PART I FINANCIAL INFORMATION
     ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at September 30, 2005
(Unaudited) and December 31, 2004
3
Condensed Consolidated Statements of Operations (Unaudited) for
the Three months and Nine months ended September 30, 2005
and 2004
4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine months ended September 30, 2005 and 2004
5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
     ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
8
     ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
10
     ITEM 4. CONTROLS AND PROCEDURES 11
PART II OTHER INFORMATION  
     ITEM 1. LEGAL PROCEEDINGS 11
     ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS 11
     ITEM 3. DEFAULTS UPON SENIOR SECURITIES 11
     ITEM 6. EXHIBITS 11
SIGNATURE 12
EXHIBIT INDEX 13

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PART I - FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

TELTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands, except shares and per share amounts

ASSETS

  September 30,
December 31,
  2005
2004
  (Unaudited)  
Current assets:            
     Cash and cash equivalents     $ 237   $ 1,580  
     Accounts receivable, net of allowance for    
          doubtful accounts       6,565     5,499  
     Costs and estimated earnings in excess of billings    
          on uncompleted contracts       793     342  
     Inventories, net       5,384     3,858  
     Other current assets       1,732     382  


          Total current assets       14,711     11,661  
 
Property and equipment, net       2,659     3,729  
Other assets       998     1,034  
 

          Total assets     $ 18,368   $ 16,424  
 


LIABILITIES AND SHAREHOLDERS' DEFICIENCY

Current liabilities:    
     Current portion of long-term debt and capital    
          lease obligations     $ 7,260   $ 4,831  
     Accounts payable       5,805     5,883  
     Other current liabilities       4,866     3,869  
 

          Total current liabilities       17,931     14,583  
 

Long-term liabilities:    
     Long-term debt and capital lease obligations,    
          net of current portion       2,526     7,885  
Commitments and contingencies    
Shareholders' deficiency:    
     Capital stock       8     8  
     Additional paid-in capital       24,360     24,301  
     Accumulated deficit and other comprehensive loss       (26,457 )   (30,353 )
 

          Total shareholders' deficiency       (2,089 )   (6,044 )
 

          Total liabilities and shareholders' deficiency     $ 18,368   $ 16,424  
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TELTRONICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

In thousands, except shares and per share amounts

  Three Months
Ended September 30,

Nine Months
Ended September 30,

  2005
2004
2005
2004
Net sales                    
     Product sales and installation     $ 7,865   $ 9,076   $ 24,150   $ 27,497  
     Maintenance and service       2,949     2,551     9,464     7,581  




        10,814     11,627     33,614     35,078  
Cost of goods sold       6,532     6,857     19,566     20,730  




Gross profit       4,282     4,770     14,048     14,348  
Operating expenses:    
     General and administrative       1,606     1,442     4,394     4,331  
     Sales and marketing       1,916     1,970     5,790     6,382  
     Research and development       986     761     2,945     2,455  




        4,508     4,173     13,129     13,168  




Income from operations       (226 )   597     919     1,180  
 
Other income (expense):    
     Interest       (231 )   (357 )   (974 )   (1,306 )
     Non operating gains       3,958     1,236     4,519     1,236  




        3,727     879     3,545     (70 )




Income before income taxes       3,501     1,476     4,464     1,110  
Income taxes       17     2     25     5  




Net income       3,484     1,474     4,439     1,105  
 
Dividends on Preferred Series B and C    
     Convertible stock       163     156     485     467  




Net income available to common    
     Shareholders       3,321     1,318     3,954     638  




Net income per share:    
     Basic     $ 0.42   $ 0.17   $ 0.50   $ 0.08  
     Diluted     $ 0.32   $ 0.13   $ 0.42   $ 0.08  




Weighted average shares outstanding:    
     Basic       7,880,806     7,858,496     7,874,143     7,831,051  
     Diluted       10,874,280     11,120,520     10,883,415     8,917,101  





The accompanying notes are an integral part of these condensed consolidated financial statements.

4


TELTRONICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands, except shares and per share amounts

Nine Months Ended
September 30,

2005
2004
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES   $   (2,455 )     $    152  
 
INVESTING ACTIVITIES - NET   260       (451 )
 
FINANCING ACTIVITIES:  
     Net borrowings on line of credit   2,617       1,531  
     Other   (1,707 )     (480 )
 
 
Net cash flows provided by (used in) financing activities   910       1,051  
 
Effect of exchange rate changes on cash   (58 )     11  
 
 
Net (decrease) increase in cash and cash equivalents for the period   (1,343 )     763  
 

Cash and cash equivalents - Beginning of Period   1,580       146  
 
 
Cash and cash equivalents - End of Period   $       237       $    909  
 
 



The accompanying notes are an integral part of these condensed consolidated financial statements.

5


TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except shares and per share amounts
(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2004.

NOTE 2 - COMPREHENSIVE INCOME

Total comprehensive income is as follows:

  Three Months Ended
September 30,

Nine Months Ended
September 30,

  2005
2004
2005
2004
Net income   $ 3,484   $1,474   $ 4,439   $1,105  
Foreign currency translation   (46 ) 5   (76 ) 11  




Total comprehensive income   $ 3,438   $1,479   $ 4,363   $1,116  





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NOTE 3 - NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share for the periods indicated:

  Three Months Ended
September 30,

Nine Months Ended
September 30,

Net income per share 2005
2004
2005
2004

Basic
         
Net income   $          3,484   $          1,474   $          4,439   $        1,105  
Preferred dividends   (163 ) (156 ) (485 ) (467 )




    3,321   $          1,318   3,954   638  




Weighted average shares outstanding   7,880,806   7,858,496   7,874,143   7,831,051  
Net income per share   $            0.42   $            0.17   $            0.50   $          0.08  




Diluted  
Net income   $          3,484   $          1,474   $          4,439   $        1,105  
Preferred dividends   ---    ---    ---    (467 )
Interest   32   11   97   32  




    3,516   1,485   4,536   670  




Weighted average shares outstanding   10,874,280   11,120,520   10,883,415   8917,101  
Net income per share   $            0.32   $                   0.13   $            0.42   $          0.08  





For the three and nine months ended September 30, 2005 and 2004, options to purchase 1,526,850 and 1,078,000 shares of common stock, respectively, were not included in the computation of diluted net income per share because the effect would be anti-dilutive.

For the three and nine months ended September 30, 2005 and 2004, warrants to purchase 536,236 and 1,190,000 shares of common stock, respectively, were not included in the computation of diluted net income per share because the effect would be anti-dilutive.

NOTE 4 - INVENTORIES

The major classes of inventories are as follows:

  September 30, 2005
December 31, 2004
  (Unaudited)

 
Raw materials $  3,124     $  1,707    
Work-in-process 870     759    
Finished goods 1,390     1,392    
 

  $  5,384     $  3,858    
 



NOTE 5 - NON OPERATING GAINS

In July 2005, the Company entered into a new $11,000 Revolving Credit, Term Loan and Security Agreement. Under the terms of the agreement, the Company used approximately $8,100 under the facility to satisfy the Company's debt under its previous line of credit facility and its Secured Promissory Note. In addition, the Company recognized a gain of $3,959 on the extinguishment of the Secured Promissory Note.

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On October 12, 2005, the Company entered into a settlement agreement ("Agreement") with Tri-Link Technologies Inc. ("Tri-Link") and Hargan-Global Ventures Inc. under which all arbitration and legal proceedings between the parties were settled and mutual releases were exchanged. Under the Agreement, the Company paid $1,000 and issued 750,000 restricted shares of the Company's Common Stock and a $750 note to Tri-Link in exchange for the Company's original promissory note in the amount of $2,250.

This new note, which matures in October 2008, requires monthly payments of principal and interest, at an annual rate of eight percent (8%) and is secured by a first lien on the software acquired from Tri-Link.

To facilitate the Agreement, the Company borrowed $250,000 from an affiliate controlled by one of the Company's directors. Principal and cumulative interest, at an annual rate of fifteen percent (15%), are due November 2008. The note, which is unsecured, may be prepaid by the Company beginning in October 2006 and is convertible, at the option of the holder, into shares of the Company's Common Stock and/or shares of any of the Company's existing or future preferred stock.


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATIONS

               (In thousands, except shares and per share amounts)

FORWARD-LOOKING STATEMENTS

References in this report to the "Company," "Teltronics," "we." or "us" mean Teltronics, Inc. together with its subsidiaries, except where the context otherwise requires. A number of statements contained in this Quarterly Report on Form 10-Q are forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as we "believe," "anticipate," "expect," or words of similar import. Similarly, statements that describe our future plans, objectives, strategies or goals are also forward-looking statements. These forward-looking statements involve a number of risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited to, the timely development and market acceptance of products and technologies, competitive market conditions, successful integration of acquisitions, the ability to secure additional sources of financing, the ability to reduce operating expenses, and other factors described in the Company's filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

RESULTS OF OPERATIONS

Net Sales and Gross Profit Margin

Net sales decreased $813 or 7.0% for the three month period ended September 30, 2005 as compared to the same period in 2004. Net sales decreased $1,464 or 4.2% for the nine month period ended September 30, 2005 as compared to the same period in 2004. The sales decrease for the three months ended September 30, 2005 is primarily due to a decrease in non-recurring projects. The decrease in sales for the nine months ended September 30, 2005 is attributable to the ongoing downturn in the Intelligent Systems Management market as customers switch from the Time Division Multiplexing technology to the Internet Protocol technology in addition to positive and negative sales fluctuations due to the sporadic nature of non-recurring projects.

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Gross profit margin for the three month period ended September 30, 2005 and 2004 was 39.6% and 41.0%, respectively. Gross profit margin for the nine month period ended September 30, 2005 and 2004 was 41.8% and 40.9%, respectively. Gross profit margin percentage is driven by sales mix, manufacturing variances and project management.

Operating Expenses

Operating expenses were $4,508 and $4,173 for the three month period ended September 30, 2005 and 2004, respectively.

General and administrative expenses increased $164 for the three month period ended September 30, 2005 as compared to the same period in 2004. The net increase was primarily the result of a $174 increase in compensation and fringe expense, a $54 increase in employee recruitment, and $53 increase in legal fees, partially offset by a decrease of $76 in the provision for doubtful accounts, a decrease of $23 in public entity expense, and a $45 decrease in depreciation expense.

Sales and marketing expenses decreased $54 for the three month period ended September 30, 2005 as compared to the same period in 2004. The net decrease was primarily the result of a $116 decrease in depreciation expense, a $39 decrease in rents associated with a change in facility in the NYC area, and a $43 decrease in travel and tradeshow expense, offset by a net increase of $100 in compensation expense primarily attributed to commission expense and a $37 increase in temporary labor.

Research and development expenses increased $225 for the three month period ended September 30, 2005 as compared to the same period in 2004. The increase was primarily the result of a $156 increase in compensation, a $19 increase in recruiting, a $29 increase in supplies, and a $26 increase in depreciation.

Operating expenses were $13,129 and $13,168 for the nine month period ended September 30, 2005 and 2004, respectively.

General and administrative expenses increased $63 for the nine month period ended September 30, 2005 as compared to the same period in 2004. The net increase was primarily the result of a $256 increase in compensation, a $57 increase in recruiting, and a $112 increase in legal expenses, offset with a $241 decrease in the provision for doubtful accounts resulting from the resolution of outstanding specific accounts, and a decrease of $131 in depreciation expense.

Sales and marketing expenses decreased $592 for the nine month period ended September 30, 2005 as compared to the same period in 2004. The net decrease was primarily a result of the decrease in compensation costs of $153, a $261 reduction in depreciation expense, and a $235 decrease in rent expense associated with the change in facility in NYC. These decreases are offset with an increase of $84 in temporary labor. ` Research and development expenses increased $490 for the nine months period ended September 30, 2005 as compared to the same period in 2004. The net increase was primarily the result of $484 additional compensation, and recruiting expense associated with new staff.

Other Income (Expense)

Other income (expense) was $3,727 and $879 for the three month period ended September 30, 2005 and 2004, respectively. For the three month period ended September 30, 2005 interest expense decreased $126, as a result of the settlement of the note payable to Harris Corporation. Gain on sale of abandoned property decreased $1,234 based on the prior year gain on the patent transfer agreement. Other income increased $3,956 which is gain recognized on the extinguishment of the secured promissory note,

Other income (expense) was $3,535 and $(70,000) for the nine month period ended September 30, 2005 and 2004, respectively. For the nine month period ended September 30, 2005 interest expense decreased $332, as a result of the decrease in the interest rate and ultimate settlement of the note payable to Harris Corporation. Gain on sale of abandoned property decreased $739, the prior year gain

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on the patent transfer agreement offset by the current year gain on the sales of abandoned technologies. Other income increased $4,022 which is primarily the gain recognized on the extinguishment of the secured promissory note,

LIQUIDITY AND CAPITAL RESOURCES

In July 2005, the Company entered into a new Revolving Credit, Term Loan and Security Agreement under which the Company obtained a $3,000 Term Loan and was granted an $8,000 revolving credit facility (Revolver). Advances under the Revolver are based on a borrowing base formula that provides for among other things eligibility based on certain percentages of receivables and inventory. Advances bear interest at prime plus 2.5% (9.0% at September 30, 2005) while the Term Loan, which is payable in 36 installments based on a six year amortization, bears interest at prime plus 3.5% (10.0% at September 30, 2005). Substantially all of the Company's assets are pledged to secure the borrowings under the this agreement. The amount available under this credit facility based on availability formulas as of September 30, 2005 was $1,162. At December 31, 2004, the Company's interest rate 8.25%.

During the nine month period ended September 30, 2005, the Company paid $750 to a related party reducing the outstanding loan balance to $0.

In October 2005, the Company entered into a settlement agreement ("Agreement") with Tri-Link Technologies Inc. ("Tri-Link") and Hargan-Global Ventures Inc. under which arbitration proceedings between the parties was settled and mutual releases were exchanged. Under the Agreement, the Company paid $1,000,000 and issued 750,000 shares of the Company's Common Stock and a $750,000 note to Tri-Link in exchange for the Company's original promissory note in the amount of $2,250,000.

This new note, which matures in October 2008, requires monthly payment principal and interest, at an annual rate of eight percent (8%) and is secured by a first lien on the software acquired from Tri-Link.

To facilitate the Agreement, the Company borrowed $250,000 from an affiliate controlled by one of the Company's directors. Principal and cumulative interest, at an annual rate of fifteen percent (15%), are due November 2008. The note, which is unsecured, may be prepaid by the Company beginning in October 2006 and is convertible, at the option of the holder, into shares of the Company's Common Stock and/or shares of any of the Company's existing or future preferred stock.

Seasonality

The Company has experienced seasonality due in part to purchasing tendencies of our customers during the fourth and first quarters of each calendar year. Consequently, net sales for the fourth and first quarters of each calendar year are typically not as strong as results during the other quarters. The net sales of the Company continued to be impacted by the general slowdown of telecommunications expenditures.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no material changes to the disclosure under the caption "Quantitative and Qualitative Disclosures About Market Risks" in our Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference.

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ITEM 4.  CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company's consolidated subsidiaries required to be disclosed in the Company's reports filed or submitted under the Exchange Act. There has been no change in the Company's internal control over financial reporting during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

See information contained in Form 8-K dated October 17, 2005.

ITEM 2.  UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

See information contained in Form 8-K dated October 17, 2005 and July 12, 2005.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

As of September 30, 2005, we were in arrears on dividend payments on our Series B and Series C Preferred Stock in the amounts of $181 and $1,128, respectively, which amounts include interest thereon.

We were also in arrears on the Note Payable to Tri-Link Technologies Inc. ("Tri-Link") in the amount of $1,440. As more fully described in PART I - ITEM 2 LIQUIDITY AND CAPITAL RESOURCES, this note was returned to the Company in October 2005 as part of a settlement agreement with Tri-Link.

ITEM 6.   EXHIBITS

10.1 Settlement Agreement and Mutual Release among Teltronics, Inc., Tri-Link Technologies Inc., and Hargan-Global Ventures Inc. dated October 12, 2005.
10.2 Promissory Note of Teltronics, Inc. in the principal amount of $750,000 dated October 12, 2005 delivered to Tri-Link Technologies Inc.
10.3 Promissory Note of Teltronics, Inc. in the principal amount of $250,000 dated October 12, 2005 delivered to Dove Ventures, Ltd.
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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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.




Dated:  November 14, 2005
TELTRONICS, INC.


By: /s/ EWEN R. CAMERON
——————————————
Ewen R. Cameron
President & Chief Executive Officer



Dated:  November 14, 2005



By: /s/ RUSSELL R. LEE III
——————————————
Russell R. Lee III
Vice President & Chief Financial Officer





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EXHIBIT INDEX

Exhibit
Number


Description

10.1* Settlement Agreement and Mutual Release among Teltronics, Inc., Tri-Link Technologies Inc., and Hargan-Global Ventures Inc. dated October 12, 2005.
10.2* Promissory Note of Teltronics, Inc. in the principal amount of $750,000 dated October 12, 2005 delivered to Tri-Link Technologies Inc.
10.3* Promissory Note of Teltronics, Inc. in the principal amount of $250,000 dated October 12, 2005 delivered to Dove Ventures, Ltd.
31.1* Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32* Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
__________________
(*)     Filed as an Exhibit to this Report on Form 10-Q for the period ended September 30, 2005.




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