-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BV1SJ9BVGi/KfvyuDt81s9Iomb6AUrVEO63muwlOQZVnHmZSuMkge5JW/dsA3sqZ 5rIveaAg5PE+Dn38qq/+Pg== 0000724136-97-000001.txt : 19970115 0000724136-97-000001.hdr.sgml : 19970115 ACCESSION NUMBER: 0000724136-97-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE LP CENTRAL INDEX KEY: 0000724136 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 042798638 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17147 FILM NUMBER: 97505191 BUSINESS ADDRESS: STREET 1: 265 FRANKLIN ST 15TH FLR CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174398118 10-Q 1 THIS IS A 10-Q UNITED STATES 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 November 30, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to . Commission File Number: 0-17147 PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP (Exact name of registrant as specified in its charter) Delaware 04-2798638 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 265 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617)439-8118 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 ____ -- PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP BALANCE SHEETS November 30, 1996 and August 31, 1996 (Unaudited) (In thousands) ASSETS November 30 August 31 ----------- --------- Real estate investments: Investment property held for sale $ 4,720 $ 4,720 Land 1,150 1,150 Mortgage loans receivable 9,185 9,185 -------- ------- 15,055 15,055 Cash and cash equivalents 1,019 973 Interest receivable 85 85 Tax and tenant security deposit escrows 38 71 Prepaid expenses 8 14 Deferred expenses, net 8 9 -------- -------- $ 16,213 $ 16,207 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Accounts payable - affiliates $ 18 $ 18 Accounts payable and accrued expenses 55 113 Tenant security deposits 13 13 Partners' capital 16,127 16,063 -------- -------- $ 16,213 $ 16,207 ======== ======== STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the three months ended November 30, 1996 and 1995 (Unaudited) (In thousands) General Limited Partners Partners -------- -------- Balance at August 31, 1995 $ 10 $15,878 Net income 3 355 Cash distributions (3) (292) ------ ------- Balance at November 30, 1995 $ 10 $15,941 ====== ======= Balance at August 31, 1996 $ 11 $16,052 Net income 4 355 Cash distributions (3) (292) ------ ------- Balance at November 30, 1996 $ 12 $16,115 ====== ======= See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP STATEMENTS OF INCOME For the three months ended November 30, 1996 and 1995 (Unaudited) (In thousands, except per Unit amounts) 1996 1995 ---- ---- Revenues: Interest from mortgage loans $ 255 $ 255 Land rent 36 33 Interest earned on short- term investments 12 10 ------ ------ 303 298 Expenses: Management fees 21 21 General and administrative 60 68 Amortization of deferred expenses 1 1 ------ ------- 82 90 ------ ------- Operating income 221 208 Income from operations of investment property held for sale, net 138 150 ------- ------- Net income $ 359 $ 358 ======= ======= Net income per Limited Partnership Unit $9.93 $9.91 ===== ===== Cash distributions per Limited Partnership Unit $8.16 $8.16 ===== ===== The above net income and cash distributions per Limited Partnership Unit are based upon the 35,794 Units of Limited Partnership Interest outstanding during each period. See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP STATEMENTS OF CASH FLOWS For the three months ended November 30, 1996 and 1995 (Unaudited) Increase (Decrease) in Cash and Cash Equivalents (In thousands) 1996 1995 ---- ---- Cash flows from operating activities: Net income $ 359 $ 358 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred expenses 1 1 Changes in assets and liabilities: Tax and tenant security deposit escrows 33 35 Prepaid expenses 6 4 Accounts payable and accrued expenses (58) (64) --------- -------- Total adjustments (18) (24) --------- -------- Net cash provided by operating activities 341 334 Cash flows from financing activities: Distributions to partners (295) (295) --------- -------- Net increase in cash and cash equivalents 46 39 Cash and cash equivalents, beginning of period 973 790 --------- -------- Cash and cash equivalents, end of period $ 1,019 $ 829 ========= ======== See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP Notes to Financial Statements (Unaudited) 1. General ------- The accompanying financial statements, footnotes and discussion should be read in conjunction with the financial statements and footnotes contained in the Partnership's Annual Report for the year ended August 31, 1996. In the opinion of management, the accompanying financial statements, which have not been audited, reflect all adjustments necessary to present fairly the results for the interim period. All of the accounting adjustments reflected in the accompanying interim financial statements are of a normal recurring nature. The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of November 30, 1996 and August 31, 1996 and revenues and expenses for the three months ended November 30, 1996 and 1995. Actual results could differ from the estimates and assumptions used. 2. Mortgage Loan and Land Investments ---------------------------------- The outstanding first mortgage loans and the cost of the related land to the Partnership at November 30, 1996 and August 31, 1996 are as follows (in thousands): Amount of Property Mortgage Loan Cost of Land -------- ------------- ------------ Appletree Apartments $ 4,850 $ 650 Omaha, NE Woodcroft Shopping Center Durham, NC Phase I 3,100 360 Phase II 1,235 140 ------- ------- $ 9,185 $ 1,150 ======= ======= The interest rates on the mortgage loans range from 11% to 11.25% per annum. The land leases have terms of 40 years. Among the provisions of the lease agreements, the Partnership is entitled to additional rent based upon the gross revenues from the operating properties in excess of a base amount, as defined. For the three months ended November 30, 1996 and 1995, additional rent of $4,000 and $1,000, respectively, was earned from the Woodcroft Shopping Center investments. The lessees have the option to purchase the land for specified periods of time, as discussed in the Annual Report, at a price based on fair market value, as defined, but in no event less than the original cost to the Partnership. As of November 30, 1996, all of the options to purchase the land underlying the above properties were exercisable. The Partnership's investments are structured to share in the appreciation in value of the underlying real estate. Accordingly, upon either sale, refinancing, maturity of the mortgage or exercise of the option to purchase the land, the Partnership will receive a 33% to 50% share of the appreciation above a specified base amount. Subsequent to November 30, 1996, Woodcroft's owner agreed upon sale terms with a third-party buyer. The sale transaction closed on December 20, 1996. As part of the transaction, the Partnership received $4,335,000 from the Woodcroft borrower which represented the full repayment of the first leasehold mortgage loan secured by the Woodcroft Shopping Center which matured on December 17, 1996. Simultaneously, the Woodcroft borrower purchased the Partnership's interest in the underlying land for the amount of $500,000. In addition, under the terms of the ground lease, the Partnership was entitled to a share of the property's appreciation. This resulted in a participation payment to the Partnership of $650,000. In total, the Partnership received $5,485,000 to close the transactions. As a result of this transaction, the Partnership will make a special distribution of $153 per original $1,000 investment on January 15, 1997 to unitholders of record as of December 20, 1996. This special distribution will be paid along with the regular quarterly distribution for the quarter ended November 30, 1996. Subsequent to the Woodcroft special distribution, the Partnership's annualized distribution rate will be adjusted from 6.5% to 5.5% beginning with the distribution for the quarter ending February 28, 1997, which will be made on April 15, 1997. During the last quarter of fiscal 1995, the Partnership received notice from the Appletree borrower of its intent to prepay the Partnership's mortgage loan and repurchase the underlying land. The borrower reported that it had secured the necessary financing to complete this transaction. However, the amount to be received by the Partnership as its share of the appreciation of the Appletree property has not been agreed upon to date. The terms of the Partnership's ground lease provide for the possible resolution of disputes between the parties over value issues through an arbitration process. The borrower could force the Partnership to submit to such an arbitration process during fiscal 1997, although to date it has given no formal indication of an intent to do so. In addition to the amount to be determined as the Partnership's share of the property's appreciation under the ground lease, the terms of the Appletree mortgage loan require a prepayment penalty which would be equal to 2.5% of the outstanding principal balance of $4,850,000 for any prepayment prior to April 30, 1997. Subsequent to April 30, 1997, the prepayment penalty declines to 1.5% for the next twelve months after which there would be no prepayment penalty for the remainder of the term through maturity in June 1999. If completed, the proceeds of any prepayment transaction would be distributed to the Limited Partners. However, a prepayment transaction remains contingent on, among other things, a resolution of the value issue. Accordingly, there are no assurances that a transaction will be consummated. As discussed further above, the Woodcroft loan was repaid in December 1996, and the potential for a near term prepayment of the Appletree loan is high. As a result of these circumstances, based on an expected short-term maturity, the estimated fair values of the Partnership's mortgage loan instruments approximated their carrying values as of November 30, 1996 since the estimated fair values of the collateral properties exceeded the principal balances of the loans. 3. Related Party Transactions -------------------------- The Adviser earned basic management fees of $21,000 for both of the three-month periods ended November 30, 1996 and 1995. Accounts payable affiliates at both November 30, 1996 and August 31, 1996 consists of management fees of $18,000 payable to the Adviser. Included in general and administrative expenses for the three months ended November 30, 1996 and 1995 is $39,000 and $37,000, respectively, representing reimbursements to an affiliate of the Managing General Partner for providing certain financial, accounting and investor communication services to the Partnership. Also included in general and administrative expenses for the three months ended November 30, 1996 and 1995 is $1,000 and $3,000, respectively, representing fees earned by an affiliate, Mitchell Hutchins Institutional Investors, Inc., for managing the Partnership's cash assets. 4. Investment Properties --------------------- As discussed in the Annual Report, the Partnership foreclosed under the terms of the mortgage loan secured by the Westside Creek Apartments on March 23, 1989 due to nonpayment of the required debt service. The Adviser has employed a local property management company to conduct the day-to-day operations of the property under the direction of the Managing General Partner since assuming ownership. The property consists of 142 units and is located in Little Rock, Arkansas. The net carrying value of the Partnership's investment in the Westside Creek Apartments, of $4,720,000, is classified as investment property held for sale on the accompanying balance sheets as of November 30, 1996 and August 31, 1996. The Partnership recognizes income from the operations of investment property held for sale in the amount of the excess of the property's gross revenues over the sum of property operating expenses (including capital improvement costs), taxes and insurance. Summarized operating results of the Westside Creek investment property for the three months ended November 30, 1996 and 1995 are as follows (in thousands): 1996 1995 ---- ---- Revenues: Rental income $ 234 $ 246 Other income 7 9 ------- ------- 241 255 Expenses: Property operating expenses 82 84 Property taxes and insurance 21 21 ------- ------- 103 105 ------- ------- Income from operations, net $ 138 $ 150 ======= ======= 5. Contingencies ------------- As discussed in more detail in the Annual Report, the Partnership is involved in certain legal actions. At the present time, the Managing General Partner is unable to estimate the impact, if any, of these matters on the Partnership's financial statements, taken as a whole. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Subsequent to November 30, 1996, the owner of the Woodcroft Shopping Center agreed upon sale terms with a third-party buyer. The sale transaction closed on December 20, 1996. As part of the transaction, the Partnership received $4,335,000 from the Woodcroft borrower which represented the full repayment of the first leasehold mortgage loan secured by the Woodcroft Shopping Center which matured on December 17, 1996. Simultaneously, the Woodcroft borrower purchased the Partnership's interest in the underlying land for the amount of $500,000. In addition, under the terms of the ground lease, the Partnership was entitled to a share of the property's appreciation. This resulted in a participation payment to the Partnership of $650,000. In total, the Partnership received $5,485,000 to close the transactions. As a result of this transaction, the Partnership will make a special distribution of $153 per original $1,000 investment on January 15, 1997 to unitholders of record as of December 20, 1996. This special distribution will be paid along with the regular quarterly distribution for the quarter ended November 30, 1996. Subsequent to the Woodcroft special distribution, the Partnership's annualized distribution rate will be adjusted from 6.5% to 5.5% beginning with the distribution for the quarter ending February 28, 1997, which will be made on April 15, 1997. During the last quarter of fiscal 1995, the Partnership received notice from the Appletree borrower of its intent to prepay the Partnership's mortgage loan and repurchase the underlying land. The borrower had represented that it had received the necessary financing to complete this transaction. However, the amount to be received by the Partnership as its share of the appreciation in the Appletree property has not been agreed upon to date. The terms of the ground lease provide for the possible resolution of disputes between the parties over value issues through an arbitration process. The borrower could force the Partnership to submit to such an arbitration process during fiscal 1997, although to date it has given no formal indication of an intent to do so. In addition to the amount to be determined as the Partnership's share of the property's appreciation under the ground lease, the terms of the Appletree mortgage loan require a prepayment penalty which would be equal to 2.5% of the outstanding principal balance of $4,850,000 for any prepayment prior to April 30, 1997. Subsequent to April 1997, the prepayment penalty declines to 1.5% for the next twelve months, after which there would be no prepayment penalty for the remainder of the term until maturity in June 1999. If completed, the proceeds of any prepayment transaction would be distributed to the Limited Partners. However, a prepayment transaction remains contingent on, among other things, a resolution of the value issue, and the borrower has not pursued negotiation efforts in recent months. Accordingly, there are no assurances that a transaction will be consummated. At the Partnership's wholly-owned multi-family residential property, Westside Creek Apartments in Little Rock, Arkansas, the occupancy level averaged 86% for the quarter, compared to 89% for the prior quarter. There have been unusually high levels of tenant turnover at Westside Creek in recent quarters which can be attributed to the opening of a nearby newly constructed apartment property and by several tenants leaving to purchase single-family homes. The construction of this nearby apartment community with 225 units is not expected to have a significant impact on occupancy levels at Westside Creek over the long term; however it is expected to limit the property management team's ability to raise rental rates in the near term. There are two more new properties under construction in the West Little Rock market and one may directly compete with Westside Creek. The property management team has recommended that the Partnership invest funds in capital improvements at the property in order to stay competitive with these new developments. During the current quarter, the Partnership received an offer to purchase the Westside Creek property and entered into negotiations for a potential sales contract. As previously reported, Westside Creek consists of two separately-owned phases. The two phases share their amenities with one another and allocate expenses by agreement through a common management company. The proposed sale transaction would involve both phases, which management believes would maximize the proceeds to the Partnership. The Partnership owns Phase I which includes the common entrance, leasing office and clubhouse, and has negotiated a favorable allocation of the potential sales price with the owner of Phase II based on Phase I's physical advantages. In order to capitalize on this potential for a combined sale of both phases, and in light of the possible near term repayment of the Appletree mortgage loan and related land sale, management believes that pursuing a current sale of the Westside Creek property would be in the best interests of the Limited Partners. A sale of Westside Creek and the disposition of the Appletree investments would be followed by a liquidation of the Partnership. The Partnership is in the process of finalizing a purchase and sale agreement with the prospective buyer for Westside Creek and could close a sale transaction during the third quarter of fiscal 1997. As with any negotiation, there can be no assurance that a sale transaction will be completed. At November 30, 1996, the Partnership had available cash and cash equivalents of approximately $1,019,000. Such cash and cash equivalents will be used for working capital requirements and for distributions to the partners. The source of future liquidity and distributions to the partners is expected to be through cash generated from the Partnership's real estate investments, repayment of the mortgage loans receivable and the proceeds from the sales or refinancings of the underlying land and the investment property. Such sources of liquidity are expected to be adequate to meet the Partnership's needs on both a short-term and long-term basis. Results of Operations Three Months Ended November 30, 1996 - ------------------------------------ The Partnership's net income increased by $1,000 for the three-month period ended November 30, 1996 when compared to the same period in the prior year. The change in net income is attributable to an increase in operating income of $13,000 which was partially offset by a decrease in income from operations of investment property held for sale of $12,000. Operating income increased due to an increase in land rent income and a decrease in general and administrative expenses. Land rent increased by $3,000 due to an increase in the additional rent in excess of a specified base amount received from the Woodcroft Shopping Center investment during the current quarter pursuant to the terms of the ground lease. General and administrative expenses decreased by $8,000 mainly due to a decrease in certain required professional fees. The decrease in income from investment property held for sale of $12,000 is primarily attributable to a decrease in rental income at the Westside Creek Apartments. Rental income decreased due to a decrease in the property's average occupancy level when compared to the same period in the prior year as a result of the competitive conditions discussed further above. PART II Other Information Item 1. Legal Proceedings - ------------------------- In November 1994, a series of purported class actions (the "New York Limited Partnership Actions") were filed in the United States District Court for the Southern District of New York concerning PaineWebber Incorporated's sale and sponsorship of various limited partnership investments, including those offered by the Partnership. The lawsuits were brought against PaineWebber Incorporated and Paine Webber Group, Inc. (together "PaineWebber"), among others, by allegedly dissatisfied partnership investors. In March 1995, after the actions were consolidated under the title In re PaineWebber Limited Partnership Litigation, the plaintiffs amended their complaint to assert claims against a variety of other defendants, including Third Qualified Properties, Inc. and Properties Associates, ("PA"), which are the General Partners of the Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified class action treatment of the claims asserted in the litigation. The amended complaint in the New York Limited Partnership Actions alleged that, in connection with the sale of interests in PaineWebber Qualified Plan Property Fund Three, LP., PaineWebber, Third Qualified Properties, Inc. and Properties Associates (1) failed to provide adequate disclosure of the risks involved; (2) made false and misleading representations about the safety of the investments and the Partnership's anticipated performance; and (3) marketed the Partnership to investors for whom such investments were not suitable. The plaintiffs, who purported to be suing on behalf of all persons who invested in PaineWebber Qualified Plan Property Fund Three, LP., also alleged that following the sale of the partnership interests, PaineWebber, Third Qualified Properties, Inc. and Properties Associates misrepresented financial information about the Partnership's value and performance. The amended complaint alleged that PaineWebber, Third Qualified Properties, Inc. and Properties Associates violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal securities laws. The plaintiffs sought unspecified damages, including reimbursement for all sums invested by them in the partnerships, as well as disgorgement of all fees and other income derived by PaineWebber from the limited partnerships. In addition, the plaintiffs also sought treble damages under RICO. In January 1996, PaineWebber signed a memorandum of understanding with the plaintiffs in the New York Limited Partnership Actions outlining the terms under which the parties have agreed to settle the case. Pursuant to that memorandum of understanding, PaineWebber irrevocably deposited $125 million into an escrow fund under the supervision of the United States District Court for the Southern District of New York to be used to resolve the litigation in accordance with a definitive settlement agreement and plan of allocation. On July 17, 1996, PaineWebber and the class plaintiffs submitted a definitive settlement agreement which has been preliminarily approved by the court and provides for the complete resolution of the class action litigation, including releases in favor of the Partnership and the General Partners, and the allocation of the $125 million settlement fund among investors in the various partnerships at issue in the case. As part of the settlement, PaineWebber also agreed to provide class members with certain financial guarantees relating to some of the partnerships. The details of the settlement are described in a notice mailed directly to class members at the direction of the court. A final hearing on the fairness of the proposed settlement was held in December 1996, and a ruling by the court as a result of this final hearing is currently pending. In February 1996, approximately 150 plaintiffs filed an action entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber Incorporated and various affiliated entities concerning the plaintiffs' purchases of various limited partnership interests, including those offered by the Partnership. The complaint alleged, among other things, that PaineWebber and its related entities committed fraud and misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs by selling or promoting limited partnership investments that were unsuitable for the plaintiffs and by overstating the benefits, understating the risks and failing to state material facts concerning the investments. The complaint sought compensatory damages of $15 million plus punitive damages against PaineWebber. Mediation with respect to the Abbate action was held in December 1996. As a result of such mediation, a tentative settlement between PaineWebber and the plaintiffs was reached which would provide for complete resolution of such action. PaineWebber anticipates that releases and dismissals with regard to this action will be received by February 1997. Under certain limited circumstances, pursuant to the Partnership Agreement and other contractual obligations, PaineWebber affiliates could be entitled to indemnification for expenses and liabilities in connection with the litigation described above. However, PaineWebber has agreed not to seek indemnification for any amounts it is required to pay in connection with the settlement of the New York Limited Partnership Actions. At the present time, the General Partners cannot estimate the impact, if any, of the potential indemnification claims on the Partnership's financial statements, taken as a whole. Accordingly, no provision for any liability which could result from the eventual outcome of these matters has been made in the accompanying financial statements of the Partnership. Item 2. through 5. NONE Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: NONE (b) Reports on Form 8-K: No reports on Form 8-K have been filed by the registrant during the quarter for which this report is filed. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP 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. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP By: THIRD QUALIFIED PROPERTIES, INC. Managing General Partner By: /s/ Walter V. Arnold -------------------- Walter V. Arnold Senior Vice President and Chief Financial Officer Dated: January 14, 1997 EX-27 2 ARTICLE 5 FDS FOR THE THREE MONTHS ENDED 11/30/96
5 This schedule contains summary financial information extracted from the Partnership's audited financial statements for the quarter ended November 30, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS AUG-31-1997 NOV-30-1996 1,019 0 9,270 0 0 1,150 5,870 0 16,213 86 0 0 0 0 16,127 16,213 0 441 0 82 0 0 0 359 0 359 0 0 0 359 9.93 9.93
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