1
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 fiscal quarter ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-556
ROSEVILLE TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
California 94-0817190
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
211 Lincoln Street, Roseville, California 95678
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 786-6141
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Without Par Value
(Title of class)
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.
As of April 30, 1996, 14,915,424 shares of the registrant's Common Stock were
outstanding.
ROSEVILLE TELEPHONE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Quarter Ended Quarter Ended
March 31, 1995 March 31, 1996
-------------- --------------
Operating revenues:
Local service $ 11,480,000 $ 12,026,000
Network access service 7,925,000 8,477,000
Long distance service 1,040,000 1,037,000
----------- -----------
Total rate regulated revenues 20,445,000 21,540,000
Directory advertising 1,603,000 1,767,000
Nonregulated sales and service 1,129,000 1,025,000
Other 1,367,000 1,187,000
----------- -----------
Total operating revenues 24,544,000 25,519,000
Operating expenses:
Plant operations 6,033,000 6,538,000
Depreciation 4,727,000 5,237,000
Customer operations 3,219,000 3,440,000
General and administrative 3,937,000 4,044,000
Cost of nonregulated sales and service 766,000 715,000
Property and miscellaneous taxes 448,000 459,000
----------- -----------
Total operating expenses 19,130,000 20,433,000
----------- -----------
Income from operations 5,414,000 5,086,000
Other income (expense):
Interest income 401,000 342,000
Interest expense (755,000) (712,000)
Equity in earnings of cellular partnership 1,218,000 1,963,000
Other, net (101,000) 72,000
----------- -----------
Total other income, net 763,000 1,665,000
----------- -----------
Income before income taxes 6,177,000 6,751,000
Income taxes 2,508,000 2,747,000
----------- -----------
Net income $ 3,669,000 $ 4,004,000
=========== ===========
Per Share of Common Stock:
Net Income (1) $0.25 $0.27
===== =====
Cash Dividends (2) $0.15 $0.15
===== =====
Shares of common stock used to
calculate net income per
share 14,915,424 14,915,424
========== ==========
(1) Shares used in the computation of net income per share of common stock are
based on the weighted average number of shares outstanding in each period after
giving retroactive effect to a 3% stock dividend issued in December 1995.
(2) Cash dividends per share of common stock are based on the actual dividends
per share, as declared by the Company's Board of Directors, after giving
retroactive effect to stock dividends.
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1995 March 31, 1996
----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 24,854,000 $ 35,953,000
Short-term investments 1,748,000 1,748,000
Refundable deposit 8,960,000 -
Accounts receivable, net 13,687,000 14,117,000
Inventories 2,189,000 2,196,000
Prepaid expenses and other current assets 2,688,000 1,243,000
------------ ------------
Total current assets 54,126,000 55,257,000
Property, plant and equipment, net 178,225,000 184,556,000
Investments and other assets:
Cellular partnership 23,292,000 25,621,000
Deferred charges and other assets 1,246,000 1,241,000
------------ ------------
24,538,000 26,862,000
------------ ------------
$256,889,000 $266,675,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,571,000 $ 4,107,000
Accounts payable and accrued liabilities 18,067,000 26,846,000
------------ ------------
Total current liabilities 21,638,000 30,953,000
Long-term debt 33,750,000 32,321,000
Deferred credits 25,158,000 25,301,000
Minority interest in subsidiary 1,950,000 1,940,000
Shareholders' equity:
Common Stock, without par value; 20,000,000
shares authorized, 14,915,424 shares
issued and outstanding 166,676,000 166,676,000
Retained earnings 7,717,000 9,484,000
------------ ------------
Total shareholders' equity 174,393,000 176,160,000
------------ ------------
$256,889,000 $266,675,000
============ ============
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Quarter Ended Quarter Ended
March 31, 1995 March 31, 1996
-------------- --------------
Net cash provided by operating activities $10,352,000 $ 9,850,000
Cash flows from investing activities:
Maturities of held-to-maturity investments 13,689,000 -
Capital expenditures for property, plant
and equipment (7,907,000) (4,220,000)
Investment in cellular partnership (2,401,000) (366,000)
Return of refundable deposit - 8,960,000
Changes in deferred charges and other
assets 6,000 5,000
----------- -----------
Net cash provided by investing
activities 3,387,000 4,379,000
Cash flows from financing activities:
Principal payments of long-term debt - (893,000)
Dividends paid (2,173,000) (2,237,000)
----------- -----------
Net cash used in financing activities (2,173,000) (3,130,000)
----------- -----------
Increase in cash and cash equivalents 11,566,000 11,099,000
Cash and cash equivalents at beginning of
period 21,282,000 24,854,000
----------- -----------
Cash and cash equivalents at end of
period $32,848,000 $35,953,000
=========== ===========
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. General and Basis of Accounting
The condensed consolidated financial statements of Roseville Telephone
Company (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") and, in
the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the results for
the interim periods shown. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations and generally accepted
accounting principles applicable for interim periods. Management believes
that the disclosures made are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 1995 Annual Report to Shareholders.
A number of telecommunications companies, including all of the Regional
Bell Operating Companies, have determined that they no longer meet the
criteria of Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" ("SFAS No. 71"), which
requires companies meeting the criteria to give effect in their financial
statements to certain actions of regulators. However, because such
telecommunications companies are significantly different from the Company
in the level and nature of competition they experience and in the nature
and mix of services they offer, the Company believes it continues to meet
the criteria of SFAS No. 71. Accordingly, the Company's condensed
consolidated financial statements have been prepared on that basis. For
example, amounts charged to operations for depreciation expense reflect
estimated lives and methods prescribed by regulators rather than those
consisting of useful and economic lives that might otherwise apply to
nonregulated enterprises. As a result of increasing competition and rapid
changes in the telecommunications industry, the Company periodically
monitors whether it continues to meet the criteria which require the use of
SFAS No. 71. If it becomes no longer reasonable to assume that the Company
can recover its costs of providing regulated services through rates charged
to customers, whether resulting from the effects of increased competition
or specific regulatory actions, SFAS No. 71 would no longer apply. In the
future, should the Company determine it no longer meets the SFAS No. 71
criteria, a material, extraordinary, noncash charge would result. The
approximate amount of the Company's net regulatory asset at December 31,
1995 was between $5 million and $13 million, consisting principally of
property, plant and equipment. The estimate for property, plant and
equipment was calculated based upon a projection of useful lives which may
be affected by the increasing competition and rapid changes in the
telecommunications industry referred to above.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(CONTINUED)
2. Property, Plant and Equipment
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121").
Under SFAS No. 121, companies are required to recognize impairment losses
on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amount
of those assets. SFAS No. 121 requires the impairment loss to be
recognized to the extent the carrying amount of the assets exceeds the fair
value of the assets. The adoption of SFAS No. 121 had no effect on the
Company's consolidated financial position or results of operations for the
first quarter of 1996. However, given the uncertainties relating to the
outcome of the Company's rate proceeding before the Public Utilities
Commission of the State of California ("P.U.C."), the future effect, if
any, of applying SFAS No. 121 cannot be determined at this time.
3. Investment in Cellular Partnership
The Company has an approximate 23.5% interest in the Sacramento-Valley
Limited Partnership (the "Cellular Partnership"), which operates a cellular
mobile radiotelephone system principally in California.
Summarized unaudited income statement information for the quarters ended
March 31, 1996 and 1995 for the Cellular Partnership is as follows (in
thousands):
Quarter Ended Quarter Ended
March 31, 1995 March 31, 1996
-------------- --------------
Net revenues $27,432 $32,122
Costs and expenses 22,244 23,758
------- -------
Net income $ 5,188 $ 8,364
======= =======
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(CONTINUED)
4. Pending Rate Case
On May 15, 1995, the Company filed a rate case with the P.U.C. in which the
Company requested a revenue increase of approximately $11 million. In
February 1996, evidentiary hearings on the issues commenced, in which the
P.U.C.'s Division of Rate Advocates ("D.R.A.") submitted its testimony and
proposed an approximate $12.5 million reduction in the Company's annual
rates and charges. The Company disagrees with the D.R.A.'s proposal and
provided its rebuttal testimony in the evidentiary hearings. Oral hearings
will be held on June 6, 1996 and the Company expects a final decision by
the end of 1996. The ultimate outcome of the rate case, and its effect on
the Company's consolidated financial position and results of operations,
cannot presently be determined. However, any consequences of the rate case
would be accounted for at or following the time a final decision is
rendered.
ROSEVILLE TELEPHONE COMPANY
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Operating Revenues
Revenues from rate regulated services, which include local service, network
access service and long distance service revenues, constitute approximately 84%
and 83% of the Company's total operating revenues for the quarters ended March
31, 1996 and 1995, respectively. Rate regulated revenues are derived from
various sources, including billings to business and residential subscribers for
basic exchange services, extended area service charges and transition revenues
from Pacific Bell, P.U.C. mandated surcharges, billings to Pacific Bell, long
distance carriers and subscribers for network access services, interstate
settlement revenues from the National Exchange Carrier Association, and support
payments from the interstate Universal Service Fund and California High Cost
Fund.
The Company bills Pacific Bell various charges for certain local service,
network access service and long distance service revenues pursuant to agreements
(the "Pacific Bell Agreements") that arose as a result of the termination on
January 1, 1992 of previous revenue sharing arrangements with Pacific Bell. Of
the Company's total revenues for the quarters ended March 31, 1996 and 1995, 24%
in each period were recorded under the Pacific Bell Agreements. Included in
such amounts were transition revenues of $2.0 million in each of the quarters
ended March 31, 1996 and 1995. The transition revenues are anticipated to be
approximately $8.2 million in 1996. Beginning in 1997 such revenues will be
reduced by approximately $2.0 million per year until ultimately eliminated.
Rate regulated revenues increased $1.1 million or 5% for the quarter ended March
31, 1996 compared to the same period in 1995 due to the combined effects of 1)
access line growth of approximately 7% and increased custom calling, voice mail
and enhanced network service revenues, which increased local service revenues by
$546,000 and 2) an increase in network access revenues arising from several new
commercial customers and increased minute-of-use volumes.
On May 15, 1995, the Company filed a rate case with the P.U.C. in which the
Company requested a revenue increase of approximately $11 million. In February
1996, evidentiary hearings on the issues commenced, in which the P.U.C.'s
Division of Rate Advocates ("D.R.A.") submitted its testimony and proposed an
approximate $12.5 million reduction in the Company's annual rates and charges.
The Company disagrees with the D.R.A.'s proposal and provided its rebuttal
testimony in the evidentiary hearings. Oral hearings will be held on June 6,
1996 and the Company expects a final decision by the end of 1996. The ultimate
outcome of the rate case, and its effect on the Company's consolidated financial
position and results of operations, cannot presently be determined. However,
any consequences of the rate case would be accounted for at or following the
time a final decision is rendered.
Operating Expenses:
Operating expenses increased approximately $1.3 million or 7% for the quarter
ended March 31, 1996 compared to the same period in 1995. Plant operations
increased $505,000 due to 1) costs associated with a larger work force, 2)
switching software expenditures and 3) normal inflationary factors.
Depreciation expense increased $510,000 as a result of higher average plant
levels. Customer operations expense increased $221,000 primarily due to
increased labor costs. General and administrative expense increased $107,000
due to higher costs associated with the Company's involvement in numerous state
and federal regulatory proceedings including the Company's rate proceeding.
Other Income, Net:
Other income, net, increased $902,000 for the quarter ended March 31, 1996
compared to the same period in 1995. The increase was primarily due to an
increase of $745,000 in income attributable to the Company's interest in the
Sacramento-Valley Limited Partnership.
Income Taxes:
Income taxes for the quarter ended March 31, 1996 increased $239,000 compared to
the same period in 1995 due to the increase in income subject to tax. The
effective federal and state income tax rate was approximately 40.7% and 40.6%
for the quarters ended March 31, 1996 and 1995, respectively.
Liquidity and Capital Resources
As reflected in the Condensed Consolidated Statements of Cash Flows, net cash
provided by operating activities amounted to $9.9 million and $10.4 million for
the quarters ended March 31, 1996 and 1995, respectively. During the quarter
ended March 31, 1996, the Company used cash flows from operations and existing
cash and cash equivalents to fund 1) capital expenditures of $4.2 million
pertaining to ongoing plant construction projects, 2) dividends of $2.2 million,
and 3) principal payments of $893,000 to retire long-term debt.
Cash flows to meet the remaining 1996 budgeted capital expenditures of
approximately $20.4 million, anticipated dividends of approximately $6.7
million, and remaining 1996 maturities of long-term debt of $2.7 million are
anticipated to be met from positive net cash flows from operations and existing
cash, cash equivalents and short-term investments.
Other Financial Information
As more fully discussed in the notes to the condensed consolidated financial
statements, the Company believes it continues to meet the criteria of Statement
of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("SFAS No. 71"). Accordingly, the Company's condensed
consolidated financial statements have been prepared on that basis. In the
future, should the Company determine it no longer meets the SFAS No. 71
criteria, a material, extraordinary, noncash charge would result. The
approximate amount of the Company's net regulatory asset at December 31, 1995
was between $5 million and $13 million, consisting principally of property,
plant and equipment.
PART II
Item 1. Regulatory and Legal Proceedings
Except for the proceedings described below, the Company is not aware of any
material pending legal proceedings, other than ordinary routine litigation
incidental to its business, to which it is a party or to which any of its
property is subject.
The Company is subject to regulation by the Federal Communications Commission
("F.C.C.") and P.U.C. In the past, there have been various proceedings before
these agencies to which the Company has been a party. The regulatory
proceedings discussed below relate to matters which may affect the Company
prospectively and are not expected to affect the Company's interim financial
statements at or for the quarter ended March 31, 1996.
The P.U.C. has instituted an investigation (I.87-11-033) into the manner in
which it regulates local exchange carriers, including the Company. It has
announced that in the course of this investigation it will consider the manner
in which certain services presently provided solely by the Company within its
local exchange area should be opened to competition. On September 15, 1994, the
P.U.C. adopted Decision 94-09-065, its opinion in this matter with respect to
competition within each Local Access and Transport Area ("LATA") and rate design
issues. The order revised basic exchange, toll, access, private line, and
service connection rates and authorized competition for toll and toll-like
services within the Company's LATA effective January 1, 1995. In addition, the
order as amended required the Company to submit an application for a general
rate case and proposal for a new regulatory framework. Accordingly, on May 15,
1995, the Company filed a rate case with the Public Utilities Commission of the
State of California ("P.U.C.") in which the Company requested a revenue increase
of approximately $11 million. In February 1996, evidentiary hearings on the
issues commenced, in which the P.U.C.'s Division of Rate Advocates ("D.R.A.")
submitted its testimony and proposed an approximate $12.5 million reduction in
the Company's annual rates and charges. The Company disagrees with the D.R.A.'s
proposal and provided its rebuttal testimony in the evidentiary hearings. Oral
hearings will be held on June 6, 1996 and the Company expects a final decision
by the end of 1996. The ultimate outcome of the rate case, and its effect on
the Company's consolidated financial position and results of operations, cannot
presently be determined. However, any consequences of the rate would be
accounted for at or following the time a final decision is rendered.
On April 7, 1993, the P.U.C. opened an investigation and rulemaking proceeding
(R. 93-04-003) to establish rules necessary to provide nondiscriminatory access
by competing service providers to the network capabilities of local exchange
carriers necessary to ensure fair competition in accordance with the mandate of
Public Utilities Code Section 2282.5. In connection with this proceeding, the
P.U.C. issued a further order on August 5, 1993 proposing additional rules for
implementation of the open access principles proposed in its open access
proceeding. On April 26, 1995, the P.U.C. adopted Decision 95-04-073, an
interim opinion governing the provision of expanded interconnection and
restructuring of local transport rates by Pacific Bell and GTE California. On
December 6, 1995, the P.U.C. adopted Decision 95-12-016 which adopted principles
to govern the development of cost studies for the basic network functions of the
local exchange networks of Pacific Bell and GTE California. In this order, the
P.U.C. ordered the Company to participate in the process of developing these
cost studies in anticipation of a possible order that the Company designate and
be bound for two years by the results of the cost studies for a comparable
Pacific Bell or GTE California wire center and to develop a proposal for how to
account for shared and common costs, including overhead. Also, on December 6,
1995, the P.U.C. adopted Decision 95-12-020 which modified the rate structure
previously adopted for local transport in order to bring it into parity with
that adopted by the F.C.C. in its own proceedings on local transport
restructuring. These proceedings may broaden the scope of competition in the
provision of intrastate services, the effects of which on the Company cannot
presently be determined.
In November 1993, the P.U.C. issued a report to the Governor of the State of
California entitled "Enhancing California's Competitive Strength: A Strategy
For Telecommunications Infrastructure" in which it proposes to open all markets
to competition and aggressively streamline regulation to accelerate the pace of
innovation in the telecommunications marketplace. In connection with this
report, on December 21, 1994, the P.U.C. adopted Decision 94-12-053, an initial
procedural plan to facilitate opening local exchange telecommunications markets
to competition by January 1, 1997. In this decision, the Commission expressed
its intent to implement local exchange competition, intraLATA presubscription,
open access to local exchange carrier networks based on an unbundled basis, and
reform of the new regulatory framework for local exchange carriers. In
conjunction with these proceedings, the P.U.C. adopted Rulemaking 95-01-020 and
Investigation 95-01-021 on January 24, 1995, an order instituting investigation
and rulemaking to consider the goals of and definition of universal telephone
service in a changing telecommunications environment, including examination of
subsidy support mechanisms and issues of "carrier of last resort" and
"franchise" obligations. After reviewing comments, the P.U.C. issued Decision
95-07-050 on July 19, 1995 setting forth a set of proposed rules pertaining to
universal service responsibilities in a competitive environment. Proceedings in
connection with establishing the mechanisms for calculating and funding future
subsidy support mechanisms are continuing. The Company anticipates that further
orders will be issued in this proceeding during 1996 which may result in changes
in intrastate telecommunications regulation, the effects of which on the Company
cannot yet be determined.
On April 26, 1995, the P.U.C. adopted Rulemaking 95-04-043 and Investigation 95-
04-044, an order instituting investigation and rulemaking to develop and adopt
rules for local exchange competition. On July 24, 1995, the P.U.C. issued
Decision 95-07-054 opening Pacific Bell and GTE California territories to
competition under interim rules by facilities-based competitors on January 1,
1996 and by resale competitors on March 31, 1996. Additional interim rules
governing interconnection and related matters were adopted on December 20, 1995
in Decision 95-12-057 approving the applications of an initial group of
facilities-based local service competitors. On February 23, 1996, the P.U.C.
adopted Decision 96-02-072 approving the applications of an initial group of
resale competitors. A companion decision establishing the rates to be paid by
resale competitors for interconnection and related services was adopted on March
13, 1996 to be effective March 31, 1996. While the orders issued to date on
local service competition do not apply to the Company's territory, the P.U.C.
has expressed its intention to open all telecommunications markets, including
the Company's territory, to competition by January 1, 1997. The P.U.C. is
anticipated to hold proceedings during 1996 to establish the rules for local
service competition in the Company's territory.
There are a number of regulatory proceedings occurring at the federal level that
may have a material impact on the Company. These regulatory proceedings
include, but are not limited to, consideration of changes to the interstate
universal service fund and the regulation of local exchange carriers. In
addition, the F.C.C. periodically establishes the authorized rate of return for
interstate access services. Since January 1, 1991, the F.C.C. has established
an 11.25% rate of return for interstate access services.
In addition, in September 1992, the F.C.C. issued an order granting to
competitors expanded interconnection rights to facilities of local exchange
carriers with annual revenues from regulated operations in excess of $100
million. These rules were overturned by the United States Court of Appeals.
The F.C.C. issued new rules to comply with the decision of the Court of Appeals.
While not yet applicable to the Company, these rules will permit competitors to
terminate facilities on terms and conditions equivalent to those which would
apply if they were permitted to terminate their facilities in telephone company
central offices.
The Company's operations may also be impacted by the recently enacted
Telecommunications Act of 1996. Given its recent enactment, and the
commencement of proceedings by the F.C.C. to promulgate rules and regulations
thereunder, it is not yet possible to comprehend fully the impact of the
Telecommunications Act on the Company's operations.
These proceedings may broaden the scope of competition in the provision of
regulated services and change the rates and rate structure for regulated
services furnished by the Company, the effects of which on the Company cannot
yet be determined.
On May 9, 1995, the Company filed an application with the P.U.C. requesting
authorization to implement an Agreement and Plan of Reorganization (the "Plan")
approved by the Company's shareholders on June 16, 1995, which would result in a
holding company. The Company intends to proceed with the reorganization after
approval of the Plan by the P.U.C. The decision to approve the creation of a
holding company structure was determined independently from and not as a result
of any other regulatory proceedings. In addition, it is not anticipated that the
holding company structure would have any impact upon any such proceedings.
The eventual impact on the Company of the effect of all the proceedings
described above cannot presently be determined.
Item 6. Exhibits and Reports on Form 8-K.
a) None.
b) No reports on Form 8-K were filed during the first quarter of 1996.
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.
ROSEVILLE TELEPHONE COMPANY
(Registrant)
Date: May 14, 1996 By: /s/BRIAN H. STROM
Brian H. Strom,
President and Chief
Executive Officer
Date: May 14, 1996 By: /s/MICHAEL D. CAMPBELL
Michael D. Campbell,
Executive Vice-President and
Chief Financial Officer
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