UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] 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: 1-13828
MEMC ELECTRONIC MATERIALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-1505767
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
501 Pearl Drive (City of O'Fallon) St. Peters, Missouri 63376
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 279-5500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock outstanding at September 30, 1997: 41,408,314 shares
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars in thousands, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $260,026 $303,525 $728,090 $917,667
Cost of goods sold 223,856 237,034 633,019 681,021
------- ------- ------- -------
Gross margin 36,170 66,491 95,071 236,646
Marketing, administration and
technology expenses 34,354 32,469 98,389 92,576
------- ------- ------- -------
Operating profit 1,816 34,022 (3,318) 144,070
Nonoperating (income) expense:
Interest expense 5,265 - 6,521 494
Interest income (265) (659) (1,048) (4,394)
Royalty income (2,233) (1,394) (6,525) (4,731)
Other (income) expense, net (755) 3,704 (7,296) 6,209
------- ------- ------- -------
Total nonoperating (income)
expense 2,012 1,651 (8,348) (2,422)
------- ------- ------- -------
Earnings (loss) before income
taxes, equity in income (loss)
of joint ventures and minority
interests (196) 32,371 5,030 146,492
Income taxes (85) 12,948 2,163 58,597
------- ------- ------- -------
Earnings (loss) before equity in
income (loss) of joint ventures
and minority interests (111) 19,423 2,867 87,895
Equity in income (loss) of joint
ventures (6,033) 1,460 (9,477) 21,505
Minority interests 1,883 270 3,325 (2,135)
------- ------- ------- -------
Net earnings (loss) $ (4,261) $ 21,153 $ (3,285)$107,265
======= ======= ======= =======
Net earnings (loss) per share $(0.10) $0.51 $(0.08) $2.59
===== ==== ===== ====
Weighted average shares used in
computing net earnings (loss)
per share 41,420,801 41,396,951 41,431,689 41,405,992
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
September 30, December 31,
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 16,074 $ 35,096
Accounts receivable, less allowance for
doubtful accounts of $2,346 and $2,299
in 1997 and 1996, respectively 165,958 129,325
Inventories 126,692 100,505
Prepaid and other current assets 53,700 49,329
---------- ----------
Total current assets 362,424 314,255
Property, plant and equipment, net of accumulated
depreciation of $436,214 and $372,680 in 1997
and 1996, respectively 1,165,641 1,015,145
Investment in joint ventures 84,363 101,103
Excess of cost over net assets acquired, net of
accumulated amortization of $3,408 and $2,376
in 1997 and 1996, respectively 50,116 51,148
Other assets 32,104 27,324
---------- ----------
Total assets $1,694,648 $1,508,975
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of
long-term debt $ 100,532 $ 47,130
Accounts payable 124,775 156,841
Accrued liabilities 45,463 45,386
Accrued wages and salaries 25,510 25,975
Income taxes payable (9,155) (3,882)
---------- ----------
Total current liabilities 287,125 271,450
Long-term debt, less current portion 459,043 284,701
Pension and similar liabilities 71,279 70,232
Customer deposits 67,121 48,174
Other liabilities 27,862 28,923
---------- ----------
Total liabilities 912,430 703,480
---------- ----------
Minority interests 60,719 63,527
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000
shares authorized, none issued or outstanding
in 1997 or 1996 - -
Common stock, $.01 par value, 200,000,000 shares
authorized, 41,444,519 and 41,470,971 issued
and outstanding in 1997 and 1996, respectively 414 415
Additional paid-in capital 574,556 573,351
Retained earnings 167,858 171,143
Cumulative translation adjustment (19,083) (396)
Unearned restricted stock awards (918) (1,217)
Treasury stock, at cost: 36,205 shares in 1997
and 1996 (1,328) (1,328)
---------- ----------
Total stockholders' equity 721,499 741,968
---------- ----------
Total liabilities and stockholders' equity $1,694,648 $1,508,975
========== ==========
See accompanying notes to consolidated financial statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)
Nine Months Ended
September 30,
1997 1996
---- ----
Cash flows from operating activities:
Net earnings (loss) $ (3,285) $107,265
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 90,543 64,626
Gain on sale of property, plant and equipment (5,956) -
Minority interests (3,325) 2,135
Equity in (income) loss of joint ventures 9,477 (21,505)
Working capital and other (93,911) 75,038
--------- --------
Net cash provided by (used in) operating
activities (6,457) 227,559
--------- --------
Cash flows from investing activities:
Additions to property, plant, and equipment (273,347) (414,453)
Proceeds from sale of property, plant and
equipment 16,497 -
Equity infusions in joint ventures (4,000) (17,197)
Deposit with affiliate, net - 55,000
Dividend received from unconsolidated joint
venture 11,263 -
Other 791 2,295
--------- --------
Net cash used in investing activities (248,796) (374,355)
--------- --------
Cash flows from financing activities:
Net short-term borrowings 57,651 (1,763)
Proceeds from issuance of long-term debt 188,781 100,807
Principal payments on long-term debt (10,096) (482)
Contributions from minority interest - 2,476
Stock options exercised 334 872
Repurchase of common stock - (1,328)
--------- --------
Net cash provided by financing activities 236,670 100,582
--------- --------
Effect of exchange rate changes on cash (439) 227
--------- --------
Net decrease in cash and cash equivalents (19,022) (45,987)
Cash and cash equivalents at beginning of period 35,096 77,192
--------- --------
Cash and cash equivalents at end of period $ 16,074 $ 31,205
========= ========
See accompanying notes to consolidated financial statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of MEMC
Electronic Materials, Inc. and Subsidiaries (the Company), in the opinion of
management, include all adjustments (consisting of normal, recurring items)
necessary to present fairly the Company's financial position and results of
operations and cash flows for the periods presented. The consolidated
financial statements are presented in accordance with the requirements of
Regulation S-X and consequently do not include all disclosures required by
generally accepted accounting principles. Operating results for the
three-month and nine-month periods ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
(2) Sale of Santa Clara, California Assets
On May 30, 1997, the Company sold certain assets of the Santa Clara,
California wafer facility to UniSil Corporation for approximately $14.0
million. The divestiture resulted in the recognition of a pretax gain of
$6.0 million or $0.14 per share. This gain has been reflected as part of
other nonoperating income.
(3) Inventories
Inventories consist of the following:
September 30, December 31,
1997 1996
---- ----
Raw materials and supplies $ 58,128 $ 47,209
Goods in process 35,937 27,411
Finished goods 32,627 25,885
------ --------
$ 126,692 $ 100,505
======= =======
(4) Earnings per Share (EPS)
Net EPS for the three-month and nine-month periods ended September 30, 1997
and 1996 were calculated based on the weighted average shares outstanding
during each respective period.
(5) Derivative Financial Instruments
The Company enters into forward exchange contracts to manage foreign
currency exchange risk relating to current trade receivables with its
foreign subsidiaries and current trade receivables with its customers
denominated in foreign currencies (primarily Japanese yen and German marks).
The purpose of the Company's foreign currency hedging activities is to
protect the Company from the risk that the eventual dollar net cash flows
resulting from foreign currency transactions will be adversely affected by
changes in exchange rates. The Company does not hold or issue financial
instruments for trading purposes.
The Company's foreign exchange contracts are accounted for as hedges and,
accordingly, gains and losses on those contracts are deferred and recognized
at the time of settlement of the related receivables. Deferred gains and
losses are included on a net basis in the consolidated balance sheet as
either other assets or other liabilities. Upon termination, gains and losses
are included in the consolidated statement of earnings as other income or
expense. If a forward exchange contract is designated as a hedge but is no
longer effective, it is marked to market and included in other income or
expense in the consolidated statement of earnings. A payment or receipt
arising from the termination of a foreign currency contract that is
effective as a hedge is included in other income or expense in the
consolidated statement of earnings.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Net Sales. Net sales decreased 14.3% to $260.0 million for the three months
ended September 30, 1997 from $303.5 million for the three months ended
September 30, 1996. Net sales for the nine-month period ended September 30, 1997
decreased 20.7% to $728.1 million from $917.7 million for the comparable period.
The declines on both a quarter and year-to-date basis were caused by lower sales
volumes and average selling prices. For both the three- and nine-month periods,
net sales were lower for all wafer diameters and geographic regions, except
Japan, reflecting lower prices for all wafer diameters and the inventory
correction in the semiconductor industry that began in the second half of 1996.
Japan experienced higher sales volumes and revenues due to increased demand for
eight inch epitaxial wafers.
On a sequential basis, however, net sales increased 5.8% over second quarter
1997 net sales of $245.8 million. This increase was due to improved product
volumes and mix, offset by lower average selling prices. Net sales improved in
all geographic regions except North America, which was essentially unchanged
from the second quarter. From a product standpoint, sales volumes improved for
all wafer diameters, but most significantly for the six and eight inch
diameters.
Gross Margin. For the quarter ended September 30, 1997, gross margin decreased
to 13.9% from 21.9% for the year-ago quarter. For the nine months ended
September 30, 1997, gross margin was 13.1% as compared to 25.8% for the same
period of 1996. The decreases in gross margin for both the three-month period
and the nine-month period resulted from lower prices, a lower rate of capacity
utilization and start-up costs mainly associated with the St. Peters and MEMC
Southwest expansions.
As compared to the second quarter of 1997, gross margin improved by 1.4% due to
increased product volumes and the continued shift in product mix to advanced
large diameter and epitaxial products. Advanced large diameter and epitaxial
products represented 40% of product volume for the 1997 third quarter, compared
to 39% in the second quarter of 1997.
Marketing, Administration and Technology Expenses. Marketing, administration and
technology expenses for the quarter ended September 30, 1997 increased to $34.4
million from $32.5 million in the same 1996 quarter. Following the same trend,
marketing, administrative and technology expenses increased to $98.4 million
from $92.6 million for the nine months ended September 30. The increases in
expenses for the three-month and nine-month periods are primarily attributable
to increased technology expenses related to higher investment in 300mm research
and development and crystal and wafering process improvements in the United
States, Italy and Japan offset by reduced administration costs. As compared to
the third quarter of 1996, technology expenses have increased 47% while
administration costs have been reduced 25% for the three months ended September
30, 1997.
Interest Expense. Interest expense increased to $5.3 million during the 1997
third quarter due to the completion of capital projects for which interest was
previously capitalized. The increase for the 1997 nine-month period was
comparable to the 1997 three-month period. The Company expects interest expense
to continue to increase as capital projects are completed and interest expense
can no longer be capitalized. Based upon the projects completed and those
anticipated to be completed during the next quarter, interest expense may
approximate $8 million for the fourth quarter of 1997.
Other (Income) Expense. Other (income) expense for the third quarter of 1997
increased to income of $0.8 million from expense of $3.7 million for the same
period of 1996. Comparing the nine-month period ended September 30, 1997 to the
same period of the prior year, other (income) expense improved by $13.5 million
primarily as a result of the Santa Clara wafer facility divestiture in the 1997
second quarter.
Income Taxes. The Company's effective tax rate was 43% for both the three-month
and nine-month periods ended September 30, 1997 compared to 40% for the
comparable 1996 periods. The 1997 effective tax rate may increase due to changes
in the composition of the Company's worldwide pretax income.
Joint Ventures. Equity in income (loss) of joint ventures decreased to a loss of
$6.0 million for the quarter ended September 30, 1997 from income of $1.5
million for the year-ago period. For the 1997 period, the Company's share of
losses were attributable to losses of $0.3 million at PHC, the Korean joint
venture, and losses of $5.7 million at Taisil, the Taiwanese joint venture. PHC
incurred a slight loss during the third quarter due to a reduced rate of
operation following a labor disruption during the month of July 1997 and a
scheduled shutdown of the facility for normal maintenance. Taisil experienced a
water contamination issue which led to a higher loss in the current quarter.
Both operational issues were resolved during the third quarter. For the third
quarter of 1996, the Company's share of earnings from PHC and Taisil were $6.3
million of income and $4.8 million of losses, respectively.
Minority Interests. Minority interests in net losses of consolidated
subsidiaries were $1.9 million for the three-month period ended September 30,
1997 as compared to interest in losses of $0.3 million for same period of 1996.
On a year-to-date basis, 1997 minority interests in net losses of consolidated
subsidiaries were $3.3 million compared to interests in income of consolidated
subsidiaries of $2.1 million. In both the quarter and year-to-date periods, the
decreases are due mainly to project activities at MEMC Southwest, MEMC-CSMC,
and MEMC Kulim.
Liquidity and Capital Resources. At September 30, 1997, the Company had cash and
cash equivalents of $16.1 million. The Company's borrowings against its $784.6
million of credit facilities were $559.6 million at September 30, 1997.
Outstanding borrowings increased $227.7 million from December 31, 1996 to
September 30, 1997, the proceeds of which have been used to finance the
Company's expansion efforts and working capital requirements. The Company's
weighted-average borrowing rate was 6.1% at September 30, 1997.
A comparison of the components of the Company's financial condition follows
(dollars in millions):
September 30, December 31,
1997 1996
---- ----
Working capital $75.3 $42.8
Current ratio 1.26 to 1 1.16 to 1
Stockholders' equity $721.5 $742.0
Total debt to total
capitalization 41.7% 29.2%
Cash flows used in operating activities were $6.5 million for the nine months
ended September 30, 1997 compared to $227.6 million of cash flows provided for
the comparable 1996 period. The decrease is primarily attributable to lower net
earnings, higher accounts receivable, increased inventories, decreased accounts
payable and lower income taxes payable and customer deposit receipts, offset by
higher depreciation and lower equity in income from joint ventures.
Cash flows used in investing activities for the nine months ended September 30,
1997 included capital expenditures of $273.3 million which represents a $141.1
million reduction from the first nine months of 1996. The Company had committed
capital expenditures of $98.8 million as of September 30, 1997. Capital
expenditures in 1997 primarily relate to equipping the MEMC Southwest and St.
Peters wafer manufacturing facilities, expansion of MEMC Pasadena and
construction of an integrated development line for 12 inch wafers in Japan.
Also, included in cash flows used in investing activities were $16.5 million of
proceeds from the sale of fixed assets primarily due to the sale of the Santa
Clara wafer facility, and an $11.3 million dividend received from PHC.
Cash flows from financing activities increased $136.1 million from the 1996
nine-month period due to the issuance of short-term and long-term debt to
finance the Company's expansion efforts.
Outlook. The Company anticipates reporting an operating loss for the 1997 fourth
quarter, on only slighly higher net sales. In addition to the pricing
issues discussed below, the Company anticipates a return to a seasonal
demand pattern in the silicon wafer industry. The expected seasonality
effect is reflective of fewer production days during the fourth quarter,
planned customer shutdowns for maintenance and higher customer emphasis
on inventory management.
The Company continues to experience pricing pressure, particularly for advanced
large diameter and epitaxial wafers, for three reasons. First, DRAM
manufacturers have been experiencing substantial price declines throughout 1997,
and are trying to reduce their costs to maintain margins. Second, a number of
DRAM manufacturers are interested in migrating to eight inch epitaxial wafers to
enhance yields, but not at current prices. This has resulted in pricing pressure
for these wafers in an otherwise tighter market. Third, wafer supply is slightly
greater than demand.
For 1998, the unfavorable pricing environment that originated during early 1997
is expected to continue. In addition, a number of qualitative factors, most
significantly the relative strength of the U.S. dollar to the Japanese yen, will
place increasing pressure on prices over the near term since a strong U.S.
dollar permits Japanese silicon wafer manufacturers to export product at lower
prices, without sacrificing profit in Japan. From a cost standpoint, the Company
anticipates approximately $20 to $25 million in higher expenditures for
technology during 1998, due to strong customer interest in 12 inch wafers in
North America and Japan.
Other. In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 established standards for the computation and presentation
of earnings per share for entities with publicly held common stock or potential
common stock. The Statement is effective for financial statements issued for
periods ending after December 15, 1997 and requires retroactive restatement of
all prior period earnings per share data presented. The pro forma effect of SFAS
No. 128 on the financial periods presented is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Earnings per share, as reported $(0.10) $0.51 $(0.08) $2.59
====== ===== ====== =====
Basic earnings per share $(0.10) $0.51 $(0.08) $2.60
====== ===== ====== =====
Diluted earnings per share $(0.10) $0.51 $(0.08) $2.58
====== ===== ====== =====
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This Statement established standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
All items that are required to be recognized under accounting standards as
components of comprehensive income must be reported in a financial statement
with the same prominence as other financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement established standards for
the manner in which public business enterprises report information about
operating segments in interim and annual financial statements, and the related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for periods beginning after December 15, 1997.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- - except for the historical information contained herein, the matters discussed
in this document regarding interest expense, the effective tax rate, pricing and
the results of operations for the fourth quarter of 1997, the devaluation of the
Korean won and the New Taiwan dollar and pricing and increases in technology
expenses for 1998 are forward looking statements. Such statements involve
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward looking statements. Potential risks and
uncertainties include such factors as the demand for the Company's wafers,
utilization of manufacturing capacity, demand for semiconductors generally,
competitors' actions, changes in the pricing environment and other risks
described in the Company's filings with the Securities and Exchange Commission,
including the report on Form 10-K for the year ended December 31, 1996.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See the Exhibit Index at page 10 of this report.
(b) Reports on Form 8-K
None.
SIGNATURE
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.
MEMC Electronic Materials, Inc.
November 14, 1997 /s/ JAMES M. STOLZE
---------------------------------------------
James M. Stolze
Executive Vice President and Chief
Financial Officer
(on behalf of the registrant and as
principal financial and accounting officer)
EXHIBIT INDEX
The exhibits below are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit
Number Exhibit
- ------ -------
2 Omitted -- Inapplicable
3-a Omitted -- Inapplicable
3-b Omitted -- Inapplicable
4 Omitted -- Inapplicable
10-uu Amendment to Ground Lease Agreement dated as of May 31, 1997, between
the Company, MEMC Pasadena, Inc., and Albemarle Corporation.
11 Omitted -- Inapplicable
15 Omitted -- Inapplicable
18 Omitted -- Inapplicable
19 Omitted -- Inapplicable
22 Omitted -- Inapplicable
23 Omitted -- Inapplicable
24 Omitted -- Inapplicable
27 Financial Data Schedule (filed electronically with the SEC only)
99 Omitted -- Inapplicable
AMENDMENT TO
GROUND LEASE AGREEMENT
THIS AMENDMENT TO GROUND LEASE AGREEMENT amends, effective as of May 31,
1997 (the "Amendment Date"), that certain Ground Lease Agreement ("Lease") dated
July 15, 1995 by and between ALBEMARLE CORPORATION ("Lessor") and MEMC PASADENA,
INC. ("Lessee").
Lessor and Lessee hereby agree as follows:
1. As of the Amendment Date, the real property described in the attached
Exhibits B-1(A) and B-2(A) is added to the definition of "Land". The addition of
such real property does not, however, change any of the terms of the Ground
Lease Agreement, including the Initial Term or any Extension Term.
2. As of the Amendment Date, Section 2.1 is revised to read as follows:
"Rent. Lessee hereby tenders to Lessor and Lessor hereby accepts from
Lessee the sum of $143,383.00, which constitutes paid up rent for the
duration of the Lease Term for the approximately 15.8692 acres comprising
the Land. This consists of $50.00 per acre for the 12.3 acres originally
leased to Lessee as of the Commencement Date and $40,000 per acre for the
approximately 3.5692 acres which have been added to the Land pursuant to
this Amendment No. 1 to the Lease."
3. As to the 3.5692 acres which have been added to the Land pursuant to
this Amendment No. 1 to the Lease, Lessee will not build any permanent
improvements within five (5) feet of the northern property line of Tract 2 (as
shown in Exhibit B-1(A)). If Lessee decides to fence this northern property
line, then Lessee will, at its own cost and expense, remove any and all
improvements (whether permitted or otherwise) that Lessee has made within this
five (5) foot setback and any fence constructed by Lessee will be constructed
outside of this five (5) foot setback.
4. All other terms and conditions of the Lease remain unchanged.
MEMC PASADENA, INC. ALBEMARLE CORPORATION
By: /s/ William R. Cooke By: /s/ Thomas G. Avent
- ---------------------------- --------------------------------
Title: President & COO Title: Senior Vice President
Date: 6/4/97 Date: 6/4/97
MEMC ELECTRONIC MATERIALS, INC.
By: /s/ Charles W. Cook, Jr.
- --------------------------------------
Title: Corporate Vice President
Date: 4 June 97
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This schedule contains summary financial information extracted from SEC Form
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