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Archive for December, 2008

We’re unabashed fans of Carl Icahn, who’s reputation for pushing up the stock prices of the companies he invests in has led to a phrase that describes his Midas touch: the “Icahn lift.” We’ve previously covered the billionaire investor’s antics in YHOO here. Our gift to you is 60 Minutes’ August profile on Icahn:

It takes a certain breed of stock market investor, the kind with lots of money and lots of guts, to thrive in queasy times like these, when the market keeps losing altitude. Carl Icahn is one of that breed.

He has a knack for turning someone else’s loss into profit for himself. But he can also help others improve their bottom line through the so-called “Icahn Lift,” an upward bounce that often happens when he starts buying a beleaguered stock.

To see the video, click here: (60 Minutes’ “The Icahn Lift”). Enjoy!

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Avigen, Inc. (NASDAQ:AVGN) has received an offer from MediciNova, Inc. (NASDAQ:MNOV), a biopharmaceutical company that is publicly traded on both the Nasdaq Global Market and the Hercules Market of the Osaka Securities Exchange (Code Number: 4875).

We’ve been following AVGN (see earlier posts here, here, here and here) because it’s a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities) and it has a specialist biotechnology activist fund Biotechnology Value Fund (BVF) pushing it to liquidate and return its cash to shareholders. We esimate AVGN’s net cash value at $43.5M or $1.46 per share.

According to this filing, MNOV proposes to offer AVGN stockholders a pro rata portion of 1.75M shares of MNOV and a convertible security representing AVGN’s Net Cash Assets,” which MNOV defines as AVGN’s cash remaining after it is wound up less $7M paid to be paid to MNOV. The convertible security issued by MNOV would allow each AVGN stockholder at their election to either (i) convert each share of the convertible security into MNOV at a conversion price of $4.00 per share or (ii) have the convertible security redeemed for cash in an amount per share that represents the Net Cash Assets per share of AVGN. The redemption would occur on the later of March 31, 2010 or 12 months from the closing of the merger transaction. The letter from MNOV to AVGN is reproduced below:

Zola Horovitz, Ph.D.

Chairman of the Board

Avigen, Inc.

Dear Dr. Horovitz:

The purpose of this letter is to provide you with more details concerning the recent expression of interest MediciNova, Inc. (“MediciNova”) made to Avigen, Inc. (“Avigen”) with respect to a potential merger of the two companies in the letter to you dated December 9, 2008.

Our present thinking, based upon the information in publicly available documents and preliminary due diligence, is that we would offer as consideration a combination of registered MediciNova common stock and shares of a MediciNova convertible security for each share of Avigen common stock outstanding. In connection with the merger, Avigen would wind up all of its business activities, including satisfying all of its obligations by way of indebtedness, severance and related liabilities, while retaining all intellectual property assets for the combined companies.

MediciNova proposes that at closing each Avigen shareholder will receive a pro rata portion of 1.75 million shares of MediciNova common stock. In consideration for this, MediciNova will receive $7 million of Avigen cash.

The remaining amount of Avigen cash after Avigen’s wind-up activities are completed and less the $7 million in cash received by MediciNova (the “Net Cash Assets”) will be sequestered and, unless converted earlier as described in the next sentence, not used until the later of March 31, 2010 or 12 months from the closing of the merger transaction (the “Final Conversion Date”). The Net Cash Assets of Avigen will be attested by an independent auditor. The convertible security issued by MediciNova as consideration would allow each Avigen stockholder at their election to either (i) convert each share of such convertible security into shares of MediciNova common stock at a conversion price of $4.00 per share at certain pre-specified accelerated conversion dates or the Final Conversion Date or (ii) have the convertible security redeemed by MediciNova on the Final Conversion Date for cash in an amount per share which represents the Net Cash Assets per share of Avigen.

Based on this proposal, we note that the proposed transaction values each Avigen share at a substantial premium to both your recent stock price and the closing average market price of Avigen’s common stock since your October 21, 2008 announcement. Additionally, the convertible security allows each Avigen stockholder the choice of receiving cash in an amount not presently available to them, other than in a liquidation scenario, or participating in what we believe will be growth in value of the combined entity.

We continue to believe that a merger between MediciNova and Avigen would be in the best interests of the stockholders of both companies for many reasons, including the likely incremental increase in value of the Companies’ combined product candidates. We note that it also addresses the recent pressures Avigen has faced from its stockholder base.

Our proposal remains subject to the completion of customary due diligence, as well as the negotiation of definitive transaction agreements and the satisfaction of necessary approvals and customary conditions to closing of a transaction to be set forth in such agreements. While this letter, and our prior letter to you dated December 9, 2008, are not intended as a binding offer, we continue to stand ready to meet with you and your advisors immediately to discuss this matter.

Please be advised that, because of the past relationships among various of our respective directors, MediciNova has constituted a Special Committee of Directors to represent MediciNova with respect to the proposed business combination. That Special Committee consists of myself as Chair, along with Alan Dunton, Arlene Morris and Hideki Nagao from the MediciNova Board. Our Committee continues to believe this proposal represents a unique opportunity for Avigen’s stockholders and we look forward to a prompt and favorable reply.

Very truly yours,

Jeff Himawan, Ph.D.

Chairman of the Board of Directors

MNOV’s offer represents a clever way for AVGN’s stockholders to receive cash in an amount almost equivalent to what they would receive in a liquidation scenario less $7M paid to MNOV. This equates to approximately $1.22 per share in cash. AVGN’s shareholders also have the option to receive MNOV shares valued at $4.00 (MNOV closed yesterday at $1.60) instead of the cash. AVGN shareholders would also receive 1.75M shares of MNOV divided between 30M AVGN shares on issue.

The offer seems broadly positive to us. Our few quibbles are as follows:

  1. the $7M payment to MNOV seems excessive
  2. the MNOV conversion price of $4.00 is too high
  3. the redemption date – on the later of March 31, 2010 or 12 months from the closing of the merger transaction – is too far away.

If these could be negotiated to a more favorable position for AVGN, the MNOV offer should be welcomed by AVGN’s stockholders.

Hat tip to commenter KC.

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We posted yesterday that Avigen, Inc. (NASDAQ:AVGN) had announced the sale of its rights to an early-stage blood coagulation compound for $7M. We weren’t sure that the sale was for cash. According to this filing, the sale was for cash:

On December 17, 2008, Avigen, Inc. entered into an Asset Purchase Agreement with Baxter Healthcare Corporation, Baxter International Inc., and Baxter Healthcare S.A. (collectively “Baxter”), providing for the sale of the rights to Avigen’s early stage blood coagulation compound, AV513, to Baxter.

Avigen received a cash payment of $7.0 million from Baxter as proceeds from the sale of AV513. At September 30, 2008, Avigen reported cash, cash-equivalents, and available for sale securities and restricted investments of $56.4 million and an accumulated deficit of $244.9 million. Avigen reported no revenue for the first nine-months of 2008 and a net loss of $24.2 million. The Company is in the process of evaluating the terms of the transaction, but believe that if the transaction had been completed at the beginning of the 2008 fiscal year, the cash received would have been recorded as revenue and would have increased the amount of financial assets and decreased each of the net loss and the accumulated deficit reported at September 30, 2008 by $7.0 million. Avigen is unable to estimate the amount of any expenses that would have been avoided, if any, if the sale of AV513 had been completed at the beginning of the 2008 fiscal year. Other than these items, the transaction would not have had any other impact on Avigen’s financial statements.

We’ve been following AVGN (see earlier posts here, here and here) because it’s a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities) and it has a specialist biotechnology activist fund Biotechnology Value Fund (BVF) pushing it to liquidate and return its cash to shareholders. In our initial post,we noted that AVGN’s net cash position was $36.5M. Adding the $7M or $0.24 per share to AVGN’s cash position gives it a net cash value we estimate at $43.5M or $1.46 per share against a close yesterday of $0.73.

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Happy holidays

We would like to wish all our readers (both of them) the season’s greetings. We’ll be taking a break from regular posting until January 5, 2009. We will be keeping an eye on the market and we’ll update anything that might affect the positions we have open. Here’s hoping 2009 is a prosperous new year.

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A number of commenters have identified in the notes to ValueVision Media Inc. (NASDAQ:VVTV)‘s latest 10Q that VVTV has substantial cash obligations under the cable and satellite agreements and operating leases falling due over the five fiscal years from 2009 to 2012 and not reflect in VVTV’s balance sheet. The worst case scenario is that these obligations represent an additional $185M liability. If this is the case, then our previous estimate for VVTV’s $55.7M in liquidating value is obviously wrong and VVTV may have no value in liquidation.

The value proposition

We’ve previously posted about VVTV here and here, writing that it seemed to us to be one of the better opportunities available because it’s a net net stock (i.e. a stock trading for less than its net current assets) with other apparently valuable assets and noted activist investor J. Carlo Cannell of Cannell Capital holding an activist position in it. The company also seemed to us to be taking steps to realize its value, publicly announcing that it had appointed a special committee of independent directors to conduct an auction to be completed by February 2, 2009. We estimated VVTV’s liquidating value at $55.7M or $1.66 per share. We may have to alter this estimate now to account for the “contractual cash obligations and commitments with respect to [VVTV]’s cable and satellite agreements and operating leases.”

The offending statement is to be found under the Financial Condition, Liquidity and Capital Resources – Cash Requirements section and reads as follows:

In addition to the potential preferred stock redemption cash commitment mentioned above, we have additional long-term contractual cash obligations and commitments with respect to its cable and satellite agreements and operating leases totaling approximately $185 million over the next five fiscal years with average annual cash commitments of approximately $44 million from fiscal 2009 through fiscal 2012.

We don’t know the terms of the cable and satellite agreements and operating leases and so it is impossible to determine whether the “contractual cash obligations” are absolute or contingent on VVTV continuing to use the services contracted. The worst case scenario is that the obligations are absolute, and therefore represent an additional $185M liability not carried in VVTV’s financial statements. If this is the case, then VVTV may have no value in liquidation.

Conclusion

This is a particularly unfortunate situation because we don’t know how to deal with the “contractual cash obligations.”  If any commenters have a suggestion, we’d be keen to hear it. We note that Williamss commented as follows:

Operating leases are notorious for making the balance sheet appear much better than it actually is. If you add these back to the balance sheet, and combine it with the 44.6 million coming due as part of the GE capital redemption for the preferred shares, then I worry that this company seems to be rapidly headed towards illiquidity, if not insolvency.

When we run into an issue with a financial statement, we generally return to first principles. Graham writes in Security Analysis

A company’s balance sheet does not convey exact information as to its value in liquidation, but it does supply clues or hints which may prove useful.  The first rule in calculating liquidating value is that the liabilities are real but the assets are of questionable value.  This means that all true liabilities shown on the books must be deducted at their face amount.

We have to take the most conservative position, which is that the liability is real and a “true liability” and must therefore be deducted at its face amount. On that basis, VVTV has no value in liquidation and we’re out.

As we’ve discussed in our About Greenbackd and About liquidation value investing pages, we apply Graham’s liquidating value methodology because it’s conservative, it doesn’t require a great deal of sophistication – it’s a simple formula – and it doesn’t require the heroic leaps in reasoning required to forecast future earnings. We believe that this type of analysis will yield reasonable results given a sufficiently large sample size and sufficiently long period of time, even allowing for our mistakes. We’ve committed a real howler with VVTV.

VVTV closed yesterday at $0.33. We liked it at $0.44, so we’re down 25% on an absolute basis.

The S&P 500 closed yesterday at 871.63 and closed at 888.67 (-1.92%) when we liked VVTV first, so we’re down 23.08% on a relative basis.

Hat tips to commenters Williamss and Jim.

[Disclosure: We do have a holding in VVTV. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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Avigen, Inc. (NASDAQ:AVGN) announced on Thursday that it had sold its rights to an early-stage blood coagulation compound for $7M. We have not been able to confirm that the sale was for cash. Assuming that it was, we estimate that it adds $0.24 per share to AVGN’s cash position and takes its net cash value to $1.46 per share, some 122% higher than its close Friday at $0.658.

We’ve been following AVGN (see earlier posts here and here) because it’s a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities) and it has a specialist biotechnology activist fund Biotechnology Value Fund (BVF) pushing it to liquidate and return its cash to shareholders. In our initial post,we noted that AVGN’s net cash position was $36.5M. Assuming that the $7M sale was for cash, adding it to AVGN’s cash position gives it a net cash value we estimate at $43.5M or $1.46 per share, 122% higher than its Friday close.

If BVF is able to cause the company to quickly distribute its remaining cash to stockholders, AVGN is an attractive investment opportunity. The risk is that BVF is unable to persuade the company to do so before AVGN dissipates its remaining cash.

AVGN closed Friday at $0.658.

The S&P 500 Index closed Friday at 887.88.

[Disclosure: We do not presently have a holding in AVGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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According to the Portland Business Journal, a group of “high-powered executives” plan to save InFocus Corporation (NASDAQ:INFS) from “New York sharks” who want to liquidate the company for a quick profit. The group, which includes Steve Hix, INFS’s co-founder, wants to buy the company if they can get financing. The group says its strategy, which entails expanding beyond projectors, could save the company. Said one of the group:

We’ve got some whispers that there’s a guy in New York looking at buying 50 percent of this company, and he’ll liquidate it. We are scared. We don’t want that to happen to this company. We’ve been working for nine months on a way to save it.

We’ve been following INFS recently (see earlier posts here, here, here and here) writing that it is a deeply undervalued asset situation with two activist investors, Nery Capital Partners and Lloyd I. Miller, III, pushing the company to “consider the views expressed by its shareholders and pursue new alternatives to increase shareholder value.” We see a second bidding group as a positive catalyst.

Hat tip to commenter Steven.

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Borders Group, Inc. (NYSE:BGP) has released its 10Q for the third quarter. We’ve previously posted about BGP here. When we first looked at it, we said that it presented a rare opportunity to invest in a stock with a well-known brand alongside one of the best activist investors in the US, William A. Ackman of Pershing Square Capital Management, L.P. At that time, BGP’s market capitalization was $39.4M (at the previous day’s close of $0.65) and we estimated that its liquidation value was some 250% higher at $135M or $2.23 per share. Well, we’ve now had an opportunity to review the 10Q for the third quarter and the results aren’t pretty. In fact, we now believe that there is a risk that the assets may have no value in a liquidation and we’re out.

The updated value proposition

BGP has made a $175M loss for the quarter, operating cash flow was negative in the amount of $51M and the company has taken on $55M in new debt. By way of contrast, in the last quarter to August, while the company made a loss of $9M, operating cash flow was positive in the amount of $77M and the company retired $129M in debt. Our summary analysis of the balance she

et is set out below (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):

bgp-q3-summaryBGP’s value remains concentrated in its inventory and property, plant and equipment, both of which are up slightly on the last quarter. Compared to $18.01 per share in Q2, inventory is now $20.75 per share, which we’ve written down by two-thirds to $13.91 per share (written down value of $12.07 in Q2). Property, plant and equipment is now carried at $27.18 per share compared to $27.04 per share in Q2. We have written it down the by half to $13.59 per share (slightly higher than the written down value of $13.52 per share in Q2). While its assets have increased slightly, the real problem for BGP is the growth in its substantial liabilities. Total liabilities now stand at $29.83 per share, up from $25.92 per share, the debt portion of which is up from $7.69 per share to $8.68 per share.

Our previous estimate for the liquidating value of BGP was around $2.23 per share. We now estimate that its liquidating value is -$9.6M or $-0.16 per share. This is on the basis of a very conservative treatment of its tangible assets and does not take into account BGP’s intangibles, like consumer brand recognition, which must have some residual value. We also note that BGP has a seasonal business, and this most recent quarter sees BGP in a much better position than the same quarter last year, at which time we estimate that its liquidating value was closer to -$4.87 per share. We think there’s a good chance that BGP will have some substantial asset value next year, and that it’s worth more than its liquidation value, but on our very conservative treatment of its assets, it has a negative liquidating value at this point in time.

As a brief diversion, set out below is a summary financial analysis of BGP without any discount applied to the assets (both the “Carrying” and “Liquidating” columns shows the assets as they are carried in the financial statements):

bgp-q3-summary-carrying-valueIn this analysis, with no discount applied to the carrying value of the assets, BGP appears wildly undervalued. We prefer our much more conservative estimate of liquidating value for two reasons:

  1. We think the discounted values are more likely to be right; and
  2. If we’re wrong in our estimate, we hope that we’ve applied a sufficient discount that we’re wrong on the upside, and not the down side. Valuing assets in liquidation is not an exact science. Prior to the actual sale, we don’t know with any certainty how much any given asset might yield. If we were to value assets at close to their carrying values, we think that more often than not we’d be disappointed.

You can read more about our undervalued asset situations philosophy on our About Greenbackd page and our rationale and method for calculating values on our About liquidation value investing page.

Conclusion

Our overly optimistic conclusion when we first wrote about BGP deserves repeating here (if only to stop us doing it again). We said, “It’s not often that the stars align like this: a stock with a well-known brand selling at less than a third of its value in a liquidation with one of the best activist investors in the US controlling almost a third of its outstanding stock. BGP has already embarked on its value enhancing transformation. We believe that, given time, BGP will be worth more than its liquidation value, but, if we’re wrong, it’s still trading at a third of that value, which is a bargain.” We even bolded that last part, which, in retrospect, we regret. While we still agree that BGP has a well-known brand, Will Ackman is one of the best activist investors in the US, and BGP will be worth much more than its liquidation value, it’s no longer trading at a third of its liquidation value, so the downside protection is gone. Our focus here is undervalued asset situations, and BGP is not an undervalued asset situation at this time. So that mean we’re out for now. We are, however, going to keep an eye on it for its next few quarters to see if the value returns.

BGP closed yesterday at $0.58. We liked it at $0.65, so we’re down 9.83% on an absolute basis.

The S&P 500 closed yesterday at 904.42 and closed at 816.21 (+10.81%) when we liked BGP, so we’re down 20.64% on a relative basis.

[Disclosure: We have a holding in BGP but we plan to exit it soon. We may acquire it again in the future. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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MathStar Inc (OTC:MATH) is another tiny net cash stock with a substantial stockholder lobbying management to liquidate the company. The stock closed yesterday at $0.68, giving it a market capitalization of just $6.2M. We estimate the liquidating value to be more than 120% higher at $14.4M or $1.57 per share. The value in liquidation is predominantly cash and short term investments in the amount of $14.8M. MATH has twice rejected unsolicited merger proposals. The board has largely suspended the company’s operations and is in the process of evaluating its “strategic alternatives, which could include merger, acquisition, increasing operations in another structure or liquidation.” Salvatore Muoio of S. Muoio & Co. LLC filed a Schedule 13D on December 15, 2008 urging MATH’s board to consider liquidation rather than a merger.

About MATH

MATH is a fabless semiconductor company engaged in the development, marketing and selling of high-performance, programmable platform chips and design tools required to program chips. The company’s investor relations website can be found here.

The value proposition

MATH has rapidly burned cash throughout the year, mainly on research and development. The company has now put a stop to its R&D activities, which has reduced the cash burn significantly from $6.6M in the June quarter to $1.6M in the September quarter. From the Business Overview section of the September 10Q:

During 2008, sales of our field programmable object array, or FPOA, did not materialize as expected, and development of the next generation of FPOA fell even further behind schedule. As a result, on May 20, 2008, the Board of Directors voted to suspend research and development activities and ongoing operations while analyzing strategic alternatives to protect the remaining value and increase the liquidity to the stockholders. The Board of Directors continues to explore these strategic alternatives, which could include merger, acquisition, increasing operations in another structure or liquidation.

Set out below is our summary analysis of the company’s balance sheet (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):

math-summary

The company has a net cash position (i.e. cash remaining after paying out all liabilities) of $13.9M or $1.52 per share, which is around 120% higher than MATH’s closing price yesterday of $0.68.

The catalyst

This is one of the rare instances where management seems to have taken proactive steps to protect the company’s remaining value. The board also appears to be seeking a way to unlock that value through a merger, acquisition, increasing operations in another structure or liquidation. Salvatore Muoio of S. Muoio & Co. LLC annexed to his 13D filing the following letter setting out his preference for a liquidation over a merger:

December 12, 2008

Mr. Douglas M. Pihl
Chairman of the Board
MathStar, Inc.
19075 NW Tanabourne, Suite 200
Hillsboro, OR 97124

Dear Mr. Pihl,

Thank you for taking time out to speak with me today about MathStar’s history and current status.

To reiterate, and for the record, given the current business environment and the company’s assets and prospects, we strongly urge the Board to pursue a path of liquidation.

We have been investors in the securities of companies in liquidation for over 25 years and believe the process to be relatively straight-forward, in particular for companies as clean and litigation-free as MathStar.

As I mentioned, we don’t believe the current environment represents an attractive opportunity to merge with a speculative business in need of the company’s cash. We also don’t believe the incremental but uncertain future value of the company’s NOL in a merged entity offsets the hard cash equivalent value shareholders would receive in a liquidation in the current environment.

In addition, we would be particularly concerned if a transaction were to be announced where any appearance of a conflict of interest were present.

Sincerely,

Salvatore Muoio, C.F.A.
Managing Member

Conclusion

MATH is one of the best prospects we’ve run across recently. It is undervalued at $0.68, trading at 45% of its net cash of $1.52 per share. Management has already taken proactive steps to reduce its formerly significant cash burn rate and seems to be actively seeking a way to unlock the company’s value. We feel more comfortable that Salvatore Muoio is keeping an eye on management’s exploration of strategic alternatives and has expressed his strong preference for a liquidation. As always, the risk is that MATH is unable to unlock its value before dissipating its remaining cash but in this instance we believe that risk is low.

MATH closed yesterday at $0.68.

The S&P 500 Index closed yesterday at 913.18.

[Disclosure: We do not presently have a holding in MATH. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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InFocus Corporation (NASDAQ:INFS) held a conference call yesterday to discuss the progress of its auction. We’ve previously posted about INFS here, here and here, writing that it is a deeply undervalued asset situation with two activist investors, Nery Capital Partners and Lloyd I. Miller, III, pushing the company to “consider the views expressed by its shareholders and pursue new alternatives to increase shareholder value.”

The call is pretty tightly scripted and doesn’t shed much additional light on the auction progress (the archive of the earnings webcast is available here) (registration required). CEO Bob O’Malley, the speaker, says that INFS has retained Thomas Weisel Partners, an investment bank, to provide advisory services including advice concerning unsolicited offers from outside sources. O’Malley attributes the interest in purchasing the company to INFS’s “good brands, good projectors, market share, channels, strong and dedicated team etc.” He continued that the special committee will work with the investment bank to review the offers “so management can continue running the company.” The “structure and nature of the offers vary” so the review will take an “undeterminate” (sic) amount of time. INFS will provide updates when they reach “definitative offer” and “completed agreement” stages or “the board has terminated the process.” O’Malley reitereated that INFS has “put on hold” the buy back. Other than that, there was little else to report. O’Malley refused to take questions, so no commentary from Nery Capital Partners or Lloyd I. Miller, III, which was a little disappointing.

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