-----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, VHzXmbhJgsfp7uxp9PWqMu8MAkFEQKK4QkEbugrNiJ096fq25hLB4YR90NN3dGab qjLiNL8qm9fd2QVFKXZy2Q== 0000812818-99-000004.txt : 19990517 0000812818-99-000004.hdr.sgml : 19990517 ACCESSION NUMBER: 0000812818-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUTTON INVESTORS FUTURES FUND L P II CENTRAL INDEX KEY: 0000812818 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 133406160 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16526 FILM NUMBER: 99621648 BUSINESS ADDRESS: STREET 1: 390 GREENWICH ST 1ST FLOOR STREET 2: C/O SMITH BARNEY FUTURES MANAGEMENT INC CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2127235424 MAIL ADDRESS: STREET 1: C/O SMITH BARNEY FUTURERS MANAGEMENT INC STREET 2: 390 GREENWICH STREET 1ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10013 10-Q 1 HUTTON INVESTORS FUTURES FUND, L.P.II FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended March 31, 1999 Commission File Number 0-16526 HUTTON INVESTORS FUTURES FUND L.P. II (Exact name of registrant as specified in its charter) Delaware 13-3406160 - ----------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) c/o Smith Barney Futures Management Inc. 390 Greenwich St. - 1st. Fl. New York, New York 10013 - ----------------------------------------------------------------- (Address and Zip Code of principal executive offices) (212) 723-5424 - ----------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No HUTTON INVESTORS FUTURES FUND L.P. II FORM 10-Q INDEX Page Number PART I - Financial Information: Item 1 Financial Statements: Statement of Financial Condition at March 31, 1999 (unaudited) and December 31, 1998 3 Statement of Income and Expenses and Partners' Capital for the three months ended March 31, 999 and 1998 (unaudited) 4 Notes to Financial Statements (unaudited) 5 - 9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 13 Item 3 Quantitative and Qualitative Disclosures of Market Risk 14 - 15 PART II - Other Information 16 PART I Item 1. Financial Statements HUTTON INVESTORS FUTURES FUND L.P. II STATEMENT OF FINANCIAL CONDITION MARCH 31, DECEMBER 31, 1999 1998 ---------- ----------- (Unaudited) ASSETS: Equity in commodity futures trading account: Cash and cash equivalents $21,436,591 $21,116,563 Net unrealized appreciation on open futures contracts 747,016 2,163,400 ----------- ----------- $22,183,607 $23,279,963 =========== =========== LIABILITIES AND PARTNERS' CAPITAL: Liabilities: Accrued expenses: Commissions on open futures contracts $ 90,231 $ 80,379 Other 32,239 34,426 Incentive fees -- 5,645 Redemptions payable 323,108 180,739 ----------- ----------- 445,578 301,189 ----------- ----------- Partners' capital : General Partner, 44 Unit equivalents outstanding in 1999 and 1998, respectively 263,274 274,225 Limited Partners, 3,589 and 3,643 Units of Limited Partnership Interest outstanding in 1999 and 1998, respectively 21,474,755 22,704,549 ----------- ----------- 21,738,029 22,978,774 ----------- ----------- $22,183,607 $23,279,963 =========== =========== See Notes to Financial Statements. 3 HUTTON INVESTORS FUTURES FUND L.P. II STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL (UNAUDITED) THREE MONTHS ENDED MARCH 31, ---------- ----------- 1999 1998 ----------- ----------- Income: Net gains (losses) on trading of commodity futures: Realized gains (losses) on closed positions $ 554,957 $ (320,716) Change in unrealized gains/losses on open positions (1,416,384) (859,198) ----------- ----------- (861,427) (1,179,914) Less, brokerage commissions including clearing fees of $6,003 and $5,680, respectively (222,735) (192,262) ----------- ----------- Net realized and unrealized losses (1,084,162) (1,372,176) Interest income 179,399 203,600 ----------- ----------- (904,763) (1,168,576) ----------- ----------- Expenses: Other 12,874 9,560 Incentive fees -- 4,563 ----------- ----------- 12,874 14,123 ----------- ----------- Net loss (917,637) (1,182,699) Redemptions (323,108) (142,591) ----------- ----------- Net decrease in Partners' capital (1,240,745) (1,325,290) Partners' capital, beginning of period 22,978,774 21,541,490 ----------- ----------- Partners' capital, end of period $ 21,738,029 $ 20,216,200 =========== =========== Net asset value per Unit (3,633 and 3,828 Units outstanding at March 31, 1999 and 1998, respectively) $ 5,983.49 $ 5,281.14 =========== =========== Net loss per Unit of Limited Partnership Interest and General Partner Unit equivalent $ (248.89) $ (306.80) =========== =========== See Notes to Finanacial Statements 4 HUTTON INVESTORS FUTURES FUND L.P. II NOTES TO FINANCIAL STATEMENTS March 31, 1999 (Unaudited) 1. General Hutton Investors Futures Fund L.P. II (the "Partnership") is a limited partnership, organized on March 31, 1987 under the partnership laws of the State of Delaware, to engage in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options and forward contracts. The commodity interests that are traded by the partnership are volatile and involve a high degree of market risk. The Partnership commenced operations on July 24, 1987. Salomon Smith Barney Futures Management Inc. acts as the general partner (the "General Partner") of the Partnership. The Partnership's commodity broker is Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General Partner. The General Partner is wholly owned by Salomon Smith Barney Holdings Inc. ("SSBH"), which is the sole owner of SSB. SSBH is a wholly owned subsidiary of Citigroup Inc. All trading decisions are made for the Partnership by John W. Henry & Company, Inc. and TrendLogic Associates, (collectively, the "Advisors"). The accompanying financial statements are unaudited but, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Partnership's financial condition at March 31, 1999 and the results of its operations for the three months ended March 31, 1999 and 1998. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. It is suggested that these financial statements be read in conjunction with the financial statements and notes included in the Partnership's annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1998. Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year. HUTTON INVESTORS FUTURES FUND L.P. II NOTES TO FINANCIAL STATEMENTS March 31, 1999 (continued) 2. Net Asset Value Per Unit Changes in net asset value per Unit for the three months ended March 31, 1999 and 1998 were as follows: THREE-MONTHS ENDED MARCH 31, -------- ---------- 1999 1998 --------- ---------- Net realized and unrealized losses $ (294.05) $ (355.94) Interest Income 48.66 52.82 Expenses (3.50) (3.68) --------- --------- Decrease for period (248.89) (306.80) Net Asset Value per Unit, beginning of period $ 6,232.38 $5,587.94 --------- --------- Net Asset Value per Unit, end of period $ 5,983.49 $5,281.14 ========= ========= 3. Trading Activities: The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The results of the Partnership's trading activity are shown in the statement of income and expenses. The Customer Agreement between the Partnership and SSB gives the Partnership the legal right to net unrealized gains and losses. All of the commodity interests owned by the Partnership are held for trading purposes. The fair value of these commodity interests, including options thereon, if applicable, at March 31, 1999 and December 31, 1998 was $747,016 and $2,163,400, respectively, and the average fair value during the three and twelve months then ended, based on monthly calculation, was $1,325,770 and $1,359,853, respectively. 4. Financial Instrument Risk: The Partnership is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments, in the normal course of its business. These financial instruments may include forwards, futures and options, whose value is based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash flows, to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter ("OTC"). Exchange traded instruments are standardized and include futures and certain option contracts. OTC contracts are negotiated between contracting parties and include forwards and certain options. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange traded instruments because of the greater risk of default by the counterparty to an OTC contract. Market risk is the potential for changes in the value of the financial instruments traded by the Partnership due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk with respect to exchange traded instruments is reduced to the extent that an exchange or clearing organization acts as a counterparty to the transactions. The Partnership's risk of loss in the event of counterparty default is typically limited to the amounts recognized in the statement of financial condition and not represented by the contract or notional amounts of the instruments. The Partnership has concentration risk because the sole counterparty or broker with respect to the Partnership's assets is SSB. The General Partner monitors and controls the Partnership's risk exposure on a daily basis through financial, credit and risk management monitoring systems and, accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership is subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions. The notional or contractual amounts of these instruments, while not recorded in the financial statements, reflect the extent of the Partnership's involvement in these instruments. At March 31, 1999, the notional or contractual amounts of the Partnership's commitment to purchase and sell these instruments was $66,897,322 and $150,381,770, respectively, as detailed below. All of these instruments mature within one year of March 31, 1999. However, due to the nature of the Partnership's business, these instruments may not be held to maturity. At March 31, 1999, the fair value of the Partnership's derivatives, including options thereon, if applicable, was $747,016, as detailed below. MARCH 31, 1999 NOTIONAL OR CONTRACTUAL AMOUNT OF COMMITMENTS TO PURCHASE TO SELL FAIR VALUE Currencies: - -Exchange Traded Contracts $ 463,650 749,600 $ 3,675 - -OTC Contracts 6,274,360 39,469,972 259,285 Energy 1,232,249 -- 145,936 Grains 725,575 261,673 (23,974) Interest Rates U.S. 1,424,475 43,736,302 214,314 Interest Rates Non-U.S 50,412,457 55,669,792 (152,255) Livestock -- 306,330 2,610 Metals 215,788 8,291,103 37,908 Softs 462,542 1,519,120 32,461 Indices 5,686,226 377,878 227,056 ------------ ------------ ------------ Totals $ 66,897,322 $150,381,770 $ 747,016 ============ ============ ============ At December 31, 1998, the notional or contractual amounts of the Partnership's commitment to purchase and sell these instruments was $108,181,799 and $127,926,600, respectively, and the fair value of the Partnership's derivatives, including options thereon, if applicable, was $2,163,400, as detailed below. DECEMBER 31, 1998 NOTIONAL OR CONTRACTUAL AMOUNT OF COMMITMENTS TO PURCHASE TO SELL FAIR VALUE Currencies: - - Exchange Traded Contracts $ 411,875 $ 580,480 $ (2,080) - - OTC Contracts 14,206,101 12,487,422 161,573 Energy 126,000 1,063,986 53,388 Grains 105,624 852,175 17,550 Interest Rates U.S. 15,761,211 28,262,556 (160,305) Interest Rates Non-U.S 74,172,100 80,325,196 2,072,871 Livestock -- 174,990 5,520 Metals -- 3,249,325 24,909 Softs 1,533,560 809,481 37,315 Indices 1,865,328 120,989 (47,341) ------------ ------------ ------------ Totals $108,181,799 $127,926,600 $ 2,163,400 ============ ============ ============ Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources The Partnership does not engage in the sale of goods or services. Its only assets are its equity in its commodity futures trading account, consisting of cash and cash equivalents (such as U.S. Treasury Bills, which constituted approximately 78% of the Partnership's assets at March 31, 1999) and net unrealized appreciation (depreciation) on open futures contracts. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a substantial decrease in liquidity, no such losses occurred in the Partnership's first quarter of 1999. The Partnership's capital consists of the capital contributions of the partners as increased or decreased by gains or losses on commodity futures trading, expenses, interest income, redemptions of Units and distributions of profits, if any. For the three months ended March 31, 1999, Partnership capital decreased 5.4% from $22,978,774 to $21,738,029. This decrease was attributable to net loss from operations of $917,637 coupled with the redemption of 54 units resulting in an outflow of $323,108 for the three months ended March 31, 1999. Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent months. Risk of Computer System Failure (Year 2000 Issue) The Year 2000 issue is the result of existing computers in many businesses using only two digits to identify a year in the date field. These computers and programs, often referred to as "information technology," were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results at the Year 2000. Such systems and processes are dependent on correctly identifying dates in the next century. The General Partner administers the business of the Partnership through various systems and processes maintained by SSBH and SSB. In addition, the operation of the Partnership is dependent on the capability of the Partnership's Advisors, the brokers and exchanges through which the Advisors trade, and other third parties to prepare adequately for the Year 2000 impact on their systems and processes. The Partnership itself has no systems or information technology applications relevant to its operations. The General Partner, SSB, SSBH and their parent organization Citigroup Inc. have undertaken a comprehensive, firm-wide evaluation of both internal and external systems (systems related to third parties) to determine the specific modifications needed to prepare for the year 2000. The combined Year 2000 program in SSB is expected to cost approximately $140 million over the four years from 1996 through 1999, and involve over 450 people at the peak staffing level. SSB expects to complete all compliance and certification work by June 1999. At this time, over 95% of SSBH systems have completed the correction process and are Year 2000 compliant. Over 73% of the systems have completed certification testing. The Year 2000 project at SSBH remains on schedule. The systems and components supporting the General Partner's business that require remediation have been identified and modifications have been made to bring them into Year 2000 compliance. Testing of these systems was completed in the fourth quarter of 1998. Final testing and certification are expected to be completed by the end of the first quarter of 1999. This expenditure and the General Partner's resources dedicated to the preparation for Year 2000 do not and will not have a material impact on the operation or results of the Partnership. The General Partner has requested and received statements from the Advisors that each has undertaken its own evaluation and remediation plans to identify any of its computer systems that are Year 2000 vulnerable. Each Advisor has confirmed it is taking immediate actions to remedy those systems as necessary. The General Partner will continue to inquire into and to confirm each Advisor's readiness for Year 2000. The most likely and most significant risk to the Partnership associated with the lack of Year 2000 readiness is the failure of outside organizations, including the commodities exchanges, clearing organizations, or regulators with which the Partnership interacts to resolve their Year 2000 issues in a timely manner. This risk could involve the inability to determine the value of the Partnership at some point in time and would make effecting purchases or redemptions of Units in the Partnership infeasible until such valuation was determinable. SSB has successfully participated in industry-wide testing including: The Streetwide Beta Testing organized by the Securities Industry Association (SIA), a government securities clearing test with the Federal Reserve Bank of New York, The Depository Trust Company, and The Bank of New York, and Futures Industry Association participants test. The firm is also participating in the streetwide testing which commenced in March 1999. It is possible that problems may occur that would require some time to repair. Moreover, it is possible that problems will occur outside SSBH for which SSBH could experience a secondary effect. Consequently, SSBH is preparing comprehensive, written contingency plans so that alternative procedures and a framework for critical decisions are defined before any potential crisis occurs. The goal of Year 2000 contingency planning is a set of alternate procedures to be used in the event of a critical system failure or a failure by a supplier or counterparty. Planning work was completed in December 1998, and testing of alternative procedures will be conducted in the first half of 1999. Results of Operations During the Partnership's first quarter of 1999, the net asset value per Unit decreased 4.0% from $6,232.38 to $5,983.49, as compared to the first quarter of 1998 in which the net asset value per Unit decreased 5.5%. The Partnership experienced a net trading loss before brokerage commissions and related fees in the first quarter of 1999 of $861,427. Losses were primarily attributable to the trading of livestock, metals, non-U.S. interest rates, grains and softs and were partially offset by gains in currencies, U.S. interest rates, indices and energy products. The Partnership experience a net trading loss before brokerage commissions and related fees in the first quarter of 1998 of $1,179,914. Losses were primarily attributable to the trading of currencies, grains, metals, U.S. interest rates, softs and indices and were partially offset by gains in non-U.S interest rates, energy products and livestock. Commodity futures markets are highly volatile. Broad price fluctuations and rapid inflation increase the risks involved in commodity trading but also increase the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Advisors to identify correctly those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisors are able to identify them, the Partnership expects to increase capital through operations. Interest income earned on U.S. Treasury Bills decreased by $24,201 for the three months ended March 31, 1999, as compared to the corresponding period in 1998. Fluctuations in interest income are due to the percentage of U.S. Treasury Bills to assets held by the Partnership varying as a result of the effects of trading performance on Partnership equity. Brokerage commissions are based on the number of trades executed by the Advisors. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Brokerage commissions and fees for the three months ended March 31, 1999 increased by $30,473, as compared to the corresponding period in 1998. Incentive fees are based on the new trading profits generated by each Advisor as defined in the advisory agreements between the Partnership, the General Partner and each Advisor. Trading performance for the three months ended March 31, 1999 and 1998 resulted in incentive fees of $0 and $4,563, respectively. Item 3. Quantitative and Qualitative Disclosures of Market Risk The Partnership is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or substantially all of the Partnership's assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership's main line of business. Market movements result in frequent changes in the fair market value of the Partnership's open positions and, consequently, in its earnings and cash flow. The Partnership's market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership's open positions and the liquidity of the markets in which it trades. The Partnership rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership's past performance is not necessarily indicative of its future results. Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership's speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership's experience to date (i.e., "risk of ruin"). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification included in this section should not be considered to constitute any assurance or representation that the Partnership's losses in any market sector will be limited to Value at Risk or by the Partnership's attempts to manage its market risk. The following table indicates the trading Value at Risk associated with the Partnership's open positions by market category as of March 31, 1999. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. As of March 31, 1999, the Partnership's total capitalization was $21,738,029. There has been no material change in the trading Value at Risk information previously disclosed in the Form 10-K for the year ended December 31, 1998. March 31, 1999 % of Total Market Sector Value at Risk Capitalization Exchange Traded Contracts $ 882,165 4.06% Energy 105,100 0.48% Grains 28,400 0.13% Interest rates U.S. 319,200 1.47% Interest rates Non-U.S 708,791 3.26% Livestock 10,025 0.05% Metals 267,500 1.23% Softs 103,237 0.47% Indices 627,565 2.89% ---------- ------ Total $3,051,983 14.04% ========== ====== PART II OTHER INFORMATION Item 1. Legal Proceedings For information concerning a purported class action against numerous broker-dealers including Salomon Smith Barney, see the description that appears in the sixth paragraph under the caption Item 3. "Legal Proceedings" on Form 10-K for the year ending December 31, 1998. SSBH has filed a motion to dismiss the amended complaint. Item 2. Changes in Securities and Use of Proceeds - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. (a) Exhibits - None (b) Reports on Form 8-K - None SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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. HUTTON INVESTORS FUTURES FUND L.P. II By: Smith Barney Futures Management Inc. (General Partner) By: /s/ David J. Vogel David J. Vogel, President Date: 5/14/99 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: Smith Barney Futures Management Inc. (General Partner) By: /s/ David J. Vogel David J. Vogel, President Date: 5/14/99 By /s/ Daniel A. Dantuono Daniel A. Dantuono Chief Financial Officer and Director Date: 5/14/99 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000812818 HUTTON INVESTORS FUTURES FUND, L.P. II 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 21,436,591 747,016 0 0 0 22,183,607 0 0 22,183,607 445,578 0 0 0 0 21,738,029 22,183,607 0 (904,763) 0 0 12,874 0 0 (917,637) 0 0 0 0 0 (917,637) (248.89) 0
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