Final Results

Legacy Distribution Group Inc 05 June 2006 Legacy Distribution Group Inc. MAIDEN PRELIMINARY RESULTS SHOW SOLID MARGIN GROWTH Legacy Distribution Group Inc. ('Legacy' or 'the Company') (AIM: LDG), the Arizona based distributor of tobacco, cigarettes, candy and grocery products, announces preliminary results for the 12 months ended 31 December 2005. The results, which are in line with expectations, show good progress and the initial benefits from the Company's focus on introducing higher margin grocery products and on penetrating the convenience store segment of the retail market. These results show the Company's first full year of trading for the 12 months ended 31 December 2005 compared to the 5 months from 31 July to 31 December 2004. Highlights of the results include: Financial Highlights (these highlights are compared on a pro forma annualised basis): • Sales rose 13.3% to $64.6 million (2004: $57.0 million) • Gross profit grew 20.6% to $3.546 million (2004: $2.941 million) • Net assets increased 15.3% to $7.317 million (2004: $6.344 million), primarily resulting from increased receivables due to sales growth and investment in fixed assets, but offset by lower inventory levels • Gross margin percentage improved to 5.5% (2004: 5.2%) • One off exceptional costs associated with the AIM admission ($0.502 million), prudently setting up a bad debt provision ($0.250 million) and increased overheads ($0.130 million) to allow for expansion, resulted in an expected operating loss of $586,190 (2004: Profit $464,612). Operational Highlights: • Higher margin grocery products introduced in June 2005 • Investment in a new high velocity warehouse and new delivery fleet to support growth strategy • Inventory management improved with 35.9 turns in 2005 (2004: 26.1 turns) • Prudent management of cash flow • Significant contract won to provide cigarettes exclusively to all of Albertsons' (one of the largest retail food and drug chains in the world) Arizona stores. Post period events: • Successful admission of the Company's shares to the AIM market of the London Stock Exchange in March 2006 • Albertsons contract extended in May 2006 to include all tobacco products • Contract won in April 2006 with QDN Corporation, a US national wholesale distribution service provider which supplies retailers across the United States, to serve as the sole supplier to 200 new retail locations Commenting on the results, Michael Mills, Chairman said: 'This has been a period of significant change for Legacy and we believe the Company is now well placed to grow. The increase in sales, combined with improvement in gross margin percentage has justified our decision to add grocery lines to our product offering and we believe the Company is now positioned to reap future benefit from this strategy. Although the process of admission to AIM did inevitably divert some management time away from the day-to-day running of the business, it has provided us with a currency which we can use to make acquisitions and I look forward to the future with confidence.' For further information: Frank Patton, Legacy Distribution Group Inc.: +1 602 344 6750 Richard Sunderland/Rachel Drysdale, Tavistock Communications: 020 7920 3150 Oliver Cairns/Romil Patel, Corporate Synergy: 020 7448 4400 Chairman's Statement I am pleased to present my first report to shareholders since the Company made the transition from a 50 year old privately owned family enterprise to a company whose shares are traded on the AIM market of the London Stock Exchange. In August 2004, the business of Best Candy & Tobacco Company Inc. was acquired by a new management and consulting team led by Frank Patton. This team formulated a new long-term expansion strategy and then started to prepare for raising finance and a public listing. As part of this process, considerable changes were made to the business including the acquisition of a new distribution facility and generally preparing to become a public company under the new name Legacy Distribution Group Inc. ('Legacy'). During 2005, the employees and management team of Legacy worked extremely hard to build a foundation for profitable growth in the Arizona marketplace. I am very pleased with their efforts to stay focused on servicing customers during a period when the intensive activity surrounding the AIM admission increased their workload. The process of admission to AIM took a little longer than anticipated, which resulted in a slightly negative impact on trading in the latter part of 2005. This disruption continued into the first part of 2006, until the admission to AIM was successfully concluded on 16 March 2006. Since that date, the Company has successfully signed a number of new clients. Financial Results Sales for the 12 months to 31 December 2005 improved 13.3% to $64.6 million (2004: $57.0 million), producing a gross profit increase of 20.6% to $3.546 (2004: $2.941). This represents 5.5% of sales, up from 5.2% over the same period last year. This substantial improvement is directly attributable to the decision to focus on higher margin grocery products and rationalising low margin tobacco only customers. Until early 2005, the Company concentrated only on low margin tobacco products and was seen as a speciality distribution company. Under Legacy's new management team, the strategy is to add higher margin grocery products for distribution to its existing retail customers and acquire new convenience store customers, thereby generating higher returns from the same resources. One-off exceptional costs, including $502,000 associated with the admission to AIM and $250,000 to prudently set up a bad debt provision, combined with a $130,000 increase in overhead to allow for expansion resulted in an operating loss of $586,190, (2004: Profit $464,612). This loss was in line with management expectations. Net assets increased to $7.32 million (2004: $6.344 million), reflecting the sales growth seen in 2005. Of particular note is that, although receivables grew in 2005, inventories were reduced by $371,339 (18%), with inventory turns at 35.9 times versus 26.1 times in 2004. Inventory turns are a key performance metric for the Company and must be a continual focus, so that the high sales growth strategy does not require a large cash investment. The increase in net assets was financed primarily through the use of the Company's revolving line of credit but also by decreasing inventories and renegotiating the Company's payments terms with some of the non-tobacco vendors. Operational Review Despite manufacturers imposing significant price increases to keep pace with inflation in the United States, Legacy has been able to improve its margins. Additionally, the number of adult smokers in the United States again remained flat at 25% for 2005 but, given the population growth in Arizona, the Company continues to see increases in its core tobacco business. The resulting margin gains have been partially offset by increases in gasoline prices, which rose by over 30% in 2005. The Company has not yet instituted a fuel surcharge to customers in order to maintain a competitive advantage over Core-Mark and McLane's, its two main competitors. Inflationary increases on operational expenses and labour will inevitably have to be passed along to customers, but the Company's strategy is to be a 'follower' versus a 'leader' in the area of increasing customer pricing. The extended time taken to complete the AIM admission resulted in the planned cash injection being deferred by almost six months, leaving the Company unable to sustain the rate of growth that was started in Q3 2005. The uncertainty of this situation resulted in lower than planned trading levels and profits in the second half of the year. The Company has now regained this momentum, but the focus on cash flow will continue in order to foster profitable sales growth. A milestone transaction was concluded in December, when, following a competitive pitch, a distribution agreement was signed with Albertsons Incorporated, one of the largest retail food and drug chains in the world, for the distribution of cigarette products to all of its stores in Arizona, New Mexico and El Paso, Texas. Historically, this contract has been worth around $20 million per annum and we intend to use this opportunity to demonstrate our ability to Albertsons with a view to selling through higher margin products in the future. This contract has already been extended when in May 2006, we won a further mandate from Albertsons to supply it with all of its other tobacco related products in the same stores. Outlook We are benefiting from the addition of grocery products to the Company's product mix and the focus on growing our share of the convenience store market alongside our traditional customer base. Legacy's business has a 50 year reputation in the market place, built on reliability, in-store sales support and 48 hour delivery windows which is now enabling us to win market share away from our competitors. The recent investments in the new high velocity warehouse and new delivery equipment will support the Company's growth targets by improving operational efficiencies and enabling new products to be added to the product portfolio. These will take time to find their place in the market, but initial progress is promising. Highly volatile fuel prices experienced towards the end of last year have continued. They remain unpredictable and we are taking the necessary steps to contain costs throughout the business. As we replace our delivery fleet through its natural rotation, we are ensuring that vans with higher fuel economy are added, whilst we investigate new technologies that will boost the fuel economy of the existing fleet. The Company will continue to manage costs closely and pass on increases as and when competitive conditions allow. Summary This is a highly satisfactory result, given that the new team and structure have only been in operation for a short time. We will continue the emphasis on growing sales in all areas whilst improving the sales mix in favour of higher margin grocery products over lower margin tobacco items. We expect to acquire more convenience store customers, which will also strengthen gross margins. The margin improvement generated in 2005, while significant, was stifled by the limitations imposed by the delay in the AIM listing. Now that this is complete, the Company is better placed to deliver on not only its financial targets but also to exploit any opportunities arising that will allow us to consolidate our position in the market. Our strategic goal is to stay focused on the convenience store segment for the foreseeable future, as it will provide Legacy with greater possibilities for improved profitability. Michael Mills, Chairman 5 June 2006 CHIEF EXECUTIVE'S REVIEW Over the 12 month period the Company has undergone a period of transformation. We are now a publicly quoted company and are in a position from which we can grow. We are operating from modern facilities using new systems, which allow us to both improve the quality of service we provide to our customers and improve our own margins. There have been challenges throughout the year, ranging from inflationary pressures in the US, increasing manufacturer pricing, heightened borrowing costs due to unforeseen interest rate increases and rising fuel costs. These are however, industry wide issues and are not specific to us and our focus has been on ensuring that each element of our growth strategy is in the best competitive position. SALES Legacy's focus in 2005 was to add grocery products as a core product category and to use these products to grow market share in the convenience store sales segment. Sales grew 13.3% during the 12 month period driven by Legacy's focus on reliability, in-store sales representative support and delivery flexibility. Our long-standing reputation for providing tobacco related products combined with the addition of grocery products, has resulted in Legacy receiving overwhelming interest and conversion of convenience store customers. We strengthened our convenience store sales team with the addition of three experienced sales representatives recruited from competitors due to Legacy's focus on operational excellence and delivery flexibility. These additions are a key element in our sales strategy, which is to provide in-store sales support, designed to differentiate Legacy from its main competitors, create a barrier to entry for new distributors and provide a significant disincentive for customer losses. Additionally, the Company is currently rolling out new handheld sales computers that will materially improve the efficiency and accuracy of the product ordering process. Sales growth during Q4 2005 was less than Q3 2005 due to cash limitations ahead of the AIM admission, thereby impacting the growth of the convenience store segment. During this period, the Company began to review and manage the profitability of current customers with the intention of freeing up capital tied up in tobacco only or unprofitable small drop customers that could be used to help accelerate the growth of the convenience store segment. OPERATIONS Over the period, the Company's chief focus was the successful conclusion of the admission to AIM and the investment that required. These investments were critical to the long term success of the Company and despite a one-off impact on profitability the benefits are already being seen in 2006. ASSETS In order to ensure that excess capital would not be needed to support the high growth sales strategy, the Company focused on inventory management and developed and implemented a more sophisticated purchasing model. Legacy now utilises rolling sales demand to better forecast purchasing requirements while considering manufacturer lead times and delivery minimums. This effect has resulted in dramatically improving the Company's inventory turns. Additionally, the Company renegotiated payment terms with some of its non-tobacco vendors to better match the terms afforded to the other competitors in our market. Receivables grew as a direct result of the sales growth in 2005 and the Company will now focus on receivables management in order to limit the Company's interest expense. Considerable investment was made in property and equipment, due to the need to replace aged delivery equipment and the costs associated with the Company's new warehouse. When the Company was purchased in 2004, the age, quality and vehicle types were not suited for the type of distribution that would be required in 2005 and beyond. Therefore, 25% of the fleet was replaced in 2005 with better suited diesel based power plants. The move into the new warehouse resulted in procuring high rise/high velocity racking along with more efficient material handling equipment. These capital investments will support our current growth targets for the foreseeable future. PEOPLE As well as strengthening the sales team, we have made a number of critical operational appointments during the year. Gary Nelson's appointment as Senior VP of Category Management on 1 May 2006 will help the Company tremendously. Gary has over 20 years of retail grocery category management and purchasing experience and is well know throughout the distribution industry. These appointments are key as the Company does and will continue to use operational excellence as a way of differentiating itself from its competition. The Company is characterised by the enthusiasm and loyalty of long serving employees and it gave me great pleasure during the year to recognise one employee with 25 years of service, two 20 years and one with 10 years. The success of the business is built on the hard work and commitment of each person and I extend thanks to each of them for the achievements of the period. PROSPECTS The Company faces continued cost pressures during the upcoming period. Specifically, fuel prices and inflationary cost increases for operational expenditures such as employee benefits and labour wages. Historically, Legacy has allowed the other competitors to drive the market in terms of how these additional costs are passed along to customers. However, the Company's strategy is one of customer acquisition and the unilateral price increases taken by the Company's competitors will help drive our market share growth in 2006, without large expenditures for marketing or incentive pricing. As stated by the Chairman, the Company has successfully won a contract with Albertsons to provide cigarette products to all of its stores in Arizona and New Mexico and six stores in El Paso, Texas. This contract win is a large milestone for the Company and has the potential to significantly increase annual revenues. It also led to the Company securing a secondary agreement to provide these same stores with other tobacco products such as cigars and bulk tobacco. Another major contract win was to become the Southwest Member for Quality Distribution Network ('QDN'). QDN is a $65 million dollar contracting organisation that services large multi-state companies such as Host Marriott Services, airport locations that provide snacks, cigarettes and sundries to air travellers. QDN has awarded all of its Arizona business to the Company; this contract has historically been worth around $4 million annually. Since its admission to AIM, the Company has refocused on growing its market share in this sales channel. As of this date, the Company has increased its market share by one percentage point, which may not appear substantial but does represent an incremental $2.5 million in annual revenue. The average gross margin generated by a typical convenience store exceeds 10%. We expect the barriers to entry in this industry to remain high as the tobacco manufacturers are not granting new direct buying franchises and customers are unwilling to try a distributor that has not been in the industry for a long period of time. I am therefore confident that we can continue to grow sales over the next 12 months and increase our market share in the convenience store segment by a substantial amount. Our strengths are our reputation for operational excellence, delivery flexibility and reliability, and the in-store sales personnel to help our customers grow their business profitably. While the cost pressure in the industry will be challenging, these attributes will enable the Company to grow for the foreseeable future. Frank Patton Chief Executive Officer 5 June 2006 Legacy Distribution Group Inc (Formerly Best Holdings Acquisition Company, LLC And Subsidiary) Consolidated Statements of Income and Retained Earnings For the Year Ended December 31, 2005 and the Period August 1, 2004 through December 31, 2004 Period from Year Ended August 1, 2004 to December 31, 2005 December 31, 2004 $ $ Sales 64,574,192 24,111,419 Cost of sales 61,028,261 22,903,021 Gross profit 3,545,931 1,208,398 Operating expenses 4,132,121 1,056,234 Income from operations (586,190) 152,164 Interest expense 324,536 77,774 Income before income taxes (910,726) 74,390 Income tax benefit (provision) 200,000 (53,000) Net income (loss) (710,726) 21,390 Retained earnings (deficit): Beginning of period 21,390 - End of period (689,336) 21,390 Legacy Distribution Group Inc (Formerly Best Holdings Acquisition Company, LLC And Subsidiary) Consolidated Balance Sheets December 31, December 31, 2005 2004 $ $ Assets Current Assets Cash - 45,104 Accounts receivable, net of allowance for doubtful accounts of $100,000 and $215,000 at December 30, 2005 and December 31, 2004) 1,670,664 1,201,219 Inventory 1,701,185 2,072,524 Notes receivable, related parties 459,164 439,004 Deferred income taxes - 44,000 Recoverable income taxes 269,500 - Other current assets 403,307 174,219 Total Current Assets 4,503,820 3,976,070 Property and equipment, net 1,264,849 865,216 Goodwill 1,502,378 1,502,378 Deposits 46,083 - Total Other Assets 1,548,461 1,502,378 Total Assets 7,317,130 6,343,664 Liabilities and Members' Equity Current Liabilities Checks drawn in excess of cash 47,608 - Accounts payable and accrued expenses 787,117 410,891 Cigarette and tobacco taxes payable - 678,536 Income taxes payable 71,875 71,875 Line of credit 3,000,000 1,393,588 Current portion of notes and leases payable 467,027 242,236 Holdback note payable 430,000 405,000 Total Current Liabilities 4,803,627 3,202,126 Notes payable, net of current portion 1,498,229 1,736,018 Leases payable, net of current portion 294,980 - Deferred income taxes 260,000 234,500 Members' Equity Members' capital 1,149,630 1,149,630 Retained earnings (deficit) (689,336) 21,390 Total Members' Equity 460,294 1,171,020 Total Liabilities and Members' Equity 7,317,130 6,343,664 Legacy Distribution Group Inc (Formerly Best Holdings Acquisition Company, LLC And Subsidiary) Consolidated Statement of Cash Flows For the Year Ended December 31, 2005 and and the Period August 1, 2004 through December 31, 2004 Period from Year Ended August 1, 2004 to December 31, 2005 December 31, 2004 $ $ NET INCOME (LOSS) (710,726) 21,390 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 269,309 46,893 Loss on disposal of fixed assets 19,889 Provision for bad debts 186,732 110,000 Provision for deferred income taxes 69,500 (24,000) Changes in operating assets and liabilities Accounts receivable (656,177) (493,216) Inventory 371,339 561,611 Other assets (544,672) (202,167) Accounts payable and accrued expenses 423,835 229,048 Cigarette and tobacco taxes payable (678,536) (92,801) Income taxes payable - 71,875 Other liabilities - 16,482 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,249,507) 245,115 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Best Candy and Tobacco Company, net of shareholder loans repaid - (4,873,630) Purchases of property and equipment (227,701) (24,773) Note due to seller 25,000 Note due from investor (20,160) (439,004) NET CASH USED IN INVESTING ACTIVITIES (222,861) (5,337,407) CASH FLOWS FROM FINANCING ACTIVITIES Loan proceeds - 2,059,000 Line of credit proceeds 10,941,844 1,591,000 Line of credit repayments (9,335,432) (197,412) Proceeds from related party note 100,000 - Loan repayments (279,148) (80,746) Capital contribution - 1,149,630 NET CASH PROVIDED BY FINANCING ACTIVITIES 1,427,264 4,521,472 NET DECREASE IN CASH AND EQUIVALENTS (45,104) (570,820) CASH AND EQUIVALENTS-Beginning of Period 45,104 615,924 CASH AND EQUIVALENTS-End of Period - 45,104 NOTE 1. NATURE OF OPERATIONS Organisation Best Holdings Acquisition Company, LLC ('Company') is an Arizona limited liability company formed on August 1, 2004 for the purpose of acquiring Best Candy and Tobacco Company ('Best'). On February 2, 2006, the Company was merged into Legacy Distribution Group, Inc. ('Legacy'), a Delaware corporation. Legacy was incorporated on January 25, 2006 to be a holding company for Best. Following the merger, the separate existence of the Company ceased. On March 16, 2006, Legacy's common stock was listed on the London Alternative Investment Market (AIM). The Company's operates on a 52 week fiscal period ending on Friday. The Company's fiscal years ended on December 30, 2005 and December 31, 2004, respectively. Best is a wholesale distributor of tobacco and other grocery products in Arizona and Nevada. Tobacco products represent approximately eighty percent (80%) of the Company's sales. On August 1, 2004, the Company acquired 100% of the outstanding shares of Best for aggregate consideration of $5,405,000 from former stockholders as follows: Cash $ 5,000,000 Holdback note 405,000 $ 5,405,000 The Company paid the former stockholders an additional $25,000 to extend the due date of the note from February 1, 2006 to March 1, 2006. The total note amount of $430,000 was paid in full on March 13, 2006. The purchase of the Company has been accounted for using the purchase method of accounting and accordingly, the acquired assets and liabilities have been recorded at fair value. The preliminary purchase price allocation is as follows: Cash $ 615,924 Accounts receivable, net 818,003 Inventories 2,634,135 Other current assets 98,142 Property and equipment 887,616 Goodwill 1,502,378 Deferred income taxes (214,500) Assumed liabilities (936,698) $ 5,405,000 The accompanying financial statements of the Company include the operations of Best from August 1, 2004, the date of acquisition. The following pro forma statements of income are based on the historical financial statements of Best and are presented to show the operations of the Company as if the purchase transaction had occurred on January 1, 2004. The pro forma financial information is presented for illustrative purposes only, and is not indicative of the operating results that would have occurred if the transaction occurred on January 1, 2004, nor is it necessarily indicative of future operating results. January 1, 2004 August 1, 2004 to Year Ended to July 31, 2004 December 31, 2004 December 31, (Best) (Company) 2004 (Pro Forma) $ $ $ Sales 32,896,439 24,111,419 57,007,858 Cost of sales 31,163,588 22,903,021 54,066,609 Gross profit 1,732,851 1,208,398 2,941,249 Operating expenses 1,420,403 1,056,234 2,476,637 Income from operations 312,448 152,164 464,612 Other income (expense) 2,105 (77,774) (75,669) Income before income taxes 314,553 74,390 388,943 Provision for income taxes 124,000 53,000 177,000 Net income 190,553 21,390 211,943 The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. NOTE 2. REVOLVING LINE OF CREDIT At December 30, 2005, the Company had an agreement with a bank to borrow up to $3,000,000 on a revolving line of credit. The agreement provided for interest at the bank's prime rate plus 0.5% (7.75% at December 30, 2005) with interest payments due monthly. The agreement includes certain financial covenants. The line of credit is secured by all assets of the Company and by personal guarantees from certain shareholders. On February 4, 2006, the line was amended. The maximum available under the line was reduced from $3,000,000 to $2,500,000, and the interest rate was increased to the bank's prime rate + 2.00%. The line is subject to renewal on March 31, 2007. NOTE 3. NOTES PAYABLE Notes payable consist of the following: December 31 2005 2004 $ $ Acquisition note due September 30, 2007; principal payments of $29,857 plus interest at prime + 2.5% (10.0% at December 30, 2005) due monthly 1,214,286 $ 1,428,571 Mortgage note due September 30, 2007; principal payments of $2,329 plus interest at prime + 2.0% (9.5% at December 30, 2005) due monthly 521,733 549,683 Related party note due February 10, 2007; interest at 10% 100,000 - Vehicle loans due August 10, 2010; monthly payments of $1,208 including interest at 4.9% 60,251 - 1,896,270 1,978,254 Less: current portion 398,041 242,236 Notes payable, net of current portion 1,498,229 1,736,018 The notes payable are secured by all the Company's assets and by personal guarantees from certain shareholders and require maintenance of certain financial covenants. The vehicle loans are secured by the automobiles acquired under the agreements. NOTE 4. RISKS AND CONCENTRATIONS The Company maintains its cash in the bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. During the year ended December 31, 2005, one customer represented greater than 10% of the Company's sales. This customer is a related party through common ownership with the Company as discussed in Note 11. During the period from August 1, 2004 to December 31, 2004, sales to one customer comprised approximately 10% of the Company's sales. During the year ended December 31, 2005 and from August 1, 2004 to December 31, 2004, purchases from two vendors comprised approximately 60% and 56% of the Company's purchases, respectively. NOTE 5. RELATED PARTY TRANSACTIONS Gila Candy & Tobacco Co. (Gila) has common ownership with the Company. The Company sells cigarettes and other products to Gila under terms that management considers to be arm's-length. Amounts due from Gila totaled $403,963 at December 31, 2005. This amount was paid on March 15, 2006. There were no amounts due from Gila at December 31, 2004. On November 21, 2005, the Company received a working capital advance of $100,000 from a related party. The advance is due on February 10, 2007 and bears interest at 10%. NOTE 6. SUBSEQUENT EVENTS On February 2, 2006, the Company was merged into Legacy Distribution Group, Inc. ('Legacy'), a Delaware corporation. Legacy was incorporated on January 25, 2006 to be a holding company for Best. Following the merger, the separate existence of the Company ceased. Legacy has authorised capital of 550,000,000 shares. Upon the merger on January 25, 2006, 132,222,390 shares of Legacy's common stock were outstanding. On March 9, 2006, Legacy implemented a reverse stock split whereby every 3.385 shares outstanding prior to the split were converted into 1 share of common stock. Immediately after this reverse split, there were 39,061,269 shares of common stock outstanding. On March 14, 2006, Legacy issued warrants to purchase 26,739,605 shares of common stock. One third of the warrants are exercisable in whole or in part at the price of 10 pence ($0.176) per share during the one year period ending March 14, 2007. One third of the warrants are exercisable in whole or in part at the price of 20 pence ($0.352) per share during the two year period ending March 14, 2008. The remaining one third of the warrants are exercisable in whole or in part at the price of 30 pence ($0.528) per share during the three year period ending March 14, 2009. On March 16, 2006, Legacy's common stock was admitted to AIM. NOTE 7. DIVIDENDS The Directors do not recommend the payment of a dividend NOTE 8. The reports and accounts will be dispatched to shareholders in due course This information is provided by RNS The company news service from the London Stock Exchange
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