(Mark One)
For the quarterly period ended February 24, 2005
For the transition period from __________ to __________
Commission File Number1-12604
Registrant’s telephone number, including area code: (414) 905-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 12, 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 filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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 APRIL 1, 2005 - 21,228,042
CLASS B COMMON STOCK OUTSTANDING AT APRIL 1, 2005 - 9,090,471
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See accompanying notes to consolidated financial statements.
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* Includes $190 of cash included in assets of discontinued operations. ** Includes $2 of cash included in assets of discontinued operations.
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Certain matters discussed in this Management’s Discussion and Analysis of Results of Operations and Financial Condition are “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may generally be identified as such because the context of such statements will include words such as we “believe,” “anticipate,” “expect” or words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause results to differ materially from those expected, including, but not limited to, the following: (i) the availability, in terms of both quantity and audience appeal, of motion pictures for our theatre division; (ii) the effects of increasing depreciation expenses and preopening and start-up costs due to the capital intensive nature of our businesses, including the possibility that such costs may exceed our expectations; (iii) the effects of adverse economic conditions in our markets, particularly with respect to our hotels and resorts division; (iv) the effects of adverse weather conditions, particularly during the winter in the Midwest and in our other markets; (v) the effects on our occupancy and room rates from the relative industry supply of available rooms at comparable lodging facilities in our markets; (vi) the effects of competitive conditions in the markets served by us; (vii) our ability to identify properties to acquire, develop and/or manage and continuing availability of funds for such development; (viii) the adverse impact on business and consumer spending on travel, leisure and entertainment resulting from terrorist attacks in the United States, the United States’ responses thereto and subsequent hostilities; and (ix) our decisions regarding the use of the proceeds received from the sale of our limited-service lodging division and other asset sales. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances or otherwise.
We report our consolidated and individual segment results of operations on a 52-or-53-week fiscal year ending on the last Thursday in May. Fiscal 2005 and 2004 are both 52-week years. We divide our fiscal year into three 13-week quarters and a final quarter consisting of 13 or 14 weeks. Our primary operations are reported in the following two business segments: movie theatres and hotels and resorts. As a result of our recent sale of substantially all of the assets of our limited-service lodging division, this segment has been presented as discontinued operations in the accompanying financial statements and in this discussion. As a result of our recent sale of the Miramonte Resort, this asset and related results of operations, previously included in our hotels and resorts segment, has also been presented as discontinued operations in the accompanying financial statements and in this discussion. Prior year results have been restated to conform to the current year presentation.
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The following table sets forth revenues, operating income, earnings from continuing operations, earnings from discontinued operations, net earnings and earnings per share for the third quarter and first three quarters of fiscal 2005 and 2004 (in millions, except for per share data and variance percentage):
Revenues and operating income (earnings before other income/expense and income taxes) from both our theatre and hotels/resorts divisions decreased during the third quarter of fiscal 2005 compared to the same period last year. Theatre division operating results were negatively impacted by a weaker slate of movies compared to the same period last year. The hotels and resorts division, with all of its remaining owned properties located in the Midwest, experienced a relatively soft winter, particularly for group business. Year-to-date, increased revenues from our hotels/resorts division were partially offset by reduced theatre division revenues, resulting in a slight increase in overall revenues for the first three quarters of fiscal 2005 compared to the same period last year. The declines in third quarter operating income from both divisions have resulted in small year-to-date decreases in operating income in these same two divisions, compared to the first three quarters last year. As described in more detail below, increased investment income and decreased interest expense partially offset the reduced operating income during the third quarter and contributed to our increased earnings from continuing operations during our fiscal 2005 first three quarters compared to the same period last year. Net earnings increased during both the fiscal 2005 third quarter and first three quarters compared to the same periods last year due to significant gains from the sale of discontinued operations.
Our investment income totaled $2.0 million and $3.8 million for the third quarter and first three quarters of fiscal 2005, respectively, compared to $400,000 and $1.5 million during the same periods last year. The increases during the fiscal 2005 periods were the result of interest earned on proceeds received from the sale of the limited-service lodging division in September 2004 and Miramonte Resort in December 2004. The majority of our $176.3 million of cash and cash equivalents at the end of our third quarter is invested in federal tax-exempt short-term financial instruments. Our estimated effective income tax rate for continuing operations has been lowered to reflect this current method of investment. In addition, $155.2 million of cash was being held by intermediaries at the end of our fiscal third quarter in conjunction with potential tax deferral opportunities that we were exploring. We earned taxable interest on these funds. The majority of the cash held by intermediaries was released to us in early March 2005 and has subsequently been reinvested in additional federal tax-exempt short-term financial instruments. Investment income will continue to exceed prior year amounts in future periods until a further determination of the potential uses of the sales proceeds is made.
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Our interest expense totaled $3.7 million and $11.4 million for the third quarter and first three quarters of fiscal 2005, respectively, compared to $3.9 million and $12.3 million during the same periods last year. The decrease was primarily the result of reductions in outstanding borrowings that we made during the first half of fiscal 2005 compared to the prior year. Due to the fact that we paid off all of our outstanding short-term borrowings, consisting of commercial paper, during the first half of fiscal 2005 with cash provided by operating and investing activities (including the sale of the limited-service lodging division), we do not expect our interest expense to change substantially during the remainder of fiscal 2005 other than as a result of the payment of scheduled current maturities of our long-term debt.
Our continuing operations did not recognize any material gains or losses on disposition of property and equipment during the third quarter of fiscal 2005 or fiscal 2004. Gains to continuing operations on disposition of property and equipment for the first three quarters of fiscal 2005 were $2.3 million compared to gains of $1.3 million during the first three quarters of fiscal 2004. The timing of periodic sales of our property and equipment may vary from quarter to quarter, resulting in variations in our gains or losses on disposition of property and equipment. We anticipate periodic additional sales of non-revenue generating property and equipment with the potential for additional gains on disposition from time to time during the remainder of fiscal 2005.
The following table sets forth revenues, operating income and operating margin for our theatre division for the third quarter and first three quarters of fiscal 2005 and 2004 (in millions, except for variance percentage and operating margin):
Consistent with the seasonal nature of the motion picture exhibition industry, our third quarter is typically one of the strongest periods for our theatre division due to the traditionally strong holiday movie season. The decrease in third quarter revenues, operating income and operating margin was entirely due to decreased box office and concession revenues. Despite a very strong summer box office, theatre division revenues and operating income are now slightly lower for the first three quarters of fiscal 2005 compared to the same periods last year.
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The following table breaks out revenues for the theatre division for the third quarter and first three quarters of fiscal 2005 and 2004 (in millions, except for variance percentage):
The decrease in our box office receipts and concession revenues for the third quarter of fiscal 2005 compared to the same period last year was due to a decrease in attendance. Our average ticket price increased 2.8% and 2.6% during the third quarter and first three quarters of fiscal 2005, respectively, partially offsetting the attendance decreases. These increases in our average ticket price were attributable primarily to modest ticket price increases. Our average concession sales per person during our fiscal 2005 third quarter and first three quarters increased 2.9% and 4.8%, respectively, compared to the same periods last year. Modest concession price increases have contributed to these increases. In addition, this year’s film mix has included more family-oriented movies compared to last year and films that appeal to families and teenagers generally produce greater concession sales compared to more adult-oriented films. Other revenues, which include management fees and pre-show advertising income, decreased slightly compared to last year’s third quarter and have decreased during the first three quarters of fiscal 2005 due to the fact that last year’s revenues (and resulting operating income and operating margin) were favorably impacted by an insurance settlement of approximately $400,000 related to a fire that occurred several years ago at one of our Milwaukee-area theatres.
Total theatre attendance decreased 8.1% during the third quarter compared to the same period last year. For the first three quarters of fiscal 2005, total attendance was down 3.9% compared to the first three quarters of fiscal 2004. Overall, the audience appeal of this year’s third quarter films, which included top grossing films Meet the Fockers, National Treasure and Oceans 12, was not as strong as last year’s third quarter films, which included the mega-blockbuster Lord of the Rings: The Return of the King (which was our top grossing movie during all of fiscal 2004). In addition, comparisons to last years results were negatively impacted by the fact that during this year’s holiday season, Christmas Eve (the only night of the year on which our theatres close) and Christmas Day were on a Friday and Saturday, which are normally the two biggest movie-going days of the week. Excluding the last two weeks of December that were negatively impacted by the holiday and Lord of the Rings comparisons, our total box office receipts for the other 11 weeks of the third quarter actually increased compared to the same weeks last year.
Film product for the fourth quarter has thus far underperformed compared to the prior year fourth quarter due to the very strong performance of The Passion of The Christ last year. As a result, we do not expect our fiscal 2005 fourth quarter operating results for our theatre division to equal last year’s fourth quarter results. The extended outlook for film product begins to look significantly better in May and beyond, beginning with Kingdom of Heaven and Kicking and Screaming and including the finalStar Wars installment, which is due to open in mid-May. In addition, our fiscal 2006 first quarter appears to have the potential to be very strong, due to expected blockbuster films such as Madagascar, The Longest Yard, Cinderella Man, Batman Begins and War of the Worlds. Revenues for the theatre business and the motion picture industry in general are heavily dependent upon the general audience appeal of available films, together with studio marketing, advertising and support campaigns, all factors over which we have no control.
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We ended the third quarter of fiscal 2005 with 451 company-owned screens in 40 theatres and 40 managed screens in four theatres compared to 454 company-owned screens in 42 theatres and 40 managed screens in four theatres at the end of the same period last year. During the fiscal 2005 third quarter, we opened two additional screens at a theatre in Oshkosh, Wisconsin. In addition, a new 12-screen theatre in Saukville, Wisconsin opened early during the fourth quarter of fiscal 2005. A new UltraScreen® (our sixth such screen) at our theatre in Oakdale, Minnesota is scheduled to open in time for the newStar Wars film in mid-May. We continue to review additional opportunities to add new screens to existing locations and to develop or acquire new locations in and around our existing markets, including recently announced new multi-screen theatres in Green Bay, Racine, East Troy, and Brookfield, Wisconsin. Groundbreaking for two of these new theatres (Green Bay and Racine) is currently scheduled during our fiscal 2005 fourth quarter.
The following table sets forth revenues, operating income and operating margin for our hotels and resorts division for the third quarter and first three quarters of fiscal 2005 and 2004 (in millions, except for variance percentage and operating margin). Prior year results have been restated to reflect the current year presentation of the recently sold Miramonte Resort as a discontinued operation.
Our third quarter is historically the weakest quarter of the year for our hotels and resorts division due to reduced travel during the winter months at our predominantly Midwestern properties. Total division revenues decreased during the third quarter of fiscal 2005 compared to the same period last year due primarily to slow group travel business. Continued strong improvement at our newest properties partially offset the reduced performance at our group-oriented hotels and resorts. Total revenues have increased during the first three quarters of fiscal 2005 compared to the same period last year, with our properties that focus on the individual business traveler, such as the Pfister, Hotel Phillips and Hilton Madison Monona Terrace, experiencing the strongest increases. Also contributing to the improvement in fiscal 2005 year-to-date revenues was increased food and beverage revenues. Operating income decreased during the third quarter and first three quarters of fiscal 2005 compared to the same period last year. A substantial portion of the third quarter decrease in operating income and all of the year-to-date decrease may be attributed to reduced earnings from our timeshare operations due to increased marketing and selling costs and approximately $380,000 and $940,000, respectively, of combined start-up and preopening costs associated with our Las Vegas condominium hotel and downtown Chicago hotel projects.
The total revenue per available room, or RevPAR, for comparable company-owned properties (i.e., excluding the Miramonte Resort) decreased 1.4% during our fiscal 2005 third quarter compared to the same period last year. The decrease in RevPAR was due entirely to a decrease in occupancy percentage (number of occupied rooms as a percentage of available rooms) of 1.9 percentage points during this same period. Our overall average daily room rate (“ADR”) for these comparable properties increased 2.6% during the third quarter compared to the same period last year. The small decline in group business travel, which often involves lower negotiated room rates, contributed to the occupancy decline and ADR increase during the quarter. Total RevPAR for comparable properties increased 1.3% during the first three quarters of fiscal 2005 compared to the same period last year. An overall increase in occupancy percentage of 1.3 percentage points, partially offset by a small decline in our ADR of 0.7%, contributed to the overall RevPAR improvement during fiscal 2005 to date.
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As we indicated in prior discussions, we have attempted to retain the integrity of our rate structure during the past several years (a period when others in the industry were heavily discounting), believing that this strategy was in our best long-term interest. As a result, according to data from outside industry sources such as Smith Travel Research, our comparative changes in RevPAR during calendar 2002 and 2003 consistently outperformed others in our segment of the industry but underperformed compared to others during calendar 2004. As the economy and the industry recover, it appears that those that heavily discounted or operated in markets that were impacted more severely by the economic downturn are generally now experiencing larger increases in RevPAR and ADR than our hotels and resorts. Historically, our hotels have generally experienced RevPAR changes equal to or better than others in our industry segment and we would expect that trend to continue as conditions stabilize in the industry.
The near-term outlook for the future performance of our hotels and resorts division appears very promising. Despite a brief decline in group travel during the third quarter, our advanced booking pace for group business at our hotels is encouraging, with our fiscal 2005 fourth quarter looking particularly strong. The group business segment is very important to several of our properties, as this is a segment of our customer base that typically provides non-room revenues to our hotels and resorts that are a key to returning this division to prior profitability levels. In addition, the individual business travel segment, which has been the strength of our fiscal 2005 results to date, continues to show steady improvement. As a result, based on the current trends and subject to continued improvement in economic conditions, we expect our division operating results to continue to improve during the remainder of fiscal 2005 and into fiscal 2006, with cost controls remaining a high priority.
We recently began construction on our Las Vegas condominium hotel joint venture, the Platinum Suite Hotel & Spa, with a targeted opening date in spring 2006. Construction continues on a company-owned hotel in downtown Chicago, Illinois that was originally expected to be a Baymont Inn & Suites. This project was not included in the sale of our limited-service lodging division and has been taken over by our hotels and resorts division. We anticipate announcing the brand that has been selected for this location in the very near future. With a targeted opening date at the end of May 2005, we expect to incur additional preopening expenses and other initial start-up losses from this hotel and the Las Vegas project during the fourth quarter of fiscal 2005. We also continue to pursue multiple new growth opportunities, with a focus on expanding our hotel management business. A number of the projects that we are currently exploring may also include some small equity investments. We recently expanded our internal development team in order to help facilitate our future growth.
On September 3, 2004, we sold substantially all of the assets of our limited-service lodging division to La Quinta Corporation of Dallas, Texas for a total purchase price of approximately $415 million in cash. La Quinta purchased our Baymont Inns & Suites, Woodfield Suites and Budgetel Inns brands, substantially all of the division’s real estate and related assets and assumed the operation of 90 company-owned and operated Baymont Inns & Suites, seven Woodfield Suites, one Budgetel Inn and the 87-unit Baymont franchise system (including four joint venture Baymont Inns & Suites that were excluded from the transaction and have become franchisees). Our net proceeds as of the end of the fiscal 2005 third quarter, before the payment of income taxes resulting from the gain on sale, were $349.2 million, net of transaction costs and excluding approximately $35 million in proceeds held in escrow pending completion of certain customary transfer requirements on eight locations. The net proceeds amount above excludes approximately $19 million of proceeds related to the sale of four joint venture properties to LaQuinta and $10.5 million of proceeds related to the sale of a joint venture property to a third party. The assets sold to date consist primarily of land, buildings and equipment with a net book value of approximately $229 million. As a result, we have reported an after-tax gain on sale of discontinued operations of approximately $73 million during the first three quarters of fiscal 2005, including approximately $2 million reported during the third quarter of fiscal 2005 related to the sale of one location that was previously held in escrow and the sale of one of the four joint venture properties that were not included in the sale to LaQuinta. Upon completion of the transfer requirements associated with the $35 million in funds currently held in escrow, assets with a net book value of approximately $22 million will be sold and we would expect to report additional after-tax gains on sale of approximately $7.5 to 8.0 million in future periods. Approximately $13 million of these escrow funds were released early in our fiscal 2005 fourth quarter.
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The results of our limited-service lodging division have been accounted for as discontinued operations in our consolidated financial statements for the third quarter and first three quarters of fiscal 2005 and prior year results have been restated to conform with the current year presentation. The following table sets forth revenues, operating income and income from discontinued operations, net of applicable taxes, for our limited-service lodging division for the third quarter and first three quarters of fiscal 2005 and 2004 (in millions, except for variance percentage):
Our fiscal 2005 third quarter operating results include various remaining costs associated with the now-sold division, as well as results from three of our joint venture Baymont Inns & Suites that were excluded from the transaction and are now operating as Baymont franchises. As noted earlier, one of the original four joint venture properties excluded from the sale to LaQuinta was sold early in our fiscal 2005 third quarter and we are exploring opportunities to sell the remaining three properties. The limited-service lodging division’s operating loss and loss from discontinued operations, net of applicable taxes, during the fiscal 2005 first three quarters included various costs associated with exiting the business, including approximately $1.8 million of severance related costs.
On December 1, 2004, we sold the Miramonte Resort for $28.7 million in cash, before transaction costs. The assets sold consisted primarily of land, building and equipment. As a result of this transaction, we reported a gain of $5.9 million before tax and $3.6 million after tax during our fiscal 2005 third quarter.
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The results of the Miramonte Resort, which had previously been included in our hotels and resorts segment results, have been accounted for as discontinued operations in our consolidated financial statements for the third quarter and first three quarters of fiscal 2005 and prior year results have been restated to conform with the current year presentation. The following table sets forth revenues, operating loss and loss from discontinued operations, net of applicable taxes, for the Miramonte Resort for the third quarter and first three quarters of fiscal 2005 and 2004 (in millions, except for variance percentage):
Operating results for the Miramonte Resort for the third quarter of fiscal 2005 included five days of operation prior to completion of the sale. Operating results for the first three quarters of fiscal 2005 benefited from increased revenues as a result of a recently opened spa.
Our movie theatre and hotels/resorts businesses each generate significant and consistent daily amounts of cash because each segment’s revenue is derived predominantly from consumer cash purchases. We believe that these relatively consistent and predictable cash sources, together with the funds from our sale of the limited-service lodging division and the sale of our Miramonte Resort, as well as the availability of $125 million of unused credit lines as of the end of the third quarter, should be adequate to support the near-term anticipated ongoing operational liquidity needs of our businesses.
Net cash provided by operating activities decreased by $59.9 million during the first three quarters of fiscal 2005 to $6.6 million, compared to $66.5 million during the prior year’s first three quarters. The decrease was due primarily to $50.0 million in income taxes related to the gain on sale of discontinued operations as well as the collection of a large note receivable last year, resulting in an unfavorable comparison in collections of accounts and notes receivable, partially offset by improved operating results.
Net cash provided by investing activities during the fiscal 2005 first three quarters totaled $183.0 million, compared to net cash used in investing activities of $32.8 million during the fiscal 2004 first three quarters. Our fiscal 2005 results include $349.2 million of net proceeds from the disposal of our limited-service lodging division and $28.5 million of net proceeds from the sale of the Miramonte Resort, of which $155.2 million was invested with intermediaries in conjunction with potential tax deferral opportunities that we were exploring. The majority of the cash held by intermediaries was released to us in early March 2005. Capital expenditures totaled $40.1 million during the first three quarters of fiscal 2005 compared to $33.9 million during the prior year’s first three quarters. Fiscal 2005 first three quarters capital expenditures included $15.4 million incurred in our hotels and resorts division, the majority of which was related to the downtown Chicago development recently absorbed by that division and several major remodeling projects at our Grand Geneva Resort & Spa. In addition, we incurred capital expenditures of approximately $19.8 million in our theatre division related to the recently opened new theatre in Saukville, Wisconsin as well as screen additions and remodeling projects at existing theatres and land for new theatres. Also included in our capital expenditure totals for fiscal 2005 year-to-date are $3.8 million of expenditures in our limited-service lodging division incurred prior to the sale related to previously committed capital projects.
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Net cash used in financing activities during the first three quarters of fiscal 2005 totaled $22.9 million compared to $36.2 million during the first three quarters of fiscal 2004. Excess cash available during the first three quarters of both fiscal years was used to reduce our outstanding commercial paper borrowings during the periods. Our principal payments on notes payable and long-term debt totaled $39.6 million during the first three quarters of fiscal 2005 compared to $39.2 million during the same period last year. New debt of $15.3 million related primarily to the Chicago project was added during the first three quarters of fiscal 2005, compared to $5.4 million of new debt added during the same period last year. Our debt capitalization ratio (long-term debt, including current maturities, divided by shareholders equity plus long-term debt, including current maturities) was 0.30 at February 24, 2005, compared to 0.38 at the prior fiscal year-end, with the decrease attributable to reduced debt levels and an increase in shareholders’ equity due to the significant gains on sale of discontinued operations.
Based upon our current expectations for fiscal 2005 capital expenditure levels (estimated to be approximately $60 million) and our expectation for recording additional gains as funds currently held in escrow from the limited-service lodging division are released, we anticipate that our debt-capitalization ratio will remain at or below current levels during the remainder of fiscal 2005. Our actual long-term debt total and debt-capitalization ratio at the end of fiscal 2005 will be dependent upon our decisions regarding the use of the limited-service lodging division sale proceeds. We are actively evaluating the potential uses of the sale proceeds. We are committed to growing our two remaining divisions and we will also consider other opportunities and uses of the proceeds. We continue to be patient in assessing these opportunities to ensure that all uses of the proceeds are in the best interests of our shareholders.
The actual timing and extent of the implementation of our current expansion plans will depend in large part on industry and general economic conditions, our financial performance and available capital, the competitive environment, evolving customer needs and trends and the availability of attractive opportunities. It is likely that our plans will continue to evolve and change in response to these and other factors.
We have not experienced any material changes in our market risk exposures since May 27, 2004.
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Through February 24, 2005, our board of directors has approved the repurchase of up to 4.7 million shares of our outstanding Common Stock. Under these authorizations, we may repurchase shares of our Common Stock from time to time in the open market, pursuant to privately negotiated transactions or otherwise. The repurchased shares are held in our treasury pending potential future issuance in connection with employee benefit, option or stock ownership plans or other general corporate purposes. These authorizations do not have an expiration date.
The following table sets forth information with respect to purchases made by us or on our behalf of our Common Stock during the periods indicated. All of these repurchases were from employees who tendered shares in connection with the exercise of stock options and pursuant to the publicly announced repurchase authorizations described above.
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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.
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