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Regarding the Response to the Accounting Issue and the Toshiba Rebuilding Initiative Overview

(Source: Operational Review of Annual Report 2016 (FY2015))
(The following description is as of September 30, 2016.)

We sincerely apologize for significantly harming the trust of all of our stakeholders including our shareholders, investors,customers, and employees due to the accounting treatment issues pertaining to the Company.

In relation to the accounting treatment issues, in September 2015 the Company received dispositions from the Tokyo Stock Exchange and the Nagoya Stock Exchange designating the shares of the Company as Securities on Alert because it was recognized that the Company has serious problems in its internal control systems, etc. and that the improvement of those internal control systems, etc. is highly necessary, and in December 2015 the Company received an administrative monetary penalty payment order of ¥7,373,500,000 from the Financial Services Agency. The Company has taken seriously the dispositions designating its shares as Securities on Alert and the administrative monetary penalty payment order for the largest-ever penalty amount, which is a measure proportional to delisting, and in September 2015 the Company established a management rebuilding promotion structure, took measures to ensure sincere management based on compliance, and proceeded with corporate governance reform, and in December 2015 the Company established Corporate Governance Guidelines.

Further, while the entire Company worked to steadily implement measures to prevent any recurrence, it also compiled an "Improvement Plan and Situation Report" in March 2016, and on September 15, 2016, submitted to the Tokyo Stock Exchange and Nagoya Stock Exchange "Written Confirmation of Internal Management System," as required by Securites Listing Regulations of the stock exchanges. The Tokyo Stock Exchange and Nagoya Stock Exchange will use this submission as the basis for examining and evaluating Toshiba's current internal management systems, and in the event that they deem that there are no problems they will end the designation of the Company's shares as "Securities on Alert."

the Toshiba Rebuilding Initiative

The following is a report on measures and initiatives to prevent any recurrence of the Company's accounting issues.

In formulating the "Improvement Plan and Situation Report," the Company once again analyzed the causes of the accounting issues taking into account not only the issues pointed out in the reports by the Independent Investigation Committee and the Executive Liability Investigation Committee but also the historical background and structural factors, while also referring to the "Principles for Listed Companies in Scandal" issued by the Japan Exchange Regulation.

As a result, the Company has recognized that the events in question occurred because of a combination of multiple factors including pressure to meet targets from Atsutoshi Nishida, Norio Sasaki, and Hisao Tanaka, each of whom are former CEOs of the Company, performance assessment and budget control systems that focused on net income that allowed for such pressure, insufficient checks and balances by the Finance Division (CFO) and business execution departments such as finance and accounting departments, dysfunction in the internal audit department, insufficient supervising of past CEOs and executive officers by the Board of Directors and bodies such as the Nomination Committee and the Audit Committee, a lack of awareness towards appropriate financial reports by past CEOs and executive officers, and reduced awareness towards appropriate financial reports in finance and accounting departments because the opinions of past CEOs were given priority.

In light of the results of those cause analyses, in addition to inspecting and coordinating measures to prevent recurrence including what has been formulated and published to date, the Company has analyzed problems in its timely disclosure system and established new measures such as developing and operating a disclosure system aimed at proactive information disclosure.

On March 15, 2016, six months after its designation of its shares as Securities on Alert, Toshiba published its “Improvement Plan and Situation Report.” This referred to Principles for Listed Companies in Scandal issued by the Japan Exchange Regulation.

The Company hopes to regain the trust of shareholders, investors and all other stakeholders by achieving a strong corporate constitution together with implementing measures to prevent recurrence. For this purpose, it has released and is implementing management measures the "Toshiba Rebuilding Initiative" which has four strands: "Strengthening Internal Control Systems and Reforming the Corporate Culture," "Decisive Action on Business Structural Reform," "Review the Business Portfolio and Operational Structure," and "Reforming the Financial Base."

Outline of “Toshiba Rebuilding Initiative”

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Measures to prevent recurrence and the details of other reforms initiated by the Company are as follows:

Strengthening Internal Control Systems and Reforming the Corporate Culture

Ⅰ. Corporate Governance Reforms

Composition of the Board of Directors and Reinforcement of the Board of Directors' Supervisory Functions

(1) Composition of the Board of Directors and Reinforcement of the Board of Directors' Supervisory Functions
  1. To ensure substantive and productive deliberations, the Company reduced membership of the Board of Directors from 16 to 10 people (the Articles of Incorporation states "20 people or less").
  2. To secure an effective "monitor and supervise business execution" function, the Company increased the ratio of independent outside directors to be over half the members of the Board of Directors.
  3. By appointing independent outside directors who are management executives, legal and accounting professionals, or experts in other areas, the composition of the Board of Directors was changed to take the expertise of the directors into account.
  4. An independent outside director was appointed as Chairman of the Board of Directors.
(2) Reinforcement of the Board of Directors' Supervisory Functions
  1. The function and headcount of the Audit Committee Office was expanded in order to provide support for independent outside directors. By utilizing independent outside experts (including attorneys-at-law and certified public accountants) and others, the Audit Committee Office reinforced its powers of investigation. This provides the independent outside directors with stronger report collection and investigation abilities and reinforces their capabilities.
  2. The minutes of performance reporting meetings are submitted to the independent outside directors, allowing them to fully understand the content of the discussions thereat.
  3. The Company established ‘Executive Sessions,’ meetings that only consist of independent outside directors to stimulate their information exchanges and to deepen their understanding of the Company's business.
  4. In addition to newly adding matters relating to monthly performance to the matters to be reported to the Board of Directors, the Company revised reporting standards to be more specific by establishing monetary amounts with respect to management of risk of loss, compliance and other items that were already included in the matters to be reported.

Outline of Measures to Prevent Recurrence: Board of Directors

Reinforcement of the Audit Function of the Audit Committee

(1) Composition of the Audit Committee
  1. The composition of the Audit Committee was changed to only include, in principle, independent outside directors.
  2. A full-time member of the Audit Committee was appointed so as to reinforce the functions of report collection and investigation by the Audit Committee.
  3. The Audit Committee became composed of independent outside directors with a high level of expertise and extensive experience in the fields of accounting, law or management.
(2) Reinforcement of the Audit Function of the Audit Committee
  1. To ensure that the Audit Committee Office is able to collect reports and conduct investigations based on instructions from the Audit Committee, the Company increased the size of the Audit Committee Office's staff, expanded opportunities to use independent and outside experts, and implemented other measures. The Company also appointed the executive officer in charge as the head of the Audit Committee Office.
  2. In addition to the internal whistleblower system on the business execution side, the Company established an internal reporting function in the Audit Committee Office. The Company also clarified that all members of the Audit Committee have the right to access all reports made to the business execution side using the whistleblower system.
  3. The Audit Committee came to have the right to approve the appointment of, request the dismissal of, and veto the dismissal of the head and employees of the Audit Committee Office, thereby securing the independence of the Audit Committee Office.
  4. The Company eliminated the current Corporate Audit Division, separated the internal audit function of the Corporate Audit Division from the business execution side, and reestablished these functions in an Internal Audit Division under the direct control of the Audit Committee.
  5. The Company limits and focuses the work of the Internal Audit Division to audits of accounting, compliance inspections, audits of appropriateness and audits of internal control and thereby clearly separated the execution and supervisory functions. The Company appointed the executive officer in charge as general manager of the Internal Audit Division. The Company intends to newly establish the methodology of accounting audits by actively utilizing outside experts and plans to ensure the effectiveness of internal audits by allowing the outside experts to be continuously involved in internal audits to ensure constant external viewpoints in conducting internal audits in the future.
  6. The Company changed to a system in which the head and employees of the Internal Audit Division have a constant understanding of the latest business environment and management issues by regularly attending important meetings on the business execution side.
  7. The Company thoroughly and continually follows up on the improvement status of the matters indicated by internal audits through reporting the same to the Audit Committee.
  8. The Audit Committee came to have the right to approve the appointment of, request the dismissal of, and veto the dismissal of the head of the Internal Audit Division, thereby securing the independence of the Internal Audit Division.
  9. The number of members of the Internal Audit Division was increased to approximately sixty (60) people, which is 1.5 times as compared to that when the Corporate Audit Division existed. The Internal Audit Division has been reinforcing their functions by actively utilizing external accounting experts.
  10. Recognizing the inadequacies in cooperation between the Audit Committee and the accounting auditor, for the purpose of further becoming aware of the necessity of audits of accounting treatment, the Audit Committee not only receives reports on audit result summaries from the accounting auditor as in the past, but also has been setting topics to allow for active discussions between the Audit Committee and the accounting auditor, thereby further enhancing cooperation between the Audit Committee and the accounting auditor. In addition, before closing, the CFO and the General Manager of the Accounting Division sort out the important accounting treatment issues with the accounting auditor, and beginning from a stage prior to closing, report to the Audit Committee on the details of their discussions and the progress at the time of closing.

Outline of Measures to Prevent Recurrence: Audit Committee

Reinforcing the Nomination Committee and Ensuring the Transparency of Nomination Procedures

(1) Composition of the Nomination Committee
  1. The composition of the Nomination Committee was changed to only include, in principle, independent outside directors.
(2) Ensuring the Fairness of Nomination Procedures
  1. To ensure the objectivity and fairness of the process for nominating the successor of the President and Chief Executive Officer, it was decided that the Nomination Committee will formulate a Succession Plan.
  2. A reform was made to have the Nomination Committee determine the standards for electing executive officers. The Nomination Committee came to have the authority to conduct periodic interviews with all candidates, and the Company introduced a system for votes of confidence regarding the President and Chief Executive Officer by senior management.

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Ⅱ. Reinforcing the Internal Control Function

Review of Budgetary Control

From the viewpoint of escaping from an overriding current term profit policy and formulating reasonable medium-term business plans and budgets that are feasible based on actual capabilities, the budget formulation policy has been clarified from a medium-term perspective, and the budget formulation process and performance evaluation for in-house companies were also revised. As for the clarification of the budget formulation policy, a policy of business selection and concentration has been clarified in which concentrated investments are made on businesses with high growth potential, and the review of business for which growth is not anticipated is considered based on quantitative evaluations of business profitability and qualitative evaluations of business growth potential, and budget formulation reflecting this policy has been thoroughly enforced.

In addition, for the budget formulation process, revisions were conducted to shift from a process that focused on sales and increasing profits to a process that considers feasibility from a medium-term perspective focused on cash flows. Furthermore, for performance evaluations for in-house companies, changes were made from the focus on operating income and the degree of budget attainment to a focus on investment efficiency centered on cash flows. Specifically, evaluation items including budget evaluation items have been reviewed and adjusted to shift to an evaluation system based on investment efficiency (quantitative aspects) and business potential including market growth potential and the Company’s advantageous position (qualitative aspects) on a business by business basis. At the same time, in order to encourage the autonomous and independent management of in-house companies, in-house companies will conduct decisions on whether to make investments based on their own responsibility through means such as requiring explanations from in-house companies on the appropriateness of the interest-bearing debt balance from the perspective of business profitability and investment efficiency.

Along with the revisions above, the CEO Monthly Meetings that discussed the outlook for improvements in short-term profit figures were abolished, and performance reporting meetings were newly established as a forum to have debates aimed at future performance improvements based on results centered on cash flows. In addition, the General Manager of the Internal Audit Division came to attend performance reporting meetings, and the submitted materials and minutes are to be promptly shared with outside directors.

Strengthening the Checks and Balances Function Played by the CFO and Finance and Accounting Divisions

(1) CFO

The checks and balances function of the CFO was strengthened by incorporating into the account settlement process the coordination between the CFO and the Audit Committee composed only of independent outside directors. In addition, to ensure the independence of the CFO from top management, the authority to consent to proposals for CFO appointment and dismissal has been granted to the Nomination Committee.

(2) Reform of the Finance and Accounting Divisions

In order to secure the independence of the accounting departments of the in-house companies from the presidents of the same, the in-house company accounting divisions, which had been under the direct control of the in-house company presidents, were changed to be under the direct control of the Finance and Accounting Divisions as corporate staff. Following that, the Company transferred the right to evaluate the performance of the in-house company Chief Financial Officers (CCFOs) from the presidents of each in-house company to the CFO, so as to secure the independence of the finance and accounting functions. Affirming that financial accounting is something that is stringent in order to support the soundness of securities markets, the financial accounting personnel and managerial accounting personnel in the corporate staff division were separated, the Finance & Accounting Division was abolished, and the Finance & Cash Division and the Accounting Division were newly established so as to reinforce internal control functions over accounting treatment.

Outline of Measures to Prevent Recurrence: CFO & Finance Division

Reform of the Internal Reporting System

Together with establishing a direct internal reporting function in the Audit Committee Office in addition to the internal whistleblower system on the business execution side, the Company endeavors to make its whistleblower system more accessible to employees by ensuring that all employees are fully aware that a whistleblower system is available to them and that the anonymity of whistleblowers is strictly ensured. The Company has enacted a reform to immediately share the details of whistleblower reports regarding accounting with the accounting auditor.

Business Process Reform

Responding to material weakness found in the current internal control systems in respect of financial reporting, accounting regulations were amended for the revision of accounting treatment standards and revisions were made in business processes for which the existence of weakness was confirmed for four particularly important items (percentage-of-completion method, parts transactions, recording of expenses, and inventory valuation).

(1) Percentage-of-completion Method

For estimates such as total estimated income from contract work and total estimated cost of contract work, the details of regulations related to such estimates were formulated in order to make those estimates reliable, as reliable estimates are also an application condition for the percentage-of-completion method. In reflection of the fact that rules on accounting and business processes were not made well known, accounting compliance education was thoroughly implemented and the check systems on the appropriateness of accounting treatment (the appropriateness of total estimated cost of contract work, etc.) by accounting departments, etc, have also been strengthened. Furthermore, in order to ensure the appropriateness of accounting treatment for projects for which the percentage-of-completion method or the contract-completion method are used, a Project Examination Division has been newly established to conduct reviews before project orders are received and to conduct monitoring on the appropriateness of costs after orders are received.

(2) Buy-Sell Transactions, etc.

As part of structural reforms in the PC Business, horizontal specialization through the outsourcing of development and production to the companies contracted to design and manufacture the Company's brand products (ODMs) has been stopped, and the buy-sell transactions that were an issue have been abolished from the newly handled portion. In addition, as a measure until abolition, the monitoring of abnormal values in supply quantity and price was introduced by preparing receipt and payment tables and managing physical inventory for the inventory held by ODMs. Furthermore, by conducting regular stocktaking, the book quantity of actual goods is being confirmed.

(3) COs (carry overs)

Rules and processes relating to treating expenses and intra-group transactions were revised in order to appropriately recognize revenues and expenses. Specifically, checks and controls are being strengthened in departments applying for expenses, accounting departments, etc., through means such as management of abnormal values through transitive analysis and confirmation of various provision calculation results based on expense management materials.

(4) Inventory Valuation

For turn out of value (TOV) revision, the rules for revision timing have been clarified to include confirmation that front-end and back-end standard costs in relation to the manufacturing of semiconductors are linked, and it has been also clarified that the cost variance allocation method was implemented by process. In addition, the valuation criteria have been revised for inventory subject to valuation that was not clear, and education on accounting principles and regulations is being thoroughly implemented.

Outline of Measures to Prevent Recurrence: Company-wide

Development of J-SOX Compliance

Responding to the fact that J-SOX compliance was not appropriately implemented within in-house companies, the number of members of the J-SOX Promotion Group (Internal Management System Reinforcement Project Team J-SOX Promotion Group) has been increased from four (4) as in the past to 10. The J-SOX Promotion Group is providing support to ensure that J-SOX compliance is being properly implemented at in-house companies. In addition, the Internal Audit Division shall conduct audits on J-SOX-related systems, frameworks, and implementation status. Furthermore, the members of the J-SOX Promotion Group on the corporate staff side endeavor to conduct regular training for in-house company personnel to ensure the expertise of inhouse company personnel.

Accounting Compliance Committee

With the establishment of the Accounting Compliance Committee, in which the President and Chief Executive Officer serves as Chairman and the Audit Committee and the Internal Audit Division participate as observers, the Company has established a company-wide framework for the timely and appropriate assessment of issues that could lead to inappropriate financial reporting, the early discovery of risks that could threaten internal control, and instructing and considering countermeasures.

Internal Controls over Financial Reporting

The Company has already established and largely implemented the measures of its Improvement Plan for rectifying the material weakness in company-level internal controls over financial reporting that the Company identified last fiscal year. However, there are some measures regarding which the implementation status cannot be verified yet due to constraints in the implementation period, and not all the implementation status of the improvement measures have been sufficiently verified. Moreover, in connection with the closing and financial reporting process, certain items for restatement, including the restatement of financial results, were discovered in the course of the audit of financial statement, and it was also determined that there were important deficiencies for FY2015 that also required disclosure. In order to verify the remediation of material weakness in company-level internal controls requiring disclosure, the Company will endeavor to improve the implementation status of the budget control system, to firmly establish awareness of proper financial reporting among employees working in connection with closing and financial reporting, and to implement improvement measures for material weakness in internal controls requiring disclosure in connection with the closing and financial reporting process and will additionally verify the status of future quarterly financial closings.

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Ⅲ. Improving of Management and Employee Awareness

Improved Awareness and Strengthening of Compliance

The President and Chief Executive Officer sent a message to all employees expressing a firm commitment to steadily implementing the corporate governance reform discussed by the Management Revitalization Committee and to reviving Toshiba Group. His message also declared a determination for the whole Company to work together in order to regain public trust. The Company also conducted an employee survey in order to gather candid opinions. In addition, the Company held an awareness improvement seminar for officers and top management in October and December 2015, March and June 2016, toward improving the awareness of top management. The Company plans to continue these seminars.

Education on Accounting Compliance

In addition to the awareness improvement seminar for officers and top management, the Company will also hold seminars by rank and function, according to posts held and work areas, to enhance the effectiveness of accounting compliance. The Company plans to continue these seminars.

Outline of Measures to Prevent Recurrence: Company-wide

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Decisive Action on Business Structural Reform

The Company has pursued structural reform of System LSIs and Discretes in the Semiconductor business segment of the Electronic Devices Department, the PC, Visual Products, and Home Appliances business segments in the Lifestyle Products and Services Department, and the corporate Staff Division, etc. Through these measures, the Company reduced its headcount in the departments subject to structural reform by approximately 14,000 employees in total in and outside of Japan, including 3,000 employees reassigned within the Toshiba Group.

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Review the Business Portfolio and Operational Structure

Within the process of developing medium-term business plans, starting from FY2016, the Company is discussing and reforming the following items. The Company announced the plan at the FY2016 Business Plan presentation meeting held on March 18, 2016.

Business Portfolio

Focus Business Fields

  • For the purposes of solving various social problems through our technologies and products and contributing to the realization of the productive, safe and secure lives of people, the Company will focus on the businesses of Energy, Social Infrastructure and Storage, which are foundations of those goals.
  • The Healthcare business was one of the areas of focus expected to produce future growth. However, in order for the Healthcare business to realize its potential to the full and to maximize its value to the full and for the Company to strengthen its balance sheet, the Company decided to sell Toshiba Medical Systems Corporation and has signed the transfer and related agreements with Canon Inc. on March 2016.
  • Although the Home Appliances business has a long history and tradition and has been one of the businesses that represent the Company, the Company has pursued structural reform of that business to further improve operational efficiencies, considering alliances with third party companies as a future option. Specifically, after the Media business of Toshiba Lifestyle Products & Services Corporation (TLSC), which was the Company's consolidated subsidiary and engaged in the Home Appliances business, was split off, the Company finally agreed to transfer more than 80% of the shares of TLSC, which will continue to engage in the Home Appliances business, to Midea Group Co., Ltd., a major Chinese home appliances manufacturer in March 2016.
  • The Company improved operational efficiencies by splitting off the PC business and merging it with a sales company targeting domestic corporations in April 2016. Specifically, the Company signed an absorption-type company split agreement in February 2016, whereby Toshiba Information Equipments Co., Ltd. (name changed to Toshiba Client Solutions Co., Ltd. as of April 1, 2016) succeeded to the Company's PC business by means of a company split, and the PC business was transferred to that company in April 2016.
  • The Company signed an absorption-type company split agreement in February 2016, whereby part of the System LSI business at the Company's Oita Operations was transferred to Iwate Toshiba Electronics Co., Ltd. (name changed to Japan Semiconductor Co., Ltd. as of April 1, 2016) by means of a company split, so that the Company will concentrate management resources in business areas where the Company anticipates market growth and enjoys technological advantages, such as analog integrated circuits and motor control drivers for automotive and other applications, and will secure efficient integration and management of the 200mm and 150mm wafer production lines. The Company decided to withdraw from the CMOS image sensor business and transfer to Sony Corporation the 300mm wafer production line at the Company's Oita Operations in March 2016.

Establishment of a Small but Strong Headquarters

The Company will slim down corporate staff functions and concentrate the corporate staff's mission on strategic planning for the future. At the same time, in order to strengthen the independent autonomous management of the in-house companies, functions needed for business operations will be transferred to the in-house companies. Based on this decision, the Company reformed the corporate Staff Division on April 1, 2016. In order to announce the business activities of Toshiba Group in a timely and appropriate manner, and to enhance interactive communications with stakeholders, the Company repositioned the Public Relations & Investor Relations Office as a division directly under the President and Chief Executive Officer, and within that office, established a new Information Disclosure Office specifically in order to make timely and appropriate disclosure to stock markets. In addition, the Company abolished the Finance & Accounting Division and newly established the Finance & Cash Management Division and the Accounting Division in order to separate the financial accounting functions and the management accounting functions and to strengthen the internal control functions for accounting treatment.

Outline of Measures to Prevent Recurrence: Information Disclosure

Review of In-house Company System

The Company reorganized the seven in-house companies into four in-house companies in order to establish the business structure focusing on three businesses – the Energy business, Social Infrastructure business and Storage business.

Review of Operating Structure

  • The Company integrated and reorganized the Power Systems Company, the Social Infrastructure Systems Company and the Community Solutions Company into two new companies – the Energy Systems & Solutions Company and the Infrastructure Systems & Solutions Company.
  • The Company renamed the Semiconductor & Storage Products Company as the Storage & Electronic Devices Solutions Company.
  • As a result of the sale of Toshiba Medical Systems Corporation, the Company’s medical equipment subsidiary, the Company abolished the Healthcare Company and newly established the Life Science Division*. (*Eliminated on October 1, 2016)
  • The Company abolished the Personal & Client Solutions Company. The Company repositioned its Ome Complex, which was under that company, as part of the corporate Staff Division.

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Reforming the Financial Base

Reflecting on the fact that it fell into an overriding current-period profit policy, the Company will continue to further promote business management emphasizing cash flow and give first priority to restructuring for recovery from a weakened financial platform.

Measures to Secure Financial Platform

  • The Company will set firm rules on limits to investments and make resource allocations based on the business portfolio and in those business domains that will generate cash.
     Under this policy, the Company will focus its FY2016 investments on the Energy and Storage businesses and limit investments in other areas to refurbishment. The Company will also focus on research and development in technologies that generate cash flows and, with a long-term outlook, will advance research and development with an aim to create new growth businesses.
  • The Company will also reinforce management of interest-bearing debt on a consolidated basis by the in-house companies so that the Company will be able to reduce interest-bearing debt.

Sales of Assets

The Company has been thoroughly reviewing the assets it holds, such as stocks and real estate, and their necessity and considering selling them off without any restrictions. The Company plans to raise funds in the amount of one trillion yen or more by examining its assets by the end of FY2016, including the already-completed sale of Toshiba Medical Systems Corporation and the sale of shares of KONE Corporation, a Finnish corporation and partner in the elevator business, and Topcon Corporation, an affiliate.

Measures to Secure the Financial Platform

The Company has been implementing the reforms set out above and once again sincerely apologizes for causing the current situation. The management team and the entire Company will continue making their best efforts to recover the trust of all the Company's stakeholders.

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This Web site contains projections of business results, statements regarding business plans and other forward-looking statements. This information is based on certain assumptions, such as the economic environment, business policies and other factors, as of the date when each document was posted. Actual results may differ significantly from the estimates listed here.

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