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FUJITSU
FUJITSU SERVICES HOLDINGS PLC
FUJITSU SERVICES LIMITED
FUJITSU SERVICES (INVESTMENTS) LIMITED
(the “Companies”)
Minutes of a Meeting of the Fujitsu Services Management Committee
of the Boards of Directors of the Companies
Held at 9.30 am on Wednesday 29"" May 2002
at 26 Finsbury Square, London EC2A 1SL
Present:
In attendance:
Mr. H. Kurokawa (Chairman)
Mr. R. Christou
Mr. D. Courtley
Mr. T. Adachi
Mr. H. Hirata
Mr. H. Kodama
Mr. R. A. J. Allnutt (Secretary)
Mr. T. Matsuoka
Ms. Reiko Mizusaya
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Constitution of Committee
It was noted that the Committee had been constituted by
resolutions of the Boards of Directors of the Companies
passed today. The composition of the Committee,
including Mr. Kurokawa’s appointment as Chairman,
were noted. It was also noted that the final form of the
Committee's powers and terms of reference had not yet
been agreed, but that the Boards had approved the
transaction by the Committee of the business on its
Agenda for this Meeting and any other business
connected with it.
The Chairman welcomed those present to the first
meeting of the Committee, which marked a fresh start in
the management of Fujitsu Services Holdings PLC
(‘FSH’) and its Group. The aim was to make meetings
of the Committee real working sessions with a view to
moving the Group forward. He invited all members of
the Committee to express their opinions frankly.
CEO’s Report FSMC/02/01
Mr. Christou commented on his report.
The last financial year, 2001/2002 was one in which a
great deal had been achieved: the restructuring, Project
Fuji, the rebranding and some difficult contract
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negotiations. The outcome had been positive, with the
break-even result showing that the Group was capable
of operating profitably. A lot remained to be done, but
the foundations had now been laid for further progress,
and he had expressed his thanks to the Group’s
employees for all their efforts during the year. He noted,
however, that some of the actions taken would make it
more difficult to achieve operating profit targets in
2002/2003. It had been very difficult to cover the Libra
write-down, and this had been achieved by
extraordinary actions.
Going forward, the Group’s credibility would depend on
whether last year's performance continued into the
present year. The results for April 2002 were
reasonably encouraging. The biggest challenges for
2002/2003 would be EMEA and legacy issues from the
restructuring which could not be addressed because the
restructuring provision was insufficient (e.g. surplus or
vacant UK property space).
The FS/FC relationship was going well. In Mr.
Christou’s opinion, the biggest issue was FC’s lack of
critical mass in the UK and Europe. So far as FS was
concerned, it was now concentrated in the UK, with no
US representation and representation at sub-critical
level in EMEA. Viewed globally, there were big holes in
coverage and Fujitsu Limited might wish to consider
this.
This year's budget for FS must be regarded as
stretching. Revenue was likely to be a problem in H1
and it would be a challenge to break-even at the end of
H1. Nevertheless, Mr. Christou confirmed that he, Mr.
Courtley and Mr. Adachi remained determined to push
forward. He invited questions from the Meeting.
Irrelevant
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CFO's Report FSMC/02/02
Mr. Adachi presented his report, commenting that the
2001/2002 figures were not final pending resolution of
outstanding issues on the provision required on HMC&E
and on completion of the renegotiated contract with the
LCD on Libra. The time required to resolve these issues
depended, in the case of HMC&E, on negotiations for a
variation agreement with the customer, which were
expected to be concluded by the end of July 2002; in the
case of Libra, it depended on signing of the new
agreement which would, it had been hoped, take place
this month, but was now likely to be in the first half of
June (the delay being caused by the need to agree a
letter of comfort or parent company guarantee). The
accounts would have, as a matter of law, to be finalised
by the end of October 2002, which imposed a deadline.
It was hoped that the two contracts would be signed well
before then.
Noting this, the Chairman asked all concerned to use
best efforts to ensure the agreements were signed as
soon as possible.
Mr. Adachi then took the Meeting through the figures in
his reports, highlighting the following points —
(a) Page 1 — Profit and Loss 2001/2002.
Referring to the column “Full Year — Actual’, he
noted revenue of £2166m, down 10.4%; gross
margin undershooting at 17.4%; but operating
expenditure down to (17.7)%. After taking into
account the central restructuring cost of £(117m),
profit before tax was £(133m).
(b) Page 2 — Revenue and Operating Profit
Mr. Adachi commented on performance of the
divisions in turn:
e ISD revenue was up at £892m, up £90m.
This had been assisted by a commutation of
VME income from EDS.
e¢ MCD, at £533m revenue, was down £120m
on the year, with its operating profit running
at one-tenth of the previous year’s.
e P&PS: Revenues were down £50m at
£100m. Software sold to Anite had not been
a success, although a profit had been taken
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on the sale of Pericles. As a result, there
was an operating profit of £4.5m.
¢ Large Projects (including Pathway): revenues
were up to £325m from £308m last year, but
the result was £(17m) due mainly to the Libra
write-off (last year £25m).
« EMEA revenues were down from £434m to
£369m, with the loss trebled over the last
year to £33m. Much of the loss was due to
France.
(c) Page 4 - Balance Sheet
Mr. Adachi noted that the equity shown
exceeded the minimum level prescribed by the
Bank covenants.
(d) Page 5 — Cash flow 2001/02
Mr. Adachi drew attention to an increase in the
figure against “Movements in provisions/other” to
£139m. “Movements in working capital” also
worsened to £(95m). Of the movement in
working Large Projects accounted for £(61m) of
the movement in working capital. The £(33m)
figure for capital expenditure should also be
noted. Overall, there had been a shortage of
cash last year and that needed to be addressed
this year.
Passing by the detail in the second section of his report
and the draft statutory accounts contained in the third,
Mr. Adachi paused at the draft profit and loss account of
FSH for the year ended 31 March 2002 in the fourth
section. This showed a loss on ordinary activities before
taxation of £(97m) and a loss for the year carried
forward of £(113m).
Moving on to the comparative figures in the fifth section
for the current year to April, Mr. Adachi noted that actual
revenue was £134.9m, £15m down on last year (this
was mainly due to reduced sales in MCD). Gross
margin was, however, slightly better at 17.3% (15.2%).
Deducting operating expenditure of £(30.1)m, operating
profit was £(6.2m) and profit before tax £(7.3m), an
improvement on last year’s £(12.7m). The budget for
the first half was shown on the right of the page and no
change in the forecast was needed at present. With
regard to “Profit on disposal” a letter of intent for the sale
of Beaumont had been exchanged. Overall, Mr. Adachi
regarded the budget as very challenging, but he and his
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colleagues would use their best efforts to achieve it.
Turning to page 6 in this section, cash flow for the
current year, he drew attention to the entries in the last
box for “1* Half” against “Total of acquisitions”, £(16m);
and “Total disposals” (£31.2m). The former related to
the proposed acquisition of the minority in Fujitsu
Services Invia Oyj; the latter to the Beaumont and
Tieturi disposals.
Moving to the sixth section, “Negative Legacy”, Mr.
Adachi noted that the 2002/2003 budget for Profit before
tax was £30.2m, after taking into account the impacts
from Legacies as shown in the lower box. This box was
divided between Legacies included in the budget
(totalling £(44.5m)) and those not included in the
budget. The latter — Peregrine, Computer Associates
and Transys — were not “must do’s” from an accounting
perspective but, if the Company could afford to deal with
them, that would be desirable.
As regards the next paper, “Future Improvements’, the
items included were at various stages: some were
included in the budget, some were not. The effects of
the Invia acquisition and the Beaumont disposal were
shown at £(4.0m) and £6.4m, respectively. As regards
KnowledgePool, the premise was that a sale price of
£6m could be achieved for the goodwill. If MCD were
sold for £30m, the effect would be £4m. Zensar (ICIM)
was currently affected by concerns over Kashmir and its
share price was declining. A figure of £4.9m was
included for this, but this figure would worsen if the
political situation deteriorated. No figures were available
for EMEA (E. Europe), but £(0.2m) was shown. £(10m)
and £(50m) were shown as the effects for closures in
Africa and France, respectively. £(22m) was shown
against sub-letting of vacant properties. CAPEX
reductions would have no effect in 2002/2003 but should
show £6m in each of 2003/2004 and 2004/2005.
Cost/Opex reduction was shown as £50m. The profit
before tax indicated after deterioration and these
Improvements was in the range £(62.6m) - £(74.9m),
which would mean that the target of £30.2 was not
achievable. If, however, an Invia disposal followed later
in the year, the profit before tax would be in the order of
£38.5m - £26.2m.
Mr. Adachi then dealt with his paper on Preference
Share redemption. Redemption of these shares was
due in July 2002. Redemption using distributable
reserves was not possible this year, so redemption
would be effected out of the proceeds of a fresh issue of
new preference shares, redeemable in three years’ time.
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As interest rates were now lower, the coupon would be
6% rather than the 9% on the existing shares and so
there would be a £4m saving on the preferential
dividends.
The next paper concerned Banking Arrangements, and
Mr. Adachi referred the Meeting to Appendix 1. The top
box here showed borrowings, with £219m borrowed. All
these borrowings were committed, except for Citibank,
which was uncommitted. In effect, facilities of £410m
were available for borrowing. The second box showed
forecast facility usage. This showed gross borrowings
at March 2002 of £171.5m with a Q1 peak of £249m and
a Q2 peak of £284m in the current year.
Finally, Mr. Adachi referred the meeting to the proposed
support letter to the Board of FSH from Fujitsu Limited.
Mr. Adachi had on his recent visit to Japan received
confirmation that this letter would be forthcoming.
Mr. Adachi invited questions from the Meeting.
The Chairman emphasised the importance which Fujitsu
Limited attached to the accuracy of the Company's
forecasts, and the need to ensure that forecasts stayed
as close to reality as possible. This should be achieved
by reviewing the budget in Q2, paying particular
attention to the apparent decline in revenues and the
implications of that decline. Generally, it was important
to achieve a better profit level.
Whilst the Chairman appreciated that there was little
time to prepare for Q1, he requested that the work be
carried out by 18 June 2002 so that the outcome could
be explained to Fujitsu Limited. Mr. Christou, Mr.
Adachi and Mr. Courtley indicated that this would be
difficult, but they thought it could be done.
Mr. Kodama added that the actual figures for April-June
2002 would also need to be explained, and that the
explanation would be needed by the 15" of the month
for Fujitsu Limited Board Meetings, which took place on
the 20" of the month. Mr. Adachi said that this should
be in time to report.
The Chairman asked how future improvements would
be brought into actual figures. Mr. Adachi and Mr.
Christou will arrange for this to happen.
The Chairman also asked about cost reductions in Invia,
indicating that Fujitsu Limited might pursue this closely.
Mr. Adachi said that these reductions would be shown in
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the forecasts provided by 18 June 2002.
Referring to these reductions, Mr. Christou agreed to
ensure that the plans for them were collected and
reviewed. As regards cost reductions generally in the
Group, he thought that the figures for April 2002 showed
that the cost cutting measures taken were becoming
effective. Cost of sales was better, although there was
a need to look further at operational expenditure, which
had been higher in April. He would continue to keep
costs down. Containing recruitment, and accordingly
head-count, was the most effective way to effect cost
savings. He had instructed Mr. Courtley and Mr. Leek to
avoid any increases and, as a result of the measures
already taken, head-count was down from 21,000 last
year to 17,000 this year. There was still some scope for
further reductions, in particular outside the UK, in EMEA
and Invia. A plan would be worked upon.
Mr. Courtley added that he thought there was a need to
look again in the UK at about 200 people; elsewhere in
Europe, it could be very expensive to remove head-
count. As disposals proceeded, of course, the number
of employees would reduce. He confirmed that the
Group would be very careful about further recruitment.
The Chairman and Mr. Kodama confirmed that Fujitsu
Limited wanted to see a plan for these reductions, and
the expected benefits, by mid-July 2002 so that a report
could be made to its Board for it to take into account in
considering the big picture for the Fujitsu Group as a
whole. Mr. Akikusa was personally interested in this.
Increases in the budget, because these reductions were
not planned and factored into H2, would disturb the
Fujitsu Limited Board.
Mr. Christou confirmed that such a plan would be drawn
up.
The Chairman added that, apart from Invia, the way
forward on France, Africa and India had been agreed
and he wished to see the plans carried out without
hesitation. Mr. Adachi understood that the Group could
aim for an Invia disposal, including beginning
discussions with potential buyers and the possible price,
but formal approval from Fujitsu Limited was. still
needed. Mr. Kodama said this was understood but,
whether Invia was sold or not, it was important to
prevent further deterioration there. Agreeing with this,
Mr. Christou observed that three steps needed to be
achieved: to take out the minority; to stabilise the
operation; and then to look at realisable value and
decide whether a sale was in the Group's interests.
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New Organization Model FSMC/02/02-1
Mr. Courtley presented his paper and identified the
principal issues:
« Anew top team of managers, some from within FS,
some from elsewhere.
« Anew accounting model focussed on customers.
e Core delivery - a new concept to drive cost
improvements and productivity.
¢ Large Projects reporting directly to Mr. Courtley until
sensitive negotiations concluded.
« New plan for EMEA (to be presented at this meeting
by Mr. Escudier).
¢ Core organization to be involved in EMEA countries
to ensure compliance with the Group's corporate
standards.
e No changes at MCD, KnowledgePool, Africa and
Invia because of disposal plans.
¢ Head-count down significantly.
¢ Sales teams reduced, focussed on opportunities,
enabling such opportunities to be taken in the
coming year.
e Business assurance under Martin Coombs working
closely with Mr. Hirata’s team.
¢ New business review process — first round has
demonstrated it worked.
EMEA FSMC/02/03a
FSMC/02/03b
Mr. Tim Escudier in attendance.
Mr. Courtley explained that a careful withdrawal was
planned from non-core countries, consulting where
appropriate with Fujitsu Limited and relevant
governments. PricewaterhouseCoopers Finance had
been retained to advise. The overall intention was to
withdraw from East, Central and Southern Europe, and
from the Middle East so that the management team
could focus on more important countries.
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Mr. Escudier explained that the countries in question
were not an operational problem, but they were
distracting and there was always a risk of financial
problems going forward. The solutions varied. The
Balkan operations were difficult; it was proposed to
close them, move certain aspects of them under the
management of the Greek operation and then sell that
operation. The operations in the Eastern and Central
European countries would be closed or sold, and the
UAE and Malta would be sold. Fujitsu Siemens were, it
was reported, interested in the well-run operations in
Malta and the Czech Republic, and the Head of M&A
was working on that.
Mr. Christou indicated that a general approval for this
plan was sought, empowering him to effect such sales
or closures by the end of the year. He invited views
from the Meeting.
Mr. Hirata thought that where a sale was possible, it
would be worth producing a review or survey of the
business in question, but not where closure was the only
option.
The Chairman agreed that the correct course for non-
core businesses was sale or closure. If Fujitsu Siemens
was interested, that would help both FS and the
employees, many of whom were of good quality. Mr.
Christou agreed, commenting that sales to local
management might be possible; he would, however, like
a decision from Mr. Urano on the operations in the
Czech Republic and Malta.
At the Chairman’s suggestion, it was RESOLVED to
proceed with sale or closure of operations in non-core
countries and agreed that the programme should be put
in the milestone chart so that progress could be
monitored.
The Meeting turned its attention to the operations in
core countries.
By way of introduction, Mr. Christou observed that none
of the core countries, apart from the Netherlands and
Finland, could take big infrastructure support contracts.
Accordingly, even if losses were stabilised and there
was a realistic opportunity to achieve break-even or
better, the question remained what contribution those
countries could make in the next three years. The
challenge was to find a way to move the operations in
these countries into profit.
Mr. Escudier was invited to address the Meeting, and
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presented a paper entitled “Core Countries Overview’.
In summary, Mr. Escudier felt that a high degree of
autonomy had been the norm in the core countries; that
a number of countries had lost their way; and that base
offerings and capability varied widely. The Netherlands
was in the best condition. Italy and Switzerland were
the worst.
His team were engaged on three approaches to achieve
turnaround: functional discipline; Project Profit, which
aimed to deliver improvements in sales, services and
cost; and the formation of a strategic/business plan.
In considering capabilities and offerings, it was
important to look at the market place, since local
conditions were not always the same as those in the UK
or the US. For example, not all countries accepted
outsourcing. One of the objectives of the offering
portfolio was to help countries decide where they stood.
Looking at each of the countries in turn —
¢ The Netherlands — this country was in the best
shape. It was expected to deliver between £1m and
£3m of profit this year. Although there were still
some risks affecting the achievement of this result,
there was a strong business and a good strategy,
and a close alignment to Fujitsu Services Limited
(‘FS’) in the UK.
¢ France — the position here had been very poor for
many years, with £50m having been lost over the
last three years, taking into account RATEX. That
said, there was some evidence that the operation
was finally getting its act together. The local
management's current recovery plan should be
rejected. There was an outside chance of the
operation breaking even in eighteen months’ time,
but France was a very difficult location and there
would always be a risk of a relapse. The
management team was now motivated to make
money, rather than lose it.
« Germany — the base of the business here was at a
low level and capabilities were also low. It would
lose money this year but the new management
team, though inexperienced, was highly motivated.
They believed that they could tum the business
around and the expected loss of £2m this year would
certainly be better than the £5m loss last year. The
management was doing the right things to control
cost. Mr. Escudier believed that they could attain
break-even in the year 2003/2004.
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«Italy — the position here was very bad. Of the 220
staff, 110 were mobile engineers, which in a country
the size of Italy was a very small force. Another 50
staff worked on retail Centres of Excellence and
there were a further 50 employees selling various
local offerings. There was no strategy and a very
poor capability. One possible solution was to
outsource the mobile engineers to a local company:
this, and the general way forward, needed to be
discussed. All that said, it must be admitted that
Italy was a large European economy where there
should be opportunities.
e Portugal — the operation here was very well
managed by Antonio Almeida, who retired this year.
A succession plan was in place. There had been a
problem last year with a bad debt which had had to
be written off, but Portugal was not usually a loss
making operation. Nevertheless, it had to be
recognised that Portugal was not a major economy.
¢ The Republic of Ireland — this operation was
currently going backwards and the Country
Operating Officer had just been removed. Mr.
Escudier questioned the viability of the streamed
businesses of FS and Fujitsu Consulting (“FC”) in
Ireland. Given the size of the economy there, he
thought it would make sense to consolidate FS and
FC into one business.
¢ Belgium — this was a small operation, which had
been maintained because it supposedly offered the
Opportunity to develop relationships within the
European Union. There was a possibility that the
business might be turned round within eighteen
months.
¢ Switzerland — capability here was weak and there
were, in effect, only two retail customers — Bally and
McDonald. The staff consisted of twenty employees
and around thirty-five mobile engineers. Mr.
Escudier considered that the customers in
Switzerland could be supported without a Swiss
operation. He did not expect a turnaround to be
achievable within eighteen months.
Mr. Escudier added that a number of countries
complained about the costs of the arrangements with
Logicom. He considered that, if better managed, the
countries would be able to drive down their costs in this
respect, as had been done in the UK. He conceded that
the cost of the arrangements was higher than market
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rates in some countries, but they all needed logistical
capabilities and some level of cost would be incurred in
any event.
Mr. Christou suggested that the Meeting consider each
of these countries in turn. It was evident to him that the
core countries were in as much trouble as the non-core
countries.
¢ The Netherlands — Mr. Courtley indicated that he
was pleased with this country. There has been a
problem with two key customers affected by the
events of September 11', but these problems had
now been overcome. There was both the potential
for profit and a base upon which to build. The
offerings and general position were not exciting, but
were sustainable. His recommendation was that the
Netherlands should keep doing the same things as
they did at present, but do them better. The aim
should be to improve the offerings base and make a
£3m profit on £70m revenue, which he considered to
be feasible. The steps which were being taken by
Mr. Escudier included requiring the Country
Operating Officer, Frank Boekel, to submit to the
new style of the Group and its new disciplines, and
he was seeing the beginnings of a response to this.
Mr. Christou wondered whether it would be possible
to double the revenue in the Netherlands by March
2004. Mr. Courtley felt this was not possible
organically: in his view, it would take three and a half
years. Mr. Escudier thought that it would be
necessary, with UK support, to obtain two or three
total outsourcing contracts. Even then, to double
revenue would be a stretch. Mr. Christou thought
that the capability for growth in The Netherlands
meant that other courses should be at least
considered — for example, allowing recruitment or
increasing the size of the operation through an
acquisition. He stressed that he was very cautious
about this, but felt that it was easier to make a viable
operation stronger by acquisition.
The Chairman observed that, if the Netherlands
operation could maintain a critical mass, good
management and a reasonable market profile, and if
it could achieve a reasonable sustainable profit
within the next eighteen months, it seemed to him
that there would be no need to close or sell the
operation. Mr. Christou agreed with this. The
question he was asking himself was whether this
operation was ripe for investment because it
afforded an opportunity for growth. In the absence
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of such investment, he thought that the operation
would improve organically, but it would still be small
even if it was profitable.
Belgium — Mr. Courtley wished to consider Belgium
next, because of its physical proximity to the
Netherlands. He agreed with Mr. Escudier’s views.
There were 150 staff and £11-12m of revenue. The
business was budgeted to break-even. It was not
strategically significant, and its capabilities were not
exciting. It was proposed to change the
management team.
The supposed attraction of the Belgium operation
was that the European Union was based in Brussels
and provided a focus for Europe. The problem was
that the EU itself was not a large purchaser so that
the notion it offered the opportunity for revenue
growth was really illusory.
Mr. Courtley had wondered whether to align the
Belgium operation to the Dutch management team
as a means of squeezing down costs. The problem
was that the Dutch and the Belgians tended not to
work well together. On the whole, Mr. Courtley
thought that the best course was to close the
Belgium operation down, although he conceded that
it was expensive to terminate employment there.
Prospects for a sale were marginal. Mr. Hirata
agreed that the best course was to either sell the
operation, if that was possible, or to close it. He
supposed that alignment to the Netherlands was a
possibility, but it did not sound attractive.
The Chairman concluded that it would be hard to
enable this operation to reach a critical mass and
therefore sale or closure was the best answer so
that it would no longer be a liability for FS. Mr.
Adachi also thought that a turnaround in Belgium
was not credible. It was agreed that Mr. Escudier
and Mr. Hirata be asked to confer with the Director,
M&A about possibilities for disposal.
France — As noted, the huge losses were the main
feature here. Mr. Escudier’s belief was that, if the
current recovery plan were done properly, the
French operation might do better than an operating
loss of £8m. Nevertheless, it was thought that a
great deal of effort would be required to bring the
business back to break-even. There would be a
need to keep winning contracts. Further, the
workforce was intransigent because of the legal
system there, which greatly favoured the employees
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— a state of affairs of which the staff were only too
well aware. The fact was that the quality of work in
France was not helping FS in terms of its image
there. It was poorly positioned in the IT services
market.
Mr. Escudier thought that tight management of the
French operation could, nevertheless, achieve a lot.
With revenue of £48m, it ought to be possible to
make a profit. France was a major growth market.
On the other hand, the operation had a low
Capability and even after a huge effort had been put
in to turning the business around, it would still not be
a true infrastructure support business but a business
engaged in lower level field maintenance activities
etc. The only way to improve this would be to buy
an operation engaged in infrastructure support or get
a large outsourcing contract: neither of these
possibilities was very likely.
A discussion followed, to which Mr. Hirata, Mr.
Christou, Mr. Adachi and Mr. Kurokawa all
contributed. Mr Adachi considered that the French
operation should be sold or closed. The
Meeting agreed. It thought that it would cost a lot of
time and money to close the French operation
outright. So the best course might be to run the
business down to the point of closure. Although sale
was thought likely to be difficult, given that there
were only a few buyers in the market, it was decided
that this course should also be considered. These
possibilities should be brought back to the
Committee once the figures and milestones were
available. It was also agreed that there would be no
further investment in France.
Germany — Mr. Courtley observed that the operation
was small and did not provide a_ strategic
springboard from which to take on the German
market. Whilst he believed that Germany was
becoming more amenable to outsourcing, the
Company was not well positioned to take advantage
of this. The business there combined break/fix
business (which was in a competitive field and had
to operate at low margins in a widely spread out
country), retail, and legacy activities. That so, there
had been a management change last year, and
there was now a new team. Mr. Courtley believed
that Germany could do better than forecast by the
year end. Nevertheless, he did not predict a break-
even this year, although that might be possible next
year.
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The Chairman expressed his concern that the
problems in Germany were not dissimilar to those in
France, including the labour problems. He therefore
thought closure should be considered, although he
was willing to consider other courses of action.
Since he thought the operation was not capable of
catching up with Siemens, a possibility might be an
alliance with Fujitsu Siemens.
Mr. Christou considered that, if FS wanted to make
an impact on the German market, a major
acquisition would be needed, involving a price in the
hundreds of millions. It was agreed that the Group
should investigate selling or closing the business or
otherwise transferring it to Siemens.
Italy — Mr. Courtley’s plan for Italy involved changing
the management by finding an interim manager to
improve and stabilise the situation. In this regard,
Mr. Ken Cusack had been sent in on a three month
contract.
Italy had no real strategy and had had a poor
management team, which had tolerated bad
performance and losses. The new management
were now taking a stronger line and better results
were coming through. Mr. Christou referred to the
difficulty of retaining good management in an
operation which was performing badly.
The Chairman said that, subject to looking after the
retail businesses, he considered that the best course
was to close the operation. Agreeing, Mr. Christou
added that it might be possible to move the
management of Italy's retail operations to another
country.
Switzerland — the problem here was, simply, that
high administrative costs were incurred to look after
two customers. There was no new business coming
through. The answer seemed to be to close the
operation, although a decision would be needed on
how to look after the retail customers. It was noted
that Switzerland was a relatively cheap jurisdiction in
which to terminate staff.
Portugal — despite the good management here, it
had to be recognised that Portugal was a fairly small
country with a fairly small economy. Consideration
had been given to managing the Portuguese
operation together with Spain, but the countries
differed culturally and did not always work well
together.
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The Chairman wondered whether prospects for
future growth meant that a good price might be
available if FS attempted to sell the operation. Mr.
Christou thought that more profit would need to be
generated to make the business seriously attractive.
An alternative might be a sale to the existing
management, coupled with an offer to make the
Portuguese operation an FS distributor. Another
possibility was to find a local purchaser which could
remove OPEX and make the business more
profitable.
The Chairman wondered how much it would cost to
close the Portuguese operation. He was content to
leave Portugal as it was, but thought that other
possibilities should be investigated. The aim should
be to include in the July plan outline proposals for
Italy and other cases in the same situation. Mr.
Christou observed that there would need to be a
trans-European network to deal with customers from
closed operations.
Ireland — Mr. Christou’s opinion on this country was
that he did not mind whether the Fujitsu operations
there were run by FS or FC. What was needed was
closer, tighter management. Mr. Escudier thought
that the possible solution was to run the businesses
as a single FS/FC operation. This also would
provide the necessary critical mass.
The Chairman observed that reorganising the two
business streams into one was a course which had
not been thought appropriate. He felt, nevertheless,
that such a course might be considered now, given
that the circumstances were different. He would
inform Mr. Hirose in Tokyo. Mr. Christou noted that
there were proposals for Mr. Courtley to talk to Alan
Baxter of FC on this subject.
Generally — if these plans were carried out, FS
would in twelve month's time have a reasonable
business in the Netherlands, which could deal with
the maintenance of customers across Europe. The
transactions which were proposed were expected to
reduce losses and, indeed, to add £30m at the
operating profit level. There would, however, as a
result of implementing this plan, otherwise be no
European business. The feasibility of offering to
undertake large outsourcing contracts from FS’s UK
base would need to be investigated. It would
probably mean providing management in the places
where FS found its projects — just as EDS does.
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The Chairman commented that the focus now
should be on strengthening FS. It was not possible
to strengthen countries outside the UK, except in the
case of The Netherlands. In his opinion, FS should
take steps to get rid of the loss-makers and, instead,
to grow UK customers. He suggested that
consideration be given to supporting continental
Europe from The Netherlands or to getting an
outsourcing partner for continental Europe. Overall,
he saw the need to downsize in order to make a
profit and then expand again. The present was a
‘time of endurance”. Mr. Adachi agreed with this.
FS could not afford the luxury of investment: its need
was to decrease its losses. FS might indeed, at
some future time, grow to European or even global
size — but the route to this was to lift perceptions
about FS. It would then be possible to raise money
to buy more businesses and so to grow by
acquisition.
Mr. Christou said that he was looking to the Committee
for a direction as to the line to take beyond the end of
next year. Such a direction was needed to avoid the
possibility that FS would simply become reactive. In
general terms, he thought it was necessary to step back
in order to spring forward. This meant targeted
acquisitions, but not in the present financial year. The
Netherlands was the logical place to start. He also
thought it worth considering how major outsourcing
opportunities could be taken in other countries by
establishing a temporary presence there. He believed
that it would be useful to develop a strategic plan. Mr.
Courtley agreed that a plan was practicable, but pointed
out the need to remember that at present the market
was simply not there. This might afford opportunities:
many companies were suffering and distressed
purchases could be available in the short term. Mr.
Christou agreed with this, but said that small
acquisitions would not help. The size of acquisition
needed would be more of the order of £500m. Any
small sums available would be better spent on organic
growth — for example, in PFI contracts where profitable
business was available in return for additional capital
investment.
The Chairman concluded that in the present year, the
aim must be to consolidate and establish FS as a
profitable company.
As a footnote, Mr. Hirata noted that in Ireland there had
been identified fifteen software people whom Fujitsu
Limited were prepared to take.
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Invia
Mr. Christou provided an update for the Meeting.
Preparations had now been made for the buy-out of the
minority shareholders at a price of €1.50 per share. If
this Meeting approved the buy-out, an announcement
would be made later in the day that FS was making an
offer to the minority. Such offer was conditional on
sufficient acceptances to give FS 90% or more of the
shares. Provided this level of acceptance was attained,
FS could then compel dissentient shareholders to sell
their shares. In practical terms, the acquisition should
be concluded by September 2002, although the
transaction should largely be achieved in June. If less
than 90% of the shareholders accepted the offer, it
would lapse in two week’s time. But Mr. Christou had
conferred with the minority shareholders and
established that they were content to accept the offer.
Before the offer could be made, Invia had to publish its
results and, in that respect, had had to agree a goodwill
impairment at €67m. The result of this was that Invia
would have negative net assets. Under Finnish
company law, the parent was required to restore the
equity in such a company either through a subscription
for shares or by the creation of a capital loan (what
would be called a subordinated loan in the UK). In the
case of Invia, all that was required at this stage was an
announcement of FS’s intention to restore the equity
within a period of twelve months. It was likely that FS
would elect to do this partly by a subscription for new
shares and partly by a subordinated loan and that these
steps would be taken shortly after all the minority had
been bought out, i.e. some time between June and
September. Meanwhile, FS had agreed to provide
further support for Invia, and Mr. Christou was writing to
customers selected by Invia’s Managing Director, Henry
Ehrstedt.
Questions and answers for employees and the press on
this acquisition have been settled with Mr. Tokuda in
Tokyo.
Most of the shareholders would be paid at the end of
June.
The proceeds of the sale of Beaumont would provide
most of the cash for this acquisition.
It was noted that there had been leaks in Finland and
some newspaper reports. The Financial Times was also
interested but was being managed. The minority
shareholders had, Mr. Christou thought, no interest in
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making difficulties.
It was RESOLVED that the Invia acquisition be
approved and Mr. Christou was directed to progress it.
The meeting then turned to the question of a long term
strategy for Invia, and reference was made to the CEO’s
report. The real problem was that the Invia
management did not have a full grip of their business or
financial issues. It was thought that the Financial
Director, who had now been in place for eight months,
had not done well, and Mr. Adachi had expressed his
displeasure. Although the business was reasonably well
tun in Finland, the management had failed to run the
businesses in Sweden, Denmark and Norway
effectively. It had therefore been concluded that FS
must take a much closer management interest, making
sure that the business was as profitable as possible,
controlling costs and making the most of the operations
in Sweden, Denmark and Norway. Mr. Courtley was
considering operational measures including removing
cost and also splitting the operation so that the
management in Finland ran only the Finnish business
and a much stronger interim manager was identified to
run the Scandinavian businesses from Sweden. This
should be beneficial for Finland, which had the requisite
critical mass and ought — like The Netherlands — to do
well. On the other hand, Norway, which was very small
and had only one or two substantial customers, ought to
be closed.
Moving beyond the measures to stabilise these
businesses, Mr. Christou made the point that any
proposals to sell Invia would be premature without an
understanding of how the businesses were currently
positioned and possession of sufficient information
about them.
A general discussion followed, to which Mr. Courtley,
Mr. Adachi, Mr. Hirata and the Chairman contributed.
Concerns were expressed about the accuracy of
forecasting, the capability of the Invia CFO, morale, the
leak of information and communications between
Helsinki, London and Tokyo. Mr. Christou explained the
background to the desire of the Finnish business to
have autonomy and the loss of morale when the
proposed float failed. In his opinion, Invia had lost its
way even if it was solely viewed as a Finnish operation:
it had lost market share and was much less profitable.
Although the Finnish management would dislike the
imposition of the same disciplines as applied in FS, Mr.
Christou thought that such a regime would help Invia’s
performance. If, on the other hand, Invia were left
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alone, its results would not improve. Indeed, if the same
approach were allowed to continue, there would be no
point in buying out the minority shareholders.
A discussion ensued about the best way to exert
influence on Invia, and the Chairman concluded that
Invia should report directly to FS with Mr. Adachi or Mr.
Hirata as additional directors. The Chairman asked Mr.
Christou and Mr. Courtley to ensure that they were kept
well informed and in a position to assess risks in future.
Mr. Christou confirmed that he would arrange for Mr.
Adachi to spend more time with Invia in future.
On the question whether Invia should be sold, Mr.
Christou repeated that the first step was to stabilise the
operations there. Investigations would be made and
recommendations drawn up, but this was unlikely to
happen until late August or early September 2002.
Whilst agreeing with this, the Chairman said that the
overriding need was to improve FS, and this meant
finding a potential buyer for Invia. He was content for
any thorough investigations to take place, but the end
result must be the sale of Invia.
McD
Mr. Christou reported progress on the proposed
disposal.
Investigation of the purchase price that could be
attained was proceeding. Morgan Stanley, acting for
FS, were investigating the financial position with a view
to preparing a valuation.
Their provisional conclusion was that the performance
last year of MCD had been so poor that there must be
some doubt about the saleability of the division. In Mr.
Christou’s opinion it was, however, better to sell this
business than to continue to hold it. There was a risk
that multivendor reselling was being squeezed out of the
market. He thought that net asset value and a little
more was the best price that could be looked for.
This year's trading was also looking unsatisfactory. Mr.
Courtley was working on a plan for securing a profit
improvement in the business.
Pensions FSMC/02/09
Mr. Christou referred in part to his CEO's report. There
were two issues, which were entirely separate. The first
related to the way in which FS would be required from
March 2004 to account for pension liabilities in its
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corporate accounts. The second related to the question
of whether the pension fund had sufficient assets over
the long term to meet the long term liabilities that the
fund had to its members.
On the question of corporate accounting, the current
accounting convention (SSAP24) calculated whether the
assets of the fund were currently larger than its liabilities
or less than its liabilities. In each case the company
was required to amortise the surplus or the deficit over
the future projected life of the members. For most
practical purposes this was usually considered as 10
years. The new accounting standard (FRS17) required
roughly the same calculation to decide whether there
was a surplus or a deficit but it then required the
company to add that surplus to its assets or deduct the
deficiency from its assets as at the date the calculation
was made. This calculation was made each year as at
the end of the relevant fiscal year. Given that the
market value of the assets was used in determining their
value and this valuation was made as at the date on
which the relevant fiscal year ends, there was
considerable fluctuation, from year to year, in the
surplus or deficit, so that the net assets of the company
would also fluctuate from year to year in a fairly
unpredictable way depending on the market values of
the pension fund assets at the end of the relevant fiscal
year. (In contrast, under the old SSAP24 this variation
was calculated only once every three years and was
smoothed or spread out over the period of 10 years as
described above.) Where a company had large net
assets in relation to the value of the assets in the
pension fund this was of little consequence. For
instance if a company had net assets of £1bn and the
assets in its pension fund were currently valued at
£100m, the fluctuations in the future valuations of those
assets (even if they halve in value) was of little overall
consequence.
Unfortunately, in Fujitsu Service’s case its net assets
were small but the assets in the pension fund were large
(over £1bn compared to net assets of somewhere
around £250m). This means that fluctuations in the
value of the pension fund assets could easily throw up a
deficiency which materially impacted Fujitsu Service's
net assets and in extreme cases could tum them into
negative assets. The consequences of this for a wholly
owned subsidiary and indeed on Fujitsu's consolidated
accounts would have to be considered as an issue of
corporate accounting. However, it was important to
realise that these calculations did not directly affect FS’
operating performance or cash flows nor were they
necessarily a true reflection of the solvency of the
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pension fund.
To consider the true situation of the pension fund the
question to ask was whether, over the life of the fund, it
would have enough assets, and income from those
assets or from contributions, to satisfy the liabilities
which it had to pay out to its members. The actuary was
obliged to carry out valuations to decide this issue every
three years, not every year as was the case with
FRS17.
Cash to satisfy those liabilities could only come from
three sources, contributions from the employer and the
employees, income on assets held, or the proceeds of
selling assets. When deciding whether the fund could
pay out sufficient cash to cover its liabilities, the actuary,
using somewhat different assumptions to those under
FRS17, would decide the stream of cash that was
necessary to satisfy future liabilities during the life of the
fund. To the extent that the market value of the current
assets (at the date of the actuary’s calculations), plus
the income that the actuary forecasts they would
generate, was not sufficient to pay out the liabilities, the
deficit must be matched by cash paid into the fund either
by the employer or the employees. By producing
discounted cash flows, the actuary could decide on the
net present value of the amount of cash that the
employer and employees must contribute over the life of
the fund in order to satisfy any gap that was left after
taking account of the capital value of the assets and the
income they would generate. However it was not
necessary to pay any of that net present value into the
fund immediately.
The actuary would calculate first of all the expected
income stream from employees’ contributions over the
life of the fund and then would satisfy the balance by
setting a level of employer contributions which created a
stream of cash over the life of the fund which covered
the remaining deficit.
Thus the employers’ level of contributions would rise in
the event that there was a deficiency and could be
reduced in the event that there was a surplus. Any
effect of a deficit in the plan (so far as cash flow was
concerned) was reflected for the employer in a larger
level of contributions to the fund in each year until the
value of the investments in the fund rose sufficiently
(together with their projected income) that there was no
need for further deficit funding. The P&L effect of this
funding deficit was an increase in the employer's labour
costs associated with employing those employees who
were members of that fund.
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In the past ICL had been able to pay no employers’
contributions because the level of assets was sufficiently
high to make this unnecessary. At present, FS was
paying pension contributions at 18.3% and if there was
a deficit with contributions at this level then that
percentage would need to be increased until the
situation changed.
It was thus important to realise that the calculations
used for the purpose of corporate accounts under
SSAP24 or FRS17 did not determine the level of
deficiency or surplus in the fund over the long term nor
did they require that the company pay into the fund each
year the amount in cash of any deficit thrown up by the
calculation under FRS17.
It was useful to have a further discussion and to
understand the effect on the corporate accounts but, so
far as paying further cash or changing the contribution
rate into the pension fund for the employer, this should
await a full and careful valuation of the fund and its
liabilities by the actuaries, which would take place in
April 2003. Until then there would not be sufficient data
to take any particular decision on the subject, although
the Group was considering an interim valuation and a
number of options for dealing with this issue.
The Chairman asked whether there would be a deficit in
the fund and, if so, whether it would be a big one. Mr.
Christou said that he did not know. It depended on
where equities stood in April 2003. He thought it was
likely that there would be a deficit, but he did not know
what size it would be.
Mr. Leek attended the Meeting and reported on his
conversations with Mr. Okada. The plan was that, from
now until September, alternative strategies would be
worked up. Thereafter, the actuaries, Watson Wyatt,
would take three to four months to do the valuation. It
should then be possible to suggest a way forward. Mr.
Adachi asked what, if the deficit identified was of the
order of £300m, would be the solution. Mr. Christou
said that, if the deficiency arose under FRS 17 and the
Company had negative net assets, the solution would
be the injection of further capital. If the deficiency was
in the pension fund, the employer's contributions would
need to be increased. An alternative would be to wind
up the fund, or to put cash into the fund (although there
was no obligation to do the latter). Another possibility
was to operate the fund as a completely closed scheme,
paying cash to top up benefits. The level of the deficit
would determine what needed to be done. Yet another
alternative would be to sell the fund to a large insurance
company, but such a course should only be taken when
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values were high. In conclusion, this was not a
desperate situation but it needed to be managed
thoroughly.
02/10 Customer Issues FSMC/02/04
Mr. Courtley referred to his report. The main points to
which he wished to draw attention were as follows:
Irrelevant.
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{
Irrelevant I
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ferentonunmy-wemnrwernrerernene -
Mr. Christou added that he would be reluctant to
lose this business and, provided it was profitable, he
thought FS should proceed with it.
The Chairman noted that a thorough study was
being made. He thought that a longer term view of
this project should be taken. On the question of FS
involvement in the US, the Chairman was discussing
such operations with Mr. Nagano and, though
European business should have priority, he thought
FS should capitalise on all its existing relationships.
Mr. Kodama referred to his own involvement in due
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diligence for Fujitsu Limited and through his role in
relation to software servicing. He wondered whether
Fujitsu Limited could help. Mr. Courtley thought that
it could. He believed this particular contract could be
the base line or basis for future business. He did not
wish to discourage the FS sales team.
Mr. Christou noted that due diligence ended on the
26" June 2002. He felt that the analysis should
proceed.
The Chairman asked about the quality of people in
data centres and whether costs could be reduced by
15-20%. Mr. Courtley said that the operation was
not badly run at present, but it could be better. The
key was getting the right quality of management in
place. He had taken steps to achieve this and also
to get the right information and to ensure it was
analysed properly to secure the best result. Mr.
Adachi said that FS was doing the necessary
calculations but would appreciate Fujitsu Limited's
input. The new management team should inspire
confidence and FS needed to stand on its own feet
in this.
The Chairman commented that, as FC would be the
prime contractor in this matter, risk was very much
uppermost in Mr Madarome’s mind. That is why he
had requested proper due diligence. Mr. Adachi
indicated a concern about sending US business
through FS.
Mr. Courtley said that FS would know at the
end of June whether it would win this project.
Pathway — agreement had not yet quite been
reached on the new network banking contract.
However, the customer was meanwhile paying FS
on a time and materials basis to do the work in any
event. The customer had ordered hardware etc. At
present it was hoped to close this matter in mid-
June. Meanwhile, discussions were continuing with
the customer about extensions and variations.
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months ago inviting Mr. Christou to cause FS to
share the pain on an £18m overrun with a view to
renegotiating the contract. Mr. Christou also
referred to the fact that the former Project Director,
Angela Thomas, had been criticised by Mr. Dekozan
for sticking to the letter of the contract instead of
being accommodating. This had resulted in FS
putting in another Director. Mr. Christou believed
that, as Mr. DeKozan has been unable to persuade
him to share the pain on the contract, he had
decided with EDS and Transys to do a new deal with
LT which would cut FS out of the project without
payment whilst conceding around £7m to LT. This
could mean that there had been a kind of conspiracy
to deprive FS of its rights under the contract.
On the question whether FS had performed its
duties as sub-sub-contractor, a report obtained from
the independent expert, Charteris, said that the
delay resulted materially from failures by Cubic and
London Transport to perform dependencies and that
this contributed seriously to the delay caused. In
short, Mr. Christou felt that FS had been badly dealt
with by Cubic. If FS did what Cubic now wanted, it
would have to give up its IPRs, give up its invoiced
charges of £7.7m and possibly pay compensation to
Cubic as well.
The present position was that FS had refused to
hand over its IPRs, which had annoyed both London
Transport and Cubic. Mr. Christou had had a
meeting with Jay Walden, the second-in-command
at London Transport. The latter had asked about
FS’s position and FS had indicated its willingness to
help London Transport but felt it was in the right. A
meeting was being set up between Mr. Christou and
Mr. Courtley on the hand and the LT Project
Director, and this would take place. There would no
doubt be frank discussions, and the question was
where they would lead. It was possible that action
would have to be taken against any one or more of
CTS, Cubic Corporation, Mr. Walter Zabel, LT and
EDS. At present it was impossible to say whether
such proceedings would be necessary. Whilst Mr.
Christou was reluctant to take that sort of action, he
could not contemplate FS giving up many millions of
pounds simply to be seen as acting co-operatively
with Cubic. Mr. Christou mentioned that Cubic
Corporation often engaged in litigation and appeared
to have a poor record. He commented that Fujitsu
Limited might well receive more letters from Mr.
Zabel.
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Overall, FS’s position was that it was willing to help
London Transport and would be happy to do a deal
with them. It would expect to get compensation and
help with the other sub-sub-contract with EDS on
support. This was not an operations issue but a
commercial/legal issue.
The Chairman noted that the other party's
perception of this dispute might be that FS were to
blame. He hoped that FS would find a way to
resolve the matter, although he added that FS
should not capitulate. He referred to the Fujitsu
Limited semi-conductor relationship with Cubic. If
FS wished, discussions could be escalated to the
Fujitsu Limited level.
Mr. Christou reiterated that he did not wish to litigate
with the other parties to the project, but felt he might
have to do so. He added that Mr. Shiraiwa of Fujitsu
Legal had been in touch with Richard Allnutt and Mr.
Hirata.
Items for Noting and Questions FSMC/02/05
FSMC/02/06
FSMC/02/07
FSMC/02/08
FSMC/02/10
Mr. Christou said that he thought most of these points
had already been dealt with during earlier discussions.
As regards Africa, he was taking steps to dispose of or
close the African businesses. As regards the countries
outside South Africa, the closures would take place by
the end of H2. The operations in South Africa itself and
Botswana would be more difficult and expensive to shut
down, because of customer obligations. It would not be
easy to sell the operations.
Mr. Courtley was intending to stabilise the operations
with a view to seeing whether break-even could be
achieved in H2. Mike Stairs, who had until recently
been dealing with France, was now dealing with Africa.
The other items were either self-explanatory or had
been dealt with above.
The Chairman asked that further details on the HR
Manpower report be passed to Mr. Kodama.
The Chairman asked what measures were to be taken
for the non-core countries. Mr. Christou confirmed that
he would clarify this by the middle or end of July: the
work had already been started and was fairly far
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advanced.
There being no further business, the meeting ended.
Chairman
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