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Business Risk Factors

Risk factors relating to the Toshiba Group ("the Group") and its business

The business areas of energy and electronics, the Group’s main business areas, require highly advanced technology for their operation. At the same time, the Group faces fierce global competition. Under such circumstance, major risk factors related to the Group recognized by the Company are described below. However, they should not be regarded as a complete and comprehensive statement of risk factors relating to the Group, and there are unforeseeable risk factors other than those described below. The actual occurrence of any of those risk factors may adversely affect the Group’s operating results and financial condition.

The risks described below are identified by the Group based on information available to the Group as of September 7, 2015 and involve inherent uncertainties, and, therefore, the actual results may differ.

1. Risks related to management policy

(1) Strategic concentrated investment

The Group is making strategic concentrated investments in the categories which aim to implement comprehensive solutions for various issues such as the increase in demand for energy or the rise in the price of resources, which are associated with the growth and expansion of emerging economies, drastic change and mass capacity growth of the information transmission and/or storage and the ensuring of the information security. While it is essential to allocate limited management resources to high growth areas or areas in which the Group enjoys competitiveness, in order to secure and maintain the Group’s advantages, the areas in which the Group is making concentrated investments may not grow as anticipated, the Group may not maintain or strengthen its competitive power in such areas, or the relevant investments may not fully generate the anticipated level of profit.

(2) Success of strategic business alliances and acquisitions

The Group actively promotes business alliances with other companies, including the formation of joint ventures, and acquisitions, in order to grow new businesses in research and development, production, marketing and various other areas. If the Group has any disagreement with its partner in a business alliance or an acquisition in respect of financing, technological management, product development, management strategies or otherwise, such business alliance may be terminated or such business alliance or acquisition may not have the expected effects. In addition, the Group’s operating results and financial condition may be adversely affected by additional capital expenditures and provision of guaranties to meet the obligations for such partnership business that may be incurred due to the deterioration of the financial condition of the partner, as well as for other reasons.

(3) Business structure reformation

The Group as a whole is taking measures to reform its business structure, in order to continue and deepen the establishment, through self-transformation, of the business quality by which it can ensure a stable profit, not susceptible to a changing environment, and the Group has incurred expenses for business structure reform in this connection and there is a possibility that the Group continues to incur such expenses in the future. However, in the event of unexpected fluctuations in foreign exchange rates, or the failure of the reform programs to produce the expected results, the Group may incur additional expenses for business structure reform due to the necessity of additional measures and in such case the Group’s operating results or financial condition may be adversely affected.

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2. Risks related to financial condition, results of operations and cash flow

(1) Business environment of the Energy and Infrastructure business

A significant portion of the net sales in the Energy and Infrastructure business is attributable to national and local government expenditures on public works and to capital expenditures by the private sector. Accordingly, this business could be affected by trends in such capital expenditures, and reductions and delays in spending on public works, low levels of private capital expenditures due to the economic recession, and exchange rate fluctuations may have a negative impact on this business.

Furthermore, this business promotes and involves the supply of products and services for large-scale projects on a worldwide basis. Post order changes in the specifications or other terms, delays, appreciation of material costs, changes to and suspension or stoppage of plans for various reasons, including policy changes, natural and other disasters and other factors, may adversely and substantially affect the progress of such projects. In addition, in the projects where the percentage-of-completion method is used for revenue recognition, the Group may retroactively reassess profits that had been recorded as accrued and record them as losses if, among other things, the original estimate is overestimated or underestimated, the expected profits from such projects do not meet original expectations, or the projects are delayed or cancelled for some reason. In the past, the Group recorded losses on certain projects.

Furthermore, it may not be possible to pass on to the customer or others any additional costs incurred due to the stoppage of the project, changes in regulations or other terms or delays in the work process, and such costs may not be collected, or a dispute may arise over such costs. In fact, there are certain projects regarding which the Group is taking legal action. With respect to the investments in an operator that promotes a certain project which investment is made in order to secure the order from such operator, there may be impairments in investments, increases in the financial burden, delays in payouts depending upon the trends in projects.

Although difficulties may arise for the continuance of certain currently ongoing projects due to a change in the policies of fund providers and other factors, the Group is making every effort to obtain other fund providers for such pending projects.

(2) Business environment of the Community Solutions business

The Community Solutions business provides diversified solutions and strengthens the smart community business aimed at delivering multiple urban and regional solutions that include the facilities business related to facilities, such as buildings, factories and housings, and the urban infrastructure solution business and the retail business. Furthermore, the Group has participated in demonstration experiments in the area of the smart community business on a worldwide basis and has provided diversified solutions in collaboration with local governments.

Since a significant portion of the net sales in this business is attributable to sales related to expenditures on public works and capital expenditures by the private sector, reductions or delays in spending on public works, low levels of private capital expenditures due to the economic recession, and trends in building and housing construction on a worldwide basis and other factors may have a negative impact on this business.

This business is promoting its business development on a worldwide basis. Post order changes in the specifications or other terms, changes to and stoppages of plans for various reasons including policy changes, changes in regulations, appreciation of material costs and personnel expenses, natural and other disasters and other factors, may adversely and substantially affect the progress of this business. In addition, exchange rate fluctuations and other factors may also have a negative impact on this business.

In addition, in projects where the percentage-of-completion method is used for revenue recognition, the Group may retroactively reassess profits that had been recorded as accrued and record them as losses if, among other things, the original estimate is overestimated or underestimated, the expected profits from such projects do not meet original expectations, or the projects are delayed or cancelled for some reason. In the past, the Group recorded losses on certain projects.

(3) Business environment of the Healthcare Systems and Services business

A significant portion of the net sales in the Healthcare Systems and Services business is attributable to medical businesses. While the medical businesses expands and develops its global market amid improvements in the medical infrastructure in emerging economies, the escalation of social welfare spending is a challenge for countries in which the population is aging, and this business is situated in a business environment which is significantly affected by policy to reduce medical expenses.

Products for medical institutions, by their nature, require a lot of time to design, research and develop and, sell the products since they require a certain amount of time to prove the clinical effects of the new technology and products, and also require obtaining approval and homologation pursuant to the laws and regulations on medical devices in various countries. On the other hand, as recent medical technology has been remarkably advanced, state-of-the-art research and development, collaborating with advanced medical institutions in various countries, has been carried out on a global scale. Continuous investments in R&D expenditures are essential to keeping up with the speed of revolutionary medical technology. As a result, although the Group makes investments based on detailed considerations and expectations, the Group may not be able to foresee changes in the market environment and medical policies and other factors, to sell products in line with market needs in a timely manner and thus may not be able to maintain its competitiveness, and consequently, investments in R&D expenditures and investments in advances into new business areas for the Healthcare Systems and Services business may not fully generate the anticipated level of profit.

(4) Business environment of the Electronic Devices and Components business

While the substantial portion of operating income/loss of the Group relies on the Electronic Devices and Components business, the market for the Electronic Devices and Components business is highly cyclical, depending on demand and supply, and intensely competitive, with many companies, mainly in overseas markets, manufacturing and selling products similar to those offered by the Group. The results of this business tend to change with economic fluctuations and, in particular, to be heavily affected by exchange rate fluctuations. Unforeseen market changes and corresponding changes in demand at the time of production may result in a mismatch between the production of particular products based on the sales volume initially expected and the actual demand for such products, or cause the business to be adversely affected by a decrease in product unit prices due to oversupply. In particular, the price for NAND flash memory, the Group’s major product in this business, may undergo rapid change, and changes in the consumer market or semiconductor heavy users may adversely influence demand for System LSIs and other semiconductor products.

Fluctuations in the results of this business may materially and adversely affect the Group’s overall business performance. In addition, the market may face a downturn, the Group may fail to market new products in a timely manner, production may not go as planned, or a rapid introduction of new technology may make the Group’s current products obsolete. Economies of scale with respect to the manufacture of the many products produced by this business are significant and there is intense competition to develop and market new products. Therefore, significant levels of capital expenditures are required to maintain and improve competitiveness in both the price and quality of products. However, there is a possibility that the necessary amount of capital expenditure cannot be secured at appropriate timing depending on the financing environment of the Group and other factors.

(5) Business environment of the Lifestyle Products and Services business

The market for the Lifestyle Products and Services business is intensely competitive, with many companies manufacturing and selling products similar to those offered by the Group and under the circumstances where earnings are structurally difficult to be recorded. Additionally, this business may be significantly affected by exchange rate fluctuations, economic fluctuations and consumer spending trends which may be affected by the scheduled increase in consumption tax, among other things. Moreover, any rapid fluctuation in demand may result in price erosion or increases in prices of parts and components, which may adversely affect the Group’s financial results with respect to this business.

The Group is promoting structural reforms in an attempt to improve profit and enhance the basic structure of the Lifestyle Products and Services business. In this connection, there is a possibility that the Group will incur a large amount of expenses for business structure reform which may give material negative impact on profitability.

(6) Financial risk

Apart from being affected by the business operations of the Company or the Group, the Company’s consolidated and nonconsolidated results and financial condition may be affected by the following major financial factors:

(ⅰ) Deferred tax assets

The Company accounted for a substantial amount of deferred tax assets. The Group reduces deferred tax assets by a valuation allowance if, based on the weight of available evidence, some portion or all of the deferred tax assets are unlikely to be realized. Recording of valuation allowances includes estimates and therefore involves inherent uncertainty.

The Group may also be required hereafter to record further valuation allowances, and the Group’s future results and financial condition may be adversely affected thereby.

The Group may be affected by future tax regulatory changes as the recordation of deferred tax assets and valuation allowances have been made based on the currently-effective tax regulations.

(ⅱ) Exchange rate fluctuations

The Group conducts business in various regions worldwide using a variety of foreign currencies and is therefore exposed to exchange rate fluctuations.

Although the Group makes efforts to minimize the effect of fluctuation in exchange rates by balancing sales in foreign currencies and purchase in foreign currencies, there is a possibility that operating income/loss will be affected by exchange rate fluctuations due to a change in the balance in each business segments and other factors. Also, there is a possibility that such foreign exchange losses will occur, as resulting from a difference between the exchange rates at the time of recognizing and at the time of settlement of the credits and debts in foreign currencies, in case of steep exchange rate fluctuations.

Foreign currency denominated assets and liabilities held by the Group are translated into yen as the currency for reporting consolidated financial results. The effects of currency translation adjustments are included in “accumulated other comprehensive income (loss)” reported as a component of equity attributable to shareholders of the Company (“shareholders’ equity”). As a result, the Group’s shareholders’ equity may be adversely affected by exchange rate fluctuations.

(ⅲ) Accrued pension and severance costs

The Group recognizes the funded status (i.e., the difference between the fair value of plan assets and the benefit obligations) of its pension plan in the consolidated balance sheets, with a corresponding adjustment, net of tax, included in “accumulated other comprehensive loss” reported as a component of shareholders’ equity. Such adjustment to“accumulated other comprehensive loss” represents the result of adjustment for the net unrecognized actuarial losses, unrecognized prior service costs, and unrecognized transition obligations. These amounts will be subsequently recognized as net periodic pension and severance costs calculated pursuant to the applicable accounting standards. The funded status of the Group’s pension plan may deteriorate due to declines in the fair value of plan assets caused by lower returns, increases of severance benefit obligations caused by changes in the discount rate, salary increase rates or other actuarial assumptions. As a result, the Group’s shareholders’ equity may be adversely affected, and the net periodic pension and severance costs to be recorded in “cost of sales” or “selling, general and administrative expenses” may increase.

(ⅳ) Impairment of long-lived assets, goodwill and listed shares.

If there is an indication of impairment for a long-lived asset and the carrying amount of such asset will not be recovered by the future undiscounted cash flow, the carrying amount may be reduced to its fair value and a loss may be recognized as an impairment with respect to such difference. As of March 31, 2015, 673,817 million yen of goodwill was recorded in the Company’s consolidated balance sheets in accordance with U.S. generally accepted accounting principles. Out of the above, 555,680 million yen was allocated to the Energy and Infrastructure business, most of which was recorded due to the acquisition of Westinghouse group conducted in October 2006 and the acquisition of Landis+Gyr conducted in July 2011. Goodwill is required to be tested for impairment annually. If an impairment test shows that the total of the carrying amounts, including goodwill, in relation to the business related to such goodwill exceeds its fair value, the relevant goodwill must be recalculated, and the difference between the current amount and the recalculated amount will be recognized as an impairment. Therefore, additional impairments may be recorded, depending on the valuation of longlived assets and the estimate of future cash flow from business related to goodwill.

Also, if the market price of listed shares held by the Group as the marketable securities declines, there is a possibility that an impairment loss on the relevant shares will be recorded or that the net unrealized losses on securities will be negatively recognized.

(7) Changes in financing environment and others

The Group has substantial amounts of interest-bearing debt for financing that is highly susceptible to market environments, including the European debt crisis, interest rate movements and fund supply and demand. Thus, changes in these factors may have an adverse effect on the Group’s funding activities. The Group has also been raising funds by issuing bonds or taking loans from financial institutions. In the case the financial markets fall into unstable turmoil, the financial institutions’ reduction in their lending in response to the change in capital adequacy requirements, or the downgrading of the credit rating of the Company given by rating agencies, there can be no assurance that the Group will obtain refinancing loans or new loans in the future on similar terms. If the Group is unable to obtain loans for the amount needed by the Group in a timely manner, the Group’s financing may be adversely affected. Moreover, because of the amendments of the past Annual Securities Reports and other reports, which is described in “10. Past inappropriate accountings,” below, the credit rating may be downgraded.

In addition, loan agreements entered into between the Company and several financial institutions provide for financial covenants. Therefore, if the Company’s consolidated net assets, consolidated operating income or credit rating falls below the respective levels provided for in the financial covenants, the Company’s obligations with respect to the relevant loan repayments may be accelerated upon demand by the relevant lending financial institutions. Furthermore, any breach by the Company of those financial covenants may trigger acceleration of the bonds or other borrowings of the Company.

The Company will make all possible efforts to obtain the understanding of the lending financial institutions with respect to this, in order to avoid breaching financial covenants and the consequent acceleration of repayments. However, if any acceleration of the Company’s loan repayments occurs, it may materially and adversely affect the Company’s business operations.

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3. Risks related to business partners and others

(1) Procurement of components and materials

It is important for the Group’s business activities to procure materials, components and other goods in a timely and appropriate manner. However, such materials, components and goods may only be obtainable from a limited number of suppliers due to the particularity of such materials, components and goods, and, therefore, such suppliers may not be easily replaced [if the need to do so arises]. In cases of delay or other problems in receiving supply of such materials, components and other goods, shortages may occur or procurement costs may rise. It is necessary to procure materials, components and other goods at competitive costs and to optimize the entire supply chain, including suppliers, in order for the Group to bring competitive products to market. In addition, a shortage in the electric power supply resulted from the suspension of the operation of nuclear power plants in Japan and a further rise in electricity costs due to the rise of fuel costs affected by exchange rate fluctuations may affect business activities, including manufacturing operations, of the Group, since a stable supply of electricity is essential to the Group’s business activities.

Any failure by the Group to procure such materials, components and other goods from key suppliers or any shortage in the power supply or further rise in electricity costs may adversely impact the Group’s competitiveness. Furthermore, any case of defective materials, components or other goods, or any failure to meet required specifications with respect to such materials, components or other goods, may also have an adverse effect on the reliability and reputation of the Group and Toshiba brand products.

(2) Securing human resources

A large part of the success of the Group’s businesses depends on securing excellent human resources in every business area and process, including product development, production, marketing and business management. In particular, securing the necessary human resources is essential in respect of achieving globalization of the Group’s businesses.

However, competition to secure human resources is intensifying, as the number of qualified personnel in each area and process is limited, while demand for such personnel is increasing. As a result, the Group may fail to retain existing employees or to obtain new human resources or require costs more than in the past in order to obtain such human resources.

In order to reduce fixed costs, the Group is implementing personnel measures, including the reallocation of human resources to focus on strong and promising businesses, reclaiming jobs that are outsourced to third parties or conducted by limited-term employees, reducing the number of limited-term employees implementing a leave system, and reducing overtime through a review of working systems. However, fixed costs may not be reduced as anticipated or the implementation of such personnel measures may adversely affect the Group’s employee morale, production efficiency or the ability to secure capable human resources.

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4. Risks related to products and technologies

(1) Investments in new businesses

The Group invests in companies involved in new businesses, enters into alliances with other companies with respect to new businesses, and actively develops its own new businesses.

Cultivation of new businesses entails substantial uncertainty, and if any new business in which the Group invests or which the Group attempts to develop does not progress as planned, the Group may be adversely affected by incurring investment expenses that do not lead to the anticipated results.

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5. Risks related to trade practices

(1) Parent company’s guarantees

When a subsidiary of the Company accepts an order for a large project, such as a plant, the Company, as the parent company, may, at the request of the customer, provide guarantees with respect to the subsidiary’s performance under the contract. Such parent guarantees are made pursuant to standard business practices and in the ordinary course of business. If the subsidiary subsequently fails to fulfill its obligations, the Company may be obligated to bear losses as a result.

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6. Risks related to new products and new technology

(1) Development of new products

It is critically important for the Group to offer innovative and attractive new products and services. However, due to the rapid pace of technological innovation, the emergence of alternative technologies and products and changes in technological standards, the optimum introduction of new products to the market may not be accomplished, or new products may be accepted by the market for a shorter period than anticipated. In addition, any failure on the part of the Group to continuously obtain sufficient funding and resources for development of technologies may affect the Group’s ability to develop new products and services and to introduce them to market.
From the viewpoint of enhancing concentration and selection of managerial resources, the Group now selects research and development themes more rigorously, with a primary focus on developing original and advanced technologies, with close consideration for the timing of market introduction. In certain products and technological fields, the research and development may not proceed due to more focus on research and development in other products and technological fields, and as a result, the Group’s technological superiority may be impaired.

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7. Risks related to laws and regulations

(1) Information security

The Group maintains and manages personal information obtained through business operations. Even though the Group makes every effort to manage this information appropriately, the Group’s brand image, reputation and business performance may be subject to negative influences, or the Group may be found to be liable for damages in the event of an unanticipated leak of such information which results in illegal retention or usage of such information by a third party.

The Group also maintains and manages trade secrets regarding the Group’s technology, marketing and other business operations. The Group is implementing measures to prevent leakage of such trade secrets outside the Group through maintaining and tightening control of its information management system, training its employees, and other measures.

However, in the past, situations have occurred in which leakage of trade secrets was suspected. The Group’s
competitive power may be weakened and the Group’s business, operating results and financial condition may be subject to negative influences, in the event of an unanticipated leak of such information which results in illegal retention or usage of such information by a third party.

Additionally, the role of information systems in the Group is critical to carrying out business activities. While the Group makes every effort to ensure the stable operation of its information systems, there is no assurance that their functionality would not be impaired or destroyed by computer viruses, software or hardware failures, disaster, terrorism, or other causes, and in such cases the Group’s business performance may be adversely affected.

(2) Compliance and internal control

The Group is active in various businesses in regions worldwide, and its business activities are subject to the laws and regulations of each region. The Group has implemented and operates the internal control systems for a number of purposes, including compliance with laws and regulations and strict reporting of business and financial matters.

However, there can be no assurance that the Group will always be able to structure and operate effective internal control systems. It was found that inappropriate accountings such as the priority of benefit and advance of expenses were repeatedly conducted in the Company for the past several years, and there was deficiency in the internal control related to reporting of business and financial matters. The Company recognizes the importance of the internal control related to the reporting of business and financial matters and, based on the recommendations by the Independent Investigation Committee established on May 15, 2015, in order to correct the deficiency, the Company has decided to establish Management Revitalization Committee which is intended to appropriately operate and implement, among others, new management structure, reform of the governance structure and measures to prevent reoccurrence of inappropriate accountings. At the initiative of such Committee, the Company will correct the deficiencies mentioned above, take measures to prevent reoccurrence of inappropriate accountings and construct and operate appropriate internal control systems under the new structure. Moreover, such internal control systems may themselves, by their nature, have limitations, and it is not possible to guarantee that they will fully achieve their objectives. Therefore, there is no assurance that the Group will not unknowingly and unintentionally violate laws and regulations in future. Changes in laws and regulations or changes in interpretations of laws and regulations by the relevant authorities may also cause difficulty in achieving compliance with laws and regulations, or in continuing business in certain regions or business categories, and may result in increased compliance costs. Furthermore, if the Group is in violation of these laws and regulations, the Group may be subject to administrative sanctions, such as fines, or criminal penalties, and legal actions claiming damages may be filed against the Group. In such cases, the Group’s reputation may be adversely affected, and the Group’s business, operating results and financial condition may be adversely affected.

(3) The environment

The Group is subject to various environmental laws, including laws on air pollution, water pollution, toxic substances, waste disposal, product recycling, prevention of global warming and energy policies, in its global business activities.

It is possible that the Group may encounter legal or social liability for environmental matters, such as liability for the clean up of land at manufacturing bases throughout the world, regardless of whether the Group is at fault or not, with respect to its business activities, including its past activities.

It is also possible that, in future, the Group will face more stringent requirements on the removal of environmental hazards, including toxic substances, or on further reducing emissions of greenhouse gases, as a result of the introduction of more demanding environmental regulations or in accordance with societal requirements.

The Group’s operations require the use of various chemical compounds, radioactive materials, nuclear materials and other toxic materials.

However, the Group may incur damage, or the Group’s reputation may be adversely affected, as a result of a natural disaster, the threat or occurrence of a terrorist incident, or of an accident or other contingency (including those beyond the Group’s control) that leads to environmental pollution or the potential for such pollution.

(4) Product quality claims

While the Group makes every effort to implement quality control measures and to manufacture its products in accordance with appropriate quality-control standards, in the past, the Group recalled certain products, and lawsuits and other claims relating to product quality were filed against the Group, and there is no assurance that all products are free of defects that may result in such product quality claims due to unforeseen reasons or circumstances.

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8. Risks related to material legal proceedings

(1) Legal proceedings

The Group undertakes global business operations and is involved from time to time in disputes, including lawsuits and other legal proceedings, and investigations by relevant authorities. It is possible that such cases may arise in the future.

Due to the differences in judicial systems and the uncertainties inherent in such proceedings, the Group may be subject to a ruling requiring payment of amounts far exceeding its expectations. Any judgment or decision unfavorable to the Group could also have a material adverse effect on the Group’s business, operating results or financial condition. In addition, due to various circumstances, there can be no assurance that lawsuits involving claims for large sums will not be brought, even if the possibility of receiving orders for such payment is quite low.

The Group is under investigation by the European Commission, and other competition regulatory authorities, for alleged violations of competition laws with respect to products that include semiconductors, cathode ray tubes (CRT), heavy electrical equipment, and optical disc devices. In addition, class action lawsuits and other claims with respect to alleged anti-competitive behavior regarding certain products brought against the Group are currently pending in the United States.

The Ministry of Defense (“MOD”) cancelled a contract for the development and manufacture of the “reconnaissance system for the F-15” between MOD and the Company. Therefore, in July 2011, the Company filed a lawsuit against MOD with the Tokyo District Court seeking payment therefore. In October 2012, MOD filed a countersuit for penalty charges based on the alleged infringement by the Company of the contract. The Company believes that it had properly executed its duties pursuant to the conditions of the contract and that MOD’s cancellation of the contract and claim for penalty charges were unreasonable. Therefore, the Company will assert its opinion in the suit.

In December 2012, the European Commission determined that there was an infringement of EU Competition Law in the Color Picture Cathode Ray Tube market, and adopted the decision to impose a fine of approximately 28 million euro on the Company, plus a fine of approximately 87 million euro jointly and severally with Panasonic Corporation and MT Picture Display Co., Ltd. According to the Company’s investigation, the Company has not infringed EU Competition law.

Therefore, the Company brought an action to the General Court of the European Union in February 2013.

In November 2014, there was an arbitral award against the Group to find the breach of contracts with clients for the reason of defect of electricity meter in Europe. In July 2015, new arbitration seeking damages was filed. Going forward, the Group intends to assert its opinion in the arbitration.

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9. Risks related to directors, employees, major shareholders and affiliates

(1) Alliance in NAND flash memory

The Group has a strategic alliance with a U.S. company, SanDisk Corporation (“SanDisk”), for the production of NAND flash memory, which includes production joint ventures (equity method affiliates). Under the joint venture agreement, the Group may purchase SanDisk’s ownership interests in the production joint ventures. In addition, the Company and SanDisk each provide a 50% guaranty in respect of the lease agreements of production facilities held by the production joint ventures. In the event that SanDisk’s operating results and financial condition deteriorate, the Company may succeed to SanDisk’s guaranty obligations or purchase SanDisk’s ownership interests in the relevant production joint ventures, in which case the production joint ventures will be treated as consolidated subsidiaries of the Company.

(2) Alliance in nuclear power systems business

The Group acquired Westinghouse group in October 2006. The Company’s ownership interest in Westinghouse group (including the holding companies) is currently 87% at present. The remainder is held by two companies in Japan and overseas (the “Minority Shareholders”). The Company is considering inviting the participation of new investors in Westinghouse, on the condition that the Company retains a majority-in-interest.

The Minority Shareholders, based on a separate agreement with the Company, have been given an option to sell all or part of their ownership interests to the Company (“Put Options”).

The Group also has an option to purchase from the Minority Shareholders all or part of their respective ownership interests in companies of Westinghouse group under certain conditions. These options are in place for the purpose of protecting the interests of the Minority Shareholders, while preventing equity participation by a third party which may put the Group at disadvantage. The Company makes every effort to maintain a favorable relationship with the Minority Shareholders in connection with Westinghouse group’s business. However in the event that the Minority Shareholders exercise their respective Put Options, or the Group exercises its purchase option, the Group will seek investment from a new strategic partner. Prior to such an investment, the Group may need to procure a certain amount of funds in connection with the exercise of Put Options or purchase options.

(3) Agreements regarding natural gas

The Company executed (ⅰ) the service agreements for processing liquefied natural gas with the companies providing services for liquefying natural gas in the United States, and (ⅱ) the pipeline agreements with the pipeline companies in United States, for the purpose to sell natural gas to the users in other countries including Japan. Pursuant to these agreements, the Company will be provided the series of services. In these agreements, it is assumed that the Company will use certain amount of the liquefying ability of the companies providing services for liquefying natural gas and the pipelines of the pipeline companies for the period of twenty (20) years from 2019. The Company generally expects to execute long-term transaction agreements with users with respect to the total amount of liquefied natural gas (LNG) the Company will obtain. However, since the payment obligations of service fee to such companies continues even if the Company cannot sell LNG to the users or in the market under conditions (including the price) the Company expects, the Company may be obligated to bear losses as a result.

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10. Past inappropriate accountings

In February 2015, the Company received an order from the Securities and Exchange Surveillance Commission, based on Article 26 of the Financial Instruments and Exchange Act, requiring submission of a report. The Company was then subject to inspection regarding projects that used percentage-of-completion accounting. Later, after establishing the Independent Investigation Committee and conducting the investigation, it was found that the Company continuously made inappropriate accountings and, therefore, the Company filed amendments of the past Annual Securities Reports and other reports.

Going forward, the Company may be sued by its shareholders and others with respect to such inappropriate accountings and depending on the progress of such procedures, the Group’s business, operating results and financial condition may be adversely affected. In addition, the Company may be charged administrative monetary penalty by the Financial Services Agency, sanctions by stock exchange in which the Company is listed, or administrative actions or investigations, including the nomination stop and suspension of business related to construction, by governmental authorities. If the Company receives such sanctions, the Group may suffer from opportunity loss or degradation of social reputation accompanied thereby, and as a result, the Group’s business, operating results and financial condition may be adversely affected.

With respect to administrative monetary penalty, a reasonably estimated amount of allowance has been reserved.

Moreover, if the net asset value of the Company is adversely affected based on the inappropriate accountings, when the Company executes an EPC (Engineering, Procurement and Construction) agreement, the Company may not be able to satisfy the financial standards required by the ordering party, and as a result, the Company’s ability to accept orders may be adversely affected.

In addition, because of the inappropriate accountings, the Company is in breach of representations and warranties and covenants under the loan agreements among the Company and multiple financial institutions; however, such financial institutions have agreed to continue financing for the time being. Moreover, in the shelf registration supplemental prospectus the Company prepared at the time of issuance of corporate bonds, the Company is required to regularly report to the bond administrator, but the Company has agreed on the extension of such report.

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11. Others

(1) Measures against counterfeit products

While the Group protects and seeks to enhance the value of the Toshiba brand, counterfeit products created by third parties are found worldwide. While the Group makes every effort to prevent counterfeit products, the heavy circulation of counterfeit products may dilute the value of the Toshiba brand, and the Group’s net sales may be adversely affected.

(2) Protection of intellectual property rights

The Group makes every effort to secure intellectual property rights. However, in some regions, it may not be possible to secure sufficient protection.

The Group uses the intellectual property of third parties pursuant to licenses. It is possible that the Group may fail to receive the necessary third-party licenses for new technology or is unable to obtain the renewal of existing licenses or receives them on unfavorable terms.

In the past, law suits or similar actions or proceedings have been brought against the Group in respect of intellectual property rights, and the Group has filed law suits in order to protect its intellectual property rights. Such lawsuits and actions may be brought against the Group or the Group may file lawsuits against infringing third parties in the future.

Such lawsuits may require time, costs and other management resources, and depending on the outcome of these lawsuits, the Group may not be able to use important technology, or the Group may be found to be liable for damages.

(3) Political, economic and social conditions

The Group undertakes global business operations. Any changes in political, economic, and social conditions and policies, legal or regulatory changes, including rules and regulations concerning investment, repatriation of profits, export and import controls, foreign exchange, and taxation, and exchange rate fluctuations, in Japan or overseas, may adversely impact market demand and the Group’s business operations.

(4) Natural disasters

Most of the Group’s Japanese production facilities are located in the Keihin region of Japan, which includes Tokyo, Kawasaki City, Yokohama City and the surrounding area, while key semiconductor production facilities are located in Kyushu, Tokai, Hanshin and Tohoku. The Group is currently expanding its production facilities in Asia. As a result, any occurrence of a wide-scale disaster, strike, terrorism or epidemic illness, such as a new type of flu, particularly in any of these areas could have a significant adverse effect on the Group’s results.

Additionally, large-scale disasters, such as earthquakes or typhoons, in regions where production or distribution sites are located may damage or destroy production capabilities, suspend procurement of raw materials or components, and cause transportation and sales interruptions or other similar disruptions, which could adversely affect production capabilities significantly. In the past, the businesses of the Group were affected to a certain extent by the Great East Japan Earthquake and the floods in Thailand.

(5) Natural disasters

Most of the Group’s Japanese production facilities are located in the Keihin region of Japan, which includes Tokyo, Kawasaki City, Yokohama City and the surrounding area, while key semiconductor production facilities are located in Kyushu, Tokai, Hanshin and Tohoku. The Group is currently expanding its production facilities in Asia. As a result, any occurrence of a wide-scale disaster, terrorism or epidemic illness, such as a new type of flu, particularly in any of these areas could have a more significant adverse effect on the Group’s results.

Additionally, large-scale disasters, such as earthquakes or typhoons, in regions where production or distribution sites are located may damage or destroy production capabilities, suspend procurement of raw materials or components, and cause transportation and sales interruptions or other similar disruptions, which could affect production capabilities significantly. In the past, the businesses of the Group were affected to a certain extent by the Great East Japan Earthquake and the floods in Thailand.

In order to manage these risks, the Group established the “Business Continuity Plan (BCP)” as part of its continuing effort to avoid or minimize any impact from such disasters in addition to establishing the precautionary measures, such as construction of earthquake-resistant buildings and emergency procedures responsive to large-scale disasters.

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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