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Management Policies of the Toshiba Group Moving Forward (Issues to be Addressed)

(Source: Financial Report for the FY ended March 31, 2019)

Toshiba Next Plan

In November 2018, the Company formulated the Toshiba Next Plan, the overall business plan that aims to transform Toshiba for the upcoming five years. The details of the plan are as follows:

1. Overview and Vision

The Group aims to become one of the world's leading cyber-physical systems (“CPS”) (Note 1) technology companies by combining the knowledge and capabilities accumulated over years of experience in a wide range of businesses, from infrastructure to electronic devices, with its strengths in information processing, digital and AI technologies. To reach this goal, the Group has developed the Toshiba Next Plan to establish the direction and measures that will transform its business to realize future growth, including five-year numerical targets.

The Group intends to continue contributing to the development of society by providing services and solutions that can help to solve issues facing the world today.

(Note 1) CPS means the system to collect data from the physical world to be analyzed and processed using digital technology. CPS create value through a constant feedback loop between the cyber and physical worlds.

2. Outline of the Toshiba Next Plan

(1) Targets and Four Reforms

The basic objective of the Toshiba Next Plan is to enhance shareholder value by maximizing enterprise value and generating value for its customers, business partners and employees. For this purpose, the Group will implement measures to improve core earning power, and will also secure investments for growth. At the end of fiscal year 2021, the Group aims to generate sales of 3.7 trillion yen and ROS of over 6%. By the end of fiscal year 2023, we are targeting to raise sales to 4 trillion yen and ROS to the 10%.By the end of the plan's five-year timeframe, we are working to maximize corporate value and expand TSR (Note 2) through profitable growth.

The Group will deploy four reforms to improve core earning power. Through structural reform, the Group will exit nonfocus businesses, withdrawing from the liquid natural gas (LNG) Agreement and the nuclear power plant business in the UK. The Group is also working to optimize its work force, reorganize its production bases and reduce the number of subsidiaries. To reform procurement, the Group will apply various measures to lower its cost rate. Reforms of sales activities will improve overall efficiency while strengthening the sales force. Measures are also now in place to strengthen evaluations of project order acceptance. In process reform, investments will be made to renew IT infrastructure and to change numerous processes throughout the Group toward improving operational efficiencies.

Additionally, the Group has planned capital expenditure of approximately 810 billion yen and R&D investments of approximately 930 billion yen to grow new businesses, improve profit margins and generate future cash flows.

(Note 2) TSR stands for Total Shareholders Return, and refers to the overall yield and return on an investment, including capital gain and dividends, received by shareholders.

(2) Business Portfolio and Action Plans

The Group will thoroughly manage its business portfolio by checking the competitiveness of each business and their markets. In businesses where expansion is anticipated, the Company will cultivate organic growth with appropriate investments. Action plans are in place to improve margins in currently low performing businesses. Progress will be monitored regularly and firmly.

(3) Policy on Shareholder Returns

The Company's Board of Directors resolved matters concerning the repurchase of the Company shares of up to 700 billion yen. Within the five years of the Toshiba Next Plan, the Company will aim to increase its dividend and to secure a planned average consolidated dividend payout rate of approximately 30% (Note 3). The Company will enhance profit distribution to shareholders through repurchases of its own shares, according to the situation.

(Note 3) For the time being, equity in earnings or losses of Toshiba Memory Holdings Corporaiton is excluded from The Company's policy on shareholder returns.

(4) Development of New Growth Fields

The Company sees opportunities in changes in the environment brought about by destructive innovation amid such mega-trends as growing urban infrastructure needs, expanding mobility of people and goods, automation through advanced technological development, expanding advanced medical technologies, and the shift to renewable energy. We aim to grow new businesses by bringing together the Group's unique technologies and resources and investing the management resources for growth. In lithium-ion rechargeable batteries, the Group will promote growth in markets where the SCiB™ can demonstrate its distinctive features. In power electronics, the Group will leverage its strengths in device technology, and will secure a competitive advantage with differentiated products in the mobility and industrial system markets. In precision medicine, the Group will use leading edge technologies in the life-science field to achieve very early cancer detection and optimized individual treatment.

(5) The Group's Digital Transformation

As the digital revolution is increasingly felt throughout society, the Group will transform itself by promoting cultural change throughout the organization in order to adopt to digitization. The Company will build a standardized IoT architecture that defines the basic design and design philosophy of hardware, operating systems (OS), networks, and applications software. By doing so, we aim to bring together Toshiba's demonstrated knowledge in diverse business fields and to make this open and broadly available as we target growth as a CPS technology company.

(6) Establishing the Structure for Execution

To revitalize the venture spirit that is an integral part of Toshiba's DNA, the Company will introduce an initiative to incubate entrepreneurship. Furthermore, to accelerate its digital transformation, The Company will take measures to develop internal talent while proactively seeking to hire new talent from outside.

The organizational structure will be changed to strengthen business operations and secure faster decision making through simplification that consolidates business units and removes layers within the corporate hierarchy. Internal control functions will be reinforced by widening the expanding the scope of internal auditing. In order to ensure executive compensation is in line with shareholder's interests and that effective incentives are in place to maximize long term enterprise value. The Company has decided to change its executive officer compensation system. The majority of performance linked compensation will be paid in restricted stock.

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Implementation of the Toshiba Next Plan

I. Monitoring Business

The status of businesses targeted for monitoring in the Toshiba Next Plan is as follows.

1. System LSI business

Although we reduced development expenses by streamlining our product areas, we were affected by declines in sales volume stemming from the deterioration of the Chinese market. In the future, we will limit logic LSI projects based on profitability, and will further narrow our focus to analog and microcomputer fields applying our strengths in automotive digital and motor control technologies. In addition, we will reduce fixed costs by implementing early retirement programs, continuing special measures targeting management level employee, and optimizing research expenses and manufacturing and sales fixed costs.

2. Thermal power business

Due to internationally accelerated efforts to prevent emissions of greenhouse gases, investment in coal-fired power has been restrained and investment has shifted to renewable energy, and as a result, the number of new thermal power projects has declined. In response to the current environment, we have been strengthening our services and solutions business, reforming the layout of manufacturing facilities, and optimizing the allocation of personnel.

3. Industrial motors

Changes in material prices and foreign exchange rates caused by global economic developments and the trade policies of different countries have affected production costs and profitability. In response, we have reviewed our equipment lineup and raised prices for low-margin equipment. We have also implemented measures to optimize personnel and production systems.

4. Mobile HDD

We recognize that the market size of the Mobile HDDs will contract. In response, we are working to stabilize earnings by accelerating automated production and by ensuring production capacity matches projected demand. Amid the accelerating shift toward Nearline HDDs for data centers, we are also developing near-line HDDs and working to secure product certification from customers.

II. Implementation of the Early Retirement Incentive Program

As part of efforts to optimize the work force in the context of reforming production under the Toshiba Next Plan, at Toshiba Energy Systems & Solutions Corporation, Toshiba Digital Solutions Corporation, and some of their subsidiaries have accepted early retirement programs offered by the companies.

And on May 2019, Toshiba Device and Storage Corporation has decided to accept the early retirement programs.

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Removal of grace period pertaining to delisting due to confirmation that the liabilities in excess of assets have been cleared

At the end of fiscal year 2016, the Company was informed by Tokyo Stock Exchange, Inc. and Nagoya Stock Exchange, Inc. that its stock had been designated as a “a security on alert” subject to a grace period pertaining to delisting due to liabilities in excess of assets. In fiscal year 2017, however, the Company increased capital through a third-party allotment and sold assets relating to Westinghouse Electric Company. As a result, shareholders' equity improved and at the end of fiscal year 2017 liabilities in excess of assets were eliminated. Consequently, the two stock exchanges in June 2018 removed Toshiba's stock from the grace period pertaining to delisting.

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Reduction of the amount of Common Stock, etc.

The Company, with an effective date of July 31, 2018, transferred the entire amount of capital legal reserves of 299,999,997,000 yen and reduced common stock of 499,999,997,000 yen by 299,999,997,000 yen, transferring the entire amount to other capital surplus. At the same time, 758,687,345,174 yen was reclassified as retained earnings brought forward. By this means, the Company funded the deficit in retained earnings brought forward in the Company's standalone balance sheet.

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The agreement related to LNG in the US

The Group resolved to sell for the agreement related to LNG in the US (the "agreement") to Total Gas & Power Asia Private Limited (“Total”), the Singaporean arm of Total S.A., the French major energy company. On May 31, 2019, the Group entered into a share transfer agreement (the “Transfer”) with Total to transfer all of the issued shares of Toshiba America LNG Corporation (“TAL”), a consolidated subsidiary of the Group.

With the intent of selling LNG to customers in Japan and overseas, the Group has been preparing for the start of a liquefaction service in 2020 by executing series of agreements required for the agreement related to LNG in the US (the “LNG agreement”), including signing a 20-year liquefaction tolling agreement with FLNG Liquefaction 3, LLC (“FLIQ3”), a US LNG service provider, (the “Liquefaction Agreement”) in 2013, followed by a pipeline capacity agreement (the “LNG Related Agreement”), and the transfer of those rights to TAL, which was established in 2017. In parallel, Toshiba Energy Systems & Solutions Corporation (“ESS”), which is responsible for the LNG agreement, entered into an agreement with TAL to receive the entire LNG capacity produced by TAL, through the Liquefaction Agreement and has subsequently promoted negotiations with multiple potential customers for LNG, in order to sell the entire annual capacity of 2.2 million tons of LNG, the volume that TAL has the right to liquefy.

The LNG Related Agreement is based on the premise that TAL will utilize the liquefaction capacity of FLIQ3 and pipeline capacity for the stipulated annual amount for 20 years, and that TAL has an obligation to pay fixed amounts for services and operations to FLIQ3 and the pipeline company, regardless of whether or not it sells LNG to customers through ESS. The Company provides a parent company guarantee for TAL in respect of its obligations under the liquefaction contract with FLIQ3.

On November 8, 2018, the Group entered into an agreement with China's ENN Ecological Holdings Co., Ltd. (“ENN”) to transfer all of the issued shares of TAL to ENN, and also agreed that all contracts related to the LNG agreement entered into by the Group, including trading agreements between the Group and customers would either be transferred to ENN and its affiliates or canceled upon the completion of the share transfer agreement. However, the Group decided to terminate the agreement on April 17, 2019 and at the same time, the Group decided to restart the bidding process to transfer the LNG agreement to a third party.

On examining multiple proposals from potential buyers, the Group selected Total. The decision was made on the basis of the maximization of the Group's corporate value, and from the comprehensive perspectives of overall clarity, minimization of loss, and securing a full release from further risk of loss related to the LNG agreement.

Upon the completion of all the necessary procedures required for closing, including obtaining FLIQ3's approval , the Group will transfer to Total all outstanding shares of TAL held by Toshiba America Inc., a wholly owned subsidiary in the US, at a price of US$15 million (approx. 1.7 billion yen).

ESS will also transfer to Total its agreement with TAL requiring it to receive the entire amount of LNG, securing full dismissal of the responsibility to receive LNG from TAL under that agreement. In return, ESS will pay a one-time payment of US$815 million (approx. 91.2 billion yen) to Total. LNG sales contracts that ESS has concluded to date will be transferred to Total, with the agreement of the customers. The economic value of these contracts is reflected in the one-time payment. The Total agreement also provides that Total will provide a substitute guarantee over the obligations of TAL under the Liquefaction Agreement with FLIQ3. Upon approval by FLIQ3, Toshiba will be released from its guarantee over TAL. Once all of these transactions are concluded, TAL will be deconsolidated from the Group. In addition, ESS will be fully relieved from all obligations based on the contracts between the Group companies in relation to the LNG agreement and the Group will complete its full withdrawal from the LNG agreement.

With the conclusion of the Transfer, the Group anticipates that losses due to one-time payment and related expenses will be approximately 93.0 billion yen (US$ 838 million), and it plans to recognize this amount in the fiscal year 2019.

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Toshiba Memory Corporation

In June 2018, the Company transferred all shares of the former Toshiba Memory Corporation to K.K. Pangea and re-invested 350.5 billion yen in K.K. Pangea, becoming an affiliate of Toshiba Corporation accounting for under the equity method .Thereafter, in August 2018, K.K. Pangea carried out an absorption-style merger with the former Toshiba Memory Corporation with K.K. Pangea as the surviving company and the former Toshiba Memory Corporation as the absorbed company, and Pangea changed its name to Toshiba Memory Corporation. It also implemented a sole-share transfer making Toshiba Memory Corporation the wholly-owned subsidiary in the share transfer and establishing Toshiba Memory Holdings Corporation as the parent company on March 1, 2019, and Toshiba Memory Holdings Corporaiton was accounted for under the equity method

The Company plans to continue to hold the shares it owns in Toshiba Memory Holdings Corporation for the foreseeable future as a stable shareholder, cooperating to realize the new listing of the shares in accordance with the shareholder agreement concluded.

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Shareholders Returns

In November 2018, while securing the necessary resources to implement the Toshiba Next Plan, including investment in growth fields, etc., for the portion of the significant amount of capital gains recorded with the completion of the transfer of the shares in former Toshiba Memory Corporation with no immediate plans for use, to secure ample room for growth investment in the future, and in consideration of maintaining a sound shareholders' equity ratio based on the nature of the business, the Company decided that returning an amount of those capital gains that would not impact the risk tolerance to our shareholders and would lead to enhanced ROE (return on equity). After further considering the cost of capital, we determined that a shareholder return would be appropriate from the standpoint of further enhancing shareholder value, resolving to acquire up to 700.0 billion yen at treasury stock, from November 9, 2018 through November 8, 2019. The Company confirmed that it had a sufficient distributable amount to implement shareholder returns according to the temporary financial statements after temporarily closing its accounts on September 30, 2018. Because of this and considering that it has not paid a dividend for a considerable time, in February 2019, the Company decided to pay a special dividend of 20 yen per share recorded in the shareholder registry as of December 31, 2018, and to pay a year-end dividend of 10 yen per share in order to distribute the surplus. The total full year dividend will be 30 yen per share.

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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