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Business Risk Factors

Risk factors relating the Group and its business

Source: Financial Review of Annual Report 2018 (FY2017)

The business areas of energy, infrastructure and electronic devices, on which the Group focuses, require highly advanced technology for their operation. At the same time, the Group faces fierce global competition. Under such circumstances, 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 June 27, 2018 and involve inherent uncertainties, and, therefore, the actual results may differ.

1. Risks related to management policy

(1) Impact of the sale of the Memory business

The Group had recently intended to focus its capital expenditure and its investments and loans in the Memory area. However, in September 2017, the Company has entered into a Share Purchase Agreement with K.K. Pangea, a special purpose acquisition company formed by a consortium led by Bain Capital Private Equity, LP, for the sale of all shares of Toshiba Memory Corporation (“TMC”), which operates the Memory business. Accordingly, it was decided that the Memory business would be treated as a discontinued operation. Subsequently, as of June 1, 2018, the sale of the shares was closed in accordance with the Share Purchase Agreement, and the Company reinvested 350.5 billion yen in total in K.K. Pangea while implementing this sale of the shares with the aim of ensuring a stable business transfer. As a result, TMC has been deconsolidated from the Group, and going forward K.K. Pangea and TMC are expected to be treated as affiliates accounted for by the equity method.

Since the operating income from the Memory business has accounted for a major part of the Group's consolidated operating income in recent years, the Group's consolidated operating income decreased significantly as a result of the Memory business becoming a discontinued operation. There can be no assurance that the areas other than Memory business will generate the same level of income as that of the Memory area, and the profit level of the Group may not recover to the level existing before the sale of the shares. In addition, if K.K. Pangea and TMC will be affiliates accounted for by the equity method of the Company, there is a possibility that impairment loss of the shares of K.K. Pangea will be recorded depending on its performance as the income/loss of K.K. Pangea will impact on the equity method investment income/loss of the Group.

(2) Success of strategic business alliances and acquisitions

The Group has actively promoted 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, additional capital expenditures and provision of guarantees may be needed 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, and as a result, the Group's operating results and financial condition may be adversely affected.

(3) Business structural reform

The Group as a whole implemented a large scale business structural reform in the fiscal year ended March 31, 2016 ("FY2015") with respect to the System LSIs and Discrete Semiconductor businesses in the Electronic Devices & Components segment, the PC, Visual Products and Home Appliances businesses in the Lifestyle Products & Services segment and the corporate staff divisions, etc. (at that time), and the Group has incurred a large amount of expenses for such business structural reform. The Group now has some good prospects for improving our unprofitable businesses. However, any other business may become unprofitable due to further change in the business environment or any other problem may occur with respect to the business of which structural reform has completed. In addition, under the “Toshiba Next Plan,” the Company will strengthen its structure and build a robust organization by focusing on restructuring in areas that include the energy business domain, indirect staff, and the number of group companies. Accordingly, the Group may incur further expenses for business structural reform due to the necessity of new or 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 Systems & Solutions business

A significant portion of the net sales in the Energy Systems & Solutions business is attributable to sales related to capital expenditures by the private sector centering on operators of electricity utilities in Japan and overseas. Accordingly, this business could be affected by trends in such capital expenditures, and low levels of private capital expenditures due to the economic recession, trends in tax reduction measures related to infrastructure investments, higher construction costs arising from factors such as appreciation of personnel expenses, and other changes in the business environment of private business operators, 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 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.

With respect to projects regarding plants of operators of electricity utilities, the Company accepts some orders that involve businesses with functions that do not exist in the Group by forming consortiums to share the responsibilities with its partners. The orders are accepted as blanket orders at fixed prices, which include design, engineering, procurement and construction. In such cases, the Company generally assumes the obligations owed to the ordering party jointly and severally with the partner companies, and, therefore, (i) if there are deficiencies in the partner companies' business operation abilities, (ii) the partner companies fail to perform their share of business, (iii) the financial condition of the partner companies deteriorates, or (iv) the partner companies file for in-court rehabilitation, then the Company will assume the obligations of the partner companies and expenses, and cash expenditures may increase unexpectedly by a large amount. In the case of a fixed-price contract, losses accrued from increase in construction cost and delay in delivery are to be borne by the company that accepted the order, in principle, except for the case where a structure to share the expense with the customer has been introduced. In particular, in certain projects in the Nuclear Power Systems business, which is one of the main businesses of the Energy Systems & Solutions business, the cost unexpectedly increased from the initial estimates and the work process was unexpectedly prolonged, due to such reasons as (i) safety standards of many countries were changed one after another due to raising of the required level of safety measures against terrorism and large-scale natural disasters and (ii) there was no precedent that could be used as a benchmark with respect to a certain project in an area where there had been no opportunity for construction of a nuclear power plant for a long period of time and another project for construction of a state-of-the-art facility.

For the reasons stated above, it may not be possible to pass on to the customer, the partner company or others any additional costs incurred due to the stoppage of the project, changes in regulations or other business circumstances, delays in the work process, or unexpected events specific to first models 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 in which investment is made in order to secure the order from such operator, the Group may incur liability for damages to a customer or any third party, additional expenses, impairments in investments, increases in the financial burden or delays in payouts, depending upon the trends in projects. Difficulties may also arise for the continuance of certain currently ongoing projects due to a change in the policies of fund providers and other factors.

With respect to projects regarding plants of operators of electricity utilities, submission of documents such as a bank guarantee for the guarantee of performance or expenditure is usually required when bidding, accepting the order, and commencing the construction. However, due to recent lowering of investment grade and aggregation of financial conditions of the Company, submission of a bank guarantee may be difficult, cost for submission of a bank guarantee may increase, or submission of cash collateral or cash deposit in a bank in lieu of submission of a bank guarantee may be required, and, as a result, opportunities to accept the orders may be lost and cash expenses may increase unexpectedly. Furthermore, as stated in "5. Risks related to trade practices (1) Parent company's guarantees" below, when a subsidiary of the Company accepts an order for a project, such as a plant, the Company may provide guarantees as a parent company with respect to the subsidiary's payment and performance of its obligation under the contract. Since the Company has actually provided the parent company's guarantee with respect to the large amount of payment obligation and performance obligation with respect to projects regarding plants for which orders were accepted by subsidiaries, if the subsidiaries fail to perform their obligations due to deterioration of the subsidiary's financial condition or other reasons, the Company will be required to fulfill the parent company's guarantee and bear a large amount of additional cash expenses, and, consequently, the Group's operating results and financial condition may be adversely affected.

The Transmission & Distribution Systems business operates internationally in each country and region. However, its business environments have been quite severe.

With respect to the Thermal Power business, if, due to internationally accelerated effort to prevent emissions of greenhouse gases, the restraint of investment in coal-fired power, specifically, and shift to renewable energy proceed, and accordingly, the demands for thermal power equipment decrease and the competition among business operators becomes intensified, the profits of such business may be affected.

(2) Business environment of the Infrastructure Systems & Solutions business

The Infrastructure Systems & Solutions business provides diversified solutions for the areas of public infrastructure, buildings and facilities, and industrial systems.

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, trends in tax reduction measures related to infrastructure investments, higher construction costs arising from factors such as appreciation of personnel expenses, and other changes in the business environment of private business operators, 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 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 Retail & Printing Solutions business

The Retail & Printing Solutions business provides retail solutions for the retail distribution industry and service industry, offices, manufacturing and logistics industries and particular customers, as well as printing solutions for offices, and manufacturing and logistics industries. The results of this business may be adversely affected by any changes in political and economic conditions, taxation, environmental regulations and foreign exchange; and postponement or suspension of capital expenditure by reason of customers' earnings deterioration, acceleration of industrial realignment due to compounding and systemization, more intensified market competition with competitors, new entries into such industry, and similar events.

(4) Business environment of the Storage & Electronic Devices Solutions business

The demand and supply in the Storage & Electronic Devices Solutions business shows a highly cyclical trend, and the results of this business tend to change with economic fluctuations and, in particular, to be heavily affected by exchange rate fluctuations. The market for this business is subject to intense competition with many companies, mainly overseas, manufacturing and selling products similar to those offered by the Group. Furthermore, demand for the products is somewhat difficult to accurately predict because it depends on such factors as technical innovation, trends in the consumer market, and the actions of ordering parties. Even if capital expenditures are made, unforeseen market changes may cause changes in demand at the time of sale, and it 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 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 competitiveness of the Group's current products may be lost or decrease due to a rapid introduction of new technology.

(5) Business environment of the Industrial ICT Solutions business

A significant portion of the net sales in the Industrial ICT Solutions business is attributable to sales related to private IT investments by, among others, the financial sector and major manufacturers, as well as national and local government expenditures on public IT investments. Accordingly, this business could be affected by changes in such investments. Low levels of private IT investments due to economic recession, and reductions and delays in spending on public IT investments may have a negative impact on this business. Since the solution services field of this business accepts most orders by executing service contracts and the term from order to delivery is relatively long, additional costs over original expectations may be incurred, if, among others, the original estimate is underestimated or a problem occurs in project management. Furthermore, in the case of delay of delivery or defects of delivered systems, the Group may be required to pay ordering parties damages, in addition to bearing additional costs.

(6) Business environment of Others

In June 2018, the Company entered into an agreement with Sharp Corporation under which the Company will transfer 80.1% of the shares of Toshiba Client Solutions Co., Ltd (“TCS”), which operates the PC business. The share transfer is scheduled to be completed in October 2018 and, after the share transfer is closed, TCS will be deconsolidated subsidiaries from the Group.

(7) 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 Group accounted for 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.

In addition, 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 recognition and at the time of settlement of the credits and debts in foreign currencies, in case of steep exchange rate fluctuations.

In addition, the payment amount under the service agreements for processing liquefied natural gas with the companies providing services for liquefying natural gas in the U.S. is fixed at U.S. dollars; therefore, the payment of this amount will be made in U.S. dollars. Consequently, the amount to be paid by the Company, if converted into yen, may increase due to rapid 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 most important assumption that affects the calculation of net periodic pension, and severance cost and benefit obligations, is discount rate and expected rate of return on plan assets. The discount rate is determined considering such factors as the yield of highly-rated fixed income corporate bonds currently available, and expected to continue to be available by the payment date of pension benefits, and the yield of fixed income government bonds. The expected rate of return has been determined considering such factors as composition of plan assets held, risk that can be assumed from investment method, actual returns, basic policy for investment of plan assets, and market trends. 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 and goodwill

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. A certain amount of goodwill has been recorded in the Company's consolidated balance sheets in accordance with U.S. Generally Accepted Accounting Principles. Goodwill is required to be tested for impairment annually. If an impairment test shows that the carrying amount of a reporting unit goodwill exceeds the implied fair value of that goodwill, the amount of such excess, up to the total amount of the goodwill assigned to the reporting unit, will be recognized as an impairment. In addition to the above annual impairment test, if any event indicating a decline in corporate value owing to changes in the business environment or other factors arises, and the total of the carrying amounts exceeds its fair value, an impairment will be recognized. Therefore, additional impairments may be recorded, depending on the valuation of long- lived assets, the estimate of future cash flow from business related to goodwill, and changes in the discount rate for the weighted average capital cost. Also, if the fair value of the marketable securities or the investments in affiliates held by the Group declines, there is a possibility that a loss will be recorded.

(8) Changes in financing environment and others

The Group is obtaining financing through loans and the issuance of bonds that are highly susceptible to market environments, including the financial 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.

Loan agreements entered into between the Company and several financial institutions (the “Loans with Financial Covenants”; the balance as of March 31, 2018 was 80.0 billion yen) provide for financial covenants. Therefore, the Company's obligations with respect to the relevant loan repayments may be accelerated upon demand by the relevant lending financial institutions. Furthermore, in such case, repayment of the Company's bonds or other borrowings of the Company, other than such loan repayment, may be accelerated in accordance with the so-called cross-default clause as well.

The Company breached the financial covenants based on the downgrading of its credit rating assigned by rating agencies on December 28, 2016. The lending financial institutions have agreed not to accelerate the repayment of loans until June 29, 2018. However, on and after June 30, 2018, the repayment of these loans may be accelerated if requested by such financial institutions. If the repayment of these loans is accelerated, the repayment of other bonds and certain borrowings may be accelerated as well. The total balance of the Company's borrowings subject to the above-mentioned cross-default (including the Loans with Financial Covenants) as of March 31, 2018, is approximately 280.0 billion yen.

Although, the Company will continue to 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 acceleration of repayments, any acceleration of the repayment of the Loans with Financial Covenants may occur.

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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 and promoting advanced product development and research. 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.

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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.

In addition, with respect to some contracts, since the Company's consolidated net assets, consolidated operating income or credit ratings fall below the respective levels provided for in the contracts with such customers, the relevant guarantees could be required to be replaced by letters of credit, bonds or submission of cash collateral, and in such cases the Group may incur additional expenses.

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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 trade secrets regarding the Group's technology, marketing and other business operations. The Group has been 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.

The Group also maintains and manages the personal information of customers, business partners and employees, etc. 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.

Additionally, the role of information systems and information/communication networks in the Group is critical to carrying out business activities. While the Group makes every effort to ensure the stable operation of, and to improve safety measures for, its information systems and information/communication networks, there is no assurance that the functionality of the information systems and information/communication networks would not be impaired or destroyed by cyberattacks such as computer viruses and unauthorized access, software or hardware failures, discontinuance of information/communication services provided by outside operators, disaster, 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, in FY2015, it was recognized 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 weakness in the internal control over financial reporting. Under the management revitalization structure established on September 30, 2015, the Company carried out the implementation of the appropriate internal control design and operations, and as a result, the Company has already established and steadily implemented most of the measures of its improvement plan for rectifying the material weakness in company-level internal controls over financial reporting in FY2015. However, taking into account the fact that (i) not all the implementation status of the improvement measures have been sufficiently verified due to constraints in the implementation period and (ii) certain items for restatement and deficiencies relating to accounting and the financial reporting process were discovered in the course of the audit of financial statements dated as of March 31, 2016, the Company has judged that there is material weakness in internal controls requiring disclosure with respect to FY2015. Thereafter, in FY2016, measures to rectify such material weakness requiring disclosure that had existed at the end of the previous fiscal year was completed, and the Company judged that internal control over financial reporting for FY2016 was effective, taking into account the status of the assessment of the control design and operation effectiveness of other relevant items.

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. In the past, the Company was imposed fines as administrative sanctions.

(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 cleanup 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. Furthermore, if material product quality claims occur in large projects, and there are long delays in deliveries to customers or reworking is needed, the Group may be liable for a large amount in expenses or damages.

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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 August 2017, a lawsuit seeking recovery of damages was filed against 3 companies within the Group and 1 company outside the Group, in which plaintiffs who has purchased products containing CRT alleged that Matsushita Toshiba Picture Display, an affiliated company of the Company until 2007, violated European antitrust laws relating to CRT and as a result they suffered from damages during the period from January 2003 to December 2006.

In December 2017, a class action was brought against the Company seeking recovery of damages by customers such as South Carolina Gas and Electric Company and other(s) who bought electricity alleging that they were damaged by cancelation of the construction projects of Units 2 and 3 of the V.C. Summer Nuclear Station in South Carolina.

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

(1) Alliance in nuclear power systems business

The Group held 60% of the shares of NuGeneration Limited ("NuGen"), the Company's consolidated subsidiary, while group companies of ENGIE S.A. ("ENGIE"), a French company, held the other 40% of the shares of NuGen. However, in July 2017, the Company completed share acquisition procedures for all shares of NuGen held by ENGIE, and NuGen became the Company's wholly owned consolidated subsidiary.

The Company will continue to look for other operators of electricity utilities to be prospective investors in NuGen, and to consider the sale of shares of NuGen held by the Group; however, if the Group cannot find prospective investors or purchasers for the shares, or negotiation for the sale of shares faces difficulty, the Group may be required to make additional investment in NuGen or incur other expenses for countermeasures, and it may adversely affect the results of operations and financial condition of the Group.

(2) Agreements regarding natural gas

The Company executed (i) the service agreements for processing liquefied natural gas (the "Service Agreements") with the companies providing services for liquefying natural gas in the U.S., (See Notes to Consolidate Financial Statements, 21. COMMITTEMNTS AND CONTINGENT LIABILITIES and 26. VARIABLE INTEREST ENTITIES) and (ii) the pipeline agreements with the pipeline companies in U.S., 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, and the Company has fixed service fee payment obligations to the companies providing services for liquefying natural gas and the pipeline companies, regardless of whether the Company can sell liquefied natural gas ("LNG") to the users. The Company generally expects to execute long-term transaction agreements with users with respect to the total amount of LNG the Company will obtain. The Company has already concluded basic agreements (with conditions precedent) (on volume, price and delivery terms, etc.). However, if the conditions precedent for conclusion of formal agreements are not met, the Company may not be able to sell LNG under the presently assumed conditions. The Company aims to execute transaction agreements also with respect to the remaining portion of LNG; however, there is a possibility that the Company cannot sell LNG (including short-term sales) to the users under the conditions (including the price) the Company expects, and as a result, the Company may be forced to bear a certain amount of losses.

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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 made inappropriate accountings and, therefore, the Company filed amendments of the past Annual Securities Reports and other reports. The Tokyo Stock Exchange ("TSE") and the Nagoya Stock Exchange ("NSE") (together, the “Exchanges”) deemed that the Company had a serious problem in its internal control systems and that improvement of such internal control systems was essential, due to the fact that the Company made misstatements in such Annual Securities Reports and other reports. Therefore, in September 2015, the Exchanges designated shares of the Company as "Securities on Alert". In September 2016, the Company submitted to Exchanges a "Written Confirmation of Internal Management Systems" for their review. In the process of this review, the Exchanges confirmed that measures have been implemented on a company-wide basis toward securing improvement, including review of a management policy that excessively pursued short-term profit; review of the composition of and changes to the ways in which the board of directors and the audit committee operated; and reorganization and enhancement of the functionality of divisions that are supposed to exercise monitoring functions. However, they also found that some problems related to accounting processes, etc. remained after the designation as "Securities on Alert", and that these indicate that the Company needs to implement further measures in such areas as ensuring compliance and affiliate company management. Accordingly, the Exchanges deemed that they still need to verify the implementation and progress of such measures. As a result, the Company received in December 2016 notices from the Exchanges to the effect that they will continue to designate the Company's shares as "Securities on Alert." On March 15, 2017, the Company's shares were designated as "Securities Under Supervision (Examination)", and on the same date, the Company resubmitted the Written Confirmation of Internal Management Systems. After confirmation by the Exchanges of the resubmitted Written Confirmation of Internal Management Systems, the Exchanges found that the internal control systems had been reasonably improved, and the designation of the Company's shares as "Securities on Alert" and “Securities Under Supervision (Examination)” was cancelled as of October 12, 2017.

In a class action brought against the Company as defendant in the State of California in the U.S. with respect to the Group's inappropriate accountings, an order granting a motion to dismiss was issued. However, the plaintiffs appealed such order. Several lawsuits have been initiated also in Japan, and claims for damages in a considerable amount have been made against the Company (See Notes to Consolidate Financial Statements, 23. Legal Proceedings). Going forward, the Company may also be sued by its shareholders and others and depending on the progress of such procedures, the Group's business, operating results and financial condition may be adversely affected. In relation to the inappropriate accountings issues, the Group is subject to investigations by relevant authorities and may be subject to additional investigations in the future. If, as a result, any sanction is given to the Group, the Group's operating results and financial condition may be adversely affected. The Company was ordered to pay an administrative monetary penalty of 7,373.5 million yen by the Financial Services Agency of Japan in December 2015 with respect to the relevant inappropriate accountings issues, and completed the payment of such penalty.

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11. Westinghouse Electric Company LLC

Westinghouse Electric Company LLC (“WEC”) entered into a share transfer agreement with Chicago Bridge & Iron Company ("CB&I"), on October 27, 2015, to acquire all the shares of CB&I's subsidiary, CB&I Stone & Webster Inc. ("S&W"), which engaged in construction and integrated services related to nuclear power plants, and acquired S&W on December 31, 2015. Up until then, WEC and S&W had created a consortium to promote construction of a total of four nuclear power plants at two project sites in the U.S. The acquisition was conducted with the intention of (i) resolving disputes and potential disputes concerns related to (a) the apportionment of cost overruns and construction delays incurred at the projects, and (b) the determination of who, the Group, the ordering parties or S&W, should bear the responsibility, and (ii) strengthening the process of obtaining increases in contract amounts and approvals for extension of time from the ordering parties, and (iii) enhancing the efficiency of construction by centrally managing the projects, thereby advancing the projects and stabilizing revenues therefrom. However, a close examination of the construction status that was conducted after the acquisition revealed that an increase in construction costs substantially more than that estimated at the time of the acquisition was necessary to complete the projects due to (i) a significant difference from the assessment assumptions at the time of the completion of the acquisition, (ii) the improvement plan for operational efficiency not having been achieved, and (iii) other factors; therefore, goodwill was recorded. Subsequently, in FY2016, the Company conducted impairment testing for the goodwill of the nuclear power systems business, and an impairment loss of goodwill of 731.6 billion yen was recorded on a consolidated basis.

On March 29, 2017, WEC and its U.S. subsidiaries and affiliates, and Toshiba Nuclear Energy Holdings (UK) Limited, a holding company for Westinghouse Group operating companies outside the U.S., (“THEN (UK)” and together with WEC and its U.S. subsidiaries and affiliates, “the Filing Companies”) filed for a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. The rehabilitation proceedings was commenced on the same day, and subsequently, under the guidance of the Bankruptcy Court, in January 2018, it was decided that WEC and its group would be sold to Brookfield WEC Holdings LLC (“Brookfield”), a U.S. company. In addition, the Company decided to sell to Nucleus Acquisition LLC (“Nucleus”), a U.S. company, the right to reimbursement and the loan receivables, etc. that it had against the Filing Companies, and it also decided to sell to Brookfield all of the shares it held in the holding companies of WEC group, including TNEH (UK). With respect to the sale of these claims and all of the shares in the holding companies, the Company agreed with the key stakeholders in the reorganization proceedings, including WEC, TNEH (UK) and Statutory Committee of Unsecured Creditors, Nucleus, a transferee of the claims held by the Company, and Brookfield, which would acquire WEC group as stated above, upon the key terms of the reorganization plan including the treatment of, and distributions to the creditors and milestones for the voting process and approval by the court for the reorganization plan. Due to this agreement, the reorganization proceedings became more likely to be completed adequately and early, and in March 2018, in line with this agreement, the reorganization plan prepared and submitted by the Filing Companies was agreed to by the creditors and approved by the Bankruptcy Court. Furthermore, the Company has agreed with Brookfield that Brookfield would assume or compensate the parent company guarantee provided by the Company in relation to the business of WEC. Therefore, the Company is expected to be able to eliminate future contingent risks that may arise under such parent company guarantee when Brookfield completes the acquisition of WEC and WEC group.

For FY2016, the Company recorded 652.3 billion yen of loss relating to the construction agreement regarding WEC in the Consolidated Statements of Operations as net loss from discontinued operation, after income taxes and before noncontrolling interests. However, the Company's independent auditor, PricewaterhouseCoopers Aarata LLC (“PwC Aarata”), gave a qualified opinion in its audit report for the consolidated financial statements and an adverse opinion to the Internal Control Report for FY2016, stating that the Company's accounting procedures for the loss did not comply with U.S. accounting principles, and the fact that the impact of the losses not recorded in the consolidated financial statements for the appropriate financial term was significant. PwC Aarata also gave a qualified result to the Consolidated Financial Statements for the first quarter of FY2017 with respect to the 3-month period ended June 30, 2017, on grounds that, in addition to the reason given above, it has yet to state the conclusions for its quarterly consolidated financial statements for the first quarter of FY2016 with respect to the 3-month period ended June 30, 2016, and such status would have an effect on the net income from discontinued business after income taxes and before noncontrolling interests for the 3-month period ended June 30, 2017, the net income before noncontrolling interests for the same period and the net income attributable to the shareholders of the Company for the same period, and its comparative information. The independent auditor also gave qualified results to the Consolidated Financial Statements for the second and the third quarters of FY2017 for the same reason state for the first quarter of FY2017. Since the independent auditor is stating that the Company's accounting procedures for the loss for FY2016 did not comply with U.S. accounting principles, and it consequently affects the feasibility of making comparisons with figures for the same period of the following year, the independent auditor gave a qualified opinion to the full-year results for FY2017.

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12. 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 lawsuits 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.

In addition, there are products for which the Company has granted use of the Toshiba trademark, etc. to companies outside the Group. Under the license agreement, the licensee is liable for any loss attributable to the products. However, there is a possibility that the Company may incur liability from claims made by third parties, who suffered losses attributable to the products, or suffer reputational harm with regard to the quality of the Group's products.

(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, Hokuriku 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, floods 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, shutdown of the production facilities or other similar disruptions, which could adversely affect asset value and 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 and India.

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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