1875 1876 1877 1878 1879 1880 1881 1882 1883 188 1884 1885 1886 1887 1888 1889 1890 1891 1892 189 1893 1894 1895 1896 1897 1898 1899 1900 1901 190 1902 1903 1904 1905 1906 1907 1908 1909 1910 191 1911 1912 1913 1914 1915 1916 1917 1918 1919 192 1920 1921 1922 1923 1924 1925 1926 1927 1928 192 1929 1930 1931 1932 1933 1934 1935 1936 1937 193 1938 1939 1940 1941 1942 1943 1944 1945 1946 194 1947 1948 1949 1950 1951 1952 1953 1954 1955 195 1956 1957 1958 1959 1960 1961 1962 1963 1964 196 1965 1966 1967 1967 1967 1968 1969 1970 1971 197 1972 1973 1974 1975 1976 1977 1978 1979 1980 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1990 1991 1992 1993 1994 1995 1996 1997 1998 199 1999 2000 2001 2002 2003 2004 2004 2005 2005 200 2005 2005 2005 2005 2005 2005 2005 Innovation Breeds Invention 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 201 2015 2016 2017 2018 2019 2020 2021 2022 2022 202 2023 2024 2025 2026 2027 2028 2029 2030 2031 203 2031 2032 2033 2034 2035 2036 2037 2038 2039 204 T O S H I B A C O R P O R A T I O N ANNUAL REPORT 2005 F I N A N C I A L R E V I E W 130th Anniversary Management’s Discussion and Analysis Eleven-year Summary Toshiba Corporation and Subsidiaries Years ended March 31 Net sales Cost of sales Selling, general and administrative expenses (Note 1) Operating income (loss) (Note 2) Income (loss) before income taxes and minority interest Income taxes Net income (loss) Per share of common stock: Net income (loss) (Note 3) —Basic —Diluted Cash dividends Total assets Shareholders’ equity Capital expenditures 2005 ¥5,836,139 4,296,572 2004 ¥5,579,506 4,075,336 2003 ¥5,655,778 4,146,460 2002 ¥5,394,033 4,070,130 1,384,760 154,807 1,329,584 174,586 1,393,776 115,542 1,437,478 (113,575) 110,567 55,944 46,041 145,041 102,237 28,825 53,123 48,532 18,503 (376,687) (113,915) (254,017) ¥14.32 13.53 5.00 ¥8.96 8.96 3.00 ¥5.75 5.75 3.00 ¥(78.91) (78.91) — ¥4,571,412 815,507 ¥4,462,200 754,990 ¥5,238,936 571,064 ¥5,407,782 705,314 (Property, plant and equipment) 318,394 227,273 230,512 348,235 Depreciation (Property, plant and equipment) R&D expenditures Number of employees 215,844 348,010 165,000 223,946 336,714 161,000 237,888 331,494 166,000 311,208 326,170 176,000 Notes: 1. ¥4,836 million and ¥48,945 million of “Subsidy received on return of substitutional portion of Employees’ Pension Fund Plan, net of settlement loss of ¥7,992 million in 2005 and ¥188,106 million in 2004” are classified as a reduction of selling, general and administrative expenses for the years ended March 31, 2005 and 2004, respectively. 2. Operating income (loss) has been determined under financial reporting practices generally accepted in Japan and is defined as net sales less cost of sales and selling, general and administrative expenses. 3. Basic net income per share (EPS) is computed based on the weighted-average number of shares of common stock outstanding during each period. Diluted EPS assumes the dilution that could occur if convertible bonds were converted or stock acquisition rights were exercised to issue common stock, unless their inclusion would have an antidilutive effect. 4. Beginning with the fiscal year ended March 31, 2001, Toshiba has adopted Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Prior-period data for the fiscal years ended from March 31, 1995 through 2000 has been restated to conform with SFAS No. 115. 5. Beginning with the fiscal year ended March 31, 1998, revenues and expenses from financial services, real estate leasing and sales, and other operations are reported as operating activities whereas they were reported as non-operating activities in prior periods. Prior-period data for the fiscal years ended from March 31, 1995 through 1997 has been reclassified to conform with the current classification. Contents 2 14 16 17 18 19 39 Management’s Consolidated Consolidated Consolidated Consolidated Notes to Report of Discussion Balance Sheets Statements of Statements of Statements of Consolidated Independent and Analysis Income Shareholders’ Cash Flows Equity Financial Statements Auditors 2 Toshiba Corporation 130th Anniversary Millions of yen, except per share amounts 2001 ¥5,951,357 4,323,525 2000 ¥5,749,372 4,254,444 1999 ¥5,300,902 3,890,622 1998 ¥5,458,498 3,960,158 1997 ¥5,521,887 3,932,585 1996 ¥5,192,244 3,647,624 1995 ¥4,864,015 3,435,146 1,395,699 232,133 1,393,959 100,969 1,379,797 30,483 1,416,046 82,294 1,391,471 197,831 1,282,053 262,567 1,260,053 168,816 188,099 96,145 96,168 (44,844) (4,530) (32,903) 11,218 20,901 (9,095) 18,748 17,313 14,723 125,456 71,593 67,077 177,749 102,965 90,388 120,674 67,607 44,693 ¥29.88 29.71 10.00 ¥(10.22) (10.22) 3.00 ¥(2.83) (2.83) 6.00 ¥ 4.57 4.57 10.00 ¥20.84 20.06 10.00 ¥28.08 26.85 10.00 ¥13.89 13.54 10.00 ¥5,724,564 1,047,925 ¥5,780,006 1,060,099 ¥6,101,929 1,128,753 ¥6,166,323 1,305,946 ¥5,933,205 1,388,827 ¥5,743,009 1,384,582 ¥5,598,565 1,255,083 269,545 298,512 375,464 339,584 341,020 308,653 293,823 308,294 327,915 188,000 329,630 334,398 191,000 309,836 316,703 198,000 291,418 322,928 186,000 252,732 332,555 186,000 261,985 314,774 186,000 283,575 302,171 190,000 130th Anniversary Toshiba Corporation 3 S C O P E O F C O N S O L I D A T I O N As of the end of March 2005, Toshiba Group (“the Group”) comprised 339 consolidated sub- sidiaries and its principal operations were in the Digital Products, Electronic Devices, Social Infrastructure, and Home Appliances business domains. R E S U L T S O F O P E R A T I O N S 82 consolidated subsidiaries were involved in Digital Products Segment, 42 in Electronic Devices Segment, 113 in Social Infrastructure Segment, 53 in Home Appliances Segment, and 49 in Others. In addition, 71 affiliates were accounted for by the equity method. The number of consolidated subsidiaries increased by 20 compared with March 31, 2004. > NET SALES In Japan, economic recovery continued through most of the period under review, primarily driven by the private sector, as business demand maintained a steady impetus. However, the economy gradually entered a period of adjustment later in the term, reflecting inventory adjustments in the information technology industry. Overseas, the US economy expanded on improved employment and increased capital investment while Europe continued to see gradual recovery. In Asia, China, and other countries continued their economic expansion. The Group aims for high growth in the Digital Products and Electronic Devices Segments. In Social Infrastructure, the Group seeks to expand its international business, to cultivate new busi- nesses, and to promote cost reductions and operational efficiency, thereby securing stable growth and profits. Consolidated sales were ¥5,836.1 billion (US$54,543 million), ¥256.6 billion higher than in the previous fiscal year. Digital Products, Electronic Devices, Social Infrastructure, and Home Appliances, all Segments recorded year-on-year sales increases through operations based on their growth strategies, achieving the Group strategy of combining high growth with steady profitability. > NET SALES BY REGION Year ended March 31 Japan Asia North America Europe Others Net Sales 2005 ¥3,259,853 949,208 811,641 615,283 200,154 ¥5,836,139 Millions of yen 2004 ¥3,399,903 829,914 710,108 517,235 122,346 ¥5,579,506 2003 ¥3,343,551 837,845 860,306 509,620 104,456 ¥5,655,778 Note: These figures are based on geographic location of the market in which sales were recorded, and therefore differ from the segment sales reported on p.8, which are based on the location of the distribution source. Japan Sales fell 4% year on year to ¥3,259.8 billion due to the reclassification of former consolidated subsidiary companies Toshiba Finance Corporation and Shibaura Mechatronics Corporation as affiliated companies accounted for by the equity method. Asia Sales in the region totaled ¥949.2 billion, a 14% increase compared with the previous fiscal year. The improved sales performance is mainly attributed to contributions from the Semiconductor business following integration of the Optical Disk Drive businesses in a Joint Venture of the Company and Samsung Electronics Co., Ltd. North America / Europe Sales in North America and Europe climbed to ¥811.6 billion and ¥615.3 billion, respectively. In addition to the improvement of profits in the PC business, results were bolstered by the robust Semiconductor business and increased revenues from Optical Disk Drive and other product sales. Others Sales surged 64% year on year to ¥200.2 billion in the Others region due to positive contributions from thermal power plant properties. 4 Toshiba Corporation 130th Anniversary > NET INCOME (LOSS) Consolidated operating income decreased by ¥19.8 billion from the same period a year earlier to ¥154.8 billion (US$1,447 million). Digital Products Segment improved its operating income sig- nificantly, while Electronic Devices, Social Infrastructure, and Home Appliances Segments saw decreases. However, if a one-time gain from the transfer of Toshiba’s employee pension fund to the government (“daiko-henjo”) in the previous year is excluded, and if a one-time environ- ment-related cost accounted for in this fiscal year is also excluded, consolidated operating income for Toshiba as a whole and for the Social Infrastructure Segment would show increases. Income before income taxes, minority interest and equity in earnings of affiliates was ¥110.6 billion (US$1,033 million), a ¥34.4 billion decrease from FY2003. Net income increased by ¥17.2 billion from the previous year to ¥46.0 billion (US$430 million). Basic earnings per share also increased by ¥5.36 to ¥14.32 (US$0.134) from a year ago. > DIVIDEND Toshiba Corporation will pay ¥3 per share as a year end dividend. This will be paid from June 6, 2005. Combined with the ¥2 interim dividend, the total full-term dividend will be ¥5 per share. > RESULTS BY INDUSTRY SEGMENT Year ended March 31 Digital Products Electronic Devices Social Infrastructure Home Appliances Others Eliminations Total (Billions of yen) Net Sales Operating Income (loss) — 2,224.2 1,307.2 1,765.3 661.0 371.6 –493.2 5,836.1 Change (%) 11% 2% 3% 4% –21% — 5% — 7.3 92.5 48.6 –3.3 9.8 –0.1 154.8 Change +31.1 –24.5 –10.0 –6.8 –9.0 — –19.8 > DIGITAL PRODUCTS—Consolidated net sales of Digital Products Segment increased by ¥214.8 billion to ¥2,224.2 billion (US$20,787 million). The Personal Computer business saw sales increase from a year ago on overseas sales growth, mainly in North America and Europe. The Digital Media business saw sales increase on higher sales of hard disk drives for portable audio players and LCD TVs, and the start of operations at a Joint Venture in optical disk drives with Samsung Electronics Co., Ltd. Retail information and office document processing systems business increased sales on higher sales of digital multi-function peripherals, mainly in overseas markets. In the Mobile Phones business, despite increased sales in Japan as a result of consecutive introduction of high-functionality products, sales were flat against the previous year on lower sales overseas. Consolidated operating income of Digital Products Segment posted a profit of ¥7.3 billion (US$68 million), an improvement of ¥31.1 billion from a year earlier, as a result of the return to profit of the Personal Computer business, which showed significant improvement, and the Mobile Phones business, which saw higher sales in the domestic market. Storage Devices saw operating income decline on market price erosion. > ELECTRONIC DEVICES—Electronic Devices Segment increased consolidated net sales by ¥23.6 billion to ¥1,307.2 billion (US$12,216 million). The Semiconductor business saw increased sales against the previous year on higher sales of System LSIs for digital consumer products and Discrete semiconductors in the first half of the fiscal year, despite sluggish sales in the second half of FY2004. The LCD business increased sales as a result of focusing on high- value-added products, particularly Small- to Medium-sized displays, and promotions that expanded overseas sales, despite significant price erosion in the TV and monitor market in the second half of the period. The Display Devices & Components Control Center business reported a significant sales decline, largely the result of ceasing production of Cathode Ray Tubes and Lithium-Ion Batteries. Consolidated operating income of Electronic Devices Segment was ¥92.5 billion (US$865 million), a decrease of ¥24.5 billion from the previous year. The LCD business posted a profit. The semiconductor business reported lower operating income, largely reflecting inventory adjustment in the digital consumer industry in the second half of FY2004, while Memories, 130th Anniversary Toshiba Corporation 5 including NAND Flash memory, continued to record a strong performance. > SOCIAL INFRASTRUCTURE—Social Infrastructure Segment saw consolidated net sales of ¥1,765.3 billion (US$16,498 million), ¥51.2 billion higher than the previous year. Sales of the Industrial and Power Systems & Services business rose on increased orders of power generation plant business overseas, despite the transfer of the Industrial Electric and Automation Systems business from the Group. The Medical Systems business sales increased on higher sales of Multi-Slice CT scanners and diagnostic Ultrasound systems, while the Social Network & Infrastructure Systems business and Elevator business also saw higher sales. The IT Solution business reported lower sales, as a result of greater selectivity in accepting orders. Consolidated operating income of the segment was ¥48.6 billion (US$454 million), ¥10.0 billion down from the year earlier period, mainly because the segment took a charge for the one-time cost of the detoxification of nonflammable insulating oil (PCB: Poly Chlorinated Biphenyl) and because the year earlier period included a one-time gain from the transfer of Toshiba’s employee pension fund to the government. The Social Network & Infrastructure Systems, IT Solution, and Medical Systems businesses showed improved performance. > HOME APPLIANCES—Consolidated net sales of Home Appliances Segment increased by ¥23.7 billion to ¥661.0 billion (US$6,178 million) compared to the previous year, largely on higher sales of Air-Conditioners. Operating income (loss) of the segment declined by ¥6.8 bil- lion to minus ¥3.3 billion (minus US$31 million), due to price erosion in Refrigerators and Washing Machines and higher raw materials costs. > OTHERS—Consolidated net sales of Others decreased by ¥101.1 billion to ¥371.6 billion (US$3,473 million) from a year earlier as some consolidated subsidiaries, including Toshiba Finance Corporation and Shibaura Mechatronics Corporation, became affiliated companies accounted by the equity method. Operating income in Others saw ¥9.0 billion decline from the previous year to ¥9.8 billion (US$92 million). Segment information is based on Japanese accounting standards. > INDUSTRY SEGMENTS Year ended March 31 Sales: Digital Products 2005 Millions of yen 2004 2003 Thousands of U.S. dollars (Note 3) 2005 Unaffiliated customers Intersegment ¥2,156,495 67,690 ¥1,939,717 69,678 ¥2,032,736 40,235 $20,154,159 632,617 Total 2,224,185 2,009,395 2,072,971 20,786,776 Electronic Devices Unaffiliated customers Intersegment Total Social Infrastructure Unaffiliated customers Intersegment Total Home Appliances Unaffiliated customers Intersegment Total Others Unaffiliated customers Intersegment Total Eliminations Consolidated 1,215,802 91,361 1,174,934 108,654 1,070,165 204,278 1,307,163 1,283,588 1,274,443 1,707,211 58,091 1,654,959 59,177 1,722,603 99,994 1,765,302 1,714,136 1,822,597 642,285 18,760 661,045 114,346 257,276 371,622 616,807 20,475 637,282 193,089 279,655 472,744 611,286 22,314 633,600 218,988 272,123 491,111 11,362,635 853,841 12,216,476 15,955,243 542,906 16,498,149 6,002,664 175,327 6,177,991 1,068,654 2,404,449 3,473,103 (493,178) (537,639) (638,944) (4,609,140) ¥5,836,139 ¥5,579,506 ¥5,655,778 $54,543,355 6 Toshiba Corporation 130th Anniversary Year ended March 31 Operating income (loss): Digital Products Electronic Devices Social Infrastructure Home Appliances Others Eliminations Consolidated Identifiable assets: Digital Products Electronic Devices Social Infrastructure Home Appliances Others Corporate and Eliminations 2005 Millions of yen 2004 2003 ¥ 7,266 92,512 48,581 (3,332) 9,863 (83) ¥ (23,810) 117,002 58,637 3,474 18,845 438 ¥ 24,828 31,853 39,178 4,134 15,532 17 Thousands of U.S. dollars (Note 3) 2005 $ 67,906 864,598 454,028 (31,140) 92,178 (776) ¥ 154,807 ¥ 174,586 ¥ 115,542 $ 1,446,794 ¥ 966,105 1,270,970 1,493,170 390,171 515,371 (64,375) ¥ 872,559 1,241,464 1,529,197 371,850 479,399 (32,269) ¥ 904,989 1,232,392 1,671,432 385,094 1,080,738 (35,709) $ 9,029,019 11,878,224 13,954,860 3,646,458 4,816,551 (601,635) Consolidated ¥4,571,412 ¥4,462,200 ¥5,238,936 $42,723,477 Depreciation and amortization: Digital Products Electronic Devices Social Infrastructure Home Appliances Others Corporate Consolidated Impairment of long-lived assets: Digital Products Electronic Devices Social Infrastructure Home Appliances Others Corporate Consolidated Capital expenditures: Digital Products Electronic Devices Social Infrastructure Home Appliances Others Corporate Consolidated ¥ 32,559 132,662 34,588 18,056 23,497 — ¥ 35,499 112,466 37,657 18,786 44,423 — ¥ 34,287 125,755 42,759 18,732 39,302 — $ 304,290 1,239,832 323,252 168,748 219,598 — ¥ 241,362 ¥ 248,831 ¥ 260,835 $ 2,255,720 ¥ — ¥ — ¥ 1,088 — — — — 10,018 — — — — ¥ 1,088 ¥ 10,018 ¥ — 7,815 — — — — 7,815 ¥ 36,478 239,361 36,571 22,024 8,073 — ¥ 48,556 136,162 27,629 19,330 23,009 — ¥ 35,090 115,664 34,585 21,259 50,219 — $ — 10,168 — — — — $ 10,168 $ 340,916 2,237,019 341,785 205,832 75,448 — ¥ 342,507 ¥ 254,686 ¥ 256,817 $ 3,201,000 130th Anniversary Toshiba Corporation 7 > GEOGRAPHIC SEGMENTS Year ended March 31 Sales: Japan 2005 Millions of yen 2004 2003 Thousands of U.S. dollars (Note 3) 2005 Unaffiliated customers Intersegment ¥ 3,651,995 1,363,317 ¥ 3,747,371 1,188,508 ¥ 3,773,309 1,169,802 $ 34,130,795 12,741,280 Total Asia 5,015,312 4,935,879 4,943,111 46,872,075 Unaffiliated customers Intersegment 806,794 548,344 617,973 568,220 563,639 521,620 7,540,131 5,124,710 Total North America Unaffiliated customers Intersegment Total Europe Unaffiliated customers Intersegment Total Others Unaffiliated customers Intersegment Total Eliminations Consolidated Operating income (loss): Japan Asia North America Europe Others Eliminations Consolidated Identifiable assets: Japan Asia North America Europe Others 1,355,138 1,186,193 1,085,259 12,664,841 744,223 21,067 765,290 568,211 28,706 596,917 64,916 1,292 66,208 667,663 19,220 686,883 488,785 15,619 504,404 57,714 2,035 59,749 784,683 20,052 804,735 477,870 13,957 491,827 56,277 1,533 57,810 6,955,355 196,888 7,152,243 5,310,383 268,281 5,578,664 606,691 12,075 618,766 (1,962,726) (1,793,602) (1,726,964) (18,343,234) ¥ 5,836,139 ¥ 5,579,506 ¥ 5,655,778 $ 54,543,355 ¥ 112,765 20,485 15,639 5,105 900 ¥ 148,729 13,368 6,599 3,875 756 ¥ 89,780 24,540 11,722 (3,197) (286) $ 1,053,878 191,449 146,159 47,710 8,411 (87) 1,259 (7,017) (813) ¥ 154,807 ¥ 174,586 ¥ 115,542 $ 1,446,794 ¥ 3,577,949 641,258 223,435 204,146 29,386 ¥ 3,589,596 513,932 180,086 210,935 28,111 ¥ 4,403,984 416,726 218,782 202,575 30,057 $ 33,438,776 5,993,065 2,088,178 1,907,907 274,635 Corporate and Eliminations (104,762) (60,460) (33,188) (979,084) Consolidated ¥ 4,571,412 ¥ 4,462,200 ¥ 5,238,936 $ 42,723,477 8 Toshiba Corporation 130th Anniversary R E S E A R C H A N D D E V E L O P M E N T The Group promotes the basic policies of “creating the world’s number one technology,” and “creating value through the integration and multi-functionality of technology.” In aggressive efforts to strengthen its distinct technologies, the Group applies these policies to all stages of its research and development activities, from the development of new materials, products, and systems to the development of manufacturing technologies. The Group promotes research and development centered on our core business segments of Digital Products, Electronic Devices, and Social Infrastructure, coordinating our growth engine technologies and products with a strategic- product map. The Group also makes efforts to generate synergy across business segments, such as with the tie-up of the Digital Products Segment with the Electronic Devices Segment for the purpose of establishing “Imaging by Toshiba.” Research and development expenditures for the entire Group on a consolidated basis totaled ¥348 billion in the fiscal year ended March 31, 2005, and R&D expenditures according to segment were as follows. Digital Products Segment Electronic Devices Segment Social Infrastructure Segment Home Appliances Segment Others (Billions of yen) 101.7 164.5 61.7 19.0 1.1 C A P I T A L E X P E N D I T U R E S > CAPITAL EXPENDITURE OVERVIEW The Group follows a basic strategy of focusing management resources on growth areas. Capital expenditures, including investments in intangible fixed assets, were primarily directed to the Electronic Devices segment, and amounted to ¥342.5 billion. Capital expenditures in the Electronic Devices Segment totaled ¥239.3 billion, and included investment for increased development and production of semiconductors and of LCDs. Principal facilities completed in the course of fiscal 2004 were facilities for the advanced pro- cess System LSIs production at Oita Operations, and NAND Flash memory production with advanced process technology at Yokkaichi Operations. Facilities still under construction include advanced System LSI manufacturing facilities at Oita Operations, and Low Temperature Polysilicon LCD production facilities and equipment at Toshiba Matsushita Display Technology Co., Ltd. In the Digital Products Segment, capital expenditures totaled ¥36.5 billion, and were channeled into the development and manufacturing of new products, such as PCs, AV products, and Magnetic Disk Devices. In the Social Infrastructure Segment, capital expenditures totaled ¥36.6 billion and were focused on system development and infrastructure upgrades. Capital expenditures in the Home Appliances Segment amounted to ¥22 billion and were directed to the development and manufacturing of new models. Capital expenditures in the others segment totaled ¥8.1 billion. > PLANS FOR CONSTRUCTING NEW FACILITIES AND RETIRING EXISTING FACILITIES The Group makes plans for capital expenditures with a comprehensive view of manufacturing plans, demand forecasts, and the ratio of expenditures to income over the next three years. Capital expenditure plans are in principle formulated by each individual company. To avoid duplication of investment throughout the Group, however, the Group makes adjustments to plans. Planned expenditures for new construction and renovations at primary facilities, including investments in intangible fixed assets, as of the fiscal year-end totaled ¥335 billion. Included in this figure are planned expenditures of ¥45.2 billion to be made by the Group through equity method affiliates. Upon completion of plans, plant capacity is expected to increase slightly compared with pre-construction capacity. 130th Anniversary Toshiba Corporation 9 F I N A N C I A L P O S I T I O N A N D C A S H F L O W S C A S H F L O W S Total assets increased by ¥109.2 billion from the end of March 2004 to ¥4,571.4 billion (US$42,723 million), as a result of increased notes and accounts receivable, reflecting higher sales in the Digital Media and Personal Computers businesses, and increased property, plant and equipment, due to capital investment in the Semiconductor business. Shareholders’ equity increased by ¥60.5 billion from the end of March 2004 to ¥815.5 billion (US$7,622 million), on improvement of net income and accumulated other comprehensive loss. Total debt decreased by ¥88.1 billion from the end of March 2004 to ¥1,111.4 billion (US$10,387 million). Free cash flow decreased by ¥70.8 billion from the year-earlier period to ¥62.4 billion, due to increased capital investment in the Semiconductor business. As a result, the debt to equity ratio was 136%, an improvement of 23 points from the end of March 2004. In the fiscal year under review, net cash provided by operating activities amounted to ¥305.5 billion, a decrease of ¥17.2 billion from ¥322.7 billion in the previous fiscal year. Major components were an improvement in net income, and an increase in receivables in line with the increase in revenues. Net cash used in investing activities totaled ¥243.1 billion, up ¥53.6 billion from ¥189.5 billion in the previous fiscal year. Principal cash outflows included an increase in capital expenditures in the Semiconductor and other businesses, and outflows to fund acquisition of property, plant and equipment. Net cash used in financing activities narrowed ¥40.4 billion from ¥132.7 billion to ¥92.3 billion. During the fiscal year under review, Toshiba Corporation issued Zero Coupon Convertible Bonds. The effect of exchange rate movements was to increase cash by ¥5.6 billion. After accounting for the aforementioned and other factors, cash and cash equivalents at the fiscal year-end decreased by ¥24.3 billion to ¥295.0 billion compared with ¥319.3 billion at the end of the previous fiscal year. > PRINCIPAL SUBSIDIARIES AND AFFILIATED COMPANIES As of March 31, 2005 Subsidiaries: Japan Affiliated Companies: Japan Percentage held by the Group MT Picture Display Co., Ltd. Toshiba Ceramics Co., Ltd. Toshiba Machine Co., Ltd. 36 41 34 Toshiba Building Co., Ltd. Toshiba Consumer Marketing Corporation Toshiba Elevator and Building Systems Corporation Toshiba Matsushita Display Technology Co., Ltd. Toshiba Medical Systems Corporation Toshiba Plant Systems & Services Corporation Toshiba Samsung Storage Technology Corporation Toshiba TEC Corporation U.S.A. Toshiba America Information Systems, Inc. Toshiba America, Inc. China Dalian Toshiba Television Co., Ltd. 100 100 80 60 100 69 51 52 100 100 65 10 Toshiba Corporation 130th Anniversary R I S K F A C T O R S R E L A T I N G T O T H E T O S H I B A G R O U P A N D I T S B U S I N E S S The Group’s business areas of Electric and Electronics require highly advanced technology. At the same time, the Group faces fierce global competition. Therefore, appropriate risk management is indispensable. Major risk factors related to the Group are described below. In order to promote full disclosure to investors, this also may include items not usually directly categorized as risk. The Group recognizes these risks and makes every effort to manage them and to minimize any impact. These risks include potential future risks that the Group judged as risks as of the end of March 2005. (1) Lawsuits The Group undertakes global business operation, and is involved in disputes, including lawsuits, in several areas. Due to differences in judicial systems it is possible that the Group may be subject to a court ruling requiring payment of amount far exceeding normal expectations, and/or a factor that results in significant difficulty in estimating potential costs of judgments. Judgments unfa- vorable to the Group in disputes may impact on results of Group operations and the Group’s financial condition. In March 2005, a jury in the California Superior Court found the Company and its U.S. subsidiary, Toshiba America Electronic Components, Inc., liable for US$465 million for misappropriation of NAND Flash-related trade secrets and related misconduct, as alleged by Lexar Media, Inc. The Company believes that the verdict rendered by the jury was in error and plans to pursue all available legal avenues to correct it. (2) Reliance on the Electronic Devices Segment The Group is heavily reliant on its Electronic Devices Segment for operating income. If the results of the segment are weak, the Group may be unable to offset them with any profits it may make from other business segments, resulting in a material adverse effect on the Group’s business results. (3) Business environment of Digital Products Segment The market for the Digital Product Segment is intensely competitive, with many competitors manufacturing and selling products similar to those offered by the Group. In addition, demand for products in this segment can be volatile. In times of decreased consumer spending due to recession, demand for the Group’s products can be low, while rapid increases in demand due to rapid economic recovery may result in shortages of parts and components, hampering the Group’s ability to supply products to the market in a timely manner. The segment makes every effort to monitor the market situation, however, if the market fluctuates rapidly, price erosion and increases in the prices of components may adversely affect the Group’s results. Furthermore, some products in this segment are dependent on particular customers. If transactions with such customers decline, the Group’s results may be adversely affected. (4) Business environment of Electronic Devices Segment The market for the Electronic Devices Segment is highly cyclical in demand, a situation usually referred to as the “Silicon Cycle.” In addition, competition to develop and market new products is severe. The segment makes every effort to monitor shifts in the market, but if the market faces a downturn, if the Group fails to market new products in a timely manner, or if due to a rapid introduction of new technology, the Group’s current products become redundant, any of these factors may adversely affect Group results. In addition, this segment requires significant levels of capital expenditure. While efforts are made to invest in stages by watching the demand situation carefully, unpredicted market change may make production capacity for particular products available at a time when demand for those products is on the wane, creating saturation. 130th Anniversary Toshiba Corporation 11 (5) Business environment of Social Infrastructure Segment A significant portion of net sales in the Social Infrastructure Segment is attributable to government and local municipality expenditure on public works and private capital expenditure. The segment monitors these trends in these capital expenditures, and makes best efforts to cultivate new business and customers, in order to avoid undue impact from any fluctuation in the trends. However, reductions and delays in public works spending, as well as low levels of private capital expenditure, can adversely affect Group results. Furthermore, the business of this segment involves supply of products and services in relation to large-scale projects. Delays, changes in plans, stoppages, natural and other disasters, and other factors beyond the control of the Group and that affect the progress of such projects may adversely affect Group results. (6) Development of new products It is critically important for the Group to offer the market viable and innovative new products and services. The Group identifies strategic products that will drive future profits, and defines a strategic product map to support the timely introduction of successive products. However, due to the rapid pace of technological innovation, introduction of new technologies or products that replace current products, or any change of technology standards, introduction of optimum new products to markets may be delayed, or new products may be received by markets for a shorter period than expected. In addition, if the Group fails to assure sufficient funding and resources for continuous product development, it may affect the Group’s ability to develop new products and services and to introduce them to the market. (7) Investments in new business The Group invests in companies involved in new business, as well as developing its own new business opportunities. Many technological issues need to be resolved and new demand effectively discovered and captured before a new line of business can become successful, and as such its progress and success are uncertain. If any new business in which the Group invests or which the Group attempts to develop does not progress as planned, the Group may not recover the funds and resources it has spent, and this may adversely affect the Group’s results and financial condition. (8) Success of Joint Ventures and other business alliances A key strategy of the Group in many of its businesses is the formation of Joint Ventures and business alliances optimized for each business, in every area of the business, including research and development, production, and marketing. If the Group fails to maintain Joint Ventures or business alliances, due to inconsistency with a partner in financing, technological management, product development or management strategies, this may adversely affect Group results. (9) Global environment The Group undertakes global business operations. Any change of political, economic, and social conditions and legal or regulatory changes in any region may change market demand or the Group’s production and thus may affect adversely Group results. As the Group expands overseas production, particularly in Asia, any occurrence of terrorism or an illness such as SARS (Severe Acute Respiratory Syndrome), could have a significant adverse effect on Group results. 12 Toshiba Corporation 130th Anniversary (10) Natural disasters Most of the Group’s Japanese production facilities are located in the Keihin regions, part of the Tokyo metropolitan area, and key facilities of semiconductor production are located in Kyushu, Tokai, and Hanshin. Large-scale disasters such as earthquakes and typhoons in these areas could damage or destroy facilities, cause operational and transportation interruptions, and affect production capabilities significantly. (11) The value of “Toshiba” brand While the Group protects and seeks to enhance the value of the “Toshiba” brand, there are lesser-quality ‘copycat’ products worldwide created by third parties, which may dilute the value of the “Toshiba” brand. Distribution of those ‘copycat’ products may decrease the Group’s net sales and may have an adverse effect on Group results. (12) Product quality claims While the Group has instituted measures to manufacture its products in accordance with appropriate quality-control standards, there can be no assurance that each of its products is free of defects or that they will not result in a recall and/or product liability or other claims relating to product quality. This could have a material adverse effect on the Group’s results. (13) Personal information The Group keeps and manages various personal information obtained in the process of business operations. While the Group manages the information properly, an unanticipated leak of personal information could occur, damaging the Group’s reputation for social reliability, diluting the Group’s brand and causing considerable costs, which may affect Group results. (14) Employee retirement benefit costs and obligations The amount of the Group’s employee retirement benefit costs and obligations are calculated on assumptions used in the relevant actuarial calculations. Adverse changes in the assumptions due to economic or other factors, or lower returns on plan assets, may adversely affect the Group’s results and financial condition. (15) Financing environment The Group has substantial amounts of interest-bearing debt for financing, highly susceptible to the market environment, including interest rate and supply and demand of funds. Changes in these factors may have an adverse effect on the Group’s results and financial condition. 130th Anniversary Toshiba Corporation 13 Consolidated Balance Sheets Toshiba Corporation and Subsidiaries As of March 31, 2005 and 2004 Assets Current assets: Cash and cash equivalents Notes and accounts receivable, trade: Notes (Note 5) Accounts (Note 5) Allowance for doubtful notes and accounts Finance receivables, net (Note 5) Inventories (Note 6) Deferred tax assets (Note 16) Prepaid expenses and other current assets Total current assets Long-term receivables and investments: Long-term receivables (Note 5) Long-term finance receivables, net (Note 5) Investments in and advances to affiliates (Note 7) Marketable securities and other investments (Note 4) Property, plant and equipment (Notes 9, 21 and 22): Land Buildings Machinery and equipment Construction in progress Less—Accumulated depreciation Millions of yen 2005 2004 Thousands of U.S. dollars (Note 3) 2005 ¥ 295,003 ¥ 319,277 $ 2,757,037 95,207 1,052,288 (26,599) — 649,998 131,144 277,278 2,474,319 19,090 — 193,266 194,191 406,547 169,464 1,064,760 2,349,258 60,547 3,644,029 (2,479,846) 1,164,183 101,624 962,216 (27,682) 17,271 629,044 114,425 236,244 2,352,419 21,808 29,887 191,391 197,901 440,987 165,255 1,070,607 2,311,773 51,897 3,599,532 (2,481,287) 1,118,245 889,785 9,834,468 (248,589) — 6,074,748 1,225,645 2,591,383 23,124,477 178,411 — 1,806,224 1,814,869 3,799,504 1,583,776 9,951,028 21,955,682 565,860 34,056,346 (23,176,131) 10,880,215 Deferred tax assets (Note 16) Other assets (Notes 8 and 11) 348,713 177,650 375,244 175,305 3,259,000 1,660,281 The accompanying notes are an integral part of these statements. ¥ 4,571,412 ¥ 4,462,200 $ 42,723,477 14 Toshiba Corporation 130th Anniversary Liabilities and shareholders’ equity Current liabilities: Short-term borrowings (Note 9) Current portion of long-term debt (Notes 9 and 20) Notes payable, trade Accounts payable, trade Accounts payable, other and accrued expenses (Note 26) Accrued income and other taxes Advance payments received Other current liabilities (Note 24) Total current liabilities Long-term liabilities: Long-term debt (Notes 9, 10 and 20) Accrued pension and severance costs (Note 11) Other liabilities Millions of yen 2005 2004 ¥ 197,765 230,285 67,291 906,248 349,009 46,561 134,326 335,358 2,266,843 ¥ 306,711 190,821 81,827 795,594 320,640 37,029 179,912 287,094 2,199,628 Thousands of U.S. dollars (Note 3) 2005 $ 1,848,271 2,152,196 628,888 8,469,608 3,261,766 435,150 1,255,383 3,134,187 21,185,449 683,396 581,598 79,361 1,344,355 701,924 601,566 68,293 1,371,783 6,386,879 5,435,495 741,691 12,564,065 Minority interest in consolidated subsidiaries 144,707 135,799 1,352,402 Shareholders’ equity (Note 18) Common stock: Authorized—10,000,000,000 shares Issued: 2005 and 2004—3,219,027,165 shares Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, at cost: 2005—3,558,726 shares 2004—2,224,121 shares Commitments and contingent liabilities (Notes 23, 24 and 25) 274,926 285,736 511,185 (254,753) (1,587) — 815,507 274,926 285,736 481,227 (285,894) — (1,005) 754,990 2,569,402 2,670,430 4,777,430 (2,380,869) (14,832) — 7,621,561 ¥4,571,412 ¥4,462,200 $42,723,477 130th Anniversary Toshiba Corporation 15 Consolidated Statements of Income Toshiba Corporation and Subsidiaries For the years ended March 31, 2005 and 2004 Sales and other income: Net sales Subsidy received on return of substitutional portion of Employees’ Pension Fund Plan, net of settlement loss of ¥7,992 million ($74,692 thousand) in 2005 and ¥188,106 million in 2004 (Note 11) Interest and dividends Other income (Notes 4, 5, 14 and 17) Costs and expenses: Cost of sales (Notes 8, 12, 21 and 26) Selling, general and administrative (Notes 8, 12, 13 and 21) Interest Other expense (Notes 4, 5, 7, 14 and 15) Income before income taxes, minority interest and equity in earnings (losses) of affiliates Income taxes (Note 16): Current Deferred Income before minority interest and equity in earnings (losses) of affiliates Millions of yen 2005 2004 Thousands of U.S. dollars (Note 3) 2005 ¥5,836,139 ¥5,579,506 $54,543,355 4,836 10,564 58,156 5,909,695 4,296,572 1,389,596 21,749 91,211 5,799,128 48,945 10,470 88,394 5,727,315 4,075,336 1,378,529 20,832 107,577 5,582,274 45,196 98,729 543,514 55,230,794 40,154,879 12,986,878 203,262 852,439 54,197,458 110,567 145,041 1,033,336 50,419 5,525 55,944 50,092 52,145 102,237 471,206 51,635 522,841 54,623 42,804 510,495 Minority interest in income of consolidated subsidiaries Income before equity in earnings (losses) of affiliates Equity in earnings (losses) of affiliates (Note 7) Net income 9,247 45,376 665 ¥ 46,041 4,708 38,096 (9,271) ¥ 28,825 Basic net income per share (Note 19) Diluted net income per share (Note 19) Yen ¥ 14.32 ¥ 13.53 ¥ 8.96 ¥ 8.96 86,420 424,075 6,215 $ 430,290 U.S. dollars (Note 3) $ 0.134 $ 0.126 Cash dividends per share (Note 18) ¥ 5.00 ¥ 3.00 $ 0.047 The accompanying notes are an integral part of these statements. 16 Toshiba Corporation 130th Anniversary Consolidated Statements of Shareholders’ Equity Toshiba Corporation and Subsidiaries For the years ended March 31, 2005 and 2004 Balance at March 31, 2003 Comprehensive income (loss): Net income Other comprehensive income (loss), net of tax (Note 18): Unrealized gains on securities (Note 4) Foreign currency translation adjustments Minimum pension liability adjustment (Note 11) Unrealized gains on derivative instruments Comprehensive income Cash dividends Purchase of treasury stock, net, at cost Balance at March 31, 2004 Comprehensive income (loss): Net income Other comprehensive income (loss), net of tax (Note 18): Unrealized gains on securities (Note 4) Foreign currency translation adjustments Minimum pension liability adjustment (Note 11) Unrealized losses on derivative instruments Comprehensive income Cash dividends Purchase of treasury stock, net, at cost Balance at March 31, 2005 Millions of yen Common stock ¥274,926 Additional paid-in capital ¥285,736 Retained earnings ¥462,058 28,825 Accumulated other comprehensive loss Treasury stock ¥(450,775) ¥ (881) Total ¥571,064 28,825 11,189 (19,701) 11,189 (19,701) 170,786 170,786 2,607 (9,656) 274,926 285,736 481,227 (285,894) (124) (1,005) 46,041 6,654 10,441 14,968 (922) (16,083) ¥274,926 ¥285,736 ¥511,185 (582) ¥(254,753) ¥(1,587) 2,607 193,706 (9,656) (124) 754,990 46,041 6,654 10,441 14,968 (922) 77,182 (16,083) (582) ¥815,507 Thousands of U.S. dollars (Note 3) Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock Total $2,569,402 $2,670,430 $4,497,449 $(2,671,907) $ (9,393) $7,055,981 Balance at March 31, 2004 Comprehensive income (loss): Net income Other comprehensive income (loss), net of tax (Note 18): Unrealized gains on securities (Note 4) Foreign currency translation adjustments Minimum pension liability adjustment (Note 11) Unrealized losses on derivative 430,290 430,290 62,187 97,579 62,187 97,579 139,888 139,888 instruments Comprehensive income Cash dividends Purchase of treasury stock, net, at cost Balance at March 31, 2005 (8,616) 721,328 (150,309) (5,439) $2,569,402 $2,670,430 $4,777,430 $(2,380,869) $(14,832) $7,621,561 (150,309) (8,616) (5,439) The accompanying notes are an integral part of these statements. 130th Anniversary Toshiba Corporation 17 Consolidated Statements of Cash Flows Toshiba Corporation and Subsidiaries For the years ended March 31, 2005 and 2004 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities— Depreciation and amortization Provisions for pension and severance costs, less payments Deferred income tax provision Equity in (earnings) losses of affiliates Loss from sales, disposal and impairment of property, plant and equipment, net Gain from sales and impairment of securities and other investments, net Minority interest in income of consolidated subsidiaries Increase in notes and accounts receivable, trade (Increase) decrease in finance receivables, net Increase in inventories (Increase) decrease in other current assets Decrease in long-term receivables (Increase) decrease in long-term finance receivables, net Increase (decrease) in notes and accounts payable, trade Increase (decrease) in accrued income and other taxes Decrease in advance payments received Increase in accounts payable and other liabilities Net cash provided by operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Proceeds from sale of securities Acquisition of property, plant and equipment Purchase of securities (Increase) decrease in investments in affiliates Increase in other assets and other Net cash used in investing activities Cash flows from financing activities Proceeds from long-term debt Repayment of long-term debt Decrease in short-term borrowings Dividends paid Proceeds from stock offering by subsidiaries Repurchase of subsidiary common stock Redemption of subsidiary preferred stock Purchase of treasury stock, net Other Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of cash flow information (Note 27) Cash paid during the year for— Millions of yen 2005 2004 Thousands of U.S. dollars (Note 3) 2005 ¥ 46,041 ¥ 28,825 $ 430,290 241,362 2,641 5,525 5,816 248,831 (8,001) 52,145 13,625 2,255,720 24,682 51,635 54,355 7,592 22,557 70,953 (4,241) 9,247 (67,678) (2,245) (10,107) (17,695) 3,928 (1,682) 82,427 9,722 (51,263) 46,143 305,533 42,094 34,138 (271,635) (12,397) (7,051) (28,255) (243,106) 251,563 (211,280) (105,416) (17,104) — (634) — (586) (8,867) (92,324) 5,623 (24,274) 319,277 ¥ 295,003 (25,028) 4,708 (14,617) 1,949 (35,852) 5,017 3,776 64,615 (21,239) (12,493) (47,050) 40,894 322,662 39,908 53,469 (199,127) (53,170) 20,570 (51,116) (189,466) 338,222 (371,554) (63,389) (11,720) 14,366 (1,182) (35,000) (195) (2,281) (132,733) (8,284) (7,821) 327,098 ¥ 319,277 (39,635) 86,420 (632,505) (20,981) (94,458) (165,374) 36,710 (15,719) 770,346 90,860 (479,093) 431,243 2,855,449 393,402 319,047 (2,538,645) (115,860) (65,897) (264,066) (2,272,019) 2,351,056 (1,974,579) (985,196) (159,851) — (5,925) — (5,477) (82,869) (862,841) 52,551 (226,860) 2,983,897 $ 2,757,037 Interest Income taxes ¥ 21,761 ¥ 38,539 ¥ 27,852 ¥ 58,496 $ 203,374 $ 360,178 The accompanying notes are an integral part of these statements. 18 Toshiba Corporation 130th Anniversary Notes to Consolidated Financial Statements Toshiba Corporation and Subsidiaries March 31, 2005 1. DESCRIPTION OF BUSINESS Toshiba Corporation and its subsidiaries (collectively, the “Company”) are engaged in research and development, manufacturing and sales of high-technology electronic and energy products, which span (1) Digital Products, (2) Electronic Devices, (3) Social Infrastructure, (4) Home Appliances, and (5) Others. For the year ended March 31, 2005, sales of Digital Products represented the most significant portion of the Company’s total sales or approximately 35 percent. Social Infrastructure represented approximately 28 percent, Electronic Devices approximately 21 percent, and Home Appliances approximately 10 percent of the Company’s total sales. The Company’s products were manufactured and marketed throughout the world with 56 percent of its sales in Japan and the remainder in Asia, North America, Europe and other parts of the world. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Toshiba Corporation and its domestic subsidiaries maintain their > PREPARATION OF FINANCIAL STATEMENTS records and prepare their financial statements in accordance with accounting principles generally accepted in Japan, and its foreign subsidiaries in conformity with those of the countries of their domicile. Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with accounting principles generally accepted in the United States. These adjustments were not recorded in the statutory books of account. > BASIS OF CONSOLIDATION AND INVESTMENTS IN AFFILIATES The consolidated financial statements of the Company include the accounts of Toshiba Corporation, its majority-owned subsidiaries and all variable interest entities (“VIEs”) for which the Company is the primary beneficiary under Financial Accounting Standards Board (“FASB”) Interpretation No.46 as revised in December 2003, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46R”). All significant intercompany transactions and accounts are eliminated in consolidation. Investments in affiliates in which the ability to exercise significant influence exists are accounted for under the equity method of accounting. Net income includes the Company’s equity in the current net earnings (losses) of such companies, after elimination of unrealized intercompany profits. > USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company has identified significant areas where it believes assumptions and estimates are particularly critical to the consolidated financial statements. These are determination of impairment on long-lived tangible and intangible assets and goodwill, realization of deferred tax assets, pension accounting assumptions and other valuation allowances and reserves. Actual results could differ from those estimates. > CASH EQUIVALENTS All highly liquid investments with original maturities of 3 months or less at the date of pur- chase are considered to be cash equivalents. > FOREIGN CURRENCY TRANSLATION The assets and liabilities of foreign consolidated subsidiaries and affiliates that operate in a local currency environment are translated into Japanese yen at applicable current exchange rates at year end. Income and expense items are translated at average exchange rates prevailing during the year. The effects of these translation adjustments are included in other comprehensive income (loss) and reported as a component of shareholders’ equity. Exchange gains and losses resulting from foreign currency transactions and translation of assets and liabilities denominated in foreign currencies are included in other income or other expense in the consolidated statements of income. > ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES An allowance for uncollectible trade receivables is recorded based on a combination of the write-off history, aging analysis, and an evaluation of any specific known troubled accounts. When all collection options are exhausted including legal recourse, the accounts or portions thereof are deemed to be uncollectible and charged against the allowance. An allowance for uncollectible finance receivables has been provided based on past loss experience and the estimation of value of the underlying collateral. > MARKETABLE SECURITIES AND OTHER INVESTMENTS The Company classifies all of its marketable securities as available-for-sale which are reported at fair value, with unrealized gains and losses included in accumulated other comprehensive income (loss), net of taxes. Other investments without quoted market prices are stated at cost. Realized gains or losses on the sale of securities are based on the average cost of a particular security held at the time of sale. 130th Anniversary Toshiba Corporation 19 Marketable securities and other investment securities are regularly reviewed for other-than-temporary declines in carrying amount based on criteria that include the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and the Company’s intent and ability to retain marketable securities and investment securities for a period of time sufficient to allow for any anticipated recovery in market value. When such a decline exists, the Company recognizes an impairment loss to the extent of such decline. > INVENTORIES Raw materials, finished products and work in process for products are stated at the lower of cost or market, cost being determined principally by the average method. Finished products and work in process for contract items are stated at the lower of cost or estimated realizable value, cost being determined by accumulated production costs. In accordance with general industry practice, items with long manufacturing periods are included among inventories even when not realizable within one year. > PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including significant renewals and additions, are carried at cost. Maintenance and repairs, including minor renewals and betterments, are expensed as incurred. Depreciation for property, plant and equipment is computed generally by the declining-balance method at rates based on the following estimated useful lives of the assets: buildings, 3 to 50 years; machinery and equipment, 2 to 20 years. > IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, other than goodwill and intangible assets with indefinite lives, are evaluated for impairment using an estimate of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable. If the estimate of undiscounted cash flow is less than the carrying amount of the asset, an impairment loss is recorded based on the fair value of the asset. Fair value is determined primarily by using the anticipated cash flows discounted at a rate commensurate with the risk involved. For assets held for sale, an impairment loss is further increased by costs to sell. Long-lived assets to be disposed of other than by sale are considered held and used until disposed of. > GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.141, Business Combinations (“SFAS 141”), and SFAS No.142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 141 requires the use of the purchase method of accounting for business combinations. SFAS 141 also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill and those acquired intangible assets that are required to be included in goodwill. Under SFAS 142, goodwill and recognized intangible assets determined to have an indefinite useful life are no longer amortized, but instead are tested for impairment at least annually. Intangible assets with finite lives are amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No.144, Accounting for the Impairment or Disposal of Long Lived Assets. > ENVIRONMENTAL LIABILITIES Liabilities for environmental remediation and other environmental costs are accrued when environmental assessments or remedial efforts are probable and the costs can be reasonably estimated, based on current law and existing technologies. Such liabilities are adjusted as further information develops or circumstances change. Costs of future obligations are not discounted to their present values. > INCOME TAXES The provision (benefit) for income taxes is computed based on the pre-tax income (loss) included in the consolidated statements of income. Deferred income taxes are recorded to reflect the expected future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, and are measured by applying currently enacted tax laws. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the change is enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The Company has various retirement benefit plans covering substantially all > ACCRUED PENSION AND SEVERANCE COSTS employees. Current service costs of the retirement benefit plans are accrued in the period. The unrecognized net obligation existing at initial application of SFAS No. 87, Employers’ Accounting for Pensions, and prior service costs resulting from amendments to the plans are amortized over the average remaining service period of employees expected to receive benefits. Unrecognized actuarial losses that exceed 10 percent of the greater of the projected benefit obligation or the fair value of plan assets are also amortized over the average remaining service period of employees expected to receive benefits. > ADDITIONAL PAID-IN CAPITAL Under the Japanese Commercial Code, the entire amount of the issue price of shares is required to be accounted for in the common stock account although a company in Japan may, by a resolution of its board of directors, account for an amount not exceeding one-half of the issue price of the shares as additional paid-in capital. > ISSUANCE OF STOCK BY A SUBSIDIARY When a subsidiary issues stock to an unrelated third party, the Company’s ownership interest in the subsidiary decreases; however, if the price per share is more or less than the Company’s average carrying amount per share, the Company is required to adjust the carrying amount of its investment in the subsidiary. The Company accounts for such adjustments as gains or losses in income for the year in which the change in ownership interest occurs rather than as a capital transaction with a charge or credit to additional paid-in capital. 20 Toshiba Corporation 130th Anniversary > NET INCOME PER SHARE Basic net income per share (“EPS”) is computed based on the weighted-average number of shares of common stock outstanding during each period. Diluted EPS assumes the dilution that could occur if stock acquisition rights were exercised to issue common stock, unless their inclusion would have an antidilutive effect. > REVENUE RECOGNITION Revenue of mass-produced standard products is recognized when there is persuasive evidence of an arrangement, the product has been delivered, the sales price is fixed or determinable, and collectibility is reasonably assured. Mass-produced standard products are considered delivered to customers once they have been shipped, and the title and risk of loss have transferred. Revenue from services is recognized as the services are provided. Revenue from the development of custom software products is recognized when the software product has been delivered and accepted by the customer. Revenue related to equipment that requires installation is recognized upon the completion of the installation of the equipment. Revenue under long-term contracts is recorded under the percentage of completion method. To measure the extent of progress toward completion, the Company generally compares the costs incurred to date to estimated total costs to complete based upon the most recent available information. A provision for contract losses is recorded in its entirety when the loss first becomes evident. Revenue from the sales of equipment under sales-type leases is recognized at the inception of the lease. Interest on sales-type leases and direct financing leases is recognized to produce a constant periodic rate of return on the net investment in the lease. Leases not qualifying as sales-type lease or direct financing lease are accounted for as operating leases and related revenues are recognized over the lease term. Revenue from arrangements with multiple elements, which may include any combination of products, equipment, installment and maintenance, is allocated to each element based on its relative fair value if such element meets the criteria for treatment as a separate unit of accounting as prescribed in the Emerging Issues Task Force Issue 00-21, Revenue Arrangements with Multiple Deliverables. Otherwise, revenue is deferred until the undelivered elements are fulfilled as a single unit of accounting. The Company includes shipping and handling costs which totaled ¥84,136 > SHIPPING AND HANDLING COSTS million ($786,318 thousand) and ¥83,329 million for the years ended March 31, 2005 and 2004, respectively in selling, general and administrative expenses. > DERIVATIVE FINANCIAL INSTRUMENTS The Company uses a variety of derivative financial instruments, which include forward exchange contracts, interest rate swap agreements, currency swap agreements, and currency options for the purpose of currency exchange rate and interest rate risk management. Refer to Note 20 for descriptions of these financial instruments. The Company recognizes all derivative financial instruments, such as forward exchange contracts, interest rate swap agreements, currency swap agreements, and currency options in the consolidated financial statements at fair value regardless of the purpose or intent for holding the derivative financial instruments. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders’ equity as a component of other comprehensive income (loss) depending on whether the derivative financial instruments qualify for hedge accounting, and if so, whether they qualify as a fair value hedge or a cash flow hedge. Changes in fair value of derivative financial instruments accounted for as fair value hedges are recorded in income along with the portion of the change in the fair value of the hedged item that relates to the hedged risk. Changes in fair value of derivative financial instruments accounted for as cash flow hedges, to the extent they are effective as a hedge, are recorded in other comprehensive income (loss), net of tax. Changes in the fair value of derivative financial instruments not qualifying as a hedge are reported in income. > SALES OF RECEIVABLES The Company enters into transactions to sell certain trade accounts receivable, trade notes receivable and finance receivables. The Company may retain certain interests in these transactions. Gain or loss on the sale of receivables is computed based on the allocated carrying amount of the receivables sold. Retained interests are recorded at the allocated carrying amount of the assets based on their relative fair values at the date of sale. The Company estimates fair value based on the present value of future expected cash flows less credit losses. > GUARANTEES The Company recognizes, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing guarantees for guarantees issued or modified after December 31, 2002 in accordance with the FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees. > RECENT PRONOUNCEMENTS In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the 130th Anniversary Toshiba Corporation 21 criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by the Company in the fiscal year beginning April 1, 2006. The Company is currently evaluating the effect that the adoption of SFAS 151 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005 and is required to be adopted by the Company in the fiscal year beginning April 1, 2006. The Company is currently evaluating the effect that the adoption of SFAS 153 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact. > RECLASSIFICATIONS Certain reclassifications to the prior year’s consolidated financial statements and related footnote amounts have been made to conform to the presentation for the current year. 3. U.S. DOLLAR AMOUNTS U.S. dollar amounts are included solely for convenience. These translations should not be construed as a representation that the yen could be converted into U.S. dollars at this rate or any other rates. The amounts shown in U.S. dollars are not intended to be computed in accordance with generally accepted accounting principles in the United States for the translation of foreign currency amounts. The rate of ¥107=U.S.$1, the approximate current rate of exchange at March 31, 2005, has been used throughout for the purpose of presentation of the U.S. dollar amounts in the accompanying consolidated financial statements. 4. MARKETABLE SECURITIES AND OTHER INVESTMENTS The aggregate cost, gross unrealized holding gains and losses, and aggregate fair value for marketable equity securities and debt securities classified as available-for-sale securities by security type at March 31, 2005 and 2004 are as follows: March 31, 2005: Equity securities Debt securities March 31, 2004: Equity securities Debt securities March 31, 2005: Equity securities Debt securities Millions of yen Gross unrealized holding gains Gross unrealized holding losses ¥57,117 0 ¥57,117 ¥43,892 2 ¥43,894 ¥920 0 ¥920 ¥258 — ¥258 Thousands of U.S. dollars Gross unrealized holding gains Gross unrealized holding losses $533,804 0 $533,804 $8,598 0 $8,598 Fair value ¥109,999 284 ¥110,283 ¥ 93,472 1,422 ¥ 94,894 Fair value $1,028,028 2,654 $1,030,682 Cost ¥53,802 284 ¥54,086 ¥49,838 1,420 ¥51,258 Cost $502,822 2,654 $505,476 At March 31, 2005, debt securities mainly consisted of corporate debt securities. Contractual maturities of debt securities classified as available-for-sale at March 31, 2005 are as follows: March 31, 2005: Due within one year Due after one year 22 Toshiba Corporation 130th Anniversary Millions of yen Thousands of U.S. dollars Cost ¥ 40 244 ¥284 Fair value ¥ 40 244 ¥284 Cost $ 374 2,280 $2,654 Fair value $ 374 2,280 $2,654 The proceeds from sales of available-for-sale securities for the years ended March 31, 2005 and 2004 were ¥11,367 million ($106,234 thousand) and ¥53,469 million, respectively. The gross realized gains on those sales for the years ended March 31, 2005 and 2004 were ¥4,980 million ($46,542 thousand) and ¥28,483 million, respectively. The gross realized losses on those sales for the years ended March 31, 2005 and 2004 were ¥107 million ($1,000 thousand) and ¥717 million, respectively. Included in other expense are charges of ¥4,892 million ($45,720 thousand) and ¥5,640 million related to other-than-temporary declines in the marketable and non-marketable equity securities for the years ended March 31, 2005 and 2004, respectively. At March 31, 2005, the cost and fair value of available-for-sale securities in an unrealized loss position over 12 consecutive months were not significant. Aggregate cost of non-marketable equity securities accounted for under the cost method totaled ¥80,894 million ($756,019 thousand) and ¥101,456 million at March 31, 2005 and 2004, respectively. At March 31, 2005, investments with an aggregate cost of ¥74,222 million ($693,664 thousand) were not evaluated for impairment because (a) the Company did not estimate the fair values of those investments as it was not practicable to estimate the fair value of the investment and (b) the Company did not identify any events or changes in circumstances that might have had significant adverse effects on the fair values of those investments. 5. FINANCE RECEIVABLES AND SECURITIZATIONS Investment in financing leases consists of sales-type and direct financing leases mainly for information systems, medical equipment, industrial equipment and others. Other finance receivables represent transactions in a variety of forms, including commercial loans, and installment sales of consumer products manufactured by the Company. Finance receivables comprise the following: March 31 Investment in financing leases: Total minimum lease payments receivable Executory costs Unearned income Less—allowance for doubtful accounts Less—current portion Other finance receivables Less—allowance for doubtful accounts Less—current portion Millions of yen 2004 ¥ 36,788 (807) (691) 35,290 (216) 35,074 (10,817) ¥ 24,257 ¥ 12,142 (58) 12,084 (6,454) ¥ 5,630 During the year ended March 31, 2005, the Company sold its controlling interest in a consolidated subsidiary engaged in leasing certain medical equipment to third parties. As a result, the subsidiary became an affiliate and was accounted under the equity method of accounting. The Company has transferred certain trade accounts receivable, trade notes receivable and finance receivables under several securitization programs. These securitization transactions are accounted for as a sale in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125, because the Company has relinquished control of the receivables. Accordingly, the receivables sold under these facilities are excluded from receivables in the accompanying consolidated balance sheets. Upon the sale of receivables, the Company holds subordinated retained interests for certain trade accounts receivable, trade notes receivable and finance receivables. A portion of these receivables, where the Company holds subordinated retained interests, is not taken off the balance sheet and are recorded at their fair value. Such carrying amount is adjusted to reflect the portion that is not expected to be collectible. As of March 31, 2005 and 2004, the fair values of retained interests were ¥41,303 million ($386,009 thousand) and ¥21,976 million, respectively. The Company recognized losses of ¥1,861 million ($17,393 thousand) and ¥1,138 million on the securitizations of receivables for the years ended March 31, 2005 and 2004, respectively. 130th Anniversary Toshiba Corporation 23 Subsequent to sale, the Company retains collection and administrative responsibilities for the receivables. Servicing fees received by the Company approximate the prevailing market rate. Related servicing assets or liabilities are immaterial to the Company’s financial position. The table below summarizes certain cash flows received from and paid to special purpose entities (“SPEs”) on the above securitization transactions. Year ended March 31 Proceeds from new securitizations Servicing fees received Cash flows received on retained interests Purchases of delinquent and foreclosed receivables Millions of yen 2005 ¥979,748 514 75,788 0 2004 ¥1,180,141 521 44,212 172 Thousands of U.S. dollars 2005 $9,156,523 4,804 708,299 0 At March 31, 2005, the assumed weighted-average life and residual cash flow discount rate used to compute the fair value of retained interests were 0.15 years and 2.76 percent, respectively. Quantitative information about delinquencies, net credit losses, and components of securitized receivables as of and for the years ended March 31, 2005 and 2004 are as follows: Total principal amount of receivables March 31, 2005 ¥1,236,396 185,558 — — 1,421,954 (255,369) ¥1,166,585 2004 ¥1,126,809 186,067 35,074 12,084 1,360,034 (227,228) ¥1,132,806 Millions of yen Amount 90 days or more past due 2005 ¥26,151 95 — — ¥26,246 2004 ¥23,162 61 — — ¥23,223 Net credit losses Year ended March 31, 2004 2005 ¥5,196 ¥3,798 271 269 — — — — ¥5,467 ¥4,067 Total principal amount of receivables Thousands of U.S. dollars Amount 90 days or more past due March 31, 2005 $11,555,103 1,734,187 — — 13,289,290 (2,386,626) $10,902,664 $244,402 888 — — $245,290 Net credit losses Year ended March 31, 2005 $35,495 2,514 — — $38,009 Accounts receivable Notes receivable Lease receivables Other finance receivables Total managed portfolio Securitized receivables Total receivables Accounts receivable Notes receivable Lease receivables Other finance receivables Total managed portfolio Securitized receivables Total receivables 6. INVENTORIES Inventories comprise the following: March 31 Finished products Work in process: Long-term contracts Other Raw materials Millions of yen 2005 ¥262,893 81,321 197,949 107,835 ¥649,998 2004 ¥270,569 85,857 164,933 107,685 ¥629,044 Thousands of U.S. dollars 2005 $2,456,944 760,009 1,849,991 1,007,804 $6,074,748 7. INVESTMENTS IN AND ADVANCES TO AFFILIATES On March 26, 2004, the Company sold 25,481,000 shares of Toshiba Finance Corporation (“TFC”), a consolidated subsidiary of the Company, to certain unrelated financial institutions for ¥10,906 million. Subsequent to the effective date of the transaction, the Company has used the equity method to account for its 35.0 percent interest held in TFC. 24 Toshiba Corporation 130th Anniversary Summarized financial information of TFC as of the effective date of the transaction is as follows: Current assets Other assets including property, plant and equipment Total assets Current liabilities Long-term liabilities Shareholders’ equity Total liabilities and shareholders’ equity Millions of yen ¥216,177 246,703 ¥462,880 ¥183,850 256,091 22,939 ¥462,880 The Company’s significant investments in affiliated companies accounted for by the equity method together with the percentage of the Company’s ownership of voting shares at March 31, 2005 were: TM T&D Corporation (50.0%); MT Picture Display Co., Ltd. (35.5%); Topcon Corporation (37.1%); Toshiba Ceramics Co., Ltd. (41.4%); Toshiba Machine Co., Ltd. (33.9%); TFC (35.0%); and Toshiba Mitsubishi-Electric Industrial Systems Corporation (“TMEIC”) (50.0%). Of the affiliates which were accounted for by the equity method, the investments in common stock of the listed companies (5 companies) were carried at ¥58,322 million ($545,065 thousand) and ¥56,451 million at March 31, 2005 and 2004, respectively. The Company’s investments in these companies had market values of ¥106,000 million ($990,654 thousand) and ¥97,162 million at March 31, 2005 and 2004, respectively, based on quoted market prices at those dates. Summarized financial information of the affiliates accounted for by the equity method is shown below: March 31 Current assets Other assets including property, plant and equipment Total assets Current liabilities Long-term liabilities Shareholders’ equity Total liabilities and shareholders’ equity Year ended March 31 Sales Net income (loss) Millions of yen 2005 ¥1,110,233 866,937 ¥1,977,170 ¥ 954,607 404,432 618,131 ¥1,977,170 2004 ¥1,022,935 793,102 ¥1,816,037 ¥ 769,150 436,020 610,867 ¥1,816,037 Millions of yen 2005 ¥1,619,823 5,344 2004 ¥1,281,165 (18,525) Thousands of U.S. dollars 2005 $10,376,009 8,102,215 $18,478,224 $ 8,921,561 3,779,738 5,776,925 $18,478,224 Thousands of U.S. dollars 2005 $15,138,533 49,944 A summary of transactions and balances with the affiliates accounted for by the equity method is presented below: Year ended March 31 Sales Purchases Sales of machinery and equipment Dividends March 31 Notes and accounts receivable, trade Other receivables Advance payment Long-term loans receivable Notes and accounts payable, trade Other payables Capital lease obligations Millions of yen 2005 ¥ 99,408 115,074 1,471 8,819 2004 ¥105,124 96,770 7,239 4,354 Millions of yen 2005 ¥ 30,805 8,751 225 5,950 113,606 30,035 46,102 2004 ¥24,024 8,507 5,598 2,350 79,272 11,232 45,706 Thousands of U.S. dollars 2005 $ 929,047 1,075,458 13,748 82,421 Thousands of U.S. dollars 2005 $ 287,897 81,785 2,103 55,607 1,061,738 280,701 430,860 8. GOODWILL AND OTHER INTANGIBLE ASSETS The Company tested goodwill for impairment under SFAS 142 applying a fair value-based test and has concluded that there was no impairment as of March 31, 2005 and 2004. 130th Anniversary Toshiba Corporation 25 The components of acquired intangible assets excluding goodwill at March 31, 2005 and 2004 are as follows: March 31, 2005 Other intangible assets subject to amortization: Software Technical license fees Other Total Other intangible assets not subject to amortization March 31, 2004 Other intangible assets subject to amortization: Software Technical license fees Other Total Other intangible assets not subject to amortization March 31, 2005 Other intangible assets subject to amortization: Software Technical license fees Other Total Other intangible assets not subject to amortization Gross carrying amount ¥ 92,397 47,371 8,652 ¥148,420 Gross carrying amount ¥ 82,735 37,398 7,789 ¥127,922 Millions of yen Accumulated amortization ¥44,374 22,632 5,657 ¥72,663 Millions of yen Accumulated amortization ¥40,070 23,448 4,790 ¥68,308 Net carrying amount ¥48,023 24,739 2,995 75,757 3,579 ¥79,336 Net carrying amount ¥42,665 13,950 2,999 59,614 3,292 ¥62,906 Thousands of U.S. dollars Gross carrying amount Accumulated amortization Net carrying amount $ 863,523 442,720 80,860 $1,387,103 $414,710 211,514 52,869 $679,093 $448,813 231,206 27,991 708,010 33,448 $741,458 Intangible assets acquired during the year ended March 31, 2005 primarily consisted of technical license fees of ¥19,742 million ($184,505 thousand). The weighted-average amortization period of technical license fees for the year ended March 31, 2005 was approximately 6.2 years. The weighted-average amortization periods for other intangible assets were approximately 5.7 years and 5.4 years for the years ended March 31, 2005 and 2004, respectively. Amortization expenses of other intangible assets subject to amortization for the years ended March 31, 2005 and 2004 were ¥25,898 million ($242,037 thousand) and ¥23,583 million, respectively. The future amortization expense for each of the next 5 years relating to intangible assets currently recorded in the consolidated balance sheets at March 31, 2005 is estimated as follows: Year ending March 31 2006 2007 2008 2009 2010 Millions of yen ¥24,456 19,011 12,661 8,032 2,627 Thousands of U.S. dollars $228,561 177,673 118,327 75,065 24,551 Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The changes in the carrying amount of goodwill for the years ended March 31, 2005 and 2004 are as follows: Year ended March 31 Balance at beginning of year Goodwill acquired during the year Foreign currency translation adjustments Balance at end of year Millions of yen 2005 ¥17,702 2,033 514 ¥20,249 2004 ¥13,628 5,265 (1,191) ¥17,702 Thousands of U.S. dollars 2005 $165,439 19,000 4,804 $189,243 As of March 31, 2005, all carrying amount of goodwill was allocated to the Digital Products Segment. 26 Toshiba Corporation 130th Anniversary 9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings at March 31, 2005 and 2004 comprise the following: March 31 Loans, principally from banks, including bank overdrafts, with weighted-average interest rate of 2.10% at March 31, 2005 and 0.74% at March 31, 2004: Secured Unsecured Commercial paper with weighted-average interest rate of 0.01% at March 31, 2004 Euro yen medium-term notes of a subsidiary, with weighted-average interest rate of 0.10% at March 31, 2005 and 0.12% at March 31, 2004 (swapped for floating rate (LIBOR, etc.) Euro obligations) Euro medium-term note of a subsidiary, with interest rate of 2.22% at March 31, 2005 Millions of yen 2005 2004 Thousands of U.S. dollars 2005 ¥ 354 162,876 ¥ 1,084 257,241 $ 3,308 1,522,206 — 20,000 — 32,442 28,386 303,196 2,093 ¥197,765 — ¥306,711 19,561 $1,848,271 Substantially all of the short-term borrowings are with banks which have written basic agreements with the Company to the effect that, with respect to all present or future loans with such banks, the Company shall provide collateral (including sums on deposit with such banks) or guarantors immediately upon the bank’s request and that any collateral furnished pursuant to such agreements or otherwise will be applicable to all indebtedness to such banks. At March 31, 2005, the Company had unused committed lines of credit from short-term financing arrangements aggregating ¥319,082 million ($2,982,075 thousand), of which ¥17,182 million ($160,579 thousand) was in support of the Company’s commercial paper. The lines of credit expire on various dates from July 2005 through March 2006. Under the agreements, the Company is required to pay commitment fees ranging from 0.08 percent to 0.125 percent on the unused portion of the lines of credit. Long-term debt at March 31, 2005 and 2004 comprise the following: March 31 Loans, principally from banks and insurance companies, due 2005 to 2032 with weighted-average interest rate of 0.69% at March 31, 2005 and due 2004 to 2032 with weighted-average interest rate of 0.89% at March 31, 2004: Millions of yen 2005 2004 Thousands of U.S. dollars 2005 Secured Unsecured ¥ 7,127 287,698 ¥ 8,994 324,869 $ 66,608 2,688,766 Unsecured yen bonds, due 2005 to 2008 with interest ranging from 0.40% to 3.025% at March 31, 2005 and due 2004 to 2008 with interest ranging from 0.40% to 3.025% at March 31, 2004 Zero Coupon Convertible Bonds with stock acquisition rights: 359,230 415,425 3,357,290 Due 2009 convertible currently at ¥587 per share Due 2011 convertible currently at ¥542 per share 50,000 100,000 — — 467,290 934,579 Euro yen medium-term notes, due 2005 to 2008 with interest ranging from 0.47% to 2.34% at March 31, 2005 and due 2004 to 2008 with interest ranging from zero% to 2.34% at March 31, 2004 (swapped for floating rate (LIBOR, etc.) Yen obligations) Unsecured yen bond of a subsidiary, due 2004 with interest rate of 1.69% at March 31, 2004 1.825% secured yen bond of a subsidiary due 2004 Euro yen medium-term notes of subsidiaries, due 2005 to 2014 with interest ranging from 0.09% to 3.55% at March 31, 2005 and due 2004 to 2013 with interest ranging from 0.08% to 2.60% at March 31, 2004 (swapped for floating rate (LIBOR, etc.) U.S. dollar, Yen or Euro obligations) Capital lease obligations Less—Portion due within one year 8,000 16,000 74,766 — — 7,000 300 — — 55,524 46,102 913,681 (230,285) ¥ 683,396 74,451 45,706 892,745 (190,821) ¥ 701,924 518,916 430,860 8,539,075 (2,152,196) $ 6,386,879 130th Anniversary Toshiba Corporation 27 Certain of the secured loan agreements contain provisions, which permit the lenders to require additional collateral. Substantially all of the unsecured loan agreements permit the lenders to require collateral or guarantors for such loans. Certain of the secured and unsecured loan agreements require prior approval by the banks and trustees before any distributions (including cash dividends) may be made from current or retained earnings. Assets pledged as collateral for short-term borrowings and long-term debt at March 31, 2005 were property, plant and equipment with a book value of ¥16,700 million ($156,075 thousand). The aggregate annual maturities of long-term debt, excluding those of capital lease obligations are as follows: Year ending March 31 2006 2007 2008 2009 2010 Thereafter Millions of yen ¥214,450 134,213 89,280 113,478 175,110 141,048 ¥867,579 Thousands of U.S. dollars $2,004,206 1,254,327 834,392 1,060,542 1,636,542 1,318,206 $8,108,215 10. ISSUANCE OF CONVERTIBLE BOND In July, 2004, Toshiba Corporation issued ¥50,000 million ($467,290 thousand) Zero Coupon Convertible Bonds due 2009 (the “2009 Bonds”) and ¥100,000 million ($934,579 thousand) Zero Coupon Convertible Bonds due 2011 (the“2011 Bonds”). The bonds include stock acquisition rights which entitle bondholders to acquire common stock under certain circumstances, and are exercisable on and after August 4, 2004 up to, and including, July 7, 2009 (in the case of the 2009 Bonds) and up to, and including, July 7, 2011 (in the case of the 2011 Bonds). The initial conversion prices are ¥587 per share (in the case of the 2009 Bonds) and ¥542 (in the case of the 2011 Bonds), subject to adjustment for certain events such as a stock split, consolidation of stock or issuance of stock at a consideration per share which is less than the current market price. (Conditions allowing exercise of stock acquisition rights) The period prior to (but not including) July 21, 2008 (in the case of the 2009 Bonds) or July 21, 2010 (in the case of the 2011 Bonds) In the case that as of the last trading day of any calendar quarter, the closing price of the shares for any 20 trading days in a period of 30 consecutive trading days ending on the last trading day of such quarter is more than 120% of the conversion price in effect on each such trading day. The period on or after July 21, 2008 (in the case of the 2009 Bonds) or July 21, 2010 (in the case of the 2011 Bonds) At any time after the closing price of the shares on at least one trading day is more than 120% of the conversion price in effect on each such trading day. The additional 85,178,875 shares and 184,501,845 shares relating to the potential conversion of the 2009 Bonds and the 2011 Bonds were included in the diluted net income per share calculations for the year ended March 31, 2005. 11. ACCRUED PENSION AND SEVERANCE COSTS All employees who retire or are terminated are usually entitled to lump-sum severance indemnities or pension benefits determined by reference to their current basic rate of pay, length of service and conditions under which their employment terminates. The obligation for the severance indemnity benefit is provided for through accruals, funding of tax-qualified non-contributory pension plans, contributory trusteed employee pension funds, and the corporate pension plan. The Company has Employees’ Pension Fund (“EPF”) Plans, which are contributory defined benefit pension plans under the Japanese Welfare Pension Insurance Law (“JWPIL”). These plans are composed of a substitutional portion which is the obligation related to the government-defined benefit prescribed by JWPIL, and a corporate portion based on a contributory defined benefit arrangement established at the discretion of Toshiba Corporation and these subsidiaries. Among several EPF Plans that the Company participated in, certain subsidiaries’ EPF Plan and the Toshiba EPF Plan were reorganized and became corporate pension plans under the Japanese Defined Benefit Corporate Pension Law during the year ended March 31, 2005 and 2004, respectively. 28 Toshiba Corporation 130th Anniversary Certain subsidiaries in Japan have tax-qualified non-contributory pension plans which cover all or a part of the indemnities payable to qualified employees at the time of termination. The funding policy for the plans is to contribute amounts required to maintain sufficient plan assets to provide for accrued benefits, subject to the limitation on deductibility imposed by Japanese income tax laws. The Company uses a March 31 measurement date for the majority of its plans. The changes in the benefit obligation and plan assets and reconciliations of net amount recognized to funded status and accrued pension and severance costs for the years ended March 31, 2005 and 2004 are as follows: March 31 Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Plan participants’ contributions Plan amendments Actuarial loss Benefits paid Divestitures Return of substitutional portion to the government Foreign currency exchange impact Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Plan participants’ contributions Benefits paid Divestitures Return of substitutional portion to the government Foreign currency exchange impact Fair value of plan assets at end of year Funded status Unrecognized actuarial loss Unrecognized net obligation at transition Unrecognized prior service cost Net amount recognized Amounts recognized in the consolidated balance sheets consist of: Prepaid pension cost Accrued pension and severance costs Accumulated other comprehensive loss, pre-tax Net amount recognized Accumulated benefit obligation at end of year Millions of yen 2005 2004 ¥1,290,504 44,106 33,134 2,932 2,110 22,024 (69,032) — (29,767) 794 ¥1,296,805 ¥ 617,832 26,028 54,223 2,932 (38,794) — (15,019) 634 ¥ 647,836 ¥ 648,969 (499,433) (12,495) 57,737 ¥ 194,778 ¥ (2,672) 581,598 (384,148) ¥ 194,778 ¥1,229,014 ¥1,936,297 45,689 55,075 2,869 (18,403) 32,130 (91,901) (15,604) (654,057) (1,591) ¥1,290,504 ¥ 844,767 122,120 68,343 2,869 (47,338) (4,449) (366,927) (1,553) ¥ 617,832 ¥ 672,672 (515,851) (24,520) 59,875 ¥ 192,176 ¥ — 601,566 (409,390) ¥ 192,176 ¥1,221,653 Thousands of U.S. dollars 2005 $12,060,785 412,206 309,663 27,402 19,720 205,832 (645,159) — (278,196) 7,420 $12,119,673 $ 5,774,131 243,252 506,757 27,402 (362,561) — (140,364) 5,925 $ 6,054,542 $ 6,065,131 (4,667,598) (116,776) 539,598 $ 1,820,355 $ (24,972) 5,435,495 (3,590,168) $ 1,820,355 $11,486,112 The components of the net periodic pension and severance cost for the years ended March 31, 2005 and 2004 are as follows: Thousands of U.S. dollars 2005 Millions of yen Year ended March 31 Service cost—benefits earned during the year Interest cost on projected benefit obligation Expected return on plan assets Amortization of unrecognized net obligation at transition Amortization of prior service cost Recognized actuarial loss Settlement loss Net periodic pension and severance cost 2005 ¥ 44,106 33,134 (18,637) 12,025 (3,584) 24,894 7,992 ¥ 99,930 2004 ¥ 45,689 55,075 (31,052) 12,025 (5,170) 42,857 188,106 ¥307,530 $ 412,206 309,663 (174,178) 112,383 (33,495) 232,654 74,692 $ 933,925 For the year ended March 31, 2004, the Company contributed certain marketable equity securities, not including those of the Company and affiliates, to employee retirement benefit trusts, with no cash proceeds thereon. The fair value of these securities at the time of contribution was ¥34,426 million. The Company expects to contribute ¥57,435 million ($536,776 thousand) to its defined benefit plans in the year ending March 31, 2006. 130th Anniversary Toshiba Corporation 29 The following benefit payments are expected to be paid: Year ending March 31 2006 2007 2008 2009 2010 2011—2015 Millions of yen ¥ 57,537 64,494 67,298 71,762 76,438 396,788 Thousands of U.S. dollars $ 537,729 602,748 628,953 670,673 714,374 3,708,299 In January 2003, the Emerging Issue Task Force reached a consensus on Issue No. 03-2 (“EITF 03-2”), Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities, which addresses accounting for a transfer to the Japanese government of a substitutional portion of EPF Plans. EITF 03-2 requires employers to account for the entire process at completion of the transfer to the Japanese government of the substitutional portion of the benefit obligation and the related plan assets, as a single settlement transaction. In October 2003, certain subsidiaries received an approval from the Japanese government to transfer the future benefit obligation related to the substitutional portion in the EPF plan. In January 2005, the subsidiaries received an approval to separate the remaining substitutional portion related to past service by its employees. In March 2005, the subsidiaries completed the transfer of the substitutional portion of the benefit obligation and the related government-specified portion of the plan assets which were computed by the Japanese government, and were relieved of all related obligations. In September 2002, the Company received an approval from the Japanese government to transfer the future benefit obligation related to the substitutional portion in the Toshiba EPF Plan. In December 2003, the Company received an approval to separate the remaining substitutional portion related to past service by its employees. In March 2004, the Company completed the transfer of the substitutional portion of the benefit obligation and the related government-specified portion of the plan assets which were computed by the Japanese government, and was relieved of all related obligations. As a result, the Company recorded a gain of ¥4,836 million ($45,196 thousand) and ¥48,945 million for the years ended March 31, 2005 and March 31, 2004, respectively. The subsidies of ¥12,828 million ($119,888 thousand) for the year ended March 31, 2005 and ¥237,051 million for the year ended March 31, 2004 from the government were calculated as the difference between the obligation settled and the assets transferred determined pursuant to the government formula, less derecognized amounts of previously accrued salary progression at the time of settlement of ¥1,920 million ($17,944 thousand) and ¥50,079 million for the years ended March 31, 2005 and March 31, 2004, respectively. Weighted-average assumptions used to determine benefit obligations as of March 31, 2005 and 2004 and net periodic pension and severance cost for the years then ended are as follows: March 31 Discount rate Rate of compensation increase Year ended March 31 Discount rate Expected long-term rate of return on plan assets Rate of compensation increase 2005 2.6% 3.0% 2005 2.7% 4.0% 3.0% 2004 2.7% 3.0% 2004 3.0% 4.0% 1.9% The Company determines the expected long-term rate of return in consideration of the target allocation of the plan assets, the current expectation of long-term returns on the assets and actual returns on plan assets. The Company’s pension and severance plan asset allocations at March 31, 2005 and 2004, by asset category are as follows: March 31 Asset category 2005 2004 Equity securities Debt securities Life insurance company general accounts Other Total The other category includes hedge funds. 30 Toshiba Corporation 130th Anniversary 52% 26% 6% 16% 100% 62% 28% 4% 6% 100% The Company’s investment policies and strategies are to assure adequate plan assets to provide for future payments of pension and severance benefits to participants, with reasonable risks. The Company designs the basic target allocation of the plan assets to mirror the best portfolio based on estimation of mid-term and long-term return on the investments. The Company periodically reviews the actual return on the investments and adjusts the portfolio to achieve the assumed long-term rate of return on the investments. The Company targets its investments in equity securities at 40 percent or more of total investments, and investments in equity and debt securities at 75 percent or more of total investments. 12. RESEARCH AND DEVELOPMENT COSTS Research and development costs were expensed as incurred and amounted to ¥348,010 million ($3,252,430 thousand) and ¥336,714 million for the years ended March 31, 2005 and 2004, respectively. 13. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising costs amounted to ¥41,494 million ($387,794 thousand) and ¥40,156 million for the years ended March 31, 2005 and 2004, respectively. 14. FOREIGN EXCHANGE GAINS AND LOSSES For the years ended March 31, 2005 and 2004, the net foreign exchange impacts were ¥1,772 million ($16,561 thousand) gain and ¥2,183 million loss, respectively. 15. IMPAIRMENT OF LONG-LIVED ASSETS Due to general price erosion, severe market competition and others, the Company recorded impairment charges of ¥1,088 million ($10,168 thousand) related to the manufacturing facilities of the Electronic Devices division, and ¥10,018 million related to the manufacturing facilities of the lithium-ion rechargeable battery business for the years ended March 31, 2005 and 2004, respectively. These impairment charges are included under the caption other expense in the accompanying consolidated statements of income. 16. INCOME TAXES For the year ended March 31, 2004, the Company was permitted to file consolidated tax returns in Japan. In connection therewith, a temporary surtax of 2.0 percent was assessed for the year ended March 31, 2004. As a result of the surtax, and certain changes in the corporate tax rate, the Company‘s normal statutory tax rate changed from 42.1 percent to 43.9 percent for the year ended March 31, 2004 and to 40.7 percent for the years ended March 31, 2005 and thereafter. A reconciliation between the reported income tax expense and the amount computed by multiplying the income before income taxes, minority interest and equity in earnings (losses) of affiliates by the applicable statutory tax rate is as follows: Year ended March 31 Expected income tax expense Increase (decrease) in taxes resulting from: Dividends Non-deductible expenses for tax purposes Net changes in valuation allowance Tax rate difference relating to foreign subsidiaries Effect of income tax rate change Other Income tax expense Millions of yen 2005 ¥45,001 9,849 4,363 8,117 (7,057) — (4,329) ¥55,944 2004 ¥ 63,673 11,245 6,134 17,114 (4,187) 3,142 5,116 ¥102,237 Thousands of U.S. dollars 2005 $420,570 92,047 40,776 75,860 (65,954) — (40,458) $522,841 130th Anniversary Toshiba Corporation 31 The significant components of deferred tax assets and deferred tax liabilities as of March 31, 2005 and 2004 are as follows: Thousands of U.S. dollars 2005 Millions of yen 2005 2004 March 31 Gross deferred tax assets: Inventories Accrued pension and severance costs Tax loss carryforwards Minimum pension liability adjustment Accrued bonus Depreciation and amortization Other Valuation allowance for deferred tax assets Deferred tax assets March 31 Gross deferred tax liabilities: Retained earnings appropriated for tax allowable reserves Unrealized gains on securities Gain on securities contributed to employee retirement benefit trusts Other Deferred tax liabilities Net deferred tax assets ¥ 21,565 112,275 123,788 156,348 42,300 30,781 130,596 617,653 (88,818) ¥528,835 ¥ 22,583 107,187 127,045 167,189 45,214 38,873 116,780 624,871 (81,297) ¥543,574 Millions of yen 2005 2004 ¥ (18,887) (23,410) (17,381) (13,402) (73,080) ¥455,755 ¥ (15,525) (17,312) (17,381) (13,774) (63,992) ¥479,582 $ 201,542 1,049,299 1,156,897 1,461,196 395,327 287,673 1,220,524 5,772,458 (830,075) $4,942,383 Thousands of U.S. dollars 2005 $ (176,514) (218,785) (162,439) (125,252) (682,990) $4,259,393 The net changes in the total valuation allowance for the years ended March 31, 2005 and 2004 were an increase of ¥7,521 million ($70,290 thousand) and an increase of ¥15,417 million, respectively. The Company’s tax loss carryforwards for each of the corporate and local taxes at March 31, 2005 amounted to ¥261,910 million ($2,447,757 thousand) and ¥416,757 million ($3,894,925 thousand), respectively, the majority of which will expire during the period from 2005 through 2011. The Company utilized tax loss carryforwards of ¥55,882 million ($522,262 thousand) and ¥22,668 million ($211,850 thousand) to reduce current corporate and local taxes, respectively, during the year ended March 31, 2005. Realization of tax loss carryforwards and other deferred tax assets is dependent on the Company generating sufficient taxable income prior to their expiration or the Company exercising certain available tax strategies. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets, less the valuation allowance, will be realized. The amount of such net deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Deferred income tax liabilities have not been provided on undistributed earnings of foreign subsidiaries deemed indefinitely reinvested in foreign operations. As of March 31, 2005 and 2004, the undistributed earnings of the foreign subsidiaries not subject to deferred tax liabilities were ¥124,375 million ($1,162,383 thousand), and ¥95,908 million, respectively. It is not practicable to estimate the amount of the deferred income tax liabilities on such earnings. 17. ISSUANCE OF STOCK BY A SUBSIDIARY In March 2004, Toshiba Samsung Storage Technology Corporation (“TSST”), issued 294 shares of its common stock to Samsung Electronics Co., Ltd. for ¥13,713 million. TSST is engaged in the business of product development, manufacturing and sales of Optical Disc Drives and was established in December 2003 as a wholly owned subsidiary of the Company. As a result of this transaction, the Company recognized a gain of ¥6,391 million, representing the excess of issuance price per share of ¥47 million over its average carrying amount of the net equity held in TSST. The gain from stock issuance by TSST is included under the caption other income in the accompanying consolidated statements of income for the year ended March 31, 2004. The transaction decreased the Company’s interest in TSST to 51.0 percent. 18. SHAREHOLDERS’ EQUITY > RETAINED EARNINGS Retained earnings at March 31, 2005 and 2004 included a legal reserve of ¥13,980 million ($130,654 thousand) and ¥13,122 million, respectively. The Japanese Commercial Code provides that an amount equal to at least 10 percent of cash dividends and other distributions from retained earnings paid by Toshiba Corporation and its Japanese subsidiaries be appropriated as a legal reserve. No further appropriations are required when the total amount of the additional paid-in capital and the legal reserve equals 25 percent of their respective stated capital. The 32 Toshiba Corporation 130th Anniversary Japanese Commercial Code also provides that to the extent that the sum of the additional paid-in capital and the legal reserve exceeds 25 percent of the stated capital, the amount of the excess, if any, is available for appropriations. The amount of retained earnings available for dividends is based on Toshiba Corporation’s retained earnings determined in accordance with generally accepted accounting principles in Japan and the Japanese Commercial Code. Retained earnings at March 31, 2005 do not reflect current year-end dividends of ¥9,646 million ($90,150 thousand) which will be paid from June 6, 2005. Retained earnings at March 31, 2005 included the Company’s equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of ¥14,297 million ($133,617 thousand). > ACCUMULATED OTHER COMPREHENSIVE LOSS An analysis of the changes in accumulated other comprehensive loss, net of tax, for the years ended March 31, 2005 and 2004 is shown below: March 31 Unrealized gains on securities: Balance at beginning of year Current year change Balance at end of year Foreign currency translation adjustments: Balance at beginning of year Current year change Balance at end of year Minimum pension liability adjustment: Balance at beginning of year Current year change Balance at end of year Unrealized (losses) gains on derivative instruments: Balance at beginning of year Current year change Balance at end of year Total accumulated other comprehensive loss: Balance at beginning of year Current year change Balance at end of year Millions of yen 2005 2004 ¥ 26,825 6,654 ¥ 33,479 ¥ (79,290) 10,441 ¥ (68,849) ¥(234,283) 14,968 ¥(219,315) ¥ 854 (922) ¥ (68) ¥(285,894) 31,141 ¥(254,753) ¥ 15,636 11,189 ¥ 26,825 ¥ (59,589) (19,701) ¥ (79,290) ¥(405,069) 170,786 ¥(234,283) ¥ (1,753) 2,607 ¥ 854 ¥(450,775) 164,881 ¥(285,894) Thousands of U.S. dollars 2005 $ 250,701 62,187 $ 312,888 $ (741,028) 97,579 $ (643,449) $(2,189,561) 139,888 $(2,049,673) $ 7,981 (8,616) $ (635) $(2,671,907) 291,038 $(2,380,869) Tax effects allocated to each component of other comprehensive income (loss) for the years ended March 31, 2005 and 2004 are shown below: For the year ended March 31, 2005: Unrealized gains on securities: Unrealized holding gains arising during year Less: reclassification adjustment for gains included in net income ¥ 15,989 (4,783) ¥ (6,499) 1,947 ¥ 9,490 (2,836) Pre-tax amount Millions of yen Tax benefit (expense) Net-of-tax amount Foreign currency translation adjustments: Currency translation adjustments arising during year Less: reclassification adjustment for losses included in net income Minimum pension liability adjustment Unrealized losses on derivative instruments: Unrealized losses arising during year Less: reclassification adjustment for losses included in net income Other comprehensive income (loss) For the year ended March 31, 2004: Unrealized gains on securities: 12,470 162 25,242 (5,927) 4,374 ¥ 47,527 (2,191) — (10,274) 2,411 (1,780) ¥ (16,386) 10,279 162 14,968 (3,516) 2,594 ¥ 31,141 Unrealized holding gains arising during year Less: reclassification adjustment for gains included in net income ¥ 43,367 (27,393) ¥ (17,517) 12,732 ¥ 25,850 (14,661) Foreign currency translation adjustments: Currency translation adjustments arising during year Less: reclassification adjustment for gains included in net income Minimum pension liability adjustment Unrealized gains on derivative instruments: Unrealized gains arising during year Less: reclassification adjustment for losses included in net income Other comprehensive income (loss) (20,040) (401) 301,726 2,571 1,909 ¥301,739 740 — (130,940) (1,098) (775) ¥(136,858) (19,300) (401) 170,786 1,473 1,134 ¥164,881 130th Anniversary Toshiba Corporation 33 For the year ended March 31, 2005: Unrealized gains on securities: Unrealized holding gains arising during year Less: reclassification adjustment for gains included in net income $149,430 (44,701) $ (60,738) 18,196 $ 88,692 (26,505) Thousands of U.S. dollars Pre-tax amount Tax benefit (expense) Net-of-tax amount Foreign currency translation adjustments: Currency translation adjustments arising during year Less: reclassification adjustment for losses included in net income Minimum pension liability adjustment Unrealized losses on derivative instruments: Unrealized losses arising during year Less: reclassification adjustment for losses included in net income Other comprehensive income (loss) 19. NET INCOME PER SHARE 116,542 1,514 235,907 (55,392) 40,878 $444,178 (20,477) — (96,019) 22,533 (16,635) $(153,140) 96,065 1,514 139,888 (32,859) 24,243 $291,038 A reconciliation of the numerators and denominators between basic and diluted net income per share for the years ended March 31, 2005 and 2004 is as follows: Year ended March 31 Net income available to common shareholders Net income effect of dilutive convertible debentures Net income available to common shareholders and assumed conversions Year ended March 31 Weighted-average number of shares of common stock outstanding for the year Incremental shares from assumed conversions of dilutive convertible debentures Millions of yen 2005 ¥46,041 — 2004 ¥28,825 — Thousands of U.S. dollars 2005 $430,290 — ¥46,041 ¥28,825 $430,290 Thousands of shares 2005 2004 3,216,215 3,216,774 186,702 — Weighted-average number of shares of diluted common stock outstanding for the year 3,402,917 3,216,774 Year ended March 31 Net income per share of common stock: —Basic —Diluted 20. FINANCIAL INSTRUMENTS Yen 2005 ¥14.32 13.53 2004 ¥8.96 8.96 U.S. dollars 2005 $0.134 0.126 > (1) DERIVATIVE FINANCIAL INSTRUMENTS The Company operates internationally, giving rise to exposure to market risks from fluctuations in foreign currency exchange and interest rates. In the normal course of its risk management efforts, the Company employs a variety of derivative financial instruments, which are comprised principally of forward exchange contracts, interest rate swap agreements, currency swap agreements, and currency options to reduce its exposures. The Company has policies and procedures for risk management and the approval, reporting and monitoring of derivative financial instruments. The Company’s policies prohibit holding or issuing derivative financial instruments for trading purposes. The counterparties to the Company’s derivative transactions are financial institutions of high credit standing. The Company does not anticipate any credit loss from nonperformance by the counterparties to forward exchange contracts, interest rate swap agreements, currency swap agreements and currency options. The Company has entered into forward exchange contracts with financial institutions as hedges against fluctuations in foreign currency exchange rates on monetary assets and liabilities denominated in foreign currencies. The forward exchange contracts related to accounts receivable and payable, and commitments on future trade transactions denominated in foreign currencies, mature primarily within a few months of the balance sheet date. Interest rate swap agreements, currency swap agreements, and currency options are used to limit the Company’s exposure to losses in relation to underlying debt instruments and accounts receivable and payable denominated in foreign currencies resulting from adverse fluctuations in foreign currency exchange and interest rates. These agreements mature during the period 2005 to 2014. 34 Toshiba Corporation 130th Anniversary Forward exchange contracts and certain interest rate swap agreements and currency swap agreements are designated as either fair value hedges or cash flow hedges depending on accounts receivable and payable denominated in foreign currencies or commitments on future trade transactions and the interest rate characteristics of the underlying debt as discussed below. Fair Value Hedge Strategy The forward exchange contracts utilized by the Company effectively reduce fluctuation in fair value of accounts receivable and payable denominated in foreign currencies. The interest rate swap agreements utilized by the Company effectively convert a portion of its fixed-rate debt to a floating-rate basis. Cash Flow Hedge Strategy The forward exchange contracts utilized by the Company effectively reduce fluctuation in cash flow from commitments on future trade transactions denominated in foreign currencies approximately for the next 6 months. The interest rate swap agreements utilized by the Company effectively convert a portion of its floating-rate debt to a fixed-rate basis for the next 10 years. The Company expects to reclassify ¥131 million ($1,224 thousand) of net gains on derivative financial instruments from accumulated other comprehensive income (loss) to earnings during the next 12 months due to the collection of accounts receivable denominated in foreign currencies and the payments of accounts payable denominated in foreign currencies and variable interest associated with the floating-rate debts. At March 31, 2005, there were no significant gains or losses on derivative financial instruments or portions thereof that were either ineffective as hedges, excluded from assessment of hedge effectiveness, or where the underlying risk did not occur. The Company’s forward exchange contract amounts, the aggregate notional principal amounts of interest rate swap agreements, currency swap agreements, and currency options outstanding at March 31, 2005 and 2004 are summarized below: Thousands of U.S. dollars 2005 Millions of yen 2004 2005 March 31 Forward exchange contracts: To sell foreign currencies To buy foreign currencies Interest rate swap agreements Currency swap agreements Currency options ¥132,673 36,702 119,250 139,208 34,816 ¥106,413 22,931 170,326 116,475 51,552 $1,239,935 343,009 1,114,486 1,301,009 325,383 > (2) FAIR VALUE OF FINANCIAL INSTRUMENTS at March 31, 2005 and 2004 are summarized as follows: The estimated fair values of the Company’s financial instruments March 31 Nonderivatives: Assets: Millions of yen 2005 2004 Carrying amount Estimated fair value Carrying amount Estimated fair value Long-term finance receivables, net ¥ — ¥ — ¥ 5,630 ¥ 6,050 Liabilities: Long-term debt, including current portion (867,579) (875,132) (847,039) (862,081) Derivative financial instruments: Forward exchange contracts Interest rate swap agreements Currency swap agreements Currency options 944 (285) 1,182 164 944 (285) 1,182 164 1,537 (163) 3,672 459 1,537 (163) 3,672 459 130th Anniversary Toshiba Corporation 35 March 31 Nonderivatives: Assets: Thousands of U.S.dollars 2005 Carrying amount Estimated fair value Long-term finance receivables, net $ — $ — Liabilities: Long-term debt, including current portion (8,108,215) (8,178,804) Derivative financial instruments: Forward exchange contracts Interest rate swap agreements Currency swap agreements Currency options 8,822 (2,664) 11,047 1,533 8,822 (2,664) 11,047 1,533 The above table excludes the financial instruments for which fair values approximate their carrying amounts and those related to leasing activities. The table also excludes marketable securities and other investments which are disclosed in Note 4. In assessing the fair value of these financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at that time. For certain instruments, including cash and cash equivalents, notes and accounts receivable–trade, finance receivables–net, short-term borrowings, notes payable–trade, accounts payable–trade and accounts payable–other and accrued expenses, it is assumed that the carrying amount approximated fair value for the majority of these instruments because of their short maturities. Quoted market prices are used for a part of marketable securities and other investments. Other techniques, such as estimated discounted value of future cash flows, and replacement cost, are used to determine fair value for the remaining financial instruments. These estimated fair values are not necessarily indicative of the amounts that could be realized in a current market exchange. 21. LEASES > LESSEE The Company leases manufacturing equipment, office and warehouse space, and certain other assets under operating leases. Rent expenses under such leases for the years ended March 31, 2005 and 2004 were ¥82,174 million ($767,981 thousand) and ¥83,889 million, respectively. The Company also leases certain machinery and equipment which are accounted for as capital leases from TFC and Toshiba Medical Finance Co., Ltd., affiliates of the Company. The costs under capital leases as of March 31, 2005 and 2004 were approximately ¥91,000 million ($850,467 thousand) and ¥87,000 million, respectively. Accumulated amortization of the machinery and equipment under capital leases as of March 31, 2005 and 2004 were approximately ¥45,000 million ($420,561 thousand) and ¥41,300 million, respectively. Minimum lease payments for the Company’s capital and non-cancelable operating leases as of March 31, 2005 are as follows: Year ending March 31 2006 2007 2008 2009 2010 Thereafter Total minimum lease payments Executory costs Amounts representing interest Present value of net minimum lease payments Less—current portion Millions of yen Thousands of U.S. dollars Operating leases ¥14,996 13,518 7,443 4,727 3,110 2,999 ¥46,793 Capital leases ¥ 17,648 15,261 9,966 5,733 1,533 171 50,312 (2,266) (1,944) 46,102 (15,835) ¥ 30,267 Operating leases $140,150 126,336 69,561 44,178 29,065 28,028 $437,318 Capital leases $ 164,935 142,626 93,140 53,580 14,327 1,598 470,206 (21,178) (18,168) 430,860 (147,991) $ 282,869 36 Toshiba Corporation 130th Anniversary Year ending March 31 > LESSOR The Company is also a lessor to office buildings and other assets under operating leases. Future minimum lease payments to be received under the Company’s non-cancelable operating leases as of March 31, 2005 are as follows: Thousands of U.S. dollars $ 9,402 9,402 9,346 8,196 7,841 73,420 $117,607 Millions of yen ¥ 1,006 1,006 1,000 877 839 7,856 ¥12,584 2006 2007 2008 2009 2010 Thereafter 22. CONSOLIDATION OF VIEs The Company leases certain manufacturing equipment from a VIE. The Company consolidates the VIE in accordance with FIN 46R. As a result, at March 31, 2005, the Company recorded machinery and equipment of ¥27,288 million ($255,028 thousand), and other liabilities of ¥29,021 million ($271,224 thousand). At March 31, 2004, the Company recorded machinery and equipment, and other liabilities of ¥37,988 million, respectively. The creditors of the VIE do not have recourse to the general credit of the Company. 23. COMMITMENTS AND CONTINGENT LIABILITIES Commitments outstanding at March 31, 2005 for the purchase of property, plant and equipment approximated ¥37,044 million ($346,206 thousand). At March 31, 2005, contingent liabilities, other than guarantees disclosed in Note 24, approximated ¥9,011 million ($84,215 thousand) principally for recourse obligations related to notes receivable transferred. 24. GUARANTEES > GUARANTEES OF UNCONSOLIDATED AFFILIATES AND THIRD PARTY DEBT The Company guarantees debt as well as certain financial obligations of unconsolidated affiliates and third parties to support the sale of the Company’s products and services. Expiration dates vary from 2005 to 2017 or terminate on payment and/or cancellation of the obligation. A payment by the Company would be triggered by the failure of the guaranteed party to fulfill its obligation under the guarantee. The maximum potential payments under these guarantees were ¥81,710 million ($763,645 thousand) as of March 31, 2005. The Company guarantees housing loans of its employees. The > GUARANTEES OF EMPLOYEES’ HOUSING LOANS term of the guarantees is equal to the term of the related loans which range from 5 to 30 years. A payment would be triggered by failure of the guaranteed party to fulfill its obligation covered by the guarantee. The maximum potential payments under these guarantees were ¥25,350 million ($236,916 thousand) as of March 31, 2005. However, the Company expects that the majority of such payments would be reimbursed through the Company’s insurance policy. > GUARANTEES OF TRANSFERRED CORPORATE BONDS The Company entered into a sale and assumption agreement with an SPE during 2001. As a result, the Company was released from being a primary obligor for ¥20,178 million of the Company’s corporate bonds, which mature on various dates through 2008, and became secondarily liable for these obligations. The maximum potential payment by the Company as a secondary obligor was ¥9,170 million ($85,701 thousand) at March 31, 2005. > RESIDUAL VALUE GUARANTEES UNDER SALE AND LEASEBACK TRANSACTIONS The Company entered into several sale and leaseback transactions in which certain manufacturing equipment was sold and leased back. The Company may be required to make payments for residual value guarantees in connection with these transactions. The operating leases will expire on various dates through July 2009. The maximum potential payments by the Company for such residual value guarantees were ¥17,265 million ($161,355 thousand) at March 31, 2005. The Company has transferred trade notes > GUARANTEES OF DEFAULTED NOTES AND ACCOUNTS RECEIVABLE receivable, trade accounts receivable and finance receivables under several securitization programs. Upon certain sales of trade notes and accounts receivable, the Company holds a repurchase obligation, which the Company is required to perform upon default of the trade notes and accounts receivable. The trade notes and accounts receivable generally mature within 3 months. The maximum potential payment for such repurchase obligation was ¥13,243 million ($123,766 thousand) as of March 31, 2005. 130th Anniversary Toshiba Corporation 37 The carrying amounts of the liabilities for the Company’s obligations under the guarantees described above at March 31, 2005 were not significant. > WARRANTY Estimated warranty costs are accrued for at the time the product is sold to a customer. Estimates for warranty costs are made based primarily on historical warranty claim experience. The following is a reconciliation of the product warranty accrual: March 31 Balance at beginning of year Warranties issued Settlements made Foreign currency translation adjustments Balance at end of year 25. LEGAL PROCEEDINGS Millions of yen 2005 ¥ 19,938 31,568 (27,211) 780 ¥ 25,075 2004 ¥ 19,491 23,590 (21,948) (1,195) ¥ 19,938 Thousands of U.S. dollars 2005 $ 186,336 295,028 (254,308) 7,290 $ 234,346 In November 2002, a lawsuit was filed by Lexar Media, Inc. against Toshiba Corporation and one of its subsidiaries, Toshiba America Electronic Components, Inc. at the California Superior Court in San Jose, United States, which accused the Company of misappropriation and misconduct of trade secret related to NAND flash memory. In connection with this case, in March 2005, a jury preliminarily found Toshiba Corporation and the subsidiary liable for approximately ¥50,000 million ($465 million). In addition, the Company is a defendant in other pending lawsuits alleging patent infringement, breaches of contract and warranties and other matters. The Company’s management believes that there are meritorious defenses to all of these actions. Based on the information currently available to both the Company and its legal counsel, management believes that damages from such lawsuits, if any, would not have a material adverse effect on the financial position or the results of operations of the Company. 26. ENVIRONMENTAL LIABILITIES The environmental regulation, “Law Concerning Special Measure against poly chlorinated biphenyl (PCB) waste” requires PCB waste holders dispose of all PCB waste by July 2016. The Company accrued ¥10,156 million ($94,916 thousand) at March 31, 2005, for environmental remediation and restoration costs for products or equipment with PCB which some Toshiba operations in Japan have retained. These costs are included as cost of sales in the accompanying consolidated statements of income. The accrual will be adjusted as assessment and remediation efforts progress or as additional technical or legal information available. Management is of opinion that the ultimate costs in excess of the amount accrued, if any, would not have a material adverse effect on the financial position or the results of operations of the Company. 27. SUPPLEMENTAL CASH FLOW INFORMATION During the year ended March 31, 2004, Toshiba Corporation and Mitsubishi Electric established TMEIC. In connection with this transaction, the Company contributed certain assets totaling ¥48,549 million, which included cash of ¥2,719 million, and liabilities of ¥32,801 million, and obtained a 50.0 percent interest in TMEIC. 38 Toshiba Corporation 130th Anniversary Report of Independent Auditors The Board of Directors and Shareholders Toshiba Corporation We have audited the accompanying consolidated balance sheets of Toshiba Corporation and subsidiaries (the “Company”) as of March 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows for the years then ended, all expressed in Japanese yen. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The Company has not presented segment information required to be disclosed in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” for the years ended March 31, 2005 and 2004. In our opinion, presentation of segment information is required under accounting principles generally accepted in the United States for a complete presentation of the Company’s consolidated financial statements. In our opinion, except for the omission of segment information discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at March 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. We have also reviewed the translation of the financial statements mentioned above into United States dollars on the basis described in Note 3. In our opinion, such statements have been translated on such basis. May 10, 2005 130th Anniversary Toshiba Corporation 39 This report was printed on recycled paper with soy-based ink. Printed in Japan