UNIDEN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31st March, 2005

Transcription

1 UNIDEN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31st March, Basis of Preparation UNIDEN CORPORATION (the "Company") and its consolidated subsidiaries maintain their accounting records and prepare their consolidated financial statements in accordance with accounting principles generally accepted in Japan. The accompanying consolidated financial statements are prepared on the basis of accounting principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards, and are compiled from the consolidated financial statements prepared by the Company as required by the Securities and Exchange Law of Japan. The accompanying consolidated financial statements are presented in Japanese yen and, solely for the convenience of the readers, have been translated into at = U.S.$1.00, the approximate rate of exchange in effect on the Tokyo Foreign Exchange Market on 31st March, This translation should not be construed as a representation that yen have been, could have been, or could in the future be, converted into at the above or any other rate. 2. Summary of Significant Accounting Policies (a) Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and 10 subsidiaries in 2004 and 11 subsidiaries in 2005 over which substantial control is exerted either through majority ownership of voting stock and/or by other means. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in unconsolidated subsidiaries and affiliates accounted for by the equity method have been expanded to include companies (other than subsidiaries as defined above) whose decisionmaking control over their operations is significantly affected by the consolidated group in various ways even if they are less than 20% owned. No investments in unconsolidated subsidiaries and affiliates, however, have been accounted for by the equity method for the years ended 31st March, 2004 and Investments in unconsolidated subsidiaries and affiliates not accounted for by the equity method are carried at cost determined by the moving average method. The reserve for possible losses on investments in unconsolidated subsidiaries is provided at an amount sufficient to cover any losses arising from potential financial difficulties. All assets and liabilities of the subsidiaries are partially revalued at fair value on acquisition, if applicable, and the excess of cost over the underlying equity in their net assets at the respective dates of acquisition is amortized on a straight-line basis over a period of five years. (b) Cash and cash equivalents All highly liquid investments, generally with a maturity of three months or less when purchased, which are readily convertible into known amounts of cash and are so near maturity that they represent only an insignificant risk of any change in value attributable to changes in interest rates, are considered cash equivalents. 7

2 2. Summary of Significant Accounting Policies (continued) (c) Marketable and investment securities Under the accounting standard for financial instruments, securities should be classified into three categories: trading, held-to-maturity or available-for-sale ("other") securities. Trading securities are carried at fair value and held-to-maturity securities are carried at amortized cost. Marketable securities classified as other securities are carried at fair value with any changes in unrealized holding gain, net of the applicable income taxes, included directly in shareholders' equity. Unrealized holding gain or loss is charged to income when recognized. Non-marketable securities classified as other securities are carried at cost. Cost of securities sold is determined by the moving average method. (d) Inventories Inventories are stated by the following methods: The Company and its manufacturing subsidiaries: Sales subsidiaries: Principally at the lower of cost or market, cost being determined by the average method. Supplies are stated at cost determined by the moving average method. Principally at the lower of cost or market, cost being determined by the average method. (e) Property, plant and equipment Property, plant and equipment is stated at cost. Depreciation is computed principally by the declining-balance method at the Company and by the straight-line method at the consolidated subsidiaries at rates based on the estimated useful lives of the respective assets. (f) Leases Noncancelable leases are accounted for primarily as operating leases (whether such leases are classified as operating or finance leases) except that leases which stipulate the transfer of ownership of the leased assets to the lessee are accounted for as finance leases. (g) Research and development expenses Research and development expenses are charged to income as incurred. Development costs of software intended for internal use have been capitalized are amortized over a period of five years by the straight-line method. (h) Income taxes Deferred income taxes are recognized by the liability method under which deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets and liabilities and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse. In accordance with Practice Report No. 12, "Practical Treatment Concerning the Presentation of the Business Scale Taxation Portion of Enterprise Tax in Statements of Income," issued by the Accounting Standards Board of Japan on February 13, 2004, enterprise tax calculated based on added value and stated capital and additional paid-in capital has been initially included in "Selling, general and administrative expenses" in the accompanying consolidated statements of income. As a result, "selling, general and administrative expenses" increased by 143 million ($1,332 thousand). 8

3 2. Summary of Significant Accounting Policies (continued) (i) Allowance for doubtful accounts The allowance for doubtful accounts is provided at an amount sufficient to cover possible losses on the collection of receivables and has been determined based on the historical experience with writeoffs plus an estimated amount for probable doubtful accounts based on a review of the collectibility of specific receivables. (j) Accrued retirement benefits Employees retirement benefits: The Company has a noncontributory defined benefit pension plan as qualified for tax purposes, which covers substantially all employees who terminate their employment with the Company. Accrued retirement benefits have been provided to prepare for employees' retirement based on estimates of the projected retirement benefit obligation and plan assets. Actuarial gain or loss was charged to income in the year following the year in which the gain or loss is recognized. At 31st March, 2005, the fair value of the pension assets exceeded the projected retirement obligation plus/minus unrecognized actuarial profit or loss and unrecognized prior service cost. This excess has been recorded as prepaid pension expenses and included in other investments in the accompanying consolidated the balance sheet. Directors retirement benefits: Directors are entitled, in general, to receive lump-sum payments based on their level of compensation and years of service at the time of retirement which are covered by an unfunded retirement benefit plan. Retirement benefits for directors included in accrued retirement benefits amounted to 980 million and 1,814 million ($16,892 thousand) at 31st March, 2004 and 2005, respectively. (k) Net income per share In accordance with an accounting standard for earnings per share which became effective 1st April, 2002, primary net income per share is computed based on the net income available for distribution to shareholders of common stock and the weighted-average number of shares of common stock outstanding during the year, and diluted net income per share is computed based on the net income available for distribution to the shareholders and the weighted-average number of shares of common stock outstanding during each year after giving effect to the dilutive potential of shares of common stock to be issued upon the conversion of convertible bonds and the exercise of warrants. (l) Foreign currency translation (i) (ii) All revenue and expense accounts of its overseas consolidated subsidiaries are translated into yen at the average rate of exchange in effect during the year. The balance sheet accounts of these subsidiaries, except for the components of shareholders' equity, are also translated at the rates of exchange in effect at the balance sheet date and the components of shareholders' equity are translated at their historical exchange rates. Monetary assets and liabilities denominated in foreign currencies of the Company and its domestic subsidiaries are translated into yen at the current rates except for those hedged by forward foreign exchange contracts, which are translated at the contracted rates. All revenues and expenses are translated at the average rate of exchange for each respective year. Gain or loss arising from foreign exchange differences is credited or charged to income when incurred. 9

4 3. Change in Method of Accounting A new Japanese accounting standard entitled "Impairment of Fixed Assets" ("Opinion Concerning Establishment of an Accounting Standard for Impairment of Fixed Assets" issued by the Business Accounting Deliberation Council on 9th August, 2002 and "Implementation Guideline for Accounting Standard Concerning Impairment of Fixed Assets" in accordance with Practice Guideline No. 6 for the Business Accounting Standards issued on 31st October, 2003) and is effective for financial years beginning on or after 1st April, Early adoption is permissible for the financial year beginning on or after 1st April, The new standard requires that tangible and intangible fixed assets be carried at cost less depreciation, and be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company and consolidated subsidiaries are required to recognize an impairment loss in their income statement or if certain indicators of asset impairment exist and if the book value of the fixed assets exceeds the undiscounted sum of their future cash flows. Effective 1st April, 2004, the Company and its consolidated subsidiaries opted for an early adoption of this standard for the impairment of fixed assets. The effect of the adoption of this standard was to recognize an impairment loss of 1,894 million ($17,637 thousand) as an other expense. As a result, income before income taxes decreased by the same amount. After recognition of an impairment loss, "fixed assets" represents the total recoverable amount stated at the carrying amount less the accumulated impairment loss. The following table summarizes the impairment loss on fixed assets for the year ended 31st March, 2005: Group of fixed assets Location of fixed assets Impaired assets Millions of yen Unused assets Chiyoda-ku, Tokyo Land 1,335 $ 12,431 Buildings 136 1,267 Unused assets Chiba City, Chiba Prefecture Land 423 3,939 1,894 $ 17,637 Assets are classified into groups based on (1) the individual asset units for leased assets and unused assets, and (2) the management accounting units for operating assets. The recoverable amount of the assets was measured at their net realizable value based on valuation reports issued by real estate apprasers. 4. Non-marketable and Investment Securities Non-marketable securities, other than those traded on the over-the-counter market and classified as other securities, amounted to 440 million and 398 million ($3,706 thousand) at 31st March, 2004 and 2005, respectively. 10

5 5. Inventories Inventories at 31st March, 2004 and 2005 consisted of the following: Finished products and goods 5,371 4,527 $ 42,155 Work in process 1,713 1,844 17,171 Raw materials and supplies 2,367 2,953 27,498 9,451 9,324 $ 86, Income Taxes The Company is subject to several taxes based on income which, in the aggregate, resulted in statutory tax rates of approximately 42 and 41 per cent. The effective tax rates reflected in the consolidated statements of income for the years ended 31st March, 2001, 2002, 2003, 2004 and 2005 differed from the statutory tax rates referred to above principally due to the effect of certain expenses not deductible for income tax purposes. The major components of deferred tax assets at 31st March, 2004 and 2005 were as follows: Deferred tax assets: Net operating loss carryforwards 1, $ 3,287 Temporary differences: Valuation loss on investment securities and investments in unconsolidated subsidiaries Allowance for doubtful accounts ,942 Valuation loss on other investments Valuation loss on fixed assets 883 1,679 15,635 Valuation loss on inventories Accrued expenses ,151 Accrued directors' retirement benefits ,872 Unrealized profit on inventories ,194 Other 2,107 1,721 16,026 Subtotal 5,823 5,918 55,107 Valuation allowance (5,497) (4,801) (44,706) Deferred tax assets 326 1,117 $ 10,401 A reconciliation between the statutory tax rates and the effective tax rates as a percentage of income before income taxes for the years ended 31st March, 2003, 2004 and 2005 is summarized as follows Statutory tax rates 42.1% 42.1% 40.7% Adjustments: Permanent differences Valuation loss on investment securities and investments in unconsolidated subsidiaries Depreciation Directors' retirement benefits Inhabitants' taxes R & D expenses - - (1.5) Decrease in valuation allowance - (29.0) (21.7) Tax bases and tax rate differences 4.7 (3.4) (3.1) Utilization of net operating loss carryforward (59.0) - - Other 8.6 (0.2) 2.5 Effective tax rates 10.8% 9.9% 17.2% 11

6 7. Short-Term Bank Loans Short-term bank loans principally represent bank overdrafts bearing interest at annual interest rates which ranged from 0.47 per cent. to 0.48 per cent. in Retirement Benefits The retirement benefit obligation, plan assets, funded status of the pension plan and the amounts recognized in the consolidated balance sheets at 31st March, 2004 and 2005 were as follows: Retirement benefit obligation (901) (995) $ (9,265) Plan assets ,138 Net unrecognized actuarial (loss) gain (30) 131 1,220 Net retirement benefit obligation for employees (204) 10 $ 93 The components of pension cost for the years ended 31st March, 2003, 2004 and 2005 were as follows: Service cost $ 829 Interest cost Expected return on plan assets (4) (7) (11) (103) Recognized actuarial (loss) gain (15) 23 (30) (279) Net periodic pension cost $ 568 The assumptions used in accounting for the above plan for the years ended 31st March, 2003, 2004 and 2005 were as follows: Percentage Discount rate 1.5% 1.5% 1.5% Expected rate of return on plan assets 1.5% 1.5% 1.5% 9. Shareholders Equity Under the Commercial Code of Japan, an amount equal to at least 10% of the amounts to be disbursed as distributions of earnings be appropriated to the legal reserve until the sum of the legal reserve and additional paid-in capital equals 25% of the common stock account. The Code also stipulates that, to the extent that the sum of the additional paid-in capital account and the legal reserve exceeds 25% of the common stock account, the amount of any such excess is available for appropriation by resolution of the shareholders. 12

7 10. Leases The following pro forma amounts represent the acquisition costs, accumulated depreciation and net book value of the leased assets at 31st March, 2004 and 2005, which would have been reflected in the balance sheets if the finance leases currently accounted for as operating leases had been capitalized: Machinery, equipment and tools Software Total Machinery, equipment and tools Software Total Acquisition costs Accumulated depreciation Net book value Machinery, equipment and tools Software Total Acquisition costs $ $ 205 Accumulated depreciation Net book value $ 28 - $ 28 The pro forma amounts of lease expenses and depreciation for the years ended 31st March, 2003, 2004 and 2005 are summarized as follows: Lease expenses $ 242 Depreciation $ Derivatives The Company and its consolidated subsidiaries in the normal course of business utilize forward foreign exchange contracts primarily to hedge their exposure to fluctuation in foreign exchange rates relating to their trade receivables and payables. As a matter of policy, the Company and its consolidated subsidiaries do not speculate in derivatives which may experience huge fluctuation in their market value. The forward foreign exchange contracts do entail market risk; however, the Company and its consolidated subsidiaries do not anticipate any risk as a result of fluctuation in the foreign currency market. In addition, the Company and its consolidated subsidiaries do not anticipate incurring credit risk resulting from nonperformance by any of the counterparties to their derivatives positions because all such counterparties are domestic financial institutions with high credit ratings. The status of the open derivatives positions, by transaction, is periodically reported to a member of management responsible for monitoring derivatives. 13

8 11. Derivatives (continued) Open derivatives positions for which market prices were determinable at 31st March, 2004 and 2005 are summarized as follows: Contract Contract Contract amount amount amount Currency related: Forward foreign exchange contracts: To buy 1, Total value 1, Aggregate market value 1, Valuation loss (97) Subsequent Events The following appropriations of retained earnings, which have not been reflected in the consolidated financial statements for the year ended 31st March, 2005, were approved at a meeting of the Company's shareholders held on 29th June, 2005: Appropriations: Cash dividends of (U.S.$0.16) per share 1,104 $ 10,280 Bonuses to directors 136 1,267 1,240 $ 11,547 At a shareholders' meeting held on 29th June, 2005, a portion of the Company's Articles of Incorporation was changed in order that the Company can repurchase its treasury stock by a resolution of the Board of Directors in accordance with Section 2-1 of Article of the Commercial Code. Following the approval by the shareholders, the Board of Directors at a meeting held on the same date approved purchase of treasury stock in accordance with Section 2-1 of Article of the Commercial Code as follows: (1) Purpose: In order to implement capital policy quickly and flexibly and thus respond to changes in the management environment (2) Shares to be purchased: Common stock (3) Number of shares: A maximum of 5,000,000 shares (4) Acquisition cost: A maximum of 9,000 million ($83,807 thousand) (5) Purchase period: From 30th June, 2005 to 20th September,

9 13. Segment Information Operations in different business segments, overseas operations and sales to overseas customers by the Company and its consolidated subsidiaries for the year ended 31st March, 2005 are presented as follows: (a) Business segment information Sales, operating income and assets relating to wireless communications equipment exceeded 90% of total sales, operating income and assets, and thus no business segment information has been disclosed. (b) Geographical segment information The geographical segment information of the Company and its consolidated subsidiaries for the year ended 31st March, 2005 is summarized as follows: I. Sales and operating income Sales: Japan North America Southeast Asia Oceania Total Eliminations and corporate Consolidated To customers 12,321 62, ,456 83,960-83,960 Interred 52, , ,147 (100,147) - Total 64,847 62,649 48,155 8, ,107 (100,147) 83,960 Operating expenses 54,454 59,496 48,095 6, ,753 (100,651) 68,102 Operating income 10,393 3, ,748 15, ,858 II. Assets 46,324 49,620 23,918 6, ,576 (33,360) 93,216 I. Sales and operating income Sales: Japan North America Southeast Asia Oceania Total Eliminations and corporate Consolidated To customers $ 114,731 $ 581,060 $ 7,291 $ 78,741 $ 781,823 - $ 781,823 Interred 489,115 2, , ,554 $ (932,554) - Total 603, , ,412 78,741 1,714,377 (932,554) 781,823 Operating expenses 507, , ,853 62,464 1,571,403 (937,247) 634,156 Operating income $ 96,778 $ 29,360 $ 559 $ 16,277 $ 142,974 $ 4,693 $ 147,667 II. Assets $ 431,362 $ 462,054 $ 222,721 $ 62,520 $ 1,178,657 $ (310,643) $ 868,014 Notes: 1. Corporate operating expenses consist primarily of administrative expenses incurred at the Company which have not been allocated to each segment. Corporate operating expenses for the year ended 31st March, 2005 amounted to 509 million ($4,740 thousand). 2. Corporate assets consist principally of cash, time deposits, marketable securities, investment securities and administrative assets of the Company. Corporate assets at 31st March, 2005 amounted to 30,792 million ($286,731 thousand). 3. Corporate operating expenses as presented above represent the total of cost of sales and selling, general and administrative expenses as reflected in the accompanying consolidated statements of operations. 15

10 13. Segment Information (continued) (c) Sales to overseas customers North Southeast America Asia Oceania Others Total Overseas sales (A) 72, ,456 1,463 83,233 Consolidated sales (B) 83,960 (A) / (B) 86.3% 1.0% 10.1% 1.7% 99.1% North Southeast America Asia Oceania Others Total Overseas sales (A) $ 674,551 $ 8,139 $ 78,741 $ 13,623 $ 775,054 Consolidated sales (B) 781,823 (A) / (B) 86.3% 1.0% 10.1% 1.7% 99.1% Note: Overseas sales consist of sales of the Company and its consolidated subsidiaries to customers located in countries other than Japan. 16