Non-Consolidated Financial Summaries for the First Half of the Fiscal Year Ending May 31, 2005 (June 1, 2004 November 30, 2004)

Transcription

1 January 21, 2005 Non-Consolidated Financial Summaries for the First Half of the Fiscal Year Ending May 31, 2005 (June 1, 2004 November 30, 2004) Company name: INTER ACTION Corporation Stock code: 7725 Stock Exchange listing: Tokyo Stock Exchange, Mothers Market Company domicile: Kanagawa prefecture URL: CEO & President: Hideo Kiji Contact: Yasuo Suzuki, Controller Tel: Date of Board of Directors meeting for approving financial results: January 21, 2005 The company has a system of interim dividend payment. The company does not employ a unit stock system. 1. Financial Results for the First Half Ended November 30, 2004 (June 1, 2004 November 30, 2004) (1) Results of Operations Million yen, rounded down Million yen Sales Operating income Ordinary income YoY change % Million yen YoY change % Million yen YoY change % First half ended Nov. 30, (51.1) 37 (93.1) 14 (97.2) First half ended Nov. 30, , Fiscal year ended May 31, , Million yen Net income YoY change % Net income per share (basic) Yen Net income per share (diluted) First half ended Nov. 30, (98.0) First half ended Nov. 30, , , Fiscal year ended May 31, , , Notes: 1. Equity in earnings (losses) of affiliated companies: First half ended November 30, 2004: - million yen First half ended November 30, 2003: - million yen Fiscal year ended May 31, 2004: - million yen 2. Average number of shares outstanding First half ended November 30, 2004: First half ended November 30, 2003: Fiscal year ended May 31, 2004: 3. Change in accounting principles applied: None 63,525 shares 29,975 shares 60,845 shares 4. The percentages shown for sales, operating income, ordinary income, and net income represent changes from the previous fiscal year. Yen 1

2 (2) Dividends Interim dividend per share Yen Annual dividend per share Yen First half ended Nov. 30, First half ended Nov. 30, Fiscal year ended May 31, (3) Financial position Million yen, rounded down Shareholders Shareholders Shareholders Total assets equity equity ratio equity per share Million yen Million yen % Yen As of November 30, ,811 2, , As of November 30, ,056 1, , As of May 31, ,138 2, , Notes: 1. Number of shares issued at the end of the period: As of November 30, 2004: 62,820 shares As of November 30, 2003: 30,056 shares As of May 31, 2004: 63,612 shares 2. Number of treasury stock at the end of the period: As of November 30, 2004: 1,000 shares As of November 30, 2003: 0 shares As of May 31, 2004: 0 shares (4) Cash flows position Million yen, rounded down Net cash provided by (used in) operating activities Net cash used in investing activities Net cash provided by (used in) financing activities Cash and cash equivalents at end of period Million yen Million yen Million yen Million yen First half ended Nov. 30, 2004 (31) (167) 62 2,121 First half ended Nov. 30, (26) (20) 1,372 Fiscal year ended May 31, (231) 979 2, Forecasts for the Fiscal Year Ending May 31, 2005 (June 1, May 31, 2005) Sales Ordinary income Net income Dividend per share during the year Year-end Million yen Million yen Million yen Yen Yen Full year 1, Reference: Estimated net income per share for the full year: Yen Please refer to 3. (3) Outlook for Fiscal Year Ending in May 2005 on page 8 of the Attachment for precondition and assumption as the basis of the above forecasts. Note: Forecasts regarding future performance in these materials are based on estimates and judgments of the Company s management made in accordance with information available at the time this report was prepared. Forecasts therefore embody risks and uncertainties. Actual results may differ significantly from these forecasts for a number of factors. 2

3 1. Corporate Group Not applicable. 2. Management Policies (1) Fundamental Management Policy INTER ACTION (the Company ) is a venture firm that was established primarily to develop and manufacture illuminators required for the testing of semiconductor imagers, which are CCDs and C-MOS imagers used in digital cameras and other products, as well as a variety of other optical inspection equipment. The Company has two core elements: a team of talented people who are skilled in optical system development, mechanical designs, hardware and software development, and other fields; and the capacity to create solutions. INTER ACTION is particularly proud of its ability to develop over a short time high-quality, illuminators and inspection equipment incorporating optical systems that are customized meet specific customer needs. INTER ACTION s fundamental approach is to put the client first in every aspect of its operations. Management is based on having all actions originate from a specific client problem or way in which the Company can be of assistance. In this context, client refers not only to buyers of the Company s products, but also shareholders, employees, residents of communities where the Company is active and all other stakeholders. A company with workforce made up primarily of young engineers, the Company adheres to the motto fair, open, challenging, aiming to gain expertise in even more advanced technology to meet the expectations of its clients. As a small venture company with only about 40 employees, INTER ACTION is determined to remain a company that retains the spirit of its entrepreneurial origin. To accomplish this, the Company believes that it must continuously conduct R&D activities based on the spirit of constantly thinking creatively. (2) Fundamental Policy Regarding Allocation of Earnings INTER ACTION believes that a stable dividend and growth in its enterprise value are important means of returning earnings to shareholders. The Company s policy is to retain sufficient earnings to strengthen its operating base and continue to pay a stable dividend, while taking into consideration the current operating environment and long-term outlook. (3) Position and Policy Regarding Reduction in Investment Unit The Company conducted a two-for-one stock split for common shareholders of record as of May 31, 2003 and November 30, The Company believes that a reduction in the investment unit to allow the purchase of relatively small amounts of stock is an effective means of raising liquidity, attracting more shareholders and increasing trading activity on the stock market. The policy is to review the stock trading unit in an appropriate manner. (4) Targeted Performance Indicators From the standpoint of increasing shareholder value, INTER ACTION places priority on improving the ROE and other related indicators for the purpose of increasing its enterprise value. Maximizing earnings from the capital entrusted to the Company by shareholders is viewed as the purpose for the Company s existence. Resources are both channeled to fulfilling this goal. Management also places importance on cash flows. Cash flows will be invested in R&D and capital expenditures in promising business fields to further increase future cash flows. The objective is raising the Company s enterprise value over the long term. 3

4 (5) Medium- and Long-Term Management Strategies Demand for CCD/C-MOS imagers is supported by a growing range of applications, including digital cameras, camera-equipped mobile phones and automotive cameras. The range of applications is expected to expand even more as advances in the performance of CCD/C-MOS imagers continue. To grow along with the market for CCD/C-MOS imagers, INTER ACTION is aiming to become a total test solution provider with a focus on illuminators and IP (image processing) modules. Until now, the Company s operating results have been highly dependent on the capital expenditures of manufacturers of CCD/C-MOS imagers, its primary customers. To achieve more stable growth and consistent profitability, the Company is building a business portfolio that is not as vulnerable to the ups and downs of capital expenditures by manufacturers of CCD/C-MOS imagers while strengthening and enlarging its existing businesses. To promote structural reforms of its businesses, the Company must focus on the following issues. 1. Start new businesses outside the testing sector of semiconductor imagers Commercialization of fiber-optic sensor products is making rapid progress. Comparative field tests for civil-engineering and construction-sector applications commenced in November in the Hokuriku region, in cooperation with Eight Consultants Co., Ltd. (HQ: Okayama, Japan, Market: the Second Section of the TSE). We expect to see applications extended to other areas, including bridges and tunnels. In December 2004, we started marketing FiSty, a home security product featuring fiber-optic sensors. We need to develop new marketing channels as we commercialize technologies for an expanding range of applications; toward that end we are forming alliances with leading firms in each area of application. 2. Generate stable earnings from the testing sector of semiconductor imagers Generate stable earnings by upgrading activities associated with the sale of equipment, such as maintenance, software development and updates for equipment, and the development of hardware. 3. Increase opportunities for growth in the testing sector of semiconductor imagers Expand business opportunities from the current domain of equipment manufacturing and sales by developing and providing total test solutions as a company that integrates an extensive lineup of equipment and software with a variety of services. (6) Key Issues a. Development and refinement of illuminators The Company believes that illuminators will remain its core business. At the same time, competition is likely to heat up as more companies are drawn to this growing market. To succeed in this environment, INTER ACTION must be the first to develop the high-performance, high-speed illuminators required to meet increasingly sophisticated semiconductor imager testing needs, based on overwhelming technological resources and close ties with customers. b. Expand the IP module business Based on a technology sharing agreement signed in February 2003 with U.S.-based Agilent Technologies Inc. (hereinafter Agilent ), the Company developed and began sales of an IP module for Agilent s SOC Series test system. In the second half of the previous fiscal year, the Company began posting significant sales of this module, mainly in Taiwan and Singapore. As a result, IP modules have grown to become the Company s second core business. More companies around the world are likely to begin developing and manufacturing semiconductor imagers, indicating that the IP module business may become a major source of growth for INTER ACTION. In addition, while developing this new business, the Company is gaining valuable knowledge about testing and ways to offer 4

5 solutions from customers perspectives, an essential skill regarding the Company s major goal of offering total solutions for the testing of semiconductor imagers. INTER ACTION will continue to develop both hardware and software technology in this field while expanding sales activities targeting Asian testing firms, mainly in Taiwan and Singapore, and reinforcing its framework for providing support to these customers. c. Kumamoto Test Solutions Development Center (TSDC) The INTER ACTION Kumamoto TSDC was completed in December Equipped with an Agilent SOC tester, Tokyo Electron 300mm wafer prober and other equipment, this center is used for the development of technology for IP modules, illuminators, and hardware and software for turnkey solutions. In addition, it starts operations as a base for creating a new business model to enable the provision of total testing solutions, such as by developing tests for customers. Moreover, from a geographic perspective, the Kumamoto TSDC supplements the development and manufacturing activities of the Company s head office, thereby commence the efficient development, manufacturing and customer support activities. d. The Fiber-Optic Sensor (FS) system business For several years, the Company has been conducting R&D concerning the heterocore optical fiber sensor, a product using exclusive INTER ACTION technology. This sensor employs optic fibers having different core diameters in order to detect distortions and cracks in structures, ground movements, the presence of fluid leaks, and for many other applications. By using optic fibers, this device offers many advantages, including water resistance, low power consumption and ease of installation even after a structure has been built. The device is also extremely easy to operate. Patents for this technology have been received in Japan and the U.S. Furthermore, in 2002, backed by industrial, academic and government partners, the heterocore optical fiber sensor was selected by the support program of the Ministry of Economy, Trade and Industry. As a result, work has advanced to the stage of practical applications for this sensor. In May 2004, INTER ACTION established the Fiber-Optic Sensor (FS) Division and commenced the comparative field tests for civil-engineering and construction-sector applications in November in the Hokuriku region, in cooperation with Eight Consultants Co., Ltd., (HQ: Okayama, Japan, Market: the Second Section of the TSE). We expect to see applications extended to other areas, including bridges and tunnels. In December 2004, we started marketing FiSty, a home security product featuring fiber-optic sensors. We need to develop new marketing channels as we commercialize technologies for an expanding range of applications; toward that end we are forming alliances with leading firms in each area of application. (7) Fundamental Stance and Actions Regarding Corporate Governance Fundamental stance regarding corporate governance As a member of society, INTER ACTION must conduct transparent management and have an effective corporate governance system. Management places much importance on the structuring and preservation of an organization capable of responding quickly and appropriately to dramatic changes in the operating environment and to conducting management in a fair and proper manner. Actions regarding corporate governance a. Management supervision and corporate governance flowchart for management decision-making, execution of business operations and auditing 5

6 Shareholders Meeting Election and dismissal Election and dismissal Board of Directors (6 members) (no external director) Supervision Board of Auditors (3 members) (includes 3 outside auditors) Election and supervision Supervision CEO & President Auditing reports Appointment Auditing reports Operating Divisions Internal audits Internal Auditing Office Board of Directors The Board of Directors has six members and holds meetings monthly and at other times as needed when important matters occur. The three corporate auditors also attend board meetings to supervise how the directors perform their duties. There is a system that enables reaching quick and suitable decisions on matters submitted to the board in accordance with regulations governing the operation of the board. Board of Auditors At the end of May 2003, the Company became a large company as stipulated by the Law Concerning Special Measures Under the Commercial Code with respect to Audit, etc. of corporation (kabushiki-kaisha). Accordingly, an additional corporate auditor was elected in August 2003, giving the Company three corporate auditors, all of whom are outside auditors. The auditors attend meetings of the Board of Directors and all other important meetings, providing a system for supervising the performance of the directors. Internal Auditing Office The Internal Auditing Office is under the direct supervision of the president, making it independent of all units of the Company. Audits are performed to check the status of business operations and finances, make management activities more efficient and streamlined, and protect the Company s assets. Compliance INTER ACTION has close ties with attorneys and other specialists from outside the Company to provide a system for checking the legality of management activities. b. Personal, financial or business relationships and other related party interests between the Company and corporate auditors There are no personal, financial, businesses or other related party interests between the Company and its three outside corporate auditors. c. Actions to improve corporate governance during past year In April 2003, the Company established the Internal Auditing Office to ensure the suitability of internal procedures and more strengthen the compliance system. At the August 2003 Annual General Meeting of Shareholders, three outside corporate auditors were newly elected in order to further strengthen the compliance system. d. Fundamental policy regarding relationship with related parties (parent company, etc.) There are no applicable related parties. 6

7 3. Results of Operations and Financial Position (1) Summary of First Half Ended November 30, 2004 (June 1, 2004 November 30, 2004) Benefiting from the aggressive capital investment by domestic and overseas semiconductor manufacturers and test houses over the past two years, INTER ACTION has steadily boosted sales. However, semiconductor manufacturers and test houses slashed capital investment in the first half of the current fiscal year, as digital camera markets saw slowed growth and demand for camera-equipped mobile phones ran its course. These trends sharply affected orders at INTER ACTION. Compounding the problem, certain customers requested postponement of deliveries. Although deliveries of orders booked in the first half were already planned, these customers either completely cancelled orders or requested postponement of deliveries to the next fiscal year. As a result of the above and other factors, interim ordinary income was 14 million yen on sales of 683 million yen. Net income was 6 million yen. Sales by product category were as follows. Illuminator sales decreased 72.2% to 352 million yen, which was 51.5% of total sales, as the Company sold 31 units. IP module sales increased 405.9% to 177 million yen, which was 25.9% of total sales, as the Company sold 8 units. Sales of supplied parts, units and maintenance services increased 55.9% to 154 million yen, which was 22.6% of total sales. (2) Financial Position Cash and cash equivalents at the end of the interim period totaled 2,121 million yen, 145 million yen less than one year earlier. Cash was used mainly in 239 million yen of income taxes paid, 153 million yen of payment for acquisition of tangible fixed assets, and 163 million yen of payment for acquisition of treasury stock. A summary of cash flows was as follows. Operating activities Net cash used in operating activities was 31 million yen. This was mainly attributable to income taxes paid of 239 million yen. Investing activities Net cash used in investing activities was 167 million yen. The primary use of cash was payment for acquisition of tangible fixed assets at the Kumamoto TSDC of 153 million yen. Financing activities Net cash provided by financing activities was 62 million yen. This was mainly the result of proceed of 450 million yen for long-term borrowings, while cash was used for 163 million yen of payment for acquisition of treasury stock, 100 million yen of repayment for long-term borrowings, and 50 million yen decrease in short-term borrowings, 51 million yen of cash dividend paid. A three-year summary of cash flow-related indicators is as follows. Fiscal year ended May 31, 2003 Fiscal year ended May 31, 2004 First half ended November 30, 2004 Shareholders equity ratio 49.5% 66.1% 65.2% Market cap shareholders equity ratio 592.7% 475.0% 273.6% Debt repayment multiple years - Interest coverage ratio Note: The shareholders equity ratio is shareholders equity divided by total assets. The market capitalization shareholders equity ratio is market capitalization divided by total assets. The debt repayment multiple is interest-bearing debt divided by operating cash flows. 7

8 The interest coverage ratio is operating cash flows divided by interest expenses. * As the Company has no consolidated financial summaries, all figures are based on non-consolidated figures. * Market capitalization is computed by multiplying the closing price of stock on the balance sheet date by the number of shares outstanding (net of treasury stock) on the balance sheet date. The number of shares issued as of May 31, 2003 includes the effect of a stock split conducted on July 18, * There are no debt repayment multiple and interest coverage ratio figures for the fiscal year ended in May 31, 2003 and first half ended in November 30, 2004 because the Company had negative operating cash flows in each of these periods. (3) Outlook for Fiscal Year Ending in May 2005 Results for the full fiscal year ending May 2005 are likely to be affected by the decline in orders in the first half, and the possible postponement of planned deliveries at the request of customers. Furthermore, we do not expect capital expenditures related to semiconductor imagers to revive fully before the fourth quarter of the current fiscal year at the earliest. Finally, our new products, including camera module testing systems and fiber-optics sensor systems, are expected to start contributing significantly from the next term. In view of the above and other factors, we are projecting ordinary income of 108 million yen and net income of 61 million yen on sales of 1,600 million yen. In addition to actively marketing and developing advanced models of testing illuminators and IP modules, we plan to make concerted efforts to market camera module testing systems and fiber-optics sensor system, demand for both of which is expected to be strong both in Japan and overseas. In respect of the shareholder dividend, management believes that raising corporate value and paying adequate dividends are important methods of sharing profit with our shareholders. INTER ACTION s basic policy is to pay stable dividends while at the same time building up adequate reserves to strengthen the company s financial position. In accordance with this policy, we plan to declare a dividend of 120 yen per common share applicable to the current fiscal year ending May 2005, maintaining the dividend payout ratio at the previous fiscal-year level. As explained in the section on Fundamental Management Policy, INTER ACTION firmly believes that relentless research and development is the key to the company s survival and growth. Our commitment to stepped-up research and development reflects these policy considerations. 4. Risk Factors Concerning Business Operations and Other Items This section lists the major items that the Company views as possible risk factors with regard to its business activities. The Company is aware of the possibility of the occurrence of these risks and is thus taking actions to avoid the occurrence of such problems and respond in the event that a problem occurs. Forward-looking statements are based on the Company s judgments as of the end of the current interim period. (1) Industry Trends a. Demand trends Demand for illuminators and IP modules, the Company s primary products, is vulnerable to trends in CCD/C-MOS imager-related capital expenditures by semiconductor manufacturers. The Company s operating results could be affected by a number of changes in demand: trends in the upgrading of existing CCD/C-MOS imager products and the development of new products; Sales trends of products incorporating CCD/C-MOS imagers and the development of and investment in new products using these imagers; and trends in capital expenditures by semiconductor manufacturers in the CCD/C-MOS imager field. In the event of a change in management policies or the operating environment of semiconductor manufacturers, there could be a change in 8

9 capital expenditure trends in the CCD/C-MOS imager field that could affect the Company s operating results. b. Competition There are currently three manufacturers of illuminators, the Company s main product: the Company, Nikon Corporation and Wakasa Optics Co., Ltd. Recently, however, some manufacturers of testers have begun supplying illuminators. The Company is distinguished by its ability to manufacture illuminators that are customized to match customer needs. The Company will continue to take steps to distinguish it from competitors in order to become more competitive and increase its market share. In the event that competitors allocate more resources to the illuminator market, or in the event of the emergence of new competitors in Japan or overseas, the Company s competitive position and market share could be affected. c. Responses to technological progress The Company believes that there will be a growing need among semiconductor manufacturers for technology that can reduce testing cost and time per CCD/C-MOS imager. Moreover, companies are developing CCD/C-MOS imagers with even higher resolution. This is expected to lead to demand for illuminators with even better performance. However, if there is a significant change in demand in relation to the forecast, or if the Company experiences delays or failures in the development of products incorporating new technology, there could be an impact on operating results. (2) Nature of Business Operations a. Small scale INTER ACTION is a small company. As of November 30, 2004, there were six directors, three auditors and 45 employees. The source of the Company s ability to compete is its skill in developing technology. That means most of its workforce is made up of engineers who are highly skilled in their respective areas of specialty. The Company is working to enhance its ability to conduct business operations, but due to its small scale, there is a considerable reliance on personnel management. In the event that employees were unable to perform their duties for some reason, or that employees left the Company, the Company could experience difficulty conducting business operations. On the other hand, rapid growth is causing an increase in fixed expenses, which could affect operating results. b. Hiring and retaining personnel As skill in developing technology is the source of the Company s ability to compete, the Company must hire and retain engineers with specialized knowledge. Furthermore, to support growth, the Company must hire personnel for sales, manufacturing, administration and other tasks. The Company is working on hiring talented individuals and training its employees. However, in the event that recruiting activities or internal training programs do not proceed as plans, the Company s operating results could be affected. c. Reliance on management team Hideo Kiji, the Company s founder and president and representative director, plays an important role in formulating management policies, sales activities, R&D activities, product development and other activities. Other directors have been at the Company only a short time but nevertheless play an important role in management. Therefore, management believes that there is a need to create an operating system that is not overly reliant on the management team. For this purpose, organizations are being created for Administration Division, Sales Division, Marketing Division, OPT Division, IP Division and FS Division, so that business activities can be conducted by these 9

10 organizations. Additionally, management plans to transfer authority within the Company as required. However, it is possible that the establishment of organizations and transfer of authority may not proceed as planned, that management may not be able to conduct business operations for some reason, or that a senior manager resigns. Such events could affect the Company s operating results. d. Manufacturing infrastructure The Company s basic policy is to perform all manufacturing processes internally, except metal processing and wiring. However, if the Company outsources key production processes and its technology or know-how is transferred to the outsourcing company as a result, there could be an impact on operating results. When outsourcing production activities, the Company exercises care to assemble a manufacturing framework that is not overly reliant on a particular company. As required, production is shifted to other companies or performed internally. To prepare for a rapid growth in the scale of its operations, the Company is working on ensuring that it has adequate production capacity both internally and through other companies. However, if the switch between internal and external production or the establishment of production capacity does not proceed as planned, or if there is a sudden deterioration in the operations of a company to which manufacturing is consigned or a change in its management policy, or a large order is received that exceeds the Company s production capacity, there could be delays in production that would impact operating results. The Company exercises care during the development, manufacture, sale and maintenance of products so as to supply products that are not defective with regard to quality or performance. Thus far, no customers have ever asked the Company to take responsibility for a defect. However, if there is a defect in the future, the Company could be asked to assume responsibility. Furthermore, legal action taken by another company regarding an alleged defect in a Company product could have an impact on operating results. e. R&D system R&D is at the heart of the Company s ability to compete. Many of the Company s employees are assigned to R&D activities in its respective businesses. These individuals work on basic research and new product development in the OPT Division, IP Division and FS Division. INTER ACTION intends to improve its R&D results by strengthening its R&D system. However, time is needed from the concentrated deployment of resources to a research theme until results are obtained. The Company s earnings could be held back during this period. Furthermore, concentrating resources on a particular research theme could result in shortages of resources for other tasks, such as manufacturing, sales and internal management. This could be an impediment to conducting business activities. f. Internal management system The Company s Administration Division consists of accounting, finance, personnel, general affairs, purchasing and investor relations. As of November 30, 2004, there were 13 employees engaged in Administration Division. As one way to strengthen its internal management system, the Company has a consulting agreement with one company that is made up mainly of certified public accountants. The Company has support on the account processing and the proper disclosure of operating information in accordance with the Commercial Code and Securities and Exchange Law. While receiving this support, the Company is conducting training programs for its employees. However, in the event that personnel training do not proceed as planned, there could be an impediment to the Company s business activities. g. Effect of changes in foreign exchange rates The Company s operating results and financial position are affected by changes in foreign exchange rates. Such 10

11 changes may have an effect on the yen translations of assets and liabilities associated with foreign currency-denominated business transactions. Furthermore, such changes may have an effect on prices and sales of products and services provided on a foreign currency basis. (3) Legal Restrictions Presently, there are no legal restrictions on the Company s ability to conduct business activities. However, there could in the future be legal restrictions of some sort on the import and/or export of the Company s products or of products in which the Company s products are an important component. It is also possible that the Company would need to obtain permission for import and/or export activities. In either case, the Company s operating results could be affected. Operating results could also be affected by the imposition of some sort of legal restriction on operations within Japan. (4) Patents The Company places importance on patents as a form of intellectual property and acts aggressively to acquire necessary patents. However, the Company s policy is to apply for patents mainly for technologies where the public disclosure of technical information for the patent process would not result in another party copying the technique or developing a similar technology. Nevertheless, the disclosure of information during the patent application process does create the possibility that other companies could develop and/or patent a related technology or product. In such a case, the Company s operating results could be affected. The Company exercises care to avoid infringing on patents when developing products, but the possibility of such an infringement does exist. Furthermore, depending on the status of patent applications and approvals in Japan and overseas, including in the growing number of business model patent applications, it is possible that a patent related to the Company s products and businesses could be granted to another company. Therefore, the Company could be infringing on another company s patent at this time or in the future. In the event that the Company is sued for patent infringement by another company, its operating results could be affected. * This financial report is solely a translation of summary of kessan Tanshin (in Japanese, including attachments), which has been prepared in accordance with accounting principles and practices generally accepted in Japan, for the convenience of readers who prefer an English translation. 11

12 5. Non-Consolidated Financial Statements (1) Balance Sheets Period As of Nov. 30, 2003 As of Nov. 30, 2004 Selected data As of May 31, 2004 Account Amount % Amount % Amount % Assets I Current assets 1. Cash and deposits in banks 1,414,761 2,166,143 2,310, Notes receivable - trade *3 136, ,665 51, Accounts receivable - trade 667, , , Inventories 330, , , Other current assets *4 56,828 94,228 71,892 Total current assets 2,606, ,158, ,628, II Fixed assets 1. Tangible fixed assets *1,2 (1) Buildings 158, , ,810 (2) Land 100, , ,867 (3) Other tangible fixed assets 42, ,249 52,806 Total tangible fixed assets 301, , , Intangible assets 2,784 8,691 3, Investments and other assets (1) Investment securities 84,149 69,747 63,627 (2) Other investments and other assets 61,157 65,133 66,335 Total investments and other assets 145, , ,963 Total fixed assets 450, , , Total assets 3,056, ,811, ,138,

13 Period As of Nov. 30, 2003 As of Nov. 30, 2004 Selected data As of May 31, 2004 Account Amount % Amount % Amount % I Current liabilities Liabilities 1. Accounts payable - trade 130,270 42, , Short-term borrowings *2 582, , , Accounts payable - other 180, , , Accrued income taxes 224,283 4, , Reserve for guarantee for after-care of products 21,013 7,077 19, Other current liabilities *4 21,997 73,797 69,290 II Long-term liabilities Total current liabilities 1,160, , , Corporate bonds 150, , , Long-term borrowings *2 205, ,722 83, Reserve for retirement benefits 4,421 3,303 2,869 Total long-term liabilities 360, , , Total liabilities 1,520, ,326, ,402, Shareholders' equity I Common stock 554, ,101, ,096, II Capital surplus 1. Additional paid-in capital 485, ,032, ,027, III Retained earnings 1. Legal reserve 2,600 2,600 2, Unappropriated retained earnings at end of period 495, , ,475 Total retained earnings 498, , , IV Unrealized holding gain (loss) on other securities (2,956) (0.1) (4,294) (0.1) (2,670) (0.1) V Treasury stock - - (163,811) (4.3) - - Total shareholders' equity 1,535, ,485, ,735, Total liabilities and shareholders' equity 3,056, ,811, ,138,

14 (2) Statements of Income Period Selected data Account Amount % Amount % Amount % I Sales 1,398, , ,520, II Cost of sales 614, , ,112, Gross profit 784, , ,407, III Selling, general and administrative expenses 235, , , Operating income 549, , , IV Non-operating income *1 1, , , V Non-operating expenses *2 27, , , Ordinary income 524, , , VI Extraordinary income , VII Extraordinary loss 6, , Net income before income taxes 519, , , Income taxes - current 224, , , Income taxes - deferred (5,404) (0.4) 6, (5,328) (0.2) Net income 299, , , Retained earnings brought forward 195, , ,687 Unappropriated retained earnings at end of period 495, , ,475 14

15 (3) Statements of Cash Flows Account Period Selected data Amount Amount Amount I Cash flows from operating activities 1. Net income before income taxes 519,083 14, , Depreciation and amortization 4,114 19,068 18, Increase (decrease) in reserve for guarantee for after-care of 3,671 (12,745) 2,481 products 4. Increase (decrease) in reserve for retirement benefits 1, (205) 5. Interest and dividends income (286) (495) (519) 6. Interest expenses and guarantee fees 9,740 8,035 16, New share issue expenses 4, , Bond issue expenses - - 7, Foreign exchange loss 9,236 8,171 17, Gain on sale of tangible fixed assets - - (292) 11. Loss on disposal of tangible fixed assets Gain on sale of investment securities (913) - (1,136) 13. Unrealized loss on investment securities 6,307-6, Loss on liquidation of business , Decrease in receivable - trade 139, ,517 93, Decrease (increase) in inventories (1,241) 11,052 (89,711) 17. Increase (decrease) in payable - trade (4,539) (91,996) 4, Increase/decrease in other assets and liabilities (36,749) (79,344) (47,842) Subtotal 654, , , Interest and dividends received Interest and guarantee fees paid (8,299) (7,278) (11,641) 21. Income taxes paid (155,192) (239,660) (232,844) Net cash provided by (used in) operating activities 490,981 (31,920) 598,726 II Cash flows from investing activities 1. Payment for term deposits (163,213) (34,800) (180,419) 2. Proceeds from withdrawal of term deposits 169,567 33, , Payment for acquisition of securities - - (19,953) 4. Payment for acquisition of tangible fixed assets (57,495) (153,242) (255,932) 5. Proceeds from sale of tangible fixed assets - - 4, Payment for acquisition of intangible assets - (5,531) (1,803) 7. Payment for acquisition of investment securities - (9,916) - 8. Proceeds from sale of investment securities 24,983 1,017 45, Proceeds from collection of loans receivable 900 1,350 1, Increase/decrease in other assets (1,456) (240) (10,761) Net cash used in investing activities (26,715) (167,763) (231,009) III Cash flows from financing activities 1. Net increase (decrease) in short-term borrowings 145,002 (50,000) (176,668) 2. Proceeds from long-term borrowings - 450, Repayment for long-term borrowings (126,722) (100,572) (361,704) 4. Proceeds from new share issue 6,594 10,467 1,069, Payment for acquisition of treasury stock - (163,811) - 6. Proceeds from corporate bond issue , Payment for redemption of corporate bonds - (32,000) - 8. Cash dividends paid (45,443) (51,944) (44,244) Net cash provided by (used in) financing activities (20,568) 62, ,228 IV Effect of exchange rate changes on cash and cash equivalents (793) (8,171) (9,347) V Net change in cash and cash equivalents 442,904 (145,716) 1,337,597 VI Cash and cash equivalents at beginning of period 929,222 2,266, ,222 VII Cash and cash equivalents at end of period 1,372,127 2,121,102 2,266,819 15

16 Significant Accounting Policies in the Preparation of Non-Consolidated Financial Summaries Items Period 1. Valuation criteria and methods for principal assets (1) Inventories a. Manufactured goods and work in process Manufactured goods and work in process are stated at cost, cost being determined by the specific identification method. (1) Inventories a. Manufactured goods and work in process (1) Inventories a. Manufactured goods and work in process b. Raw materials Raw materials are stated at cost, cost being determined by the monthly-period-average method. b. Raw materials Raw materials are stated at cost, cost being determined by the monthly-period-average method. b. Raw materials Changes in accounting treatment In prior periods, raw materials were stated at cost, cost being determined by the FIFO method. Effective the current fiscal year, raw materials are stated at cost, cost being determined by the monthly-period-average method. The change was made possible by the installation of a new computer system to enable the Company to speed up the monthly settlements of accounts. The effect of this change on income-loss is insignificant. Changes in accounting treatment In prior periods, raw materials were stated at cost, cost being determined by the FIFO method. Effective the current fiscal year, raw materials are stated at cost, cost being determined by the monthly-period-average method. The change was made possible by the installation of a new computer system to enable the Company to speed up the monthly settlements of accounts. The effect of this change on income-loss is insignificant. (2) Securities Other securities Securities with market quotations: Securities with market quotations are stated at fair value on the interim period balance sheet date. (Unrealized holding gain or loss is included directly in shareholders equity. Cost of securities sold is determined by the moving-average method.) (2) Securities Other securities Securities with market quotations: (2) Securities Other securities Securities with market quotations: Securities with market quotations are stated at fair value on the fiscal year balance sheet date. (Unrealized holding gain or loss is included directly in shareholders equity. Cost of securities sold is determined by the moving-average method.) Securities without market quotations: Securities without market quotations are stated at cost, cost being determined by the moving-average method. Securities without market quotations: Securities without market quotations: (3) Derivatives Market value method. (3) Derivatives 16

17 Items Period 2. Depreciation method for fixed assets (1) Tangible fixed assets Depreciation of tangible fixed assets (Except buildings (excluding fixtures)) is computed by the declining-balance method. Depreciation of buildings (excluding fixtures) is calculated by the straight-line method. Depreciation of small-sum items (100 thousand yen and more/less than 200 thousand yen) is calculated by the straight-line method, assuming useful life to be three years. (1) Tangible fixed assets (1) Tangible fixed assets (2) Intangible assets Amortization of intangible assets, except software for internal use, is calculated by the straight-line method. The development costs of software intended for internal use are amortized over an expected useful life of five years by the straight-line method. (2) Intangible assets (2) Intangible assets 3. Recognition of major reserves (1) Allowance for doubtful accounts To prepare for credit losses on accounts receivable, allowances equal to the estimated amount of uncollectible receivables are provided for general receivables based on the historical write-off ratio, and bad receivables based on case-by-case determination of collectibility. (1) Allowance for doubtful accounts (1) Allowance for doubtful accounts (2) Reserve for guarantee for after-care of products To account for repair costs covered under product warranty, an allowance equal to the estimated amount for the warranty period is provided. (2) Reserve for guarantee for after-care of products (2) Reserve for guarantee for after-care of products 17

18 Items Period (3) Reserve for retirement benefits The Company has adopted the new accounting standard for retirement allowances (Report No. 13 Opinion Concerning the Establishment of Accounting Standards for Retirement Benefits ), which provides for the application of the simple method for calculating retirement benefits. To provide for employee retirement benefits, an allowance pursuant to the company rules for retirement benefits is provided in the amount deemed to have accrued at the end of the interim period if all eligible employees retired on the balance sheet date. (3) Reserve for retirement benefits (3) Reserve for retirement benefits The Company has adopted the new accounting standard for retirement allowances (Report No. 13 Opinion Concerning the Establishment of Accounting Standards for Retirement Benefits ), which provides for the application of the simple method for calculating retirement benefits. To provide for employee retirement benefits, an allowance pursuant to the company rules for retirement benefits is provided in the amount deemed to have accrued at the end of the fiscal year if all eligible employees retired on the balance sheet date. 4. Translation of significant foreign currencydenominated assets and liabilities Foreign currency-denominated monetary assets and liabilities are translated into yen at the exchange rate in effect on the interim period balance sheet date. Translation gain or loss is accounted as profit or loss. Foreign currency-denominated monetary assets and liabilities are translated into yen at the exchange rate in effect on the fiscal year balance sheet date. Translation gain or loss is accounted as profit or loss. 5. Accounting for leases Finance leases other than those, which are deemed to transfer the ownership of the leased assets to the lessees, are accounted for by the method similar to that applicable to ordinary operating leases. 6. Hedge accounting (1) Hedge accounting method Interest rate swaps that accounted by the short-cut method since they meet certain criteria. (1) Hedge accounting method (1) Hedge accounting method (2) Hedging instrument and risk hedged Hedging instrument: Interest rate swaps Risk hedged: Interest on borrowings (2) Hedging instrument and risk hedged (2) Hedging instrument and risk hedged (3) Hedging policy To reduce exposure to risks from fluctuations in interest rates. Identification of the hedging instrument and risk hedged is carried out for each hedge transaction. (3) Hedging policy (3) Hedging policy 18

19 Items Period (4) Assessing the effectiveness of a hedge The Company does not assess the effectiveness of hedges since the terms of the hedging instrument and the risk hedged are identical and the effect of changes in interest rates and cash flows at inception and throughout the life of the hedge are almost fully offset or limited. (4) Assessing the effectiveness of a hedge (4) Assessing the effectiveness of a hedge 7. Scope of cash and cash equivalents in statements of cash flows Cash and cash equivalents consists of vault cash, deposits that can be withdrawn on demand, and short-term investments, with original maturities of three months or less, that are readily convertible to known amounts of cash and present insignificant risk of change in value. 8. Accounting for deferred assets (1) New share issue expenses Charged to income as incurred. (1) New share issue expenses (1) New share issue expenses (2) Bond issue expenses Charged to income as incurred. 9. Other significant accounting policies (1) Accounting of consumption taxes Consumption taxes are accounted using the net-of-tax method. (1) Accounting for consumption taxes (1) Accounting for consumption taxes 19

20 Reclassifications Interim balance sheets 1. In prior periods, Buildings were presented as a component of Other tangible fixed assets under fixed assets. Effective the current interim accounting period, Buildings are presented as a separate-line item since Buildings now represent more than 5% of total assets. Buildings totaled 1,414 thousand yen as of the end of the previous interim accounting period. 2. In prior periods, Accounts payable - other was presented as a component of Other current liabilities under current liabilities. Effective the current interim accounting period, Accounts payable - other is presented as a separate-line item since Accounts payable - other now exceeds more than 5% of total assets. Accounts payable - other totaled 35,822 thousand yen as of the end of the previous interim accounting period. Supplementary Information With the implementation of the Revision of the Local Tax Law (Legislation No. 9, 2003) on March 31, 2003 and the introduction from the fiscal year starting on and after April 1, 2004 of enterprise taxes which are based on the size of the enterprise, the Company has adopted the new accounting standard (ASBJ Accounting Standard Implementation Guidance No. 12 (February 13, 2004): Implementation Guidance on Presentation of the Size-based Portion of Enterprise Taxes in Statements of Income. Accordingly, the amount of enterprise taxes that have a tax basis on the amount of added value and the amount of capital are presented as a component of selling, general and administrative expenses. The effect of this change was to increase selling, general and administrative expenses by 2,740 thousand yen and reduce interim operating income, ordinary income and net income before income taxes by 2,740 thousand yen each, compared to amounts that would have been reported if the previous method had been applied consistently. 20