NEW JAPAN RADIO CO., LTD. For the fiscal year 2009, ended March 31, 2010

Transcription

1 NEW JAPAN RADIO CO., LTD. Annual Report 2010 For the fiscal year 2009, ended March 31, 2010

2 Management s Discussion and Analysis [Overview of Performance] During the current consolidated fiscal year, we had promoted sales policy focusing on each customers and expansion of new products. However, the sales of the fiscal year fell below the initial plan. We also promoted streamlining and rationalization, and reduced costs including payroll and expenses. However, we posted an operating loss by the large effect of the drop in sales. Furthermore, we decided to reverse the deferred tax asset as a result of reviewing the collectability. And we booked business structure improvement expenses for voluntary retirement. As a result, we posted a huge current net loss. Sales: 40,287 million (decrease of 11.9% compared to previous fiscal year) Operating Loss: 2,755 million (operating income of 4,364 million in previous fiscal year) Ordinary Loss: 2,997 (ordinary income of 4,531 million in previous fiscal year) Current Net Loss: 10,011 (current net income of 2,781 million in previous fiscal year) Semiconductor Devices <Consolidated net sales: 34,585 million; sales mix ratio: 85.8%> Sales of GaAs IC for communication equipment in China increased, but sales of the other products plunged. Commissioned products of NJR FUKUOKA CO., LTD. had also weakened. Microwave Application Products <Consolidated net sales: 2,539 million, sales mix ratio: 6.3%> Due to the slumping market, sales of all products including main products for satellite communication decreased. Microwave Tubes and Radar Components <Consolidated net sales: 3,163 million, sales mix ratio: 7.9%> Some of the Microwave tubes and Radar Components for government and public offices increased their sales, but sales of the other products decreased.

3 New Japan Radio Co., Ltd. and Subsidiaries Consolidated Balance Sheets as of March 31, 2010 and 2009, and Related Consolidated Statements of Operations, Changes in Equity, and Cash Flows for Each of the Three Years in the Period Ended March 31, 2010, and Independent Auditors' Report

4 INDEPENDENT AUDITORS' REPORT To the Board of Directors of New Japan Radio Co., Ltd.: We have audited the accompanying consolidated balance sheets of New Japan Radio Co., Ltd. and subsidiaries (the "Company") as of March 31, 2010 and 2009, and the related consolidated statements of operations, changes in equity, and cash flows for each of the three years in the period ended March 31, 2010, all expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of New Japan Radio Co., Ltd. and subsidiaries as of March 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2010, in conformity with accounting principles generally accepted in Japan. Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 1. Such U.S. dollar amounts are presented solely for the convenience of readers outside Japan. June 17, 2010

5 New Japan Radio Co., Ltd. and Subsidiaries Consolidated Balance Sheets March 31, 2010 and 2009 U.S. Dollars (Note 1) ASSET S CURRENT ASSETS: Cash and cash equivalents (Note 13) 2,705 5,318 $ 29,072 Notes and accounts receivable: Trade notes (Note 13) 1, ,115 Trade accounts (Notes 5 and 13) 10,559 8, ,490 Other ,780 Allowance for doubtful accounts (87) (2) Inventories (Notes 4 and 5) 13,590 15, ,071 Deferred tax assets (Note 7) Other current assets ,841 Total current assets 28,540 31, ,752 PROPERTY, PLANT AND EQUIPMENT (Note 5): Land ,441 Buildings and structures 25,545 25, ,553 Machinery and equipment 61,800 61, ,227 Furniture and fixtures 11,611 11, ,798 Lease assets Construction in progress ,561 Total 99,494 99,402 1,069,368 Accumulated depreciation (89,265) (86,613) (959,420) Net property, plant and equipment 10,229 12, ,948 INVESTMENTS AND OTHER ASSETS: Investment securities (Notes 3, 5 and 13) 1,645 1,485 17,682 Intangibles ,355 Deposits ,390 Deferred tax assets (Note 7) 32 5, Other assets ,220 Allowance for doubtful accounts (121) (32) (1,299) Total investments and other assets 2,670 8,514 28,694 TOTAL 41,439 52,462 $ 445,394 U.S. Dollars (Note 1) LIABILITIES AND EQUITY CURRENT LIABILITIES: Short-term bank loans (Notes 5 and 13) 1,212 13,148 $ 13,026 Current portion of long-term debt (Notes 5, 12 and 13) 1, ,141 Notes and accounts payable: Trade accounts (Note 13) 5,012 3,733 53,869 Construction and other ,028 Income taxes payable ,571 Accrued expenses 2,362 2,913 25,392 Deferred tax liabilities (Note 7) Other current liabilities ,457 Total current liabilities 11,253 20, ,951 LONG-TERM LIABILITIES: Long-term debt (Notes 5, 12 and 13) 10,324 1, ,971 Liability for retirement benefits (Note 6) 7,917 8,578 85,093 Provision for environmental measures Deferred tax liabilities (Note 7) 139 1,492 Other long-term liabilities ,944 Total long-term liabilities 18,861 10, ,725 CONTINGENT LIABILITIES (Note 12) EQUITY (Note 8): Common stock authorized, 138,000,000 shares; issued, 39,131,000 shares in 2010 and ,220 5,220 56,106 Additional paid-in capital 5,224 5,224 56,147 Retained earnings 1,456 11,545 15,644 Net unrealized gain on available-for-sale securities ,088 Deferred loss on derivatives under hedge accounting (1) (11) Foreign currency translation adjustments (765) (767) (8,219) Treasury stock at cost, 6,505 shares and 5,313 shares in 2010 and 2009 (3) (3) (37) Total equity 11,325 21, ,718 TOTAL 41,439 52,462 $ 445,394 See notes to consolidated financial statements

6 New Japan Radio Co., Ltd. and Subsidiaries Consolidated Statements of Operations Years Ended March 31, 2010, 2009 and 2008 U.S. Dollars (Note 1) NET SALES 40,288 45,719 60,443 $ 433,018 COST OF SALES (Note 9) 35,552 40,371 47, ,116 Gross profit 4,736 5,348 12,909 50,902 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 9) 7,491 9,713 11,367 80,517 Operating income (loss) (2,755) (4,365) 1,542 (29,615) OTHER INCOME (EXPENSES): Interest and dividend income Interest expense (239) (151) (119) (2,573) Foreign exchange losses (45) (258) (631) (480) Loss on sales and disposals of property, plant and equipment (26) (62) (132) (282) Gain on sales of waste Employment adjustment subsidy ,391 Commission for syndicate loan (235) (2,520) Business structure improvement expenses (Note 10) (376) (4,037) Provision for environmental measures (21) (225) Other net (Note 11) 48 (20) Other expenses net (667) (230) (619) (7,162) INCOME (LOSS) BEFORE INCOME TAXES (3,422) (4,595) 923 (36,777) INCOME TAXES (Note 7): Current ,191 Prior period 177 Deferred 6,479 (1,846) 73 69,635 Total income taxes 6,589 (1,813) ,826 NET INCOME (LOSS) (10,011) (2,782) 435 $ (107,603) Yen U.S. Dollars PER SHARE OF COMMON STOCK (Notes 2.r and 17): Basic net income (loss) ( ) (71.10 ) $ (2.75 ) Cash dividends applicable to the year See notes to consolidated financial statements

7 New Japan Radio Co., Ltd. and Subsidiaries Consolidated Statements of Changes in Equity Years Ended March 31, 2010, 2009 and 2008 Thousands Issued Net Unrealized Number of Shares of Common Stock Common Stock Additional Paid-in Capital Retained Earnings Gain on Available-for-Sale Securities Deferred Loss on Derivatives under Hedge Accounting Foreign Currency Translation Adjustments Treasury Stock At Cost BALANCE, APRIL 1, ,131 5,220 5,224 14, (198) (2) Net income 435 Cash dividends, 12 per share (469) Net decrease in unrealized gain on available-for-sale securities (63) Net decrease in foreign currency translation adjustments (364) Increase in treasury stock (1,600 shares) (1) BALANCE, MARCH 31, ,131 5,220 5,224 14, (562) (3) Adjustment of retained earnings due to adoption of PITF No. 18 (Note 2.b) (25) Net loss (2,782) Cash dividends, 12 per share (470) Net decrease in unrealized gain on available-for-sale securities (724) Net decrease in foreign currency translation adjustments (205) Increase in treasury stock (1,237 shares) BALANCE, MARCH 31, ,131 5,220 5,224 11, (767) (3) Net loss (10,011) Cash dividends, 2 per share (78) Net increase in unrealized gain on available-for-sale securities 96 Deferred loss on derivatives under hedge accounting (1) Net decrease in foreign currency translation adjustments 2 Increase in treasury stock (1,192 shares) BALANCE, MARCH 31, ,131 5,220 5,224 1, (1) (765) (3) (Continued)

8 New Japan Radio Co., Ltd. and Subsidiaries Consolidated Statements of Changes in Equity Years Ended March 31, 2010, 2009 and 2008 Common Stock Additional Paid-in Capital U.S. Dollars (Note 1) Net Unrealized Gain on Retained Available-for-Sale Earnings Securities Deferred Loss on Derivatives under Hedge Accounting Foreign Currency Translation Adjustments Treasury Stock At Cost BALANCE, MARCH 31, 2009 $ 56,106 $ 56,147 $ 124,088 $1,057 $ (4) $ (8,246) $ (34) Net loss (107,603) Cash dividends, $0.02 per share (841) Net increase in unrealized gain on available-for-sale securities 1,031 Deferred loss on derivatives under hedge accounting (7) Net decrease in foreign currency translation adjustments 27 Increase in treasury stock (1,192 shares) (3) BALANCE, MARCH 31, 2010 $ 56,106 $ 56,147 $ 15,644 $2,088 $ (11) $ (8,219) $ (37) See notes to consolidated financial statements (Concluded)

9 New Japan Radio Co., Ltd. and Subsidiaries Consolidated Statements of Cash Flows Years Ended March 31, 2010, 2009 and 2008 U.S. Dollars (Note 1) OPERATING ACTIVITIES: Income (loss) before income taxes (3,422) (4,595) 923 $ (36,777) Adjustments for: Income taxes paid (52) (1,102) (555) Refund of taxes 31 Depreciation and amortization 3,476 4,490 4,737 37,354 Loss on sales and disposals of property, plant and equipment Changes in assets and liabilities: Increase (decrease) in allowance for doubtful accounts 6 2 (1) 67 Decrease in liability for retirement benefits (661) (359) (181) (7,102) Increase in provision for environmental measures Increase (decrease) in interest payable (13) 5 5 (137) Decrease in commission for syndicate loan payable (16) (172) Decrease (increase) in notes and accounts receivable (2,588) 5, (27,820) Decrease (increase) in inventories 2,133 (504) (685) 22,925 Increase (decrease) in notes and accounts payable 1,300 (4,277) (1,050) 13,972 Other net (304) (427) (985) (3,270) Total adjustments 3,328 4,345 1,260 35,769 Net cash provided by (used in) operating activities (94) (250) 2,183 (1,008) INVESTING ACTIVITIES: Purchases of property, plant and equipment (465) (3,961) (4,076) (5,001) Proceeds from sales of property, plant and equipment Purchases of investment securities (1) (2) (2) (15) Collection of loans receivable 7 16 Other net (68) (389) (173) (729) Net cash used in investing activities (532) (4,339) (4,221) (5,718) FORWARD (626) (4,589) (2,038) $ (6,726) (Continued)

10 New Japan Radio Co., Ltd. and Subsidiaries Consolidated Statements of Cash Flows Years Ended March 31, 2010, 2009 and 2008 U.S. Dollars (Note 1) FORWARD (626) (4,589) (2,038) $ (6,726) FINANCING ACTIVITIES: Net change in short-term bank loans (11,935) 4, (128,278) Proceeds from long-term debt 10,300 1, ,705 Repayments of long-term debt (255) (199) (184) (2,741) Repurchase of treasury stock (1) (2) Cash dividends paid (79) (469) (469) (849) Other net (17) (13) (12) (183) Net cash provided by (used in) financing activities (1,986) 5, (21,348) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS (1) (44) (33) (15) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,613) 678 (1,937) (28,089) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,318 4,640 6,577 57,161 CASH AND CASH EQUIVALENTS, END OF YEAR 2,705 5,318 4,640 $ 29,072 See notes to consolidated financial statements (Concluded)

11 New Japan Radio Co., Ltd. and Subsidiaries Notes to Consolidated Financial Statements 1. BASIS OF PRESENTING FINANCIAL STATEMENTS The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations, and in conformity with accounting principles generally accepted in Japan ("Japanese GAAP"), which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards. In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan. In addition, certain reclassifications have been made in the 2009 and 2008 consolidated financial statements to conform to the classifications used in The consolidated financial statements are stated in Japanese yen, the currency of the country in which New Japan Radio Co., Ltd. (the "Company") is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of to U.S.$1, the approximate rate of exchange at March 31, Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Consolidation The consolidated financial statements as of March 31, 2010 include the accounts of the Company and all subsidiaries (together, the "Companies"). Under the control or influence concept, those companies in which the Company, directly or indirectly, is able to exercise control over operations are fully consolidated, and those companies over which the Company has the ability to exercise significant influence are accounted for by the equity method. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Companies is eliminated. b. Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements In May 2006, the Accounting Standards Board of Japan (the "ASBJ") issued ASBJ Practical Issues Task Force ("PITF") No. 18, "Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements." PITF No. 18 prescribes (1) the accounting policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circumstances should in principle be unified for the preparation of the consolidated financial statements, (2) financial statements prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or the generally accepted accounting principles in the United States of America tentatively may be used for the consolidation process, (3) however, the following items should be adjusted in the consolidation process so that net income is accounted for in accordance with Japanese GAAP unless they are not material: (a) amortization of goodwill; (b) scheduled - 8 -

12 amortization of actuarial gain or loss of pensions that has been directly recorded in the equity; (c) expensing capitalized development costs of R&D; (d) cancellation of fair value model accounting for property, plant and equipment and investment properties and incorporation of cost model accounting; (e) recording the prior years' effects of changes in accounting policies in the statements of operations where retrospective adjustments to financial statements have been incorporated; and (f) exclusion of minority interests from net income, if contained. PITF No. 18 was effective for fiscal years beginning on or after April 1, 2008 with early adoption permitted. The Company applied this accounting standard effective April 1, In addition, the Company accounted for "Adjustment of retained earnings due to adoption of PITF No. 18" on the consolidated statements of changes in equity by adjusting the beginning balance of retained earnings at April 1, 2008 as if this accounting standard had been retrospectively applied. c. Cash and Cash Equivalents Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits which mature within three months of the date of acquisition. d. Foreign Currency Transactions All short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rate at the balance sheet date. Foreign exchange gains and losses from translation are recognized in the consolidated statements of operations to the extent that they are not hedged by forward exchange contracts. e. Foreign Currency Financial Statements Financial statements of foreign subsidiaries are translated into Japanese yen at the current exchange rate as of the balance sheet date for all balance sheet accounts except for equity, which are translated at the historical exchange rate. Differences arising from such translation are shown as "Foreign currency translation adjustments" in a separate component of equity. Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the average exchange rate. f. Marketable and Investment Securities All marketable securities the Companies own are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of equity. The cost of securities sold is determined based on the moving-average method. Non-marketable available-for-sale securities are stated at cost determined by the moving-average method. For other than temporary declines in fair value, investment securities are reduced to net realizable value by a charge to income. g. Inventories Merchandise and finished goods are stated at the lower of cost, determined by the moving-average method, or net selling value. Raw materials and supplies are stated at the lower of cost, determined by the average method, or net selling value. Work in process is stated at the lower of cost, determined by the average method or using the specific identification method, or net selling value

13 In July 2006, the ASBJ issued ASBJ Statement No. 9, "Accounting Standard for Measurement of Inventories." This standard requires that inventories held for sale in the ordinary course of business be measured at the lower of cost or net selling value, which is defined as the selling price less additional estimated manufacturing costs and estimated direct selling expenses. The replacement cost may be used in place of the net selling value, if appropriate. The standard also requires that inventories held for trading purposes be measured at the market price. The standard was effective for fiscal years beginning on or after April 1, 2008 with early adoption permitted. The Company applied the accounting standard for measurement of inventories effective April 1, h. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment of the Companies is computed by the declining-balance method at rates based upon the usage of the assets over the estimated useful lives of the assets, while the straight-line method is applied to buildings acquired after April 1, 1998, and lease assets of the Company and its domestic subsidiaries. Estimated useful lives are as follows: Buildings and structures Machinery and equipment Furniture and fixtures 2 to 60 years 2 to 17 years 2 to 20 years The useful lives for lease assets are the terms of the respective leases. i. Long-Lived Assets The Companies review its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. An impairment loss would be recognized if the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the asset or the net selling price at disposition. j. Intangibles Intangibles are carried at cost less accumulated amortization, which is calculated by the straight-line method principally over 3 to 10 years. k. Retirement Benefits Since April 1, 2007, the Company has a cash balance pension plan covering employees with 20 years or more of service or employees retiring over the age of 55 with 15 years or more of service. The Companies account for the liability for retirement benefits based on projected benefit obligations and plan assets at the balance sheet date. On July 31, 2008, the ASBJ issued ASBJ Statement No. 19 "Partial Amendments to Accounting Standard for Retirement Benefits (Part 3)." The Companies adopted this statement beginning this fiscal year. The adoption of this statement did not result in change of the discount rate the Companies had previously applied. So this adoption did not have any impact on the results of operations of the Companies for the year ended March 31,

14 Until the year ended March 31, 2009, the Company and certain consolidated subsidiaries had provided an allowance for directors' and corporate auditors' retirement benefits calculated in accordance with the Company's rules and had included this amount in the liability for retirement benefits. However, resolutions were approved at the shareholders meetings held on June 26 and 15, 2009 that retirement benefits for directors and corporate auditors in response to the discontinuation of such system to be paid to the relevant directors and corporate auditors when they retire. The outstanding balance of retirement allowances for directors and corporate auditors in the amount of 182 million ($1,958 thousand) was reclassified to other long-term liabilities at March 31, l. Allowance for Doubtful Accounts The allowance for doubtful accounts is stated in amounts considered to be appropriate based on the Companies' past credit loss experience and an evaluation of potential losses in the receivables outstanding. m. Bonuses to Directors and Corporate Auditors Bonuses to directors and corporate auditors are accrued at the year end to which such bonuses are attributable. n. Research and Development Costs Research and development costs are charged to income as incurred. o. Income Taxes The provision for income taxes is computed based upon pretax income included in the consolidated statements of operations. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently enacted tax laws to temporary differences. The Companies file a tax return under the consolidated corporate-tax system, which allows companies to base tax payments on the combined profits or losses of the parent company and its wholly owned domestic subsidiaries. p. Leases In March 2007, the ASBJ issued ASBJ Statement No. 13, "Accounting Standard for Lease Transactions," which revised the previous accounting standard for lease transactions issued in June The revised accounting standard for lease transactions is effective for fiscal years beginning on or after April 1, 2008 with early adoption permitted for fiscal years beginning on or after April 1, Under the previous accounting standard, finance leases that were deemed to transfer ownership of the leased property to the lessee were to be capitalized. However, other finance leases were permitted to be accounted for as operating lease transactions if certain "as if capitalized" information is disclosed in the notes to the lessee's financial statements. The revised accounting standard requires that all finance lease transactions should be capitalized to recognize lease assets and lease obligations in the balance sheet. In addition, the revised accounting standard permits leases which existed at the transition date and did not transfer ownership of the leased property to the lessee to be accounted for as operating lease transactions. The Company applied the revised accounting standard effective April 1, In addition, the Company accounted for leases which existed at the transition date and did not transfer ownership of the leased property to the lessee as operating lease transactions. All other leases are accounted for as operating leases

15 q. Derivative Financial Instruments The Companies use derivative financial instruments to manage their exposures to fluctuations in foreign exchange and interest rates. Foreign exchange forward contracts and interest rate swaps are utilized by the Companies to reduce foreign currency exchange and interest rate risks. Derivative transactions entered into by the Companies have been made in accordance with internal policies which regulate the authorization and credit limit amount. The Companies do not enter into derivatives for trading or speculative purposes. Derivative financial instruments and foreign currency transactions are classified and accounted for as follows: (a) all derivatives are recognized as either assets or liabilities and measured at fair value and gains or losses on derivative transactions are recognized in the statements of operations or (b) for derivatives used for hedging purposes, if derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses on the derivatives are deferred until maturity of the hedged transactions. The following summarizes derivative financial instruments used by the Company and its foreign subsidiaries for hedging purposes and the corresponding items hedged: Hedging Instruments Foreign currency forward contracts Interest rate swaps Hedged Items Forecasted transactions Long-term debt The foreign currency forward contracts employed to hedge foreign exchange exposures to export sales are measured at fair value and the unrealized gains/losses are recognized in income. The foreign exchange forward contracts applied to forecasted transactions are also measured at fair value but the unrealized gains/losses are deferred until the underlying transactions are completed. The interest rate swaps which qualify for hedge accounting and meet specific matching criteria are not remeasured at market value but the differential paid or received under the swap agreements is recognized and included in interest expense or income. r. Per Share Information Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period, retroactively adjusted for stock splits. The average number of common shares used in the computation was 39,125,236 shares, 39,126,349 shares and 39,127,908 shares for 2010, 2009 and 2008, respectively. Diluted net income per share reflects the potential dilution that could occur if securities were exercised into common stock. Diluted net income per share of common stock assumes full exercise of outstanding warrants. Cash dividends per share presented in the accompanying consolidated statements of operations are dividends applicable to the respective years including dividends to be paid after the end of the year. s. Provision for Environmental Measures Provision for environmental measures is provided at an estimate of the amount required to dispose PCB (polychlorinated biphenyl) waste under the law concerning special measures against PCB waste. The Companies recorded 21 million ($225 thousand) as other expenses for the cost of disposal of PCB waste in the year ended March 31,

16 As the result, loss before income taxes increased by 21 million ($225 thousand). t. New Accounting Pronouncements Asset Retirement Obligations On March 31, 2008, the ASBJ published a new accounting standard for asset retirement obligations, ASBJ Statement No. 18 "Accounting Standard for Asset Retirement Obligations" and ASBJ Guidance No. 21 "Guidance on Accounting Standard for Asset Retirement Obligations." Under this accounting standard, an asset retirement obligation is defined as a legal obligation imposed either by law or contract that results from the acquisition, construction, development and the normal operation of a tangible fixed asset and is associated with the retirement of such tangible fixed asset. The asset retirement obligation is recognized as the sum of the discounted cash flows required for the future asset retirement and is recorded in the period in which the obligation is incurred if a reasonable estimate can be made. If a reasonable estimate of the asset retirement obligation cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when a reasonable estimate of asset retirement obligation can be made. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement cost is capitalized by increasing the carrying amount of the related fixed asset by the amount of the liability. The asset retirement cost is subsequently allocated to expense through depreciation over the remaining useful lives of the asset. Over time, the liability is accreted to its present value each period. Any subsequent revisions to the timing or the amount of the original estimate of undiscounted cash flows are reflected as an increase or a decrease in the carrying amount of the liability and the capitalized amount of the related asset retirement cost. This standard is effective for fiscal years beginning on or after April 1, 2010 with early adoption permitted for fiscal years beginning on or before March 31, Accounting Changes and Error Corrections In December 2009, the ASBJ issued ASBJ Statement No. 24 "Accounting Standard for Accounting Changes and Error Corrections" and ASBJ Guidance No. 24 "Guidance on Accounting Standard for Accounting Changes and Error Corrections." Accounting treatments under this standard and guidance are as follows: (1) Changes in accounting policies When a new accounting policy is applied with a revision of accounting standards, the new policy is applied retrospectively unless the revised accounting standards include specific transitional provisions. When the revised accounting standards include specific transitional provisions, an entity shall comply with the specific transitional provisions. (2) Changes in presentation When the presentation of financial statements is changed, prior period financial statements are reclassified in accordance with the new presentation. (3) Changes in accounting estimates A change in an accounting estimate is accounted for in the period of the change if the change affects that period only and is accounted for prospectively if the change affects both the period of the change and future periods. (4) Corrections of prior period errors When an error in prior period financial statements is discovered, those statements are restated

17 This accounting standard and the guidance are applicable to accounting changes and corrections of prior period errors which are made from the beginning of the fiscal year that begins on or after April 1, Segment Information Disclosures In March 2008, the ASBJ revised ASBJ Statement No. 17 "Accounting Standard for Segment Information Disclosures" and issued ASBJ Guidance No. 20 "Guidance on Accounting Standard for Segment Information Disclosures." Under the standard and guidance, an entity is required to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available and such information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, segment information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. This accounting standard and the guidance are applicable to segment information disclosures for the fiscal years beginning on or after April 1, MARKETABLE AND INVESTMENT SECURITIES Marketable and investment securities at March 31, 2010 and 2009, consisted of the following: U.S. Dollars Non-current: Marketable equity securities 1,638 1,478 $ 17,606 Trust fund investments and other Total 1,645 1,485 $ 17,682 The cost and aggregate fair values of marketable and investment securities at March 31, 2010 and 2009 were as follows: Cost 2010 Unrealized Gains Unrealized Losses Fair Value Securities classified as available-for-sale Equity securities 1, ,638 Total 1, ,638 Cost 2009 Unrealized Gains Unrealized Losses Fair Value Securities classified as available-for-sale Equity securities 1, ,478 Total 1, ,

18 Cost U.S. Dollars 2010 Unrealized Unrealized Gains Losses Fair Value Securities classified as available-for-sale Equity securities $ 14,098 $ 3,533 $ 25 $ 17,606 Total $ 14,098 $ 3,533 $ 25 $ 17,606 Available-for-sale securities whose fair value is not readily determinable as of March 31, 2009 were as follows. Similar information for 2010 is disclosed in Note 13. Carrying Amount 2009 Available-for-sale Equity securities 7 Total 7 Proceeds from sales of available-for-sale equity securities for the years ended March 31, 2009 and 2008 were 6 million and 9 million. Gross realized gains and losses on these sales, computed on the moving average cost basis, were 2 million and 1 million for the year ended March 31, 2009 and 4 million and 0 million for the year ended March 31, There are no available-for-sale equity securities which were sold during the year ended March 31, The impairment losses on available-for-sale equity securities for the years ended March 31, 2010, 2009 and 2008 were 3 million ($28 thousand), 6 million and 1 million, respectively. 4. INVENTORIES Inventories at March 31, 2010 and 2009, consisted of the following: U.S. Dollars Merchandise $ 570 Finished goods 3,981 4,827 42,795 Work in process 7,315 8,362 78,620 Raw materials 1,269 1,426 13,637 Supplies 972 1,000 10,449 Total 13,590 15,720 $ 146, SHORT-TERM BANK LOANS AND LONG-TERM DEBT Short-term bank loans at March 31, 2010 and 2009, consisted of notes to banks. The weighted average interest rates applicable to the short-term bank loans as of March 31, 2010 and 2009 were 1.46% and 1.26%, respectively

19 Long-term debt at March 31, 2010 and 2009, consisted of the following: U.S. Dollars Loans from banks and other financial institutions, due serially to 2015 with interest rates ranging from 1.12% to 5.97% (2010) and from 1.37% to 5.97% (2009): Collateralized* 11,405 1,400 $ 122,582 Unsecured ,150 Obligations under finance leases Total 11,826 1, ,112 Less current portion (1,502) (269) (16,141) Long-term debt, less current portion 10,324 1,505 $ 110,971 * Includes long-term debt under term-loan contracts of 10,000 million ($107,481 thousand) at March 31, Annual maturities of long-term debt, excluding obligations under finance leases (see Note 12) at March 31, 2010, were as follows: Year Ending March 31 U.S. Dollars ,490 $ 16, ,475 15, ,428 90, , and thereafter Total 11,791 $ 126,732 The carrying amounts of assets pledged as collateralized short-term bank loans and long-term debt at March 31, 2010, were as follows: U.S. Dollars Trade accounts* 2 4,494 $ 48,304 Finished goods* 2 2,929 31,478 Work in process* 2 5,887 63,275 Raw materials and supplies* 2 1,322 14,206 Buildings* 1 3,732 40,115 Land* ,507 Marketable and investment securities* 3 1,630 17,516 Total 20,134 $ 216,

20 * 1 The Company took out a mortgage on the above building and land for 1,290 million ($13,865 thousand) long-term debt, and joint revolving mortgage which has maximum amount of 6,650 million ($71,474 thousand) for 10,000 million ($107,481 thousand) long-term debt and 400 million ($4,299 thousand) short-term loans. * 2 The Company took out a revolving mortgage on above current assets "Trade accounts, Finished goods, Work in process, Raw materials and supplies" for 10,000 million ($107,481 thousand) long-term debt. * 3 The Company created a revolving pledge on above marketable and investment securities for 10,115 million ($108,717 thousand) long-term debt and 400 million ($4,299 thousand) short-term loans. In order to flexibly source funds for its operations, the Company entered into a term-loan contract for 10,000 million ($107,481 thousand) and a loan commitment contract with six banks (lead bank Mizuho Corporate Bank Ltd.) by the syndication method. These contracts have certain debt covenants consisting of following: (1) At the end of each fiscal year, the total amount of equity excluding deferred tax assets and foreign currency translation adjustments shown in each balance sheet of the Company must equal or exceed 70% of the total amount of equity at the end of March 31, (2) Operating income in the consolidated statement of operations must not be negative for two consecutive fiscal years on or after March 31, In addition, parent company (Nisshinbo Holdings Inc.) must keep designated ratio of the stock holdings. Utilization of these lines of credit under the loan commitment contract as of March 31, 2010 is summarized as follows: U.S. Dollars Total lines of credit 5,000 $ 53,740 Utilized Unutilized 5,000 $ 53, RETIREMENT BENEFITS The Company and its domestic subsidiaries maintain pension plans for their employees. The plans provide for lump-sum payments to terminated employees who have two years or more of continuous service. Since April 1, 2007, the Company had a cash balance pension plan covering employees with 20 years or more of service or employees retiring over the age of 55 with 15 years or more of service

21 Certain foreign subsidiaries have a contributory funded pension plan covering only employees who have one year or more of continuous service. Retirement allowances for employees are determined on the basis of length of service and current basic salary at the time of termination. If the termination is involuntary, the employee is usually entitled to greater payments than in the case of voluntary termination. The liability for employees' retirement benefits at March 31, 2010 and 2009 consisted of the following: U.S. Dollars Projected benefit obligation 15,592 15,518 $ 167,588 Fair value of plan assets (6,045) (4,909) (64,975) Unrecognized actuarial loss (1,630) (2,304) (17,520) Net liability 7,917 8,305 $ 85,093 The components of net periodic benefit costs are as follows: U.S. Dollars Service cost $ 9,074 Interest cost ,334 Expected return on plan assets (136) (158) (119) (1,467) Recognized actuarial loss ,430 Net periodic benefit costs 1,244* 1,180 1,181 $ 13,371 * The Company and its subsidiaries paid 230 million ($2,476 thousand) as a premium on retirement benefits and recorded it as business structure improvement expense within other expense. Assumptions used for the years ended March 31, 2010 and 2009 are set forth as follows: Discount rate 2.0% 2.0% Expected rate of return on plan assets 2.8% 3.3% Recognition period of actuarial gain/loss 15 years 15 years Amortization period of prior service cost 1 year 1 year The liability for retirement benefits to directors and corporate auditors included in the accompanying consolidated balance sheets amounted to 273 million at March 31, As described in Note 2.k, the outstanding balance of retirement allowances for directors and corporate auditors in the amount of 182 million ($1,958 thousand) was reclassified to other long-term liabilities at March 31,

22 7. INCOME TAXES The Company and its domestic subsidiaries are subject to Japanese national and local income taxes which, in the aggregate, resulted in a normal effective statutory tax rate of approximately 40.4% for the years ended March 31, 2010, 2009 and The tax effects of significant temporary differences and loss carryforwards which resulted in deferred tax assets and liabilities at March 31, 2010 and 2009, were as follows: Current U.S. Dollars Deferred tax assets: Inventories $ 1,774 Accrued bonuses ,135 Accrued enterprise tax Others Valuation allowance (528) (24) (5,673) Total Offset with deferred tax liabilities (65) (1) Net deferred tax assets $ 385 Deferred tax liabilities: Inventories $ 467 Others 5 1 Total Offset with deferred tax assets (65) (1) Net deferred tax liabilities 43 $ 467 Non-current Deferred tax assets: Liability for retirement benefits 3,221 3,471 $ 34,622 Tax loss carryforwards 4,448 2,667 47,807 Others ,085 Valuation allowance (7,823) (312) (84,083) Total 40 5, Offset with deferred tax liabilities (8) (72) (85) Net deferred tax assets 32 5,864 $ 346 Deferred tax liabilities: Undistributed earnings of subsidiaries 14 6 $ 149 Unrealized gain on available-for-sale securities ,420 Others 1 8 Total ,577 Offset with deferred tax assets (8) (72) (85) Net deferred tax liabilities 139 $ 1,

23 A reconciliation between the normal effective statutory tax rate for the years ended March 31, 2010, 2009 and 2008, and the actual effective tax rate reflected in the accompanying consolidated statements of operations is as follows: Normal effective statutory tax rate 40.4 % 40.4 % 40.4 % Taxation on per capita basis (0.5) (0.3) 1.6 Expenses not deductible for income tax purposes Lower income tax rates applicable to income in certain foreign countries (0.1) 1.3 (3.5) Valuation allowance ( 233.9) (2.8) 8.7 Tax deduction for research and development (3.5) Others net Actual effective tax rate ( 192.6) % 39.5 % 52.9 % At March 31, 2010, the Companies had tax loss carryforwards aggregating approximately 11,034 million ($118,597 thousand) which are available to be offset against taxable income of such subsidiaries in future years. These tax loss carryforwards, if not utilized, will expire as follows: Year Ending March 31 U.S. Dollars 8. EQUITY $ 2, , , and thereafter 10, ,813 Total 11,034 $ 118,597 Japanese companies are subject to the Companies Act of Japan (the "Companies Act"). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below: a. Dividends Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders meeting. For companies that meet certain criteria such as: (1) having a Board of Directors, (2) having independent auditors, (3) having a Board of Corporate Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends in kind) at any time during the fiscal year if the Company has prescribed so in its articles of incorporation. However, the Company cannot do so because it does not meet all the above criteria

24 The Companies Act permits companies to distribute dividends-in-kind (non-cash assets) to shareholders subject to certain limitations and additional requirements. Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the Company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than 3 million. b. Increases/Decreases and Transfer of Common Stock, Reserve and Surplus The Companies Act requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends until the total of the aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders. c. Treasury Stock and Treasury Stock Acquisition Rights The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by specific formula. Under the Companies Act, stock acquisition rights are presented as a separate component of equity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights. 9. RESEARCH AND DEVELOPMENT COSTS Research and development costs charged to income were 4,273 million ($45,929 thousand), 5,834 million and 6,098 million for the years ended March 31, 2010, 2009 and 2008, respectively. 10. BUSINESS STRUCTURE IMPROVEMENT EXPENSES For the year ended March 31, 2010, business structure improvement expenses included a premium on retirement benefits amounting to 376 million ($4,037 thousand) resulting from early retirement of sub-employees at the Company and certain of its consolidated subsidiaries

25 11. OTHER INCOME (EXPENSES) OTHER NET Other income (expenses) other net consisted of the following: U.S. Dollars Loss on damages (32) (69) (30) $ (343) Gain on damages Gain on sales of property, plant and equipment Gain on sales of investment securities 2 4 Reversal of allowance for doubtful accounts 1 Other net Total 48 (20) 16 $ LEASES The Company and domestic subsidiaries have several lease agreements relating to office space, computer equipment and circuit equipment. Total lease payments under finance lease agreements that do not transfer ownership of the leased property to the Company and domestic subsidiaries were 95 million ($1,019 thousand), 126 million and 158 million for the years ended March 31, 2010, 2009 and 2008, respectively. Obligations under finance leases accounted for as long-term debt and future minimum payments under noncancellable operating leases at March 31, 2010 were as follows: Finance Leases U.S. Dollars Operating Finance Leases Leases Operating Leases Due within one year $ 119 $ 1,468 Due after one year ,709 Total $ 380 $ 9,177 ASBJ Statement No. 13, "Accounting Standard for Lease Transactions" requires that all finance lease transactions should be capitalized to recognize lease assets and lease obligations in the balance sheet. However, ASBJ Statement No. 13 permits leases without ownership transfer of the leased property to the lessee whose lease inception was before March 31, 2008 to be accounted for as operating lease transactions if certain "as if capitalized" information is disclosed in the notes to the financial statements. The Company applied the ASBJ Statement No. 13 effective April 1, 2008 and accounted for such leases as operating lease transactions. Pro forma information of leased property whose lease inception was before March 31, 2008 such as acquisition cost, accumulated depreciation, obligations under finance leases, depreciation expense and interest expense that do not transfer ownership of the leased property to the lessee on an "as if capitalized" basis was as follows: Machinery and Equipment U.S. Dollars Furniture Machinery Furniture and and and Fixtures Other Total Equipment Fixtures Other Total Acquisition cost $ 252 $ 1,574 $ 1,784 $ 3,610 Accumulated depreciation ,124 1,367 2,706 Net leased property $ 37 $ 450 $ 417 $