Nagano Japan Radio Co., Ltd. and Subsidiaries Consolidated Financial Statements for the Years Ended March 31, 2003 and 2002, and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT To the Board of Directors of Nagano Japan Radio Co., Ltd.: We have audited the accompanying consolidated balance sheets of Nagano Japan Radio Co., Ltd. and subsidiaries as of March 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended, 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, procedures and practices generally accepted and applied 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 Nagano Japan Radio Co., Ltd. and subsidiaries as of March 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles and practices generally accepted in Japan. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's recurring losses from operations raise substantial doubt about its ability to continue as a going concern. The corporate restructuring plans concerning these matters are also described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The matter described in Note 19 to the consolidated financial statements is as follows: 1. Corporate Restructuring Plan The corporate restructuring plan for three years including enterprise reorganization, etc., was resolved by the Board meeting held on May 20, 2003. 2. Reorganization of Domestic Subsidiaries The reorganization of domestic subsidiaries was agreed at the shareholders meetings of each domestic subsidiary on May 26, 2003.
3. Transfer of Business of the ABS Sensor Enterprise for Cars The Company basically agreed on the transfer of business of the ABS sensor enterprise for cars with Continental Teves, Inc. on June 6, 2003. 4. Early-retirement Program The Company carried out the early-retirement program in order to reduce fixed costs as a part of the new "Project R." In this program, 110 persons requested it from June 10 to 20, 2003, and will retire on July 4, 2003. As a result of the influence of retirement, the Company is prepared for 500 million ($4 million) of extra retirement benefits in the consolidated financial statements for the year ending March 31, 2004. 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 27, 2003 The accompanying consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than Japan. The standards, procedures and practices to audit such financial statements are those which are generally accepted and applied in Japan. - 2 -
Nagano Japan Radio Co., Ltd. and Subsidiaries Consolidated Balance Sheets March 31, 2003 and 2002 U.S. Dollars Yen (Note 1) ASSET S CURRENT ASSETS: Cash and cash equivalents 1,788,337 2,250,572 $ 14,878 Time deposits other than cash equivalents 2,376,171 2,061,762 19,769 Marketable securities (Note 5) 7,486 7,483 62 Receivables: Trade notes 1,749,510 1,585,531 14,555 Trade accounts 12,795,059 16,237,308 106,448 Other 645,259 482,799 5,368 Inventories (Note 6) 10,949,027 15,735,118 91,090 Deferred tax assets (Note 12) 34,792 19,500 290 Other current assets 283,812 201,332 2,361 Allowance for doubtful accounts (29,846) (32,005) (248) Total current assets 30,559,607 38,549,400 254,573 PROPERTY, PLANT AND EQUIPMENT (Note 8): Land (Note 7) 3,804,182 3,792,112 31,649 Buildings and structures 7,122,235 7,094,193 59,253 Machinery and equipment 4,462,327 4,792,828 37,124 Furniture and fixtures 4,979,561 5,138,712 41,427 Construction in progress 302 6,184 3 Total 20,368,607 20,824,029 169,456 Accumulated depreciation (12,125,655) (12,156,188) (100,879) Net property, plant and equipment 8,242,952 8,667,841 68,577 INVESTMENTS AND OTHER ASSETS: Investment securities (Note 5) 725,250 969,884 6,034 Investments in and advances to affiliated companies 6,950 Deferred tax assets (Note 12) 384,105 1,154,724 3,195 Other assets 566,222 644,189 4,711 Allowance for doubtful accounts (77,830) (31,821) (648) Total investments and other assets 1,597,747 2,743,926 13,292 U.S. Dollars Yen (Note 1) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term bank loans (Note 8) 20,007,225 19,805,767 $ 166,449 Current portion of long-term debt (Note 8) 500,000 8,780 4,160 Payables: Trade notes 4,188,661 6,934,229 34,847 Trade accounts 4,048,171 4,576,335 33,679 Other 382,009 489,820 3,178 Income taxes payable 49,462 188,353 412 Accrued expenses 289,911 396,405 2,412 Provision for convertible bonds redemption with a premium (Note 2.i) 122,014 1,015 Other current liabilities 270,372 593,257 2,249 Total current liabilities 29,857,825 32,992,946 248,401 LONG-TERM LIABILITIES: Long-term debt (Note 8) 4,533,744 4,905,380 37,719 Liability for retirement benefits (Note 9) 4,761,072 4,202,043 39,610 Deferred tax liabilities for revaluation (Notes 7 and 12) 561,500 579,621 4,671 Other 1,230 6,230 10 Total long-term liabilities 9,857,546 9,693,274 82,010 MINORITY INTERESTS 122,522 135,744 1,019 CONTINGENT LIABILITIES (Note 18) SHAREHOLDERS' EQUITY (Notes 10 and 11): Common stock authorized, 60,000 thousand shares; issued and outstanding, 30,661 thousand shares in 2003 and 2002 3,154,220 3,154,220 26,241 Capital surplus 2,350,840 2,350,840 19,558 Retained earnings (5,709,494) 528,062 (47,500) Land revaluation surplus (Note 7) 827,045 808,925 6,881 Unrealized (loss) gain on available-for-sale securities (96,337) 2,779 (802) Foreign currency translation adjustments 76,642 294,786 638 Total 602,916 7,139,612 5,016 Treasury stock at cost, 1,638 shares in 2003 and 738 shares in 2002 (503) (409) (4) Total shareholders' equity 602,413 7,139,203 5,012 TOTAL 40,440,306 49,961,167 $ 336,442 TOTAL 40,440,306 49,961,167 $ 336,442 See notes to consolidated financial statements. - 3 -
Nagano Japan Radio Co., Ltd. and Subsidiaries Consolidated Statements of Operations Years Ended March 31, 2003 and 2002 U.S. Dollars Yen (Note 1) NET SALES 43,981,730 52,039,796 $ 365,904 COST OF SALES 40,264,045 49,737,728 334,975 Gross profit 3,717,685 2,302,068 30,929 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,038,924 5,759,450 41,921 Operating loss (1,321,239) (3,457,382) (10,992) OTHER INCOME (EXPENSES): Interest and dividends 17,728 43,274 147 Interest expense (326,866) (309,404) (2,719) Rental revenue 65,239 58,811 543 Foreign exchange (loss) gain (Note 14) (891,258) 182,404 (7,415) Amortization of transitional obligation for employees' retirement benefits (Notes 3.j and 9) (682,112) (682,112) (5,675) Extra retirement benefit (346,853) (2,886) Loss on disposal of inventories (1,321,372) (129,559) (10,993) Loss from impairment of inventories (49,668) (1,471,316) (413) Loss on devaluation of investment securities (150,727) (12,497) (1,254) Provision for convertible bonds redemption with a premium (Note 2.i) (122,014) (1,015) Other net (268,778) 325,891 (2,236) Other expenses net (4,076,681) (1,994,508) (33,916) LOSS BEFORE INCOME TAXES AND MINORITY INTERESTS (5,397,920) (5,451,890) (44,908) INCOME TAXES (Note 12): Current 85,806 85,962 714 Income taxes for prior periods 180,639 Deferred 763,255 (329,063) 6,350 Total income taxes 849,061 (62,462) 7,064 MINORITY INTERESTS IN NET LOSS 19,934 18,970 166 NET LOSS (6,227,047) (5,370,458) $ (51,806) Yen U.S. Dollars PER SHARE OF COMMON STOCK (Note 2.n): Net loss (203.10 ) (175.16 ) $ (1.69 ) Cash dividends applicable to the year 4.00 See notes to consolidated financial statements. - 4 -
Nagano Japan Radio Co., Ltd. and Subsidiaries Consolidated Statements of Shareholders' Equity Years Ended March 31, 2003 and 2002 Thousands Outstanding Number of Shares of Common Stock Common Stock Capital Surplus Retained Earnings Yen Land Revaluation Surplus Unrealized (Loss) Gain on Available-for-sale Securities Foreign Currency Translation Adjustments Treasury Stock at Cost BALANCE, APRIL 1, 2001 30,661 3,154,220 2,350,840 6,077,759 32,107 25,912 (409) Net loss (5,370,458) Cash dividends, 4.00 per share (122,639) Bonuses to directors (56,600) Foreign currency translation adjustments 268,874 Land revaluation surplus 808,925 Net decrease in unrealized gain on available-for-sale securities (29,328) BALANCE, MARCH 31, 2002 30,661 3,154,220 2,350,840 528,062 808,925 2,779 294,786 (409) Net loss (6,227,047) Bonuses to directors (10,509) Increase in treasury stock (900 shares) (94) Foreign currency translation adjustments (218,144) Increase in changing of normal effective statutory tax rates 18,120 Net decrease in unrealized gain on available-for-sale securities (99,116) BALANCE, MARCH 31, 2003 30,661 3,154,220 2,350,840 (5,709,494) 827,045 (96,337) 76,642 (503) Common Stock Capital Surplus Retained Earnings U.S. Dollars (Note 1) Land Revaluation Surplus Unrealized (Loss) Gain on Available-for-sale Securities Foreign Currency Translation Adjustments Treasury Stock at Cost BALANCE, MARCH 31, 2002 $ 26,241 $ 19,558 $ 4,393 $ 6,730 $ 23 $ 2,452 $ (3) Net loss (51,806) Bonuses to directors (87) Increase in treasury stock (900 shares) (1) Foreign currency translation adjustments (1,814) Increase in changing of normal effective statutory tax rates 151 Net decrease in unrealized gain on available-for-sale securities (825) BALANCE, MARCH 31, 2003 $ 26,241 $ 19,558 $ (47,500) $ 6,881 $ (802) $ 638 $ (4) See notes to consolidated financial statements. - 5 -
Nagano Japan Radio Co., Ltd. and Subsidiaries Consolidated Statements of Cash Flows Years Ended March 31, 2003 and 2002 U.S. Dollars Yen (Note 1) OPERATING ACTIVITIES: Loss before income taxes and minority interests (5,397,920) (5,451,890) $ (44,908) Adjustments for: Income taxes paid (224,697) (398,494) (1,869) Depreciation and amortization 737,285 920,312 6,134 Bonuses to directors (10,510) (43,000) (87) Changes in assets and liabilities: Decrease in trade notes and accounts receivable 3,012,981 8,374,981 25,067 Decrease in inventories 4,687,006 3,029,114 38,993 Decrease in trade notes and accounts payable (2,925,976) (7,132,178) (24,343) Decrease in accrued expenses (96,366) (62,714) (802) Increase in allowance for doubtful accounts 43,914 292 365 Increase in liability for retirement benefits 559,029 841,786 4,651 Other net 502,312 (617,195) 4,179 Total adjustments 6,284,978 4,912,904 52,288 Net cash provided by (used in) operating activities 887,058 (538,986) 7,380 INVESTING ACTIVITIES: Purchases of property, plant and equipment (510,908) (787,381) (4,250) Proceeds from sale of property, plant and equipment 32,415 160,121 270 Compensation for condemnation of land 251,846 Purchases of investment securities (4,050) (406,348) (34) Increase in time deposits other than cash equivalents (314,409) (2,616) Other assets net 15,517 52,235 129 Net cash used in investing activities (781,435) (729,527) (6,501) FINANCING ACTIVITIES: Increase in short-term bank loans net 201,458 2,235,767 1,676 Repayments of long-term debt (8,780) (508,740) (73) Issuance of corporate bonds 1,965,020 Disbursements for repayments of corporate bonds (1,659,825) Disbursements for repayments of convertible bonds (668,722) (5,563) Purchases of treasury stock (94) (1) Dividends paid (122,639) Net cash (used in) provided by financing activities (476,138) 1,909,583 (3,961) FORWARD (370,515) 641,070 $ (3,082) - 6 - (Continued)
Nagano Japan Radio Co., Ltd. and Subsidiaries Consolidated Statements of Cash Flows Years Ended March 31, 2003 and 2002 U.S. Dollars Yen (Note 1) FORWARD (370,515) 641,070 $ (3,082) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS (91,720) 49,307 (763) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (462,235) 690,377 (3,845) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,250,572 1,560,195 18,723 CASH AND CASH EQUIVALENTS, END OF YEAR 1,788,337 2,250,572 $ 14,878 See notes to consolidated financial statements. - 7 - (Concluded)
Nagano Japan Radio Co., Ltd. and Subsidiaries Notes to Consolidated Financial Statements Years Ended March 31, 2003 and 2002 1. BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Securities and Exchange Law and its related accounting regulations, and in conformity with accounting principles and practices generally accepted in Japan, which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards. The consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than Japan. 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 accordance with accounting procedures generally accepted in Japan, certain comparative disclosures are not required to be and have not been presented herein. The consolidated financial statements are stated in Japanese yen, the currency of the country in which Nagano 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 120.20 to $1, the approximate rate of exchange at March 31, 2003. 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. Certain reclassifications have been made in the 2002 financial statements to conform to the classifications used in the 2003 financial statements. 2. GOING CONCERN The amounts of net losses were 6,227 million ($51 million) and 5,370 million for the years ended March 31, 2003 and 2002, respectively, as a result of the gross margin ratio declining based on lowers prices due to the IT market depression, etc. Therefore shareholders' equity was decreased to 602 million ($5 million). In the situation, there is substantial doubt about the ability of the entity to continue as a going concern. The Company and all subsidiaries (together, the "Companies") carried out the corporate restructuring plan of "Project R," and have strove for curtailment of fixed costs, etc., from June 2002. And "Project R" was reconsidered and was resolved at the Board meeting on May 20, 2003, to have adequate resources to continue in operational existence for the foreseeable future. The new "Project R" includes the corporate restructuring plan for three years, which is contributed by investigating additional measures such as obtaining cooperation of an external specialist, etc. The department planning enterprise is set under the command of the chief executive officer in order to manage the progress of the new "Project R," on June 1, 2003. - 8 -
The main points of the new "Project R" are as follows: A. The Company makes re-distribution of management resources in order to aim at expansion of private-brand products by withdrawing from an unprofitable model. It is attained by a transfer of business of the ABS sensor enterprise for cars, a formation of business units (organization of enterprises by products category) in the Company, and reorganization of domestic subsidiaries. B. The Company makes the ratio of variable cost by selection of purchase places and subcontract places and the thorough cost management in a design stage. The Company reduces fixed costs through the sharp curtailment of personnel expenses. Curtailment of personnel expenses is attained by introduction of an early-retirement program. And a contributory and non-contributory funded pension plan will be carried out by December 31, 2003, in order to decrease net periodic benefit costs and to avoid excessive increase of retirement benefits in future. C. The Company decreases liabilities with interest by enterprise reorganization, an improvement of the property efficiency by process reform, an improvement of the recovery conditions by reexamination of customer composition, and curtailment of variable cost and expenses and a fixed cost. In addition to above, finance of the convertible bond redemption at the time of using the right of premium redemption and of extra retirement benefit by early retirement is planned to be supplied by the self-reliance by a transfer of business of the ABS sensor enterprise for cars, etc. And the Company obtains unofficial consent that prime financial institutions can cooperate in financing if needed temporarily. Business units in the Company were formed on June 1, 2003. Moreover, reorganization of domestic subsidiaries, the transfer of business of the ABS sensor enterprise for cars, and early-retirement program are now carried out as follows: a. Reorganization of Domestic Subsidiaries Reorganization of domestic subsidiaries was agreed at the shareholders meetings of each domestic subsidiary on May 26, 2003. (1) The purpose The purpose is to clarify the function of each domestic subsidiary, to construct organization for changing in markets, and to curtail costs rationally. (2) The date of a merger and transfer of business of domestic subsidiaries It is planned on July 1, 2003. (3) A subsidiary for manufacturing Naganichi Systems Co., Ltd. merges Iiyama Japan Radio Co., Ltd., Naganichi Device Co., Ltd. and Nagano Business Service Co., Ltd. and makes company name change at Nagano Japan Radio Manufacturing Co., Ltd. which manufactures electronic equipments and electronic devices and sells them to the Company. - 9 -
(4) A subsidiary for services The repair department of electronic devices and the maintenance department of OA equipment are transferred to Naganichi Butsuryu Co., Ltd. from Naganichi Systems Co., Ltd. And the department of material control and the department of business management from Nagano Business Service Co., Ltd. b. Transfer of Business of the ABS Sensor Enterprise for Cars The Company basically agreed on the transfer of business of the ABS sensor enterprise for cars with Continental Teves, Inc. on June 6, 2003. The transfer of business is as follows: (1) The purpose The purpose of the transfer of business is to make reinvestment to an enterprise of higher profitability by taking management resources up from the ABS sensor enterprise for cars, since the ABS sensor enterprise for cars is getting unprofitable in the international competition by companies of automotive parts supplier. (2) The contents of a transfer enterprise Manufactory and sales of ABS sensors for cars and allied products (3) The property of the transfer The property of the transfer has not defined yet. But it includes assets and liabilities of the ABS sensor enterprise for cars, and all stocks of NJRC (Lianyungaug) Electronics Co., Ltd. (4) The price of the transfer The price of the transfer has not come to agreement. (5) The profile of Continental Teves, Inc. (a) Main business Manufacturing of brake for cars (b) The date of foundation December 2000 (c) Address of the head office 62-6, Nihonbashi Hamamachi 2-chome, Chuo-ku, Tokyo (d) Chief executive officer Akira Baba (e) Capital stock 1,390,000 thousand - 10 -
c. Early-retirement Program The Company carried out the early-retirement program in order to reduce fixed costs as a part of the new "Project R." In this program, 110 persons requested it from June 10 to 20, 2003, and will retire on July 4, 2003. As a result of the influence of retirement, the Company is prepared for 500 million ($4 million) of extra retirement benefits in the consolidated financial statements for the year ending March 31, 2004. The consolidated financial statements are prepared on the going concern basis, and are not based on the influence of substantial doubt on the Companies' ability to continue as a going concern. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Consolidation The consolidated financial statements include the accounts of the Companies. Investments in two affiliated companies are stated at cost. If the equity method of accounting had been applied to account for the investments in these companies, the effect on the accompanying consolidated financial statements would not be material. 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. 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 and certificate of deposits, all of which mature or become due within three months of the date of acquisition. c. 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 rates at the balance sheet date. The 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. d. Foreign Currency Financial Statements The balance sheet accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the current exchange rate as of the balance sheet date except for shareholders' equity, which is translated at the historical rate. Differences arising from such translation are shown as "Foreign currency translation adjustments" in a separate component of shareholders' equity. Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the current exchange rate as of the balance sheet date. e. Marketable and Investment Securities All securities 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 shareholders' 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. f. Inventories Finished products and work in process are stated at cost determined by the specific identification method or the average cost method. Raw materials and supplies are stated at cost determined by the moving-average method. - 11 -
g. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment of the Company and its consolidated domestic subsidiaries is computed substantially by the declining-balance method, while the straight-line method is applied to buildings of the Company and its domestic subsidiaries acquired after April 1, 1998 at rates based on the estimated useful lives of assets. The straight-line method is principally applied to the property, plant and equipment of consolidated foreign subsidiaries. Estimated useful lives are as follows: Buildings and structures Machinery and equipment 10 to 38 years 4 to 11 years h. 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. i. Provision for Convertible Bonds Redemption with a Premium Provision for convertible bonds redemption with a premium is appropriated for redemption of convertible bonds in order to prepare for the loss accompanying use of the right of premium redemption of a convertible bond. j. Retirement Benefits The Companies have a non-contributory funded pension plan and a contributory funded pension plan both are defined benefit pension plans. The non-contributory funded pension plan covers only employees who retire at the mandatory retirement age with at least 20 years of service with the Companies. Such employees receive a lump-sum payment from the Companies as a part of total retirement benefits and the remaining portion is payable from the pension fund. The contributory funded pension plan covers most employees. Effective April 1, 2001, the Companies adopted a new accounting standard for employees' retirement benefits and accounted for the liability for retirement benefits based on the projected benefit obligations and plan assets at the balance sheet date. Retirement benefits for directors and corporate auditors are based on the amount which would have been required if all directors and corporate auditors retired at the balance sheet date. The liability for retirement benefits includes the benefit amounts for directors and corporate auditors. k. Income Taxes The provision for income taxes is computed based on the 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 the temporary differences. l. Leases All leases are accounted for as operating leases. Under Japanese accounting standards for leases, finance leases that do not transfer ownership of the leased property to the lessee are permitted to be accounted for as rental transactions if certain "as if capitalized" information is disclosed in the notes to the lessee's consolidated financial statements. - 12 -
m. Derivatives and Hedging Activities The Companies use derivative financial instruments to manage its exposures to fluctuations in foreign exchange. Foreign exchange forward contracts, currency options and interest rate swaps are utilized by the Companies to reduce foreign currency exchange risks. 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 consolidated statements of operations and (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 derivatives are deferred until maturity of the hedged transactions. The foreign currency forward contracts employed to hedge foreign exchange exposures for export sales are measured at the fair value and the unrealized gains/losses are recognized in income. Forward contracts applied for forecasted (or committed) transactions are also measured at the fair value but the unrealized gains/losses are deferred until the underlying transactions are completed. Long-term debt denominated in foreign currencies for which foreign exchange forward contracts are used to hedge the foreign currency fluctuations are translated at the contracted rate if the forward contracts qualify for hedge accounting. The currency options employed to hedge foreign exchange exposures for convertible bonds are measured at the fair value and unrealized gains/losses are recognized in income. n. Earnings per Share Information Effective April 1, 2002, the Company adopted a new accounting standard for net income per share and the application indicator of accounting standards concerning net income per share being applied on and after April 1, 2002. The influence of the application of this new standard is indicated to "Earnings per share information." The computation of net income per share is based on the weighted-average number of shares of common stock outstanding during each year, retroactively adjusted for stock splits. The weighted-average number of common shares used in the computation was 30,660 thousand shares for 2003 and 30,659 thousand shares for 2002. Basic net income per share for the year ended March 31, 2003 are computed in accordance with the new standard. In addition, the influence which it has on the computation of net income per share for the year ended March 31, 2002 by application of a new standard is immaterial. Diluted net income per share of common stock assumed full conversion of the outstanding convertible bonds at the beginning of the year with an applicable adjustment for related interest expense, net of tax, and full exercise of the outstanding stock options. Diluted net income per share is not disclosed for the years ended March 31, 2003 and 2002, because of the Company's net loss position. Cash dividends per share presented in the accompanying consolidated statements of operations are dividends applicable to the respective years without giving retroactive adjustment for treasury stock. 4. ACCOUNTING CHANGE Effective April 1, 2002, the Company adopted a new accounting standard for treasury stock and reversal of statutory reserves. The influence of the application of this new standard is immaterial. - 13 -
5. MARKETABLE AND INVESTMENT SECURITIES Marketable and investment securities as of March 31, 2003 and 2002, consisted of the following: Yen U.S. Dollars Current Corporate bonds 7,486 7,483 $ 62 Total 7,486 7,483 $ 62 Non-current: Marketable equity securities 463,822 601,735 $ 3,859 Other securities 261,428 368,149 2,175 Total 725,250 969,884 $ 6,034 Information regarding each category of the securities classified as available-for-sale at March 31, 2003 and 2002, was as follows: March 31, 2003 Cost Yen Unrealized Gains Unrealized Losses Fair Value Securities classified as available-for-sale equity securities 553,834 4,068 94,080 463,822 March 31, 2002 Securities classified as available-for-sale equity securities 611,051 71,373 80,689 601,735 March 31, 2003 Cost U.S. Dollars Unrealized Unrealized Gains Losses Fair Value Securities classified as available-for-sale equity securities $ 4,608 $ 34 $ 783 $ 3,859 Available-for-sale securities whose fair value is not readily determinable as of March 31, 2003 and 2002, were as follows: Carrying Amount Yen U.S. Dollars Available-for-sale: Equity securities 261,428 368,149 $ 2,175 Corporate bonds 7,486 7,483 62-14 -
The carrying values of debt securities by contractual maturities for securities classified as available-for-sale at March 31, 2003, were as follows: Yen Available for Sale U.S. Dollars Available for Sale Due in one year or less 7,486 $ 62 6. INVENTORIES Inventories at March 31, 2003 and 2002, consisted of the following: Yen U.S. Dollars Finished products 1,869,908 2,591,935 $ 15,557 Work in process 7,326,315 10,882,544 60,951 Raw materials and supplies 1,752,804 2,260,639 14,582 Total 10,949,027 15,735,118 $ 91,090 7. LAND REVALUATION Under the "Law of Land Revaluation" promulgated on March 31, 1998 and revised on March 31, 1999 and 2002, the Company elected a one-time revaluation of its own-use land to a value based on real estate appraisal information as of March 31, 2003. The resulting land revaluation excess represents unrealized appreciation of land and is stated, net of income taxes, as a component of shareholders' equity. There is no effect on the consolidated statements of operations. Continuous readjustment is not permitted unless the land value subsequently declines significantly such that the amount of the decline in value should be removed from the land revaluation excess account and related deferred tax liabilities. The details of the one-time revaluation as of March 31, 2002, were as follows: Land before revaluation: Land after revaluation: Land revaluation excess: 2,403,566 thousand 3,792,112 thousand 1,388,546 thousand (net of income taxes of 808,925 thousand) As at March 31, 2003, the carrying amount of the land after the above one-time revaluation exceeded the market value by 543,627 thousand ($4,523 thousand). 8. SHORT-TERM BANK LOANS AND LONG-TERM DEBT Short-term bank loans at March 31, 2003 and 2002, consisted of notes to banks and bank overdrafts. The annual interest rates applicable to the short-term bank loans were 1.7% and 1.1% at March 31, 2003 and 2002, respectively. - 15 -
Long-term debt at March 31, 2003 and 2002, consisted of the following: Yen U.S. Dollars Unsecured 0.5% Swiss franc convertible bonds, due 2004 2,568,724 2,440,360 $ 21,371 Unsecured 1.75% domestic bonds with warrants, due 2005 165,020 165,020 1,373 Collateralized 1.34% domestic bonds, due 2007 1,800,000 1,800,000 14,975 Loans from banks and other financial institutions, due serially to 2004 with interest rates 1.7% (2003) and 1.7% (2002): Collateralized 500,000 500,000 4,160 Unsecured 8,780 Total 5,033,744 4,914,160 41,879 Less current maturities (500,000) (8,780) (4,160) Long-term debt, less current maturities 4,533,744 4,905,380 $ 37,719 Annual maturities of long-term debt at March 31, 2003, were as follows: Year Ending March 31 Yen U.S. Dollars 2004 500,000 $ 4,160 2005 2,568,724 21,371 2006 165,020 1,373 2007 1,800,000 14,975 Total 5,033,744 $ 41,879 The carrying amounts of assets pledged as collateral for short-term bank loans of 3,580,000 thousand ($29,784 thousand) and the above collateralized long-term debt at March 31, 2003, were as follows: Yen U.S. Dollars Property, plant and equipment net of accumulated depreciation 3,602,150 $ 29,968 Investment securities 285,950 2,379 The conversion price of the 0.5% Swiss franc convertible bonds was 419 ($3.49) per share at March 31, 2003, using at fixed exchange rate of SFr.1 = 71.01. The 0.5% Swiss franc convertible bonds may be redeemed prior to maturity at the option of the Company at prices ranging from 104.75% to 100.25% of the principal amount. The warrants issued with 1.75% domestic bonds are detachable and entitle the holders to subscribe for shares of the Company's common stock through December 20, 2005, at the exercise price of 370 ($3.08) per share at March 31, 2003. If all these outstanding warrants would have been exercised at March 31, 2003, 446 thousand shares of common stock would have been issued. - 16 -
The exercise price of the conversion prices of the convertible bonds is subject to adjustments to reflect stock splits and certain other events. 9. RETIREMENT AND PENSION PLANS The Company and its certain consolidated subsidiaries have severance payment plans for employees, directors and corporate auditors. Under most circumstances, employees terminating their employment are entitled to retirement benefits determined based on the rate of pay at the time of termination, years of service and certain other factors. Such retirement benefits are made in the form of a lump-sum severance payment from the Company or from certain consolidated subsidiaries and annuity payments from a trustee. Employees are entitled to larger payments if the termination is involuntary, by retirement at the mandatory retirement age, by death, or by voluntary retirement at certain specific ages prior to the mandatory retirement age. The liability for retirement benefits at March 31, 2003, for directors and corporate auditors is 126,221 thousand ($1,050 thousand). The retirement benefits for directors and corporate auditors are paid subject to the approval of the shareholders. The liability for employees' retirement benefits at March 31, 2003 and 2002, consisted of the following: Yen U.S. Dollars Projected benefit obligation 12,672,934 13,052,883 $ 105,432 Fair value of plan assets (3,033,449) (4,521,183) (25,237) Unrecognized actuarial gain (3,640,410) (2,467,750) (30,286) Unrecognized transitional obligation (1,364,224) (2,046,336) (11,350) Net liability 4,634,851 4,017,614 $ 38,559 The components of net periodic benefit costs for the years ended March 31, 2003 and 2002, are as follows: Yen U.S. Dollars Service cost 685,240 596,018 $ 5,701 Interest cost 309,555 360,651 2,575 Expected return on plan assets (109,434) (168,191) (911) Prior service cost (193,078) (1,606) Recognized actuarial loss 260,349 131,299 2,166 Amortization of transitional obligation 682,112 682,112 5,675 Net periodic benefit costs 1,634,744 1,601,889 $ 13,600 Assumptions used for the years ended March 31, 2003 and 2002, are set forth as follows: 2003 2002 Discount rate 2.0% 2.5% Expected rate of return on plan assets 2.5% 3.5% Amortization period of prior service cost Fully amortized in the same fiscal as incurred Recognition period of actuarial gain/loss 10 years 10 years Amortization period of transitional obligation 5 years 5 years - 17 -
10. SHAREHOLDERS' EQUITY Japanese companies are subject to the Japanese Commercial Code (the "Code") to which certain amendments became effective from October 1, 2001. The Code was revised whereby common stock par value was eliminated resulting in all shares being recorded with no par value and at least 50% of the issue price of new shares is required to be recorded as common stock and the remaining net proceeds as additional paid-in capital, which is included in capital surplus. The Code permits Japanese companies, upon approval of the Board of Directors, to issue shares to existing shareholders without consideration as a stock split. Such issuance of shares generally does not give rise to changes within the shareholders' accounts. The revised Code also provides that an amount at least equal to 10% of the aggregate amount of cash dividends and certain other appropriations of retained earnings associated with cash outlays applicable to each period shall be appropriated as a legal reserve (a component of retained earnings) until such reserve and additional paid-in capital equals 25% of common stock. The amount of total additional paid-in capital and legal reserve that exceeds 25% of the common stock may be available for dividends by resolution of the shareholders. In addition, the Code permits the transfer of a portion of additional paid-in capital and legal reserve to the common stock by resolution of the Board of Directors. The revised Code eliminated restrictions on the repurchase and use of treasury stock allowing Japanese companies to repurchase treasury stock by a resolution of the shareholders at the general shareholders meeting and dispose of such treasury stock by resolution of the Board of Directors beginning April 1, 2002. The repurchased amount of treasury stock cannot exceed the amount available for future dividend plus amount of common stock, additional paid-in capital or legal reserve to be reduced in the case where such reduction was resolved at the general shareholders meeting. There is no amount of retained earnings available for dividends under the Code as of March 31, 2003, based on the amount recorded in the parent company's general books of account. In addition to the provision that requires an appropriation for a legal reserve in connection with the cash payment, the Code imposes certain limitations on the amount of retained earnings available for dividends. Dividends are approved by the shareholders at a meeting held subsequent to the fiscal year to which the dividends are applicable. Semiannual interim dividends may also be paid upon resolution of the Board of Directors, subject to certain limitations imposed by the Code. 11. STOCK OPTION PLAN The stock option plan which was approved by shareholders at the general shareholders meeting held on June 29, 2000, provides options on subscriptions of the Company's common stock for an aggregate maximum of 112 thousand shares for 15 directors and an aggregate maximum of 27 thousand shares for 9 key employees of the Company. The exercise period of the stock options is from January 5, 2001 to December 20, 2004. The options will be granted at an exercise price of 603 ($5.02). 12. 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 41.7% for the years ended March 31, 2003 and 2002. - 18 -
The tax effects of significant temporary differences and tax loss carryforwards which resulted in deferred tax assets and liabilities at March 31, 2003 and 2002, were as follows: Yen U.S. Dollars Current: Deferred tax assets: Loss from impairment of inventories 20,733 $ 172 Loss carryforward 90,997 67,675 757 Enterprise tax payable 2,181 2,697 18 Unrealized gain on intercompany sales of inventories 31,718 18,608 264 Foreign exchange loss of convertible bonds 289,488 2,408 Provision for convertible bonds redemption with a premium 50,932 424 Other 5,488 46 Less valuation allowance (456,745) (69,480) (3,799) Total 34,792 19,500 $ 290 Non-current: Deferred tax assets: Liability for retirement benefits to employees 1,730,838 1,389,784 $ 14,400 Liability for retirement benefits to directors and corporate auditors 53,023 75,874 441 Tax loss carryforwards 3,362,894 1,913,751 27,977 Other 115,889 44,933 964 Less valuation allowance (4,567,917) (1,957,005) (38,003) Total 694,727 1,467,337 5,779 Deferred tax liabilities: Deferred gain on sales of property 310,622 310,622 2,584 Other 1,991 Total 310,622 312,613 2,584 Net non-current deferred tax assets 384,105 1,154,724 $ 3,195 A reconciliation between the normal effective statutory tax rate for the years ended March 31, 2003 and 2002, and the actual effective tax rates reflected in the accompanying consolidated statements of operations was as follows: 2003 2002 Normal effective statutory tax rate ( 41.7) % ( 41.7) % Expenses not deductible for income tax purposes 0.4 0.6 Tax on per capita basis 0.3 0.3 Income taxes for prior periods 3.3 Increase in less valuation allowance 55.1 37.2 Other net 1.6 (0.8) Actual effective tax rate 15.7 % (1.1) % - 19 -
On March 31, 2003, a tax reform law was enacted in Japan which changed the normal effective statutory tax rate from approximately 41.7% to 40.4%, effective for years beginning on and after April 1, 2004. The effect of this change on deferred tax liabilities concerning land revaluation surplus in the consolidated financial statements for the year ended March 31, 2003 is approximately 18,120 thousand ($151 thousand). At March 31, 2003, the Company and a domestic subsidiary have tax loss carryforwards aggregating approximately 8,065,152 thousand ($67,098 thousand) which are available to be offset against taxable income of the Company in future years. These tax loss carryforwards, if not utilized, will expire as follows: Year Ending March 31 Yen U.S. Dollars 13. RESEARCH AND DEVELOPMENT COSTS 2007 4,645,742 $ 38,650 2008 3,419,410 28,447 Total 8,065,152 $ 67,097 Research and development costs charged to income were 788,115 thousand ($6,557 thousand) and 1,116,845 thousand for the years ended March 31, 2003 and 2002, respectively. 14. FOREIGN EXCHANGE LOSS The foreign exchange loss on the consolidated statements of operations includes the foreign exchange loss of 693,500 thousand ($5,770 thousand) concerning a convertible bond. 15. LEASES The Companies lease certain machinery, computer equipment and other assets. Total rental expenses for the years ended March 31, 2003 and 2002, were 725,242 thousand ($6,034 thousand) and 856,088 thousand, respectively, including 136,564 thousand ($1,136 thousand) and 138,224 thousand of lease payments under finance leases. Pro forma information of leased property such as acquisition cost, accumulated depreciation, obligation under finance lease, depreciation expense, interest expense of finance leases that do not transfer ownership of the leased property to the lessee on an "as if capitalized" basis for the years ended March 31, 2003 and 2002, was as follows: Buildings and Structures Yen 2003 2002 Buildings and Structures Machinery and Equipment Other Total Machinery and Equipment Other Total Acquisition cost 75,778 140,002 303,564 519,344 38,506 276,569 293,333 608,408 Accumulated depreciation 23,462 84,051 214,112 321,625 6,881 186,718 158,668 352,267 Net leased property 52,316 55,951 89,452 197,719 31,625 89,851 134,665 256,141 Buildings and Structures U.S. Dollars 2003 Machinery and Equipment Other Total Acquisition cost $ 630 $ 1,165 $ 2,525 $ 4,320 Accumulated depreciation 195 699 1,781 2,675 Net leased property $ 435 $ 466 $ 744 $ 1,645-20 -
Obligations under finance leases: Yen U.S. Dollars Due within one year 97,315 118,238 $ 810 Due after one year 110,421 153,492 919 Total 207,736 271,730 $ 1,729 Depreciation expense and interest expense under finance leases: Yen U.S. Dollars Depreciation expense 122,852 124,730 $ 1,022 Interest expense 8,140 10,280 68 Total 130,992 135,010 $ 1,090 Depreciation expense and interest expense, which are not reflected in the accompanying consolidated statements of operations, are computed by the straight-line method and the interest method, respectively. 16. RELATED PARTY TRANSACTIONS Transactions of the Company with Japan Radio Co., Ltd., a significant shareholder which owns 24.9% of the voting shares of the Company, for the years ended March 31, 2003 and 2002, were as follows: Yen U.S. Dollars Sales 3,109,132 3,658,463 $ 25,866 Purchases 545,754 624,644 4,540 The balances due to or from Japan Radio Co., Ltd. at March 31, 2003 and 2002, were as follows: Yen U.S. Dollars Receivables Trade notes and accounts 1,109,757 1,251,327 $ 9,233 Payables Trade notes and accounts 62,350 50,062 519 Other current liabilities 1,479 104,949 12 17. DERIVATIVES The Company enters into foreign currency forward contracts and currency options to hedge foreign exchange risk associated with certain assets and liabilities denominated in foreign currencies. - 21 -
All derivative transactions are entered to a hedge interest and foreign currency exposures incorporated within its business. Accordingly, market risk in these derivatives is basically offset by opposite movements in the value of hedged assets or liabilities. Because the counterparties to these derivatives are limited to major international financial institutions, the Company does not anticipate any losses arising from credit risk. Derivative transactions entered into by the Company have been made in accordance with internal policies which regulate the authorization and credit limit amount. The Company had the following derivatives contracts outstanding at March 31, 2003: Contract Amount Yen U.S. Dollars 2003 2003 Unrealized Unrealized Fair Gain Contract Fair Gain Value (Loss) Amount Value (Loss) Currency options: Buying Swiss franc 15,000 46,201 31,201 $ 125 $ 384 $ 259 Buying U.S. dollars 4,490 5,141 651 37 43 6 Selling Swiss franc 15,000 15,253 (253) 125 127 (2) Selling U.S. dollars 4,490 8,076 (3,586) 37 67 (30) The contract or notional amounts of derivatives which are shown in the above table do not represent the amounts exchanged by the parties and do not measure the Companies' exposure to credit or market risk. 18. CONTINGENT LIABILITIES At March 31, 2003, the Companies had the following contingent liabilities: Yen U.S. Dollars Trade notes discounted 160,000 $ 1,331 19. SUBSEQUENT EVENTS a. Corporate Restructuring Plan The corporate restructuring plan for three years including enterprise reorganization, etc., was resolved by the Board meeting held on May 20, 2003. b. Reorganization of Domestic Subsidiaries The reorganization of domestic subsidiaries was agreed at the shareholders meetings of each domestic subsidiary on May 26, 2003. c. Transfer of Business of the ABS Sensor Enterprise for Cars The Company basically agreed on the transfer of business of the ABS sensor enterprise for cars with Continental Teves, Inc. on June 6, 2003. - 22 -
d. Early-retirement Program The Company carried out the early-retirement program in order to reduce fixed costs as a part of the new "Project R." In this program, 110 persons requested it from June 10 to 20, 2003, and will retire on July 4, 2003. As a result of the influence of retirement, the Company is prepared for 500 million ($4 million) of extra retirement benefits in the consolidated financial statements for the year ending March 31, 2004. 20. SEGMENT INFORMATION The Company operates in the following industries: Electronic equipment consists of sales, fabrication and development of disaster prevention communications systems, satellite communications systems, remote control equipment, copiers, facsimiles, ticket publishing equipment, etc. Electronic devices consist of sales, fabrication and development of power supply units, ABS sensors, optical devices, etc. Information about industry segments and sales to foreign customers of the Company and consolidated subsidiaries for the years ended March 31, 2003 and 2002, was as follows: (1) Industry Segments a. Sales and Operating Income Electronic Equipment Electronic Devices Yen 2003 Eliminations or Corporate Consolidated Sales to customers 20,409,935 23,571,795 43,981,730 Intersegment sales 2,346 115,580 (117,926) Total sales 20,412,281 23,687,375 (117,926) 43,981,730 Operating expenses 20,812,221 23,409,173 1,081,575 45,302,969 Operating income (loss) (399,940) 278,202 (1,199,501) (1,321,239) b. Assets, Depreciation and Capital Expenditures Electronic Equipment Electronic Devices Yen 2003 Eliminations or Corporate Consolidated Assets 19,258,969 15,315,095 5,866,242 40,440,306 Depreciation 326,739 366,455 44,091 737,285 Capital expenditures 81,811 309,800 3,505 395,116-23 -