ONOKEN CO., LTD. and a Consolidated Subsidiary Consolidated Balance Sheets March 31, 2007 2006 2007 (Millions of yen) (Thousands of U.S. dollars) (Note 1) Assets Current assets: Cash and time deposits (Notes 3 and 7) 2,164 996 $ 18,331 Trade notes and accounts receivable 52,923 41,627 448,310 Other receivables 49 309 415 Merchandise 8,653 9,772 73,299 Deferred tax assets (Note 10) 191 263 1,618 Other current assets 960 1,077 8,133 Allowance for doubtful accounts (197) (828) (1,669) Total current assets 64,743 53,216 548,437 Property, plant and equipment (Notes 5 and 7): Land 12,806 10,106 108,479 Buildings and structures 8,078 8,044 68,429 Machinery and equipment 642 694 5,438 Construction in progress 749 19 6,345 22,275 18,863 188,691 Accumulated depreciation (4,550) (4,296) (38,543) Property, plant and equipment, net 17,725 14,567 150,148 Investments and other assets: Investment securities (Notes 4 and 7) 1,462 1,667 12,385 Investment in an unconsolidated subsidiary 3 3 25 Deferred tax assets (Note 10) 661 91 5,599 Other 1,944 1,720 16,468 Allowance for doubtful accounts (1,242) (1,066) (10,521) Total investments and other assets 2,828 2,415 23,956 Total assets 85,296 70,198 $ 722,541-1 -
March 31, 2007 2006 2007 (Millions of yen) (Thousands of U.S. dollars) (Note 1) Liabilities and net assets Current liabilities: Short-term bank loans (Notes 6 and 7) 4,000 4,000 $ 33,884 Trade notes and accounts payable (Note 7) 37,730 25,253 319,610 Other payables 686 782 5,811 Income taxes payable 1,400 101 11,859 Accrued employees bonuses 163 157 1,381 Accrued directors and corporate auditors bonuses 37 313 Other current liabilities 971 1,193 8,226 Total current liabilities 44,987 31,486 381,084 Long-term liabilities: Accrued employees retirement benefits (Note 9) 517 514 4,380 Accrued directors and corporate auditors retirement benefits 257 229 2,177 Other long-term liabilities (Note 7) 309 301 2,617 Total long-term liabilities 1,083 1,044 9,174 Total liabilities 46,070 32,530 390,258 Contingent liabilities (Note 13) Net assets: Shareholders equity: Common stock: Authorized: 50,000,000 shares at March 31, 2007 and 2006 Issued: 20,782,725 shares at March 31, 2007 and 20,712,725 shares at March 31, 2006 3,359 3,302 28,454 Capital surplus 3,072 3,016 26,023 Retained earnings 33,001 31,331 279,551 Treasury stock, at cost: 558,100 shares at March 31, 2007 and 475,600 shares at March 31, 2006 (647) (538) (5,481) Total shareholders equity 38,785 37,111 328,547 Valuation and translation adjustments: Net unrealized gains on other securities 438 557 3,711 Deferred gains on hedges 3 25 Total valuation and translation adjustments 441 557 3,736 Total net assets 39,226 37,668 332,283 Total liabilities and net assets 85,296 70,198 $ 722,541 See accompanying notes to consolidated financial statements. - 2 -
ONOKEN CO., LTD. and a Consolidated Subsidiary Consolidated Statements of Income Year ended March 31, 2007 2006 2007 (Millions of yen) (Thousands of U.S. dollars) (Note 1) Net sales 132,659 117,765 $1,123,753 Cost of sales 123,114 109,293 1,042,897 Gross profit before adjustment for unrealized profit on 9,545 8,472 80,856 installment sales Adjustment for unrealized profit on installment sales 1 2 8 Gross profit 9,546 8,474 80,864 Selling, general and administrative expenses 4,623 4,306 39,161 Operating income 4,923 4,168 41,703 Other income (expenses): Interest and dividend income 22 21 186 Interest expense (13) (15) (110) (Loss) gain on disposal of property, plant and equipment, net (5) 197 (42) Impairment loss (Note 5) (1,272) (10,775) Other, net 507 (90) 4,294 (761) 113 (6,447) Income before income taxes 4,162 4,281 35,256 Income taxes (Note 10): Current 2,166 1,552 18,348 Deferred (421) 201 (3,566) Total income taxes 1,745 1,753 14,782 Net income 2,417 2,528 $ 20,474 (Yen) (U.S. dollars) Amounts per share (Note 14): Net income: Basic 119.22 129.12 $1.01 Diluted 119.18 128.43 1.01 Cash dividends 35.00 35.00 0.30 See accompanying notes to consolidated financial statements. - 3 -
ONOKEN CO., LTD. and a Consolidated Subsidiary Consolidated Statements of Changes in Net Assets Number of shares of common stock issued Common stock Capital surplus Retained earnings (Millions of yen) Treasury stock, at cost Total shareholders equity Balance at March 31, 2005 19,458,725 2,202 1,916 29,707 (227) 33,598 Net income 2,528 2,528 Cash dividends (860) (860) Bonuses to directors and corporate auditors (35) (35) Repurchases of treasury stock (331) (331) Retirement of treasury stock (9) 20 11 Issuance of new shares 1,254,000 1,100 1,100 2,200 Net changes in items other than shareholders equity during the year Balance at March 31, 2006 20,712,725 3,302 3,016 31,331 (538) 37,111 Net income 2,417 2,417 Cash dividends (709) (709) Bonuses to directors and corporate auditors (37) (37) Repurchases of treasury stock (111) (111) Retirement of treasury stock (1) 2 1 Issuance of new shares 70,000 57 56 113 Net changes in items other than shareholders equity during the year Balance at March 31, 2007 20,782,725 3,359 3,072 33,001 (647) 38,785 Common stock Capital surplus Retained earnings Treasury stock, at cost (Thousands of U.S. dollars) (Note 1) Total shareholders equity Balance at March 31, 2006 $ 27,972 $ 25,549 $ 265,403 $(4,557) $ 314,367 Net income 20,474 20,474 Cash dividends (6,005) (6,005) Bonuses to directors and corporate auditors (313) (313) Repurchases of treasury stock (940) (940) Retirement of treasury stock (8) 16 8 Issuance of new shares 482 474 956 Net changes in items other than shareholders equity during the year Balance at March 31, 2007 $ 28,454 $ 26,023 $ 279,551 $ (5,481) $ 328,547-4 -
ONOKEN CO., LTD. and a Consolidated Subsidiary Consolidated Statements of Changes in Net Assets (continued) Net unrealized gains on other securities Deferred gains on hedges Total valuation and translation adjustments Total net assets Balance at March 31, 2005 310 310 33,908 Net income 2,528 Cash dividends (860) Bonuses to directors and corporate auditors (35) Repurchases of treasury stock (331) Retirement of treasury stock 11 Issuance of new shares 2,200 Net changes in items other than shareholders equity during the year 247 247 247 Balance at March 31, 2006 557 557 37,668 Net income 2,417 Cash dividends (709) Bonuses to directors and corporate auditors (37) Repurchases of treasury stock (111) Retirement of treasury stock 1 Issuance of new shares 113 Net changes in items other than shareholders equity during the year (119) 3 (116) (116) Balance at March 31, 2007 438 3 441 39,226 Net unrealized gains on other securities Deferred gains on hedges Total valuation and translation adjustments Total net assets Balance at March 31, 2006 $ 4,719 $ $ 4,719 $ 319,086 Net income 20,474 Cash dividends (6,005) Bonuses to directors and corporate auditors (313) Repurchases of treasury stock (940) Retirement of treasury stock 8 Issuance of new shares 956 Net changes in items other than shareholders equity during the year (1,008) 25 (983) (983) Balance at March 31, 2007 $ 3,711 $ 25 $ 3,736 $ 332,283 See accompanying notes to consolidated financial statements. - 5 -
ONOKEN CO., LTD. and a Consolidated Subsidiary Consolidated Statements of Cash Flows Year ended March 31, 2007 2006 2007 (Millions of yen) (Thousands of U.S. dollars) (Note 1) OPERATING ACTIVITIES: Income before income taxes 4,162 4,281 $ 35,256 Depreciation and amortization 327 339 2,770 Loss (gain) on disposal of property, plant and equipment, net 5 (196) 42 Impairment loss 1,272 10,775 Interest and dividend income (22) (21) (186) Interest expense 13 15 110 Increase in trade notes and accounts receivable (11,691) (2,053) (99,034) Decrease in merchandise 1,119 1,907 9,479 Decrease in allowance for doubtful accounts (455) (19) (3,854) Increase in trade notes and accounts payable 12,561 2,482 106,404 Other, net 379 357 3,211 7,670 7,092 64,973 Interest and dividend received 22 21 186 Interest paid (13) (14) (110) Income taxes paid (879) (4,170) (7,446) Net cash provided by operating activities 6,800 2,929 57,603 INVESTING ACTIVITIES: Proceeds from sales of property, plant and equipment 14 282 119 Purchases of property, plant and equipment (4,854) (475) (41,118) Purchases of investment securities (5) (30) (42) Other, net (85) 190 (721) Net cash used in investing activities (4,930) (33) (41,762) FINANCING ACTIVITIES: Decrease in short-term bank loans, net (4,100) Proceeds from issuance of common stock 114 2,191 965 Repurchases of treasury stock (111) (331) (940) Exercise of stock acquisition rights 1 11 8 Cash dividends paid (709) (860) (6,005) Net cash used in financing activities (705) (3,089) (5,972) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,165 (193) 9,869 CASH AND CASH EQUIVALENTS, BEGINNING OF 887 1,080 7,514 YEAR CASH AND CASH EQUIVALENTS, END OF YEAR (Note 3) 2,052 887 $ 17,383 See accompanying notes to consolidated financial statements. - 6 -
ONOKEN CO., LTD. and a Consolidated Subsidiary Notes to Consolidated Financial Statements Years Ended March 31, 2007 and 2006 1. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Securities and Exchange Law of Japan and its related accounting regulations, and in conformity with accounting principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards. In preparing the accompanying 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. The consolidated financial statements are stated in Japanese yen, the currency of the country in which ONOKEN CO., LTD. (the "Company") is incorporated and operates. The translation of Japanese yen amounts into U.S. dollar amounts is included solely for the convenience of readers outside Japan and has been made at the rate of 118.05 to $1, the rate of exchange in effect at March 31, 2007. Such translation should not be construed as a representation that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. - 7 -
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Consolidation The accompanying consolidated financial statements include the accounts of the Company and one significant subsidiary controlled directly by the Company (together, the Group ). Investment in an unconsolidated subsidiary, not significant in amount, is stated at cost. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group has also been eliminated. b. Cash Equivalents Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to an insignificant risk of changes in value. Cash equivalents include time deposits which become due within three months of the date of acquisition. c. Allowance for Doubtful Accounts The allowance for doubtful accounts is provided at an amount determined based on the historical experience of bad debts with respect to ordinary receivables, plus an estimate of uncollectible amounts determined by reference to specific doubtful receivables from customers which are experiencing financial difficulties. d. Merchandise Merchandise is stated at cost determined by the moving-average method. e. Investment Securities Marketable securities classified as other securities are reported at fair value, with unrealized gains or losses, net of applicable income taxes, included in a separate component of net assets. Non-marketable securities classified as other securities are stated at cost determined by the moving-average method. For other than temporary declines in fair value, securities are reduced to their respective net realizable value by a charge to income. - 8 -
f. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation of the property, plant and equipment of the Group is generally computed by the declining-balance method. However, the straight-line method is applied to buildings of the Group acquired on or after April 1, 1998. The range of estimated useful lives is principally from 10 to 47 years for buildings and structures, and from 4 to 12 years for machinery and equipment. g. Impairment Loss on Long-lived Assets Effective the year ended March 31, 2006, the Group adopted an accounting standard for the impairment of long-lived assets and the related implementation guidance. The Group reviews its long-lived assets for impairment whenever events or changes in circumstance indicate that the carrying amount of an asset or asset group may not be recoverable. An impairment loss is 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 disposal of the asset or asset group. The impairment loss is measured as the amount by which the carrying amount of the asset or asset group exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposal of the asset or asset group or the net selling price at disposal. The adoption of this new standard had no effect on the Group s operating results for the year ended March 31, 2006. h. Software Certain costs for computer software for internal use are capitalized and amortized using the straight-line method over an estimated useful life of five years. i. Stock Issuance Costs Stock issuance costs are charged to income as incurred. j. Accrued Employees Bonuses Accrued employees bonuses are provided at an amount estimated to be paid for services rendered by the employees for the calculation period. - 9 -
k. Accrued Directors and Corporate Auditors Bonuses Accrued directors and corporate auditors bonuses are provided at an estimated amount of bonuses to be paid to directors and corporate auditors for the current year s services subsequent to the balance sheet date. Effective the year ended March 31, 2007, the Group has adopted a new accounting standard for directors and corporate auditors bonuses. This standard requires that directors and corporate auditors bonuses be accounted for as an expense on an accrual basis instead of charging them directly to retained earnings in the year in which such payments are approved at a general shareholders meeting. The effect of the adoption of this standard was to decrease operating income, and income before income taxes by 37 million ($313 thousand) for the year ended March 31, 2007 from the corresponding amounts which would have been recorded under the previous method. The effect of this change on segment information was immaterial. l. Retirement Benefit Plans The Company has a non-contributory funded defined benefit retirement plan, and its consolidated subsidiary has an unfunded retirement benefit plan. The Group accounts for the liability for retirement benefits based on the projected benefit obligation and plan assets at the balance sheet date. Actuarial gains and losses are fully charged or credited to income in the year following the year in which the gains or losses are recognized. Retirement benefits to directors and corporate auditors of the Company are provided at the amount which would be required if all directors and corporate auditors retired at the balance sheet date based on the Company s internal rules. m. Revenue recognition Revenue on installment sales is recognized when the related receivables become due. The unrealized profit on installment sales corresponding to the portion of such receivables is deferred and is recorded as a component of Other current liabilities in the accompanying consolidated balance sheets. - 10-
n. Leases All leases are accounted for as operating leases. Under the Japanese accounting standard for leases, finance leases that are deemed to transfer ownership of the leased property to the lessee are capitalized, while other finance leases are 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. o. Income Taxes Deferred tax assets and liabilities are determined based on the differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse. p. 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 prevailing at the balance sheet date, except for assets and liabilities hedged by forward foreign exchange contracts. All revenues and expenses associated with foreign currencies are translated at the rates of exchange prevailing when such transactions were made. The resulting foreign exchange gains and losses are credited or charged to income. q. Derivatives and Hedging Activities The Company uses derivative financial instruments to manage its exposures to fluctuations in foreign exchange rates. Specifically, forward foreign exchange contracts are utilized by the Company to reduce foreign currency exchange risks. The Company does 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 credited or charged to income 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 the derivatives are deferred until maturity of the hedged transactions. - 11-
r. Per Share Information Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities were exercised or converted into common stock. Cash dividends per share presented in the accompanying consolidated statements of income are based on dividends applicable to the respective years including dividends to be paid after the end of the year. s. Accounting standard for the presentation of net assets in the balance sheet Effective the year ended March 31, 2007, the Company has adopted a new accounting standard for the presentation of net assets in the balance sheet and the related implementation guidance. In addition, effective the year ended March 31, 2007, the Company is required to prepare consolidated statements of changes in net assets instead of consolidated statements of capital surplus and retained earnings. In this connection, the consolidated balance sheet as of March 31, 2006 and consolidated statement of capital surplus and retained earnings for the year then ended have been restated to conform to the presentation and disclosure of the consolidated financial statements for the year ended March 31, 2007. 3. RECONCILIATION OF CASH AND TIME DEPOSITS TO CASH AND CASH EQUIVALENTS A reconciliation of cash and time deposits in the consolidated balance sheets to cash and cash equivalents in the consolidated statements of cash flows as of March 31, 2007 and 2006 was as follows: Thousands of Millions of Yen U.S. Dollars 2007 2006 2007 Cash and time deposits 2,164 996 $18,331 Time deposits with original maturities of more than three months (112) (109) (948) Cash and cash equivalents 2,052 887 $17,383-12-
4. INVESTMENT SECURITIES The aggregate cost, gross unrealized gains and losses, and aggregate fair values of investment securities classified as other securities at March 31, 2007 and 2006 were as follows: March 31, 2007 Cost Millions of Yen Unrealized Gains Unrealized Losses Fair Value Equity securities 631 750 (15) 1,366 March 31, 2006 Equity securities 639 932 1,571 March 31, 2007 Cost Thousands of U.S. Dollars Unrealized Unrealized Gains Losses Fair Value Equity securities $5,345 $6,353 $ (127) $11,571 Securities whose fair value is not readily determinable as of March 31, 2007 and 2006 were as follows: Carrying amount Thousands of Millions of Yen U.S. Dollars 2007 2006 2007 Other securities: Unlisted equity securities 96 96 $814 No securities classified as other securities were sold for the years ended March 31, 2007 and 2006. Impairment loss on investment securities due to other than temporary declines in fair value of 13 million ($110 thousand) and 1 million was recognized for the years ended March 31, 2007 and 2006, respectively. - 13-
5. IMPAIRMENT LOSS The Group recognized an impairment loss of 1,272 million ($10,775 thousand) for the year ended March 31, 2007 on land of a branch office to be closed, which has no prospect of future use, by reducing its carrying amount to its net selling price, estimated by referring to the appraised value determined by an independent appraiser. 6. SHORT-TERM BANK LOANS Short-term bank loans at March 31, 2007 and 2006 represented outstanding balances, with weighed average interest rates of 0.75% and 0.25% per annum, respectively, under overdraft agreements with banks of up to 21,000 million ($177,891 thousand) and 19,400 million in the aggregate, respectively. As described in Note 7, certain assets are collateralized for short-term bank loans. Furthermore, as is customary in Japan, the Company maintains substantial deposit balances with banks with which it has borrowings. Such deposit balances are not legally or contractually restricted as to withdrawal. 7. PLEDGED ASSETS The carrying amounts of assets pledged as collateral and the corresponding liabilities secured at March 31, 2007 and 2006 were as follows: Thousands of Millions of Yen U.S. Dollars 2007 2006 2007 Assets pledged as collateral: Time deposits 112 109 $949 Buildings and structures at book value 7 7 59 Land 530 530 4,490 Investment securities 25 27 212 Total 674 673 $5,710 Liabilities secured: Trade notes and accounts payable 44 61 $ 373 Short-term bank loans 591 590 5,006 Other long-term liabilities 100 100 847 Total 735 751 $6,226-14-
8. STOCK OPTION PLANS The Company has two stock option plans for the granting of non-transferable options to certain eligible directors of the Company and key employees of the Group. On August 5, 2002, options were granted to certain eligible directors of the Company and key employees of the Company for a term of eight years to purchase an aggregate of 462,000 shares of common stock of the Company at 613 per share. The exercise price could be subject to adjustment for certain events. The options became exercisable on June 28, 2004. 2,000 shares of common stock were issued as a result of the exercise of stock options during the year ended March 31, 2007, and 12,000 options were outstanding as of March 31, 2007. Additionally, on July 26, 2004, options were granted to certain eligible directors of the Company and key employees of the Group for a term of six years to purchase an aggregate of 586,000 shares of common stock of the Company at 1,585 per share. The exercise price could be subject to adjustment for certain events. The options became exercisable on June 26, 2006. None of the options was exercised during the year ended March 31, 2007, and 532,000 options were outstanding as of March 31, 2007. 9. RETIREMENT BENEFIT PLANS The Company has a non-contributory funded defined benefit retirement plan, and its consolidated subsidiary has an unfunded retirement benefit plan. Payments of retirement benefits for the Company s employees are made by the trustees in the form of a lump-sum severance payment or annuity payments, at the discretion of the retiring employees. Payments of retirement benefits for the subsidiary s employees are made by the subsidiary in the form of a lump-sum severance payment. The following table sets forth the funded and accrued status of the plans, and the amounts recognized in the consolidated balance sheets as of March 31, 2007 and 2006 for the Company s and the consolidated subsidiary s defined benefit plans: - 15-
Thousands of Millions of Yen U.S. Dollars 2007 2006 2007 Retirement benefit obligation 922 925 $7,810 Fair value of plan assets (470) (454) (3,981) Unfunded retirement benefit obligation 452 471 3,829 Unrecognized actuarial gain 10 2 85 Prepaid pension costs 55 41 466 Accrued employees retirement 517 514 benefits $4,380 The components of retirement benefit expenses for the years ended March 31, 2007 and 2006 were as follows: Thousands of Millions of Yen U.S. Dollars 2007 2006 2007 Service cost 58 55 $491 Interest cost 18 18 152 Expected return on plan assets (5) (4) (42) Amortization of actuarial gain (2) (8) (17) Net periodic benefit costs 69 61 $584 The assumptions used in accounting for the above plans are set forth as follows: 2007 2006 Discount rate 2.0% 2.0% Expected rate of return on plan assets 1.0% 1.0% 10. INCOME TAXES The Company and its domestic subsidiary are subject to Japanese national and local income taxes which, in the aggregate, resulted in a statutory tax rate of approximately 40.44% for the years ended March 31, 2007 and 2006. - 16-
There were no significant differences between the statutory tax rate and the Company's effective tax rates for the years ended March 31, 2007 and 2006. The significant components of deferred tax assets and liabilities at March 31, 2007 and 2006 were as follows: Deferred tax assets: Thousands of Millions of Yen U.S. Dollars 2007 2006 2007 Accrued enterprise tax 103 5 $873 Allowance for doubtful accounts 209 389 1,770 Accrued employees bonuses 66 64 559 Accrued employees retirement benefits 187 191 1,584 Accrued directors and corporate auditors retirement benefits 104 92 881 Impairment loss 515-4,363 Other 74 101 627 Total deferred tax assets 1,258 842 10,657 Deferred tax liabilities: Net unrealized gains on other securities (297) (377) (2,516) Reserve for advanced depreciation of fixed assets (107) (111) (906) Other (2) - (18) Total deferred tax liabilities (406) (488) (3,440) Net deferred tax assets 852 354 $ 7,217-17-
11. LEASES The following pro forma amounts represent the acquisition cost (including the interest portion thereon), accumulated depreciation and net book value of the leased property as of March 31, 2007 and 2006 which would have been reflected in the consolidated balance sheets if finance lease accounting had been applied to the finance leases currently accounted for as operating leases: Thousands of Millions of Yen U.S. Dollars 2007 2006 2007 Machinery and equipment: Acquisition cost 167 131 $1,415 Accumulated depreciation (76) (56) (644) Net book value 91 75 $ 771 Lease payments relating to finance leases accounted for as operating leases amounted to 32 million ($271 thousand) and 26 million, which were equal to the depreciation expense of the leased assets computed by the straight-line method over the respective lease terms, for the years ended March 31, 2007 and 2006, respectively. Future minimum lease payments (including the interest portion thereon) subsequent to March 31, 2007 for finance leases accounted for as operating leases are summarized as follows: Year ending March 31, Millions of yen Thousands of U.S. dollars 2008 33 $280 2009 and thereafter 58 491 Total 91 $771-18-
12. DERIVATIVES The Company enters into forward foreign exchange contracts to hedge foreign exchange risk associated with certain assets and liabilities denominated in foreign currencies. All derivative transactions are entered into to hedge foreign currency exposures related to the Company s 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 by its accounting department under the supervision of responsible management in accordance with internal policies. The disclosure of fair value of derivatives at March 31, 2007 and 2006 has been omitted since all derivatives have been accounted for as hedges. - 19-
13. CONTINGENT LIABILITIES At March 31, 2007, the Company had the following contingent liabilities: Millions of Yen Thousands of U.S. Dollars Notes receivable endorsed with recourse 49 $415 In addition to the above, the Company (plaintiff/respondent) is currently in a pending lawsuit arising from an appeal made to the Fukuoka High Court. The Company originally filed an action in the Oita District Court against one of its customers for recovery of unreceived payment amounting to 12 million ($102 thousand) on December 4, 2001 and amended the complaint on January 17, 2002. On March 12, 2002, a counterclaim was filed by the defendant seeking monetary damages of 591 million ($5,006 thousand) for loss of a construction contract due to an alleged deficiency in a product sold by the Company. On April 25, 2005, the Oita District Court held that the Company s complaint was sufficient and dismissed the defendant s counterclaim. The defendant filed an appeal to the Fukuoka High Court. - 20-
14. NET INCOME PER SHARE A reconciliation of the differences between basic and diluted net income per share ("EPS") for the years ended March 31, 2007 and 2006 is as follows: Millions of Thousands of U.S. Yen Shares Yen Dollars Net Income Weighted Average Number of Shares EPS For the year ended March 31, 2007: Basic EPS: Net income available to common shareholders 2,417 20,268 119.22 $1.01 Effect of dilutive securities: Stock options 8 Diluted EPS: Net income for computation 2,417 20,276 119.18 $1.01 For the year ended March 31, 2006: Basic EPS: Net income available to common shareholders 2,491 19,292 129.12 Effect of dilutive securities: Stock options 104 Diluted EPS: Net income for computation 2,491 19,396 128.43-21-
15. SUBSEQUENT EVENT The following distribution of retained earnings for the year ended March 31, 2007 was approved at the Company's shareholders meeting held on June 22, 2007: Millions of Yen Thousands of U.S. Dollars Year-end cash dividends, 20.00 ($0.17) per share 404 $3,422 16. SEGMENT INFORMATION The Company and its consolidated subsidiary are primarily engaged in the following three business segments: Sale of Steel Products and Construction Material segment: Sale of the Company s major products including steel plates, steel shapes and steel bars, and construction material Construction Contractor segment: Construction contracts accompanying sales of construction material Property Leasing segment: Property leasing and management of golf driving ranges The business segments of the Company and its consolidated subsidiary for the years ended March 31, 2007 and 2006 are outlined as follows: - 22-
a. Sales and Operating Income Sale of Steel Products and Construction Material Millions of Yen 2007 Construction Property Contractor Leasing Eliminations/ Corporate* Consolidated Sales to customers 107,405 24,532 722-132,659 Inter-segment sales and transfers - - 36 (36) - Net sales 107,405 24,532 758 (36) 132,659 Operating expenses 103,553 23,683 255 245 127,736 Operating income 3,852 849 503 (281) 4,923 Sale of Steel Products and Construction Material Thousands of U.S. Dollars 2007 Construction Property Contractor Leasing Eliminations/ Corporate Consolidated Sales to customers $909,827 $207,810 $6,116 $ - $1,123,753 Inter-segment sales and transfers - - 305 (305) - Net sales 909,827 207,810 6,421 (305) 1,123,753 Operating expenses 877,197 200,618 2,160 2,075 1,082,050 Operating income $32,630 $7,192 $4,261 $(2,380) $41,703 * The effect of the adoption of an accounting standard for directors and corporate auditors bonuses described in Note 2.k. was to increase operating expenses by 37 million ($313 thousand) and decrease operating income by the same amount under Eliminations/Corporate compared with the corresponding amount which would have been recorded under the previous method. - 23-
Sale of Steel Products and Construction Material Construction Contractor Millions of Yen 2006 Property Leasing Eliminations/ Corporate Consolidated Sales to customers 96,417 20,651 697-117,765 Inter-segment sales and transfers - - 36 (36) - Net sales 96,417 20,651 733 (36) 117,765 Operating expenses 92,987 20,160 252 198 113,597 Operating income 3,430 491 481 (234) 4,168 b. Total Assets, Depreciation, Impairment Loss and Capital Expenditures Sale of Steel Products and Construction Material Millions of Yen 2007 Construction Property Contractor Leasing Eliminations/ Corporate Consolidated Total assets 64,364 11,794 4,138 5,000 85,296 Depreciation 183 5 107 32 327 Impairment loss 1,272 - - - 1,272 Capital expenditures 4,733-11 8 4,752 Sale of Steel Products and Construction Material Thousands of U.S. Dollars 2007 Construction Property Contractor Leasing Eliminations/ Corporate Consolidated Total assets $545,228 $99,907 $35,053 $42,355 $722,541 Depreciation 1,551 42 906 271 2,770 Impairment loss 10,775 - - - 10,775 Capital expenditures 40,093-93 68 40,254-24-
Sale of Steel Products and Construction Material Millions of Yen 2006 Construction Property Contractor Leasing Eliminations/ Corporate Consolidated Total assets 53,095 9,487 4,053 3,558 70,193 Depreciation 204 5 99 31 339 Capital expenditures 37-426 29 492 Geographical segment information and information on overseas sales have not been presented since the Group primarily operates in Japan, and had neither any overseas subsidiaries nor branch offices during the years ended March 31, 2007 and 2006. Furthermore, sales to domestic customers represented more than 90% of consolidated net sales for the years ended March 31, 2007 and 2006. * * * * * * - 25-