Consolidated Statements of Cash Flows Years Ended March 31, and Cash flows from operating activities: Income before income taxes and other items Adjustments to reconcile income before income taxes and other items to net cash provided by operating activities: Depreciation and amortization Impairment losses on fixed assets Increase (decrease) allowance for doubtful accounts Increase allowance for losses on construction contracts Increase (decrease) in retirement benefits Interest and dividend income Interest expense Write-down of investment securities Gain on sale of investment securities Write-down of real estate for sale (Gain) loss on sale of property and equipment Changes in assets and liabilities: Increase in trade receivables Decrease in of uncompleted contracts Decrease (increase) in inventories Decrease in other investments Increase in trade payables Decrease in advances received and progress billings on uncompleted contracts Increase (decrease) in deposit received Other, net (Note 1) 41,987 11,376 19 942 (3,034) (4,194) 8,858 1,224 (2,643) 1,704 (200) (56,421) 47,797 15,794 2,841 22,931 (20,975) 4,543 (3,113) 69,436 50,098 11,733 926 (1,071) 7,994 1,588 (7,117) 7,685 456 (4,562) 3,422 1,928 (66,360) 56,680 (18,507) 10,752 45,793 (62,540) (11,053) 2,803 30,648 $ 426,475 99,881 7,883 (9,117) 68,051 13,518 (60,586) 65,421 3,882 (38,835) 29,131 16,413 (564,910) 482,506 (157,547) 91,530 389,827 (532,391) (94,092) 23,861 260,901 Cash received (paid) during the year for: Interest and dividends received Interest paid Income taxes paid Net cash provided by operating activities 3,453 (9,038) (5,066) 58,785 11,669 (7,958) (5,142) 29,217 99,336 (67,745) (43,773) 248,719 Cash flows from investing activities: Decrease (increase) in time deposits Decrease (increase) in short-term loans receivable Purchase of marketable and investment securities Proceeds from sale of marketable and investment securities Purchase of property, equipment and intangible assets Proceeds from sale of property, equipment and intangible assets Other, net Net cash provided by (used in) investing activities 42 93 (45,726) 8,363 (13,719) 3,052 (19) (47,914) (1,278) (289) (20,472) 26,486 (12,411) 10,776 9,238 12,050 (10,879) (2,460) (174,274) 225,470 (105,653) 91,734 78,641 102,579 Cash flows from financing activities: Decrease in short-term borrowings Proceeds from long-term debt Repayment of long-term debt Proceeds from issuance of stock Cash dividends paid, including those to minority interest Other, net Net cash provided by (used in) financing activities (19,905) 133,200 (132,533) 35,847 (5,058) (80) 11,471 (29,760) 98,230 (136,981) (6,145) (57) (74,713) (253,341) 836,213 (1,166,093) (52,311) (486) (636,018) Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Increase in cash and cash equivalents by newly consolidated and excluded subsidiaries Cash and cash equivalents at end of year (Note 3) See accompanying notes. 470 22,812 129,555 1,362 153,729 1,665 (31,781) 153,729 121,948 14,174 (270,546) 1,308,666 $1,038,120 14 TAISEI CORPORATION ANNUAL REPORT
Notes to Consolidated Financial Statements March 31, and 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 generally accepted in Japan ( Japanese GAAP ), which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards. The accounts of overseas subsidiaries are based on their accounting records maintained in conformity with generally accepted accounting principles prevailing in the respective countries of domicile. The accompanying consolidated financial statements have been restructured and translated into English (with some expanded descriptions and the inclusion of consolidated statements of shareholders equity) from the consolidated financial statements of Taisei Corporation (the Company ) prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Securities and Exchange Law. Some supplementary information included in the statutory Japanese language consolidated financial statements, but not required for fair presentation, is not presented in the accompanying consolidated financial statements. The translations of the Japanese yen amounts into U.S. dollars are included solely for the convenience of readers outside Japan, using the prevailing exchange rate at March 31,, which was 117.47 to U.S. $1. The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange. 2. Summary of Significant Accounting Policies (a) Consolidation and equity method The consolidated financial statements include the accounts of the Company and 57 and 48 of its subsidiaries in the ended March 31, and, respectively. All significant intercompany transactions and account balances are eliminated in consolidation. Investments in significant affiliates, which were 9 companies for and, were accounted for by the equity method. The consolidated financial statements are required to include the accounts of the Company and significant companies which are controlled by the Company through substantial ownership of more than 50% of the voting rights or through ownership of high percentage of the voting rights, even if it is equal to or less than 50%, and existence of certain conditions evidencing controls by the Company of decision-making body of such companies. Investments in significant affiliated companies, of which the Company has ownership of 20% or more but less than or equal to 50%, and of 15% or more and less than 20% and can exercise significant influences over operating financial policies of investees, have been accounted for by the equity method. All consolidated subsidiaries have the same balance sheet date, March 31, corresponding with that of the Company, except for 11 consolidated overseas subsidiaries for and 10 consolidated overseas subsidiaries for, whose fiscal end on December 31, and 1 consolidated domestic subsidiary for and, whose fiscal year end on February 28. Significant transactions, if any, in the period until ended March 31, and are adjusted in the respective consolidated financial statements. (b) Valuation of Assets and Liabilities of Subsidiaries In the elimination of the investments in subsidiaries, the assets and liabilities of the subsidiaries, including the portion attributable to minority shareholders, are recorded based on their fair at the time the Company acquired control of the respective subsidiaries. (c) Consolidation Adjustments Account The significant excess of the over the underlying net equity of investments in consolidated subsidiaries and affiliated companies accounted for on the equity method is recognized as Consolidation Adjustments Account and amortized principally over a period of five on a straight-line basis. (d) Foreign Currency Translation Receivables and payables denominated in foreign currencies are translated into Japanese yen at the year-end exchange rates. The resulting exchange gains and losses are reflected in the consolidated statements of income. All revenues and expenses associated with foreign currencies are translated at the rates of exchange prevailing when such transactions are made. The financial statements of consolidated foreign subsidiaries and affiliated companies on equity method are translated into Japanese yen at the exchange rates prevailing at the respective year-end dates except for shareholders equity, which is translated at historical rates. The resulting foreign currency translation adjustments are presented in the shareholders equity of the consolidated balance sheets. (e) Cash and cash equivalents in the Consolidated Statements of Cash Flows In preparing the consolidated statements of cash flows, cash on hand, readily-available deposits and short-term highly liquid investments with maturities of not exceeding three months at the time of purchase and with insignificant risks of change in are considered to be cash and cash equivalents. (f) Marketable and Investment Securities Marketable and investment securities are classified, depending on the management s intent, as (a) securities held for trading purposes (hereafter, trading securities ), (b) debt securities intended to be held to maturity (hereafter, held-to-maturity debt securities ), (c) equity securities issued by subsidiaries and affiliated companies, and (d) all other securities that are not classified in any of the above categories (hereafter, available-for-sale securities ). Held-to-maturity debt securities are stated at amortized. Equity securities issued by subsidiaries and affiliated companies that are not consolidated or accounted for using the equity method are stated at moving-average. Available-for-sale securities with available fair market s are stated at fair market. Unrealized gains and losses on these securities are reported, net of applicable income taxes, as a separate component of shareholders equity. Realized gains and losses on sale of such securities are computed using moving-average. Debt securities with no available fair market are stated at amortized, net of the amount considered not collectible. Other securities with no available fair market are stated at moving-average. TAISEI CORPORATION ANNUAL REPORT 15
Notes to Consolidated Financial Statements (cont.) March 31, and (g) Construction Contracts The great majority of short-term and long-term construction contracts are accounted for by the completed-contract method. No profits or losses, therefore, are recognized before the completion of work. However, certain long-term and large-scale construction contracts are accounted for by the percentage-of-completion method. The percentage-of-completion method is applied to constructions with the construction period exceeding 12 months and the contract amount of 1,000 million ($8,513 thousand) or more. Effective for the construction started on and after April 1, 2004, the Company changed the definition of the percentage-of-completion method from construction period of 24 months or longer and the contract amount equal or excess of 5,000 million to those with the period exceeding 12 months and the amount equal or excess of 1,000 million. This change has been made in view of the trend, which is believed likely to continue, toward the declining size of orders received, owing to changes in the operating environment. The Company believes that expanding the scope of application of the percentage-of-completion method, which reflects the trend of international accounting standard, will provide a more accurate view of performance. As a result of changing the accounting policy, sales for the year ended March 31, increased by 33,266 million compared to what would have been recorded under the previous accounting policy. Consequently, gross profits, operating income, ordinary income and income before income taxes for the year ended March 31, increased by each of 1,554 million compared to what would have been recorded under the previous accounting policy. Expenditures in connection with uncompleted contracts to be charged to the of contracts at the time of completion are included in current assets. These expenditures are not offset against advances received and progress billings on uncompleted contracts, which are instead included in current liabilities. (h) Real Estate Business The Company and certain of its subsidiaries develop real estate projects on their own account. Real estate inventories, including work in process of development, are stated at. For this purpose, the includes the purchase of land, incidental s, direct development s and (in relation to certain developments by one of the subsidiaries) interest expense. Revenues from sales are recognized when the titles of properties sold are transferred to customers. (i) Property and Equipment Property and equipment except for buildings are recorded at and depreciated principally by the declining-balance method using standard useful lives prescribed in the Corporation Tax Law. Buildings are principally depreciated using the straight-line method. (j) Derivatives and Hedge Accounting Derivative financial instruments are stated at fair and changes in fair are recognized as gains or losses unless derivative financial instruments are used for hedging purposes. If derivative financial instruments are used as hedges and meet certain hedging criteria, the Company and its consolidated domestic subsidiaries defer recognition of gains or losses resulting from changes in fair of derivative financial instruments until the related losses or gains on the hedged items are recognized. However, in cases where forward foreign exchange contracts are used as hedges and meet certain hedging criteria, forward foreign exchange contracts and hedged items are accounted for in the following manner: (1) If a forward foreign exchange contract is executed to hedge an existing foreign currency receivable or payable, a) the difference, if any, between the Japanese yen amount of the hedged foreign currency receivable or payable translated using the spot rate at the inception date of the contract and the book of the receivable or payable is recognized in the income statement in the period which includes the inception date, and b) the discount or premium on the contract (that is, the difference between the Japanese yen amount of the contract translated using the contracted forward rate and that translated using the spot rate at the inception date of the contract) is recognized over the term of the contract. (2) If a forward foreign exchange contract is executed to hedge a future transaction denominated in a foreign currency, the future transaction will be recorded using the contracted forward rate, and no gains or losses on the forward foreign exchange contract are recognized. Also, if interest rate swap contracts are used as hedge and meet certain hedging criteria, the net amount to be paid or received under the interest rate swap contract is added to or deducted from the interest on the assets or liabilities for which the swap contract was executed. (k) Lease Transactions Finance lease transactions that do not transfer ownership of the leased assets to the lessee are accounted for in the same manner as operating leases. 16 TAISEI CORPORATION ANNUAL REPORT
(l) Allowance for Doubtful Accounts The allowance for doubtful accounts is provided in an amount sufficient to cover probable losses on collection. It consists of the estimated uncollectible amount with respect to identified doubtful receivables and an amount calculated by applying the percentage of actual losses on collection experienced in the past to the remaining receivables. (m) Income Taxes The Company and its wholly owned domestic subsidiaries apply the system of consolidated tax returns. The Company computes the provision for income taxes based on the pretax income included in the consolidated statement of income and recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement basis and the tax basis of assets and liabilities. (n) Severance and Retirement Benefits The Company and some of subsidiaries provide two types of severance and retirement benefit plans for employees, unfunded lumpsum payment plans and funded non-contributory pension plans, under which all eligible employees are entitled to benefits based on the level of wages and salaries at the time of retirement or termination, length of service and certain other factors. The Company and its consolidated subsidiaries provided allowance for employees severance and retirement benefits at year-end based on the estimated amounts of projected benefit obligation and the fair of the plan assets at that date. Allowances for accrued severance indemnities to directors and corporate auditors of the Company and some of the consolidated subsidiaries have been set up in accordance with each company s regulations. (q) Net Income and Cash Dividends per Share Net income per share is calculated by dividing net income available to common shares by the weighted average number of common shares outstanding during the year. Diluted net income per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities. Diluted net income per share for the ended March 31, and were not shown, since the Company had no securities with dilutive effect to net income per share. Cash dividends per share shown for each year represent dividends declared as applicable to the respective. (r) Recognizing Appropriations of Retained Earnings In accordance with the customary practice in Japan, the appropriations are not accrued in the financial statements for the period to which they relate, but are recorded in the subsequent accounting period after the shareholders approval has been obtained. Retained earnings at March 31, include amounts representing the year-end cash dividends, which were approved at the shareholders meeting held on June 27, as described in Note 19, and bonuses to directors subsequently approved by shareholders of a consolidated subsidiary. (s) Reclassifications Certain reclassifications of the consolidated financial statements for the year ended March 31, have been made to conform to the presentation for the year ended March 31,. (o) Allowance for Losses on Construction Contracts Allowance for Losses on Contruction Contracts is provided based on estimate losses which can be anticipated for the next fiscal year and later with respect to construction projects on which eventual losses are deemed inevitable and amounts there of can reasonably be estimated. (p) Allowance for Environmental Spending Allowance for environmental spending is provided based on estimate s for disposal of Polychlorinated Biphenyl ( PCB ) waste, which is obligated to dispose by the Act on Special Measures Concerning Promotion of Proper Treatment of PCB Waste. TAISEI CORPORATION ANNUAL REPORT 17
Notes to Consolidated Financial Statements (cont.) March 31, and 3. Cash and Cash Equivalents Cash and cash equivalents at March 31, and consisted of the following: Cash and time deposits Less: Time deposits over three months Cash and cash equivalents 155,373 (1,644) 153,729 124,887 (2,939) 121,948 $1,063,140 (25,020) $1,038,120 4. Securities (1) Following tables summarized acquisition s, book s and fair of securities with available fair s as of March 31, and : (a) Held-to-maturity debt securities: Securities with available fair s exceeding book s Book Fair Difference Other securities Book Fair Difference (b) Available-for-sale securities: Securities with book s exceeding acquisition s 154 155 1 116 116 (0) 265 260 (5) $2,256 2,213 $ (43) Type Book Difference Book Difference Book Difference Equity securities Bonds Others 102,790 28 1,563 104,381 161,753 34 2,454 164,241 58,963 6 891 59,860 126,909 8 1,603 128,520 298,332 11 2,945 301,288 171,423 3 1,342 172,768 $1,080,352 68 13,646 $1,094,066 $2,539,644 94 25,070 $2,564,808 $1,459,292 26 11,424 $1,470,742 Other securities Type Book Difference Book Difference Book Difference Equity securities Bonds Others 28,023 270 28,293 26,264 247 26,511 (1,759) (23) (1,782) 5,133 200 5,333 4,682 177 4,859 (451) (23) (474) $43,696 1,703 $45,399 $39,857 1,507 $ 41,364 $(3,839) (196) $(4,035) 18 TAISEI CORPORATION ANNUAL REPORT
(2) Following tables summarized book s of securities with no available fair s as of March 31, and : (a) Held-to-maturity debt securities: Type Unlisted domestic corporate bonds 5,000 $42,564 (b) Available-for-sale securities: Type Unlisted equity securities Unlisted preferred equity securities Unlisted foreign bonds Unlisted domestic bonds Investments in silent partnership 22,022 15,650 1,189 503 6,890 46,254 23,945 10,750 503 14,306 49,504 $203,839 91,513 4,282 121,784 $421,418 (3) Redemption schedule of available-for-sale securities with maturities and held-to-maturity debt securities were as follows: Type Debt securities: Government bonds Corporate bonds Others Other securities Within one year 126 14 1,163 36 1,339 Over one year but within five 135 20 504 186 845 Over five but within ten 10 10,010 Over ten 271 10,034 1,667 222 12,194 Type Within one year Over one year but within five Over five but within ten Over ten Debt securities: Government bonds Corporate bonds Others Other securities 9 54 63 265 11 500 359 1,135 5,000 5,000 265 5,011 509 413 6,198 Type Within one year Over one year but within five Over five but within ten Over ten Debt securities: Government bonds Corporate bonds Others Other securities $ 77 459 $536 $ 2,256 94 4,256 3,056 $9,662 $ 42,564 $42,564 $ $ $ 2,256 42,658 4,333 3,515 $52,762 TAISEI CORPORATION ANNUAL REPORT 19
Notes to Consolidated Financial Statements (cont.) March 31, and (4) sales of held-to-maturity debt securities sold and the related gains and losses for the ended March 31, were as follows: of sales of held-to-maturity debt securities sold sales of held-to-maturity debt securities Gain on sale of held-to-maturity debt securities 10 10 0 $85 85 0 The consolidated domestic subsidiary sold held-to-maturity debt securities, which had been held in compensation for security deposit of business, since the subsidiary changed the security deposit from the held-to-maturity debt securities to the cash and did not need to hold such securities. (5) sales of available-for-sale securities sold and the related gains and losses for the ended March 31, and were as follows: sales of available-for-sale securities sold Gain on sale of available-for-sale securities Loss on sale of available-for-sale securities 8,110 2,670 27 9,615 4,717 154 $81,851 40,155 1,311 5. Pledged Assets The following assets were pledged principally as collateral for short-term borrowings, long-term debt, guarantee deposits received or guarantees (such as guarantees for the completion of construction contracts) at March 31, and : Time deposits Inventories: Real estate development Other current assets Land Buildings and structures (net of accumulated depreciation) Investment securities Other assets 1,647 768 10 15,880 15,596 589 953 35,443 1,786 768 15,986 14,839 998 1,160 35,537 $ 15,204 6,538 136,086 126,322 8,496 9,874 $302,520 20 TAISEI CORPORATION ANNUAL REPORT
6. Short-term Borrowings and Long-term Debt Short-term borrowings at March 31, and mainly consisted of short-term notes and overdrafts from banks. The weighted average interest rate of short-term borrowings at March 31, and was 0.9% per annum. The Company and its consolidated subsidiaries have had no difficulty in renewing such notes and overdraft facility agreements, when they considered such renewal advisable. Long-term debt at March 31, and were as follows: Bonds and notes: Issues by the Company: 2.55% yen bonds due in 2009 1.85% yen bonds due in 1.5% yen bonds due in 1.15% yen bonds due in 2007 0.93% yen bonds due in 2008 1.31% yen bonds due in 2008 1.10% yen bonds due in 2009 0.92% yen bonds due in 2009 Issues by subsidiaries: 1.3% yen bonds due in 2007 Other fixed and floating rate bonds due in Loans, principally from banks and insurance companies: Secured loans Unsecured loans Amount due within one year long-term debt (due after one year) 20,000 15,000 1,000 2,028 5,138 334,349 437,515 (125,065) 312,450 20,000 15,000 1,000 4,996 307,770 398,766 (126,500) 272,266 $ 85,128 170,257 127,692 85,128 85,128 85,128 85,128 8,513 42,530 2,619,988 3,394,620 (1,076,871) $2,317,749 Long-term loans at March 31, and were principally from banks and insurance companies. The weighted average interest of loans at March 31, and were 1.3% and 1.2% per annum, respectively. The aggregate annual maturities of long-term debt (including current portion) at March 31, were summarized as follows: Year ending March 31, 2007 2008 2009 2010 2011 2012 and thereafter 126,500 82,873 72,060 72,474 41,773 3,086 398,766 $1,076,871 705,482 613,433 616,958 355,606 26,270 $3,394,620 The Company has a commitment line provided by co-financing consisted of seven correspondent financial institutions for the purpose of securing financing in case of an emergency. The commitment line amount was 100,000 million ($ 851,281 thousand), however, there is no amount of loans as of March 31,. TAISEI CORPORATION ANNUAL REPORT 21
Notes to Consolidated Financial Statements (cont.) March 31, and 7. Income Taxes Taxes on income consist of corporation, enterprise and inhabitants taxes. The following table summarized the significant differences between the statutory tax rate and the Company's effective tax rate for financial statement purposes for the ended March 31, and : Statutory tax rate Permanent differences: Non-deductible expenses Non-taxable income Per capita inhabitant tax Adjustment on investments in related companies regarding consolidated tax system Consolidation adjustment on investments in related companies Increase in valuation allowance Others Effective tax rate 40.7% 7.1 (1.3) 1.4 0.9 48.8% 40.7% 4.9 (1.7) 1.2 4.1 (13.5) 0.4 2.0 38.1% Significant components of deferred income taxes at March 31, and were as follows: Deferred income tax assets: Disallowed portion of expenses and losses: Inventories Bad debt expenses and allowance for doubtful accounts Retirement benefits Fixed assets Consolidation adjustment on investments in related companies Accrued bonus Other Tax loss carryforward Unrealized profits Sub-total Valuation allowance Deferred income tax liabilities: Net unrealized holding gains on securities Gains on securities contribution to employee retirement benefit trust Reserve for tax deferment on replacement of assets Special depreciation reserve Adjustment on investments in related companies regarding consolidated tax system Other Net total 50,794 9,333 44,719 9,558 8,738 5,893 9,533 10,566 12,492 161,626 (9,153) 152,473 (23,642) (23,556) (2,253) (29) (225) (49,705) 102,768 41,178 5,382 46,615 7,177 15,497 5,711 10,426 6,924 10,827 149,737 (9,331) 140,406 (70,120) (23,556) (2,251) (24) (2,030) (199) (98,180) 42,226 $ 350,541 45,816 396,825 61,096 131,923 48,617 88,755 58,942 92,168 1,274,683 (79,433) 1,195,250 (596,918) (200,528) (19,162) (204) (17,281) (1,695) (835,788) $ 359,462 In addition to the deferred income taxes shown above, deferred tax assets concerning the revaluation of land amounting to 8 million at March 31,, and deferred tax liabilities concerning the revaluation of land amounting to 4,055 million at March 31, and 9,199 million ($78,309 thousand) at March 31,, are included in the consolidated balance sheets. 22 TAISEI CORPORATION ANNUAL REPORT
8. Employees severance and retirement benefits Liabilities and expenses for severance and retirement benefits of the Company and its consolidated domestic subsidiaries are determined based on the amounts obtained by actuarial calculations. The liabilities for severance and retirement benefits included in the liability section of the consolidated balance sheets as of March 31, and consisted of the following: Projected benefit obligation Unrecognized actuarial differences Unrecognized prior service Less: Fair of pension assets Prepaid pension expense Employees severance and retirement benefits (202,939) 38,201 (534) 129,121 (420) (36,571) (201,777) (13,552) (457) 178,168 (534) (38,152) $(1,717,690) (115,366) (3,890) 1,516,711 (4,546) $ (324,781) Included in the consolidated statements of income for the ended March 31, and, severance and retirement benefit expenses comprised of the following: Service s - benefits earned during the year Interest on projected benefit obligation Expected return on plan assets Amortization of actuarial differences Amortization of prior service Special retirement benefits and others Severance and retirement benefit expenses 7,576 5,014 (2,135) 1,470 (247) 429 12,107 7,426 4,961 (2,214) 5,098 (77) 1,403 16,597 $ 63,216 42,232 (18,847) 43,398 (655) 11,943 $141,287 The discount rates used by the Company and its consolidated domestic subsidiaries for the ended March 31, and were 2.0 to 2.5%. The rates of expected return on plan assets used by the Company and its consolidated domestic subsidiaries for the ended March 31, and were 0.3% to 3.0% and 0.5% to 3.0%, respectively. The estimated amount of all retirement benefits to be paid at the future retirement date was allocated equally to each service year using the estimated number of total service. Actuarial gains and losses were recognized using mainly the straight-line method over 1 to 10. Prior service s were amortized using mainly the straight-line method over 1 to 10, the period within the estimated average remaining service life of the employees. TAISEI CORPORATION ANNUAL REPORT 23
Notes to Consolidated Financial Statements (cont.) March 31, and 9. Shareholders Equity Under the Commercial Code of Japan, the entire amount of the issue price of shares is required to be accounted for as common stock, although a company may, by resolution of its Board of Directors, account for an amount not exceeding one-half of the issue price of the new shares as additional paid-in capital, which is included in capital surplus. The Commercial Code provides that an amount equal to at least 10% of cash dividends and other cash appropriations shall be appropriated and set aside as a legal earnings reserve until the total amount of legal earnings reserve and additional paid-in capital equals 25% of common stock. The total amount of legal earnings reserve and additional paid-in capital of the Company has reached 25% of common stock, and therefore the Company is not required to provide legal earnings reserve any more. The legal earnings reserve and additional paid-in capital may be used to eliminate or reduce a deficit by resolution of the shareholders meeting or may be capitalized by resolution of the Board of Directors. On condition that the total amount of legal earnings reserve and additional paid-in capital remains being equal to or exceeding 25% of common stock, they are available for distribution by the resolution of shareholders meeting. Legal earnings reserve is included in retained earnings in the accompanying financial statements. The maximum amount that the Company can distribute as dividends is calculated based on the non-consolidated financial statements of the Company in accordance with the Commercial Code. The number of treasury stock owned by the Company, consolidated subsidiaries and affiliated companies adopting the equity method as of March 31, and were 314 thousand shares and 405 thousand shares, respectively. 10. Lease Transactions (1) Finance leases (a) Lessee Assumed data concerning to the acquisition, accumulated depreciation and book of the leased assets under the finance leases which were accounted for in the same manner as operating leases at March 31, and, inclusive of interest, were summarized as follows: Buildings Machinery and equipment 3,188 7,030 10,218 Accumulated depreciation 1,837 3,632 5,469 Book 1,351 3,398 4,749 2,206 6,257 8,463 Accumulated depreciation 1,505 3,194 4,699 Book 701 3,063 3,764 Buildings Machinery and equipment $18,779 53,265 $72,044 Accumulated depreciation $12,812 27,190 $40,002 Book $ 5,967 26,075 $32,042 Future lease payments at March 31, and, inclusive of interest, under such leases were as follows: Due within one year Due after one year 1,734 3,015 4,749 1,350 2,414 3,764 $11,492 20,550 $32,042 24 TAISEI CORPORATION ANNUAL REPORT
Lease expenses (assumed data as to depreciation of the leased assets) for the ended March 31, and were as follows: Lease payments (assumed depreciation) 2,001 1,835 $15,621 Assumed depreciation was calculated by the straight-line method over the lease period, assuming estimated residual to be zero. Since there is no impairment loss on finance leases, the information is not disclosed. (2) Operating leases (a) Lessee Future minimum lease payments as of March 31, and were as follows: Due within one year Due after one year (b) Lessor Future minimum lease receipts as of March 31, and were as follows: Due within one year Due after one year 4,485 41,586 46,071 1,611 22,155 23,766 4,472 41,225 45,697 2004 1,862 25,469 27,331 $ 38,069 350,941 $389,010 $ 15,851 216,813 $232,664 11. Derivative Transactions Derivative transactions of the Company and its consolidated subsidiaries at March 31, and were as follows: (1) Status of Derivative Transactions The Company and its consolidated subsidiaries utilize interest rate swaps and interest rate options to mitigate fluctuation risk in interest rates or to reduce financing s. They also enter into currency swaps and forward foreign exchange contracts to hedge foreign exchange risk. Their derivative positions related to interest rate swaps, interest rate options, currency swaps and forward foreign exchange contracts are exposed to the fluctuation of market interest rates and foreign exchange rates. They trade derivative transactions solely with internationally recognized, highly rated financial institutions and therefore consider there is little risk of default by counterparties. The Company and its consolidated subsidiaries use forward foreign exchange contracts and interest rate swaps as derivative financial instruments only for the purpose of mitigating future risks of fluctuation of foreign currency exchange rates with respect to foreign currency receivables from the sale of their products and interest rate increases with respect to borrowings, within the amounts of foreign currency borrowings or receivables. The derivative transactions are executed and managed by their Finance Department in accordance with the established policies and within the specified limits on the amounts of derivative transactions allowed. The Manager of the Finance Department reports information on derivative transactions to the Board of Directors on certain periodic basis. The Company and its consolidated subsidiaries evaluate hedge effectiveness semi-annually by comparing the cumulative changes in cash flows from or the changes in fair of hedged items and the corresponding changes in the hedging derivative instruments. TAISEI CORPORATION ANNUAL REPORT 25
Notes to Consolidated Financial Statements (cont.) March 31, and (2) Market Value of Derivative Transactions Interest Rate-Related Derivatives: Unlisted transactions Interest rate swaps: Receive fix/pay float Receive float/pay fix 15,000 25,000 Contract amount Due after one year 15,000 25,000 Market 1,427 (897) 530 Unrealized gain (loss) 1,446 (872) 574 Unlisted transactions Interest rate swaps: Receive fix/pay float Receive float/pay fix 15,000 25,000 Contract amount Due after one year 15,000 25,000 Market 729 (444) 285 Unrealized gain (loss) 729 (444) 285 Unlisted transactions Interest rate swaps: Receive fix/pay float Receive float/pay fix $127,692 85,128 $212,820 Contract amount Due after one year $127,692 85,128 $212,820 Market $6,206 (3,780) $2,426 Unrealized gain (loss) $6,206 (3,780) $2,426 Notes 1: Market is estimated based on actual and other terms in connection with each derivative transaction, or marked to market by the originating dealer. 2: Derivative transactions which were accounted for by hedge accounting were excluded. 3: A notional amount of interest rate swaps, for which complete offsetting positions have been created in order for relevant positions to be effectively immunized from market risks related to interest rate fluctuation is 20,000 million ($170,256 thousand) at March 31, and. 12. Segment Information (1) Industry segment information The Company and its consolidated subsidiaries are primarily engaged in the following three major industry segments: Construction Real estate Other business Building construction, civil engineering and housing construction industries, etc. Resale and rental of land, houses and buildings industries, etc. Financing and leisure industries, etc. 26 TAISEI CORPORATION ANNUAL REPORT
Information by industry segment for the ended March 31, and were summarized as follows: I. Sales and operating income Net sales: Customers Intersegment Costs and expenses Operating income Construction 1,477,387 13,589 1,490,976 1,457,748 33,228 Real estate 145,124 1,255 146,379 132,458 13,921 Other 85,442 16,256 101,698 99,691 2,007 Elimination and/or corporate (31,100) (31,100) (30,900) (200) Consolidated 1,707,953 1,707,953 1,658,997 48,956 II. Identifiable assets, depreciation expense and capital expenditures Identifiable assets Depreciation expense Impairment losses on fixed assets Capital expenditures 1,396,024 6,891 19 11,170 373,420 2,480 1,863 61,435 2,005 1,181 (15,547) 1,815,332 11,376 19 14,214 I. Sales and operating income Net sales: Customers Intersegment Costs and expenses Operating income Construction 1,543,289 8,350 1,551,639 1,516,159 35,480 Real estate 118,127 970 119,097 101,758 17,339 Other 82,578 17,427 100,005 97,943 2,062 Elimination and/or corporate (26,747) (26,747) (27,040) 293 Consolidated 1,743,994 1,743,994 1,688,820 55,174 II. Identifiable assets, depreciation expense and capital expenditures Identifiable assets Depreciation expense Impairment losses on fixed assets Capital expenditures 1,443,149 7,344 104 8,527 363,026 2,653 822 3,168 57,596 1,736 1,211 (16,588) (23) 1,847,183 11,733 926 12,883 I. Sales and operating income Net sales: Customers Intersegment Costs and expenses Operating income Construction $13,137,729 71,082 13,208,811 12,906,776 $ 302,035 Real estate $1,005,593 8,257 1,013,850 866,247 $ 147,603 Other $702,971 148,353 851,324 833,770 $ 17,554 Elimination and/or corporate $ (227,692) (227,692) (230,186) $ 2,494 Consolidated $14,846,293 14,846,293 14,376,607 $ 469,686 II. Identifiable assets, depreciation expense and capital expenditures Identifiable assets Depreciation expense Impairment losses on fixed assets Capital expenditures $12,285,256 62,518 885 72,589 $3,090,372 22,585 6,998 26,969 $490,304 14,778 10,309 $(141,211) (196) $15,724,721 99,881 7,883 109,671 Notes 1. The types of business above are based upon the Standard Industrial Classification in Japan and net sales categories in the consolidated statement of income. 2. As explained in note 2(g), effective for the construction started on and after April 1, 2004, the Company changed the definition of the percentage-of-completion method from construction period of 24 months or longer and the contract amount equal or excess of 5,000 million to those with the period exceeding 12 months and the amount equal or excess of 1,000 million. The effect of this change was increases in net sales, the s and expenses, and operating income of construction by 33,266 million, 31,712 million, and 1,554 million, respectively. TAISEI CORPORATION ANNUAL REPORT 27
Notes to Consolidated Financial Statements (cont.) March 31, and (2) Geographical segment information Geographic segment information for the ended March 31, and were not shown since aggregate sales of overseas subsidiaries were less than 10% of total net sales of all segments and aggregate assets of overseas subsidiaries were less than 10% of total assets of all segments. (3) Overseas sales Overseas sales for the ended March 31, and were summarized as follows: Overseas sales Consolidated sales Percentage of overseas sales over consolidated sales Asia 93,575 5.5% Middle East 33,459 2.0% North America 11,007 0.6% Others 4,678 0.3% 142,719 1,707,953 8.4% Overseas sales Consolidated sales Percentage of overseas sales over consolidated sales Asia 98,508 5.7% Middle East 29,075 1.7% North America 16,536 0.9% Others 16,471 0.9% 160,590 1,743,994 9.2% Overseas sales Consolidated sales U.S. dollars Asia Middle East North America Others $838,580 $247,510 $140,768 $140,214 $ 1,367,072 $14,846,293 Notes 1. Geographical distances are considered in classification of country or area. Major countries and areas included in each segment were as follows: Asia Chinese Taipei and Singapore Middle East UAE and Turkey North America USA 2. Overseas sales represent sales of the Company and consolidated subsidiaries to countries and areas outside of Japan. 13. Contingent Liabilities and Commitments (1) Guarantees At March 31,, the Company and its consolidated subsidiaries were contingently liable as guarantors for loans of companies, employees and others, which were not consolidated companies, in the amount of 9,819 million ($83,587 thousand). In case there were other guarantors beside the Company and its consolidated subsidiaries, the amount of their share of the contingent liabilities resulting from the guarantees was stated. (2) Debt Assumption Based on debt assumption agreements with financial institutions, the Company has transferred the debt repayment obligation for 1.85% yen bonds due in in the amount of million ($85,128 thousand) to such financial institutions. The obligation for this bond redemption continues until bond retirement. 14. Liquidation of credit The Company conducted liquidation of trade accounts receivables amounting to 27,837 million ($236,971 thousand) at March 31,. 15. Revaluation Reserve for land In the year ended March 31, 2002, certain consolidated domestic subsidiaries executed revaluation of their land owned for business in accordance with the Law Concerning Revaluation of Land (the Law ). As a result of this revaluation, deferred income taxes concerning the differences between the amounts after revaluation and the book s before revaluation were stated in the assets and liabilities in the consolidated balance sheets. The differences between these amounts, net of taxes, were stated as Revaluation reserve for land in the shareholders equity. The revaluation was executed in accordance with the method prescribed in the Article 2, Items 3, 4 and 5 of the Law on November 30, 2001 and March 31, 2002. One of consolidated subsidiaries, which was merged with another 28 TAISEI CORPORATION ANNUAL REPORT
consolidated subsidiary on December 1, 2001, executed the revaluation on November 30, 2001. According to the Law, the Company and its consolidated subsidiaries were not permitted to re the land at any time even in case that the fair of the land rises. Such unrecorded revaluation gain at March 31, and were 5,220 million and 6,948 million ($59,147 thousand), respectively. 16. Research and Development Expenses Research and development expenses, which were included in selling, general and administrative expenses and of sales, amounted to 8,994 million and 9,386 million ($79,901 thousand) for the ended March 31, and, respectively. 17. Impairment of Fixed Assets The following tables summarized impairment losses for the year ended March 31, : Kagoshima Prefecture (rental asset: 1 property comprised of Land and Building) Chiba Prefecture (asset converted from business use to available for sale use: 1 property comprised of Land, Building and structure) Hokkaido Prefecture (dormant asset: 1 property comprised of Land) Buildings and structures Land 371 555 926 U.S dollars $3,158 4,725 $7,883 The Company and its consolidated domestic subsidiaries grouped their fixed assets based on units, for which decisions for making investments are made, and recognized impairment losses for 3 properties with low earnings comprised of rental property, etc. Book s of those fixed assets were reduced to recoverable amounts and impairment loss of 926 million ($7,883 thousand) was recognized in the year ended March 31,. The recoverable amounts of the fixed assets are the larger of (1) their net realizable s based on amounts determined by valuations made in accordance with real estate appraisal standards or publicly-assessed land s in case of less material properties, or (2) the present s of expected future cash flows from on-going utilization and subsequent disposition of the fixed assets based on a discount rate of 5.0%. Since impairment losses for the year ended March 31, was immaterial, the information for was not shown. 18. Per share data Net assets worth per share and net income per share as of and for the ended March 31, and were as follows: Net assets worth per share Net income per share 242.10 19.76 Yen 324.19 26.57 $2.760 0.226 Diluted net income per share is not presented, since the Company has never issued any dilutive securities. Calculation bases for net income per share for the ended March 31, and were as follows: Net income Net income not available to common stock holders (Net income appropriated as bonuses to directors) Net income available to common stock Average common stock outstanding (in thousands share) 19,098 34 (34) 19,064 964,858 28,363 83 (83) 28,280 1,064,445 $241,449 707 (707) 240,742 19. Subsequent Event Cash dividends The following appropriation of retained earnings at March 31, was approved at the annual meeting of the Company s shareholders held on June 27,. Cash dividends, 3.0 ($ 0.026) per share 3,193 $27,181 TAISEI CORPORATION ANNUAL REPORT 29