Income before income taxes and minority interests ¥ 10,155 ¥ 12,122 $ 86,440
Depreciation and amortization 6,082 6,220 51,771
Loss on impairment of fixed assets 992 — 8,444
Amortization of consolidation difference 208 158 1,771
Decrease in allowance for doubtful receivables (379) (181) (3,226)
Decrease in employees’ severance and retirement benefits (59) (15,101) (502)
Transfer of securities to retirement benefit trust — 12,000 —
Interest and dividend income (1,814) (615) (15,441)
Interest expense 479 462 4,077
Equity in earnings of unconsolidated subsidiaries and affiliates (14) (154) (119)
Loss (gain) on sales of property, plant and equipment, net 607 385 5,167
Loss on disposal of property, plant and equipment 1,385 182 11,789
Gain on sales of investment securities, net (258) (122) (2,196)
Write-down of investment securities 40 69 340
Decrease (increase) in receivables 2,093 (72) 17,816
Decrease (increase) in inventories 256 (4,692) 2,179
Decrease in payables (1,298) (1,337) (11,049)
Other, net (1,734) 3,362 (14,760)
Sub-total 16,741 12,686 142,501
Interest and dividends received 1,823 578 15,517
Interest paid (487) (451) (4,145)
Income taxes paid (6,589) (2,645) (56,086)
Net cash and cash equivalents provided by operating activities 11,488 10,168 97,787 Cash flows from investing activities:
Purchase of property, plant and equipment (5,176) (3,845) (44,059)
Proceeds from sales of property, plant and equipment 3,391 1,417 28,864
Purchase of intangible assets (866) (2,586) (7,371)
Purchase of investment securities (13,110) (18,569) (111,593)
Proceeds from sales of investment securities 7,227 2,712 61,517
Purchase of investments in consolidated subsidiaries and affiliates (8,318) — (70,804)
Decrease (increase) in short-term loans receivable, net 1,280 188 10,895
Disbursements for long-term loans receivable (330) (450) (2,809)
Proceeds from long-term loans receivable 779 918 6,631
Other, net (2,094) (563) (17,824)
Net cash and cash equivalents used in investing activities (17,217) (20,778) (146,553) Cash flows from financing activities:
Increase (decrease) in short-term loans, net 2,187 (1,870) 18,616
Proceeds from long-term debt 5,000 — 42,560
Repayment of long-term debt (77) (1,215) (655)
Issue of convertible bonds — 12,000 —
Increase in treasury stock, net (2,811) (5) (23,928)
Cash dividends paid (2,240) (1,835) (19,067)
Net cash and cash equivalents provided by financing activities 2,059 7,075 17,526
Effect of exchange rate changes on cash and cash equivalents 13 (3) 111
Net decrease in cash and cash equivalents (3,657) (3,538) (31,129)
Cash and cash equivalents at beginning of year 12,807 16,261 109,014
Increase in cash and cash equivalents due to change of consolidation scope 131 84 1,116
Cash and cash equivalents at end of year ¥ 9,281 ¥ 12,807 $ 79,001
See the accompanying notes to the consolidated financial statements.
39
Kokuyo Co., Ltd. Annual Report 2006
Notes to Consolidated Financial Statements
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES Years Ended March 31, 2006 and 2005
Note 01 >> 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 accompa-nying consolidated financial statements have been restructured and trans-lated into English (with some expanded descriptions and the inclusion of consolidated statements of shareholders’ equity) from the consolidated financial statements of 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, 2006, which was ¥117.48 to U.S.
$1. The convenience translations should not be construed as representa-tions 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.
Note 02 >> Significant accounting policies Principles of consolidation
The accompanying consolidated financial statements include the accounts of Kokuyo Co., Ltd. (the “Company”) and significant companies, over which the Company has power of control through majority voting rights or existence of certain conditions evidencing control by the Company. Inter-company transactions and accounts have been eliminated in the consolidation.
The consolidated financial statements include the accounts of the Com-pany and its 27 (23 in 2005) significant subsidiaries. Consolidation of the remaining subsidiaries would have no material effect on the accompanying consolidated financial statements. KOKUYO (MALAYSIA) SDN. BHD., KOKUYO Trading (Shanghai) Co., Ltd., KOKUYO Interior Technologies (Shanghai) Co., Ltd., KOKUYO International Asia Co., Ltd. and KOKUYO Commercial (Shanghai) Co., Ltd are consolidated using a fiscal period ending December 31 which differs from that of the Company. By the same token, Arvel Co., Ltd., Forest Co., Ltd. and Actus Co., Ltd. use a fiscal period ending February 28. Any significant effects occurring during the periods from January 1 to March 31 and March 1 to March 31 are adjusted in these consolidated financial statements.
Investments in affiliates, over which the Company has the ability to exercise significant influence over operating and financial policies of the investees, are accounted for using the equity method.
In the elimination of investments in subsidiaries, the assets and liabilities of the subsidiaries, including the portion attributable to minority sharehold-ers, are evaluated using the fair value at the time the Company acquired control of the respective subsidiaries.
Amortization of consolidation difference
The difference between the cost of investments and equity in their net assets at date of acquisition is amortized on a straight-line basis over the estimated period of benefit within 20 years, with the exception of minor amounts, which are charged to income in the year incurred.
Translation of foreign currencies
Financial statements of consolidated overseas subsidiaries are translated into Japanese yen at the year-end rate, except that shareholders’ equity accounts are translated at the historical rates. The resulting translation adjustments are shown as “Foreign currency translation adjustments”, a separate component of shareholders’ equity.
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 not exceeding three months at the time of purchase are consid-ered to be cash and cash equivalents.
Securities
The Company classifies securities as (a) securities held for trading pur-poses (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”).
The Company and its consolidated domestic subsidiaries do not hold trading securities. Held-to-maturity debt securities are stated at amortized cost. Equity securities issued by subsidiaries and affiliated companies which are not consolidated or accounted for using the equity method are stated at moving-average cost.
Available-for-sale securities with available fair market values are stated at fair market value. Unrealized gains and unrealized 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 cost.
Debt securities with no available fair market value are stated at amor-tized cost, net of the amount considered not collectible. Other securities with no available fair market value are stated at moving-average cost.
40
Kokuyo Co., Ltd. Annual Report 2006
If the market value of held-to-maturity debt securities, equity securities issued by unconsolidated subsidiaries and affiliated companies, and available-for-sale securities, declines significantly, such securities are stated at fair market value and the difference between fair market value and the carrying amount is recognized as loss in the period of the decline.
If the fair market value of equity securities issued by unconsolidated sub-sidiaries and affiliated companies not on the equity method is not readily available, such securities should be written down to net asset value with a corresponding charge in the statement of income in the event net asset value declines significantly. In these cases, such fair market value or the net asset value will be the carrying amount of the securities at the begin-ning of the next year.
Derivatives and hedge accounting
Derivative financial instruments are stated at fair value and changes in fair value are recognized as gains or losses unless derivative financial instru-ments are used for hedging purposes.
If derivative financial instruments are used as hedges and meet certain hedging criteria, the Company and its consolidated subsidiaries defer recognition of gains or losses resulting from changes in fair value of deriva-tive financial instruments until the related losses or gains on the hedged items are recognized.
Allowance for doubtful receivables
The Company and its consolidated subsidiaries provided the allowance for doubtful accounts in the following manner. For receivables from insolvent customers, who are undergoing bankruptcy or other collection proceedings or in similar financial condition, the allowance for doubtful accounts is provided based on the evaluation of each customer’s financial condition and the estimated recoverable amounts due to the existence of security interests or guarantees. For other receivables, the allowance for doubtful accounts is provided based on the Company’s actual rate of collection losses in the past.
Inventories
Inventories are principally stated at cost. Cost is determined using the first-in, first-out method.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation is princi-pally computed using the declining-balance method over the estimated useful lives, except that buildings acquired after March 31, 1998 are depreciated using the straight-line method. With respect to leased property and equipment, depreciation is provided using the straight-line method over lease periods.
The overseas subsidiaries depreciate their property, plant and equip-ment using the straight-line method.
The principal estimated useful lives are as follows:
Buildings and structures 7 to 50 years Machinery and equipment 4 to 13 years
Impairment of fixed assets
Effective for the fiscal year ended March 31, 2006, the Company and its domestic subsidiaries have adopted “Accounting Standards for Impairment of Fixed Assets” (“Opinions Concerning the Establishment of Accounting Standard for Impairment of Fixed Assets” issued by the Business Account-ing Deliberation Council of Japan on August 9, 2002) and “Guidance for Implementation of Accounting Standards for Impairment of Fixed Assets”
(“The Financial Accounting Standards No. 6” issued by the Accounting Standards Board of Japan on October 31, 2003).
As a result, income before income taxes and minority interest decreased by ¥992 million ($8,444 thousand) compared to what would have been reported if the new standard had not been adopted.
Intangible assets
Amortization of intangible assets is computed using the straight-line method over the estimated useful lives.
The Company and its consolidated subsidiaries include software in intangible assets and depreciate internal use software using the straight-line method over the estimated useful lives (primarily five years). Amortiza-tion of software developed for external sale is computed over the total estimated sales period (three-years).
Research and development expenses
The Company charges research and development expenses to income as incurred. Research and development expenses amounted to ¥2,022 million ($17,211 thousand) and ¥2,084 million for the years ended March 31, 2006 and 2005, respectively.
Income taxes
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 of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Bonuses
The Company follows the general Japanese practice of paying bonuses to employees in July and December. Accrued employees’ bonuses at the balance sheet date are calculated based upon management’s estimate of annual amounts.
Directors’ and statutory auditors’ bonuses, which are subject to approval at the general meeting of shareholders, are accounted for as an appropria-tion of retained earnings.
Severance and retirement benefits
(a) Employees
The liabilities and expenses for severance and retirement benefits are deter-mined based on the amounts actuarially calculated using certain assumptions.
The Company and domestic consolidated subsidiaries provide allowance for employees’ severance and retirement benefits based on the estimated amounts of projected benefit obligation and the fair value of the plan assets.
41
Kokuyo Co., Ltd. Annual Report 2006
(b) Directors and statutory auditors
The liability for directors’ and statutory auditors’ retirement benefits of the Company and certain of its domestic subsidiaries was provided in the amount, which would be required according to the Company’s severance indemnity plans for directors’ and statutory auditors’ as of the balance sheet date.
At the general shareholders’ meeting on June 29, 2005, it was decided that this plan would not be continued in the future and that the cumulative amounts as of June 29, 2005 would be settled upon each of their terminations.
The liabilities for directors’ and statutory auditors’ retirement benefits amounting to ¥997 million ($8,487 thousand) as of March 31, 2006 are included in other long-term liabilities on the balance sheets.
Accounting for leases
Finance leases which do not transfer ownership and do not have bargain purchase provisions are accounted for in the same manner as operating leases under Japanese GAAP.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2006 presentation. These changes had no impact on previously reported results of income or shareholders’ equity.
Net income per share
The computations of net income per share of common stock are based on the weighted-average number of shares outstanding during each period. The computation of diluted net income per share reflects the maximum possible dilution that could occur if securities were converted into common share.
Note 03 >> Securities
A. The following tables summarize acquisition costs and book values (fair values) of securities with available fair values as of March 31, 2006 and 2005:
March 31, 2006
Millions of yen Thousands of U.S. dollars
Acquisition Book Acquisition Book
cost value Difference cost value Difference
Securities with book values exceeding acquisition costs
Equity securities ¥14,291 ¥35,398 ¥21,107 $121,646 $301,311 $179,665
Others 803 874 71 6,835 7,439 604
Total 15,094 36,272 21,178 128,481 308,750 180,269
Securities with book values not exceeding acquisition costs
Equity securities 2,132 1,525 (607) 18,148 12,981 (5,167)
Bonds 7,026 6,727 (299) 59,806 57,261 (2,545)
Others 2,054 2,021 (33) 17,484 17,203 (281)
Total 11,212 10,273 (939) 95,438 87,445 (7,993)
Total ¥26,306 ¥46,545 ¥20,239 $223,919 $396,195 $172,276
March 31, 2005 Millions of yen Acquisition Book
cost value Difference
Securities with book values exceeding acquisition costs
Equity securities ¥ 9,649 ¥20,659 ¥11,010
Bonds 2,039 2,094 55
Others 387 403 16
Total 12,075 23,156 11,081
Securities with book values not exceeding acquisition costs
Equity securities 2,602 1,814 (788)
Bonds 5,026 4,897 (129)
Others 1,815 1,675 (140)
Total 9,443 8,386 (1,057)
Total ¥21,518 ¥31,542 ¥10,024
42
Kokuyo Co., Ltd. Annual Report 2006
B. The following table summarizes book values of securities with no available fair values as of March 31, 2006 and 2005:
Thousands of Millions of yen U.S. dollars
2006 2005 2006
Held-to-maturity debt securities:
Non-listed foreign securities ¥5,905 ¥ 5,932 $50,264
Available-for-sale securities:
Non-listed equity securities 556 513 4,733
Money management fund 11 2,217 93
Free financial fund — 1,500 —
Other 1,586 939 13,500
Total 2,153 5,169 18,326
Total ¥8,058 ¥11,101 $68,590
C. Available-for-sale securities with maturities and held-to-maturity debt securities mature as follows:
March 31, 2006 Millions of yen
Over one year Over five years
Within one year but within five years but within ten years Over ten years Held-to-maturity debt securities:
Bonds ¥200 ¥ — ¥ 735 ¥4,971
Total 200 — 735 4,971
Available-for-sale securities:
Bonds — — 4,767 1,960
Other 49 509 867 974
Total 49 509 5,634 2,934
Total ¥249 ¥509 ¥6,369 ¥7,905
Thousands of U.S. dollars Held-to-maturity debt securities:
Bonds $1,703 $ — $ 6,256 $42,314
Total 1,703 — 6,256 42,314
Available-for-sale securities:
Bonds — — 40,577 16,683
Other 417 4,333 7,380 8,291
Total 417 4,333 47,957 24,974
Total $2,120 $4,333 $54,213 $67,288
March 31, 2005 Millions of yen
Over one year Over five years
Within one year but within five years but within ten years Over ten years Held-to-maturity debt securities:
Bonds ¥821 ¥ 200 ¥ 314 ¥4,596
Total 821 200 314 4,596
Available-for-sale securities:
Bonds — 2,094 4,897 —
Other — 199 582 844
Total — 2,293 5,479 844
Total ¥821 ¥2,493 ¥5,793 ¥5,440
43
Kokuyo Co., Ltd. Annual Report 2006
D. Total sales of available-for-sale securities in the years ended March 31, 2006 and 2005 are as follows:
Thousands of Millions of yen U.S. dollars
2006 2005 2006
Total sales of available-for-sale securities ¥5,520 ¥1,402 $46,987
Related gains and losses:
Gains 318 145 2,707
Losses 61 15 519
Note 04 >> Derivative transactions
The Company and its subsidiaries use forward foreign currency contracts and interest rate swaps as derivative financial instruments for the purpose of mitigating future risks of foreign exchange rate changes and interest rate changes and obtaining higher yields from investments. The derivative trans-actions are executed in accordance with established policies and within the specified limits on the amounts of derivative transactions allowed.
The following summarizes hedging derivative financial instruments used by the Company and its subsidiaries and items hedged:
Hedging instruments:
Forward foreign exchange contracts Interest rate swaps
Hedged items:
Foreign currency trade payables
Interest on bonds and governmental bonds
The Company and its subsidiaries evaluate hedge effectiveness semi-annually by comparing the cumulative changes in cash flows from or the changes in fair value of hedged items and the corresponding changes in the hedging derivative instruments.
The following tables summarize market value information as of March 31, 2006 and 2005 of derivative transactions for which hedge accounting has not been applied:
(1) At March 31, 2006 the Company and its consolidated subsidiaries had the following outstanding contracts:
Thousands of
Millions of yen U.S. dollars
Portion
maturing Recognized Recognized
Contract amount over one year Market value gain (loss) gain (loss) Interest related:
Interest rate swaps
Receive fixed rate and pay floating rate ¥ 7,000 ¥ 6,000 ¥ (51) ¥ (51) $ (434)
Receive floating rate pay fixed rate 5,000 5,000 319 319 2,715
Currency related:
Currency swaps
Receive U.S. dollars and pay yen 4,755 3,842 141 141 1,200
Others:
Credit default option 1,000 1,000 37 37 315
Total ¥17,755 ¥15,842 ¥446 ¥446 $3,796
(2) At March 31, 2005 the Company and its consolidated subsidiaries had the following outstanding contracts:
Millions of yen
Contract Portion maturing Recognized
amount over one year Market value gain (loss)
Interest related:
Interest rate swaps
Receive fixed rate and pay floating rate ¥ 7,000 ¥ 6,000 ¥ 41 ¥ 41
Receive floating rate pay fixed rate 5,000 5,000 119 119
Currency related:
Currency swaps
Receive U.S. dollars and pay yen 4,433 3,828 (322) (322)
Others:
Credit default option 1,000 1,000 45 45
Total ¥17,433 ¥15,828 ¥(117) ¥(117)
44
Kokuyo Co., Ltd. Annual Report 2006
Note 05 >> Inventories
Inventories at March 31, 2006 and 2005 consisted of the following:
Thousands of Millions of yen U.S. dollars
2006 2005 2006
Merchandise and finished goods ¥27,339 ¥25,105 $232,712
Work in progress 1,023 726 8,708
Raw materials and supplies 1,780 1,613 15,151
Total ¥30,142 ¥27,444 $256,571
Note 06 >> Short-term loans and long-term debt
Short-term loans are represented by bank loans with average interest rates of 0.7% and 1.4% at March 31, 2006 and 2005, respectively.
Short-term loans, including the current portion of long-term debt, at March 31, 2006 and 2005 consisted of the following:
Thousands of Millions of yen U.S. dollars
2006 2005 2006
Bank loans ¥7,339 ¥3,772 $62,470
Long-term debt due within one year 902 498 7,678
Total ¥8,241 ¥4,270 $70,148
Long-term debt at March 31, 2006 and 2005 consisted of the following:
Thousands of Millions of yen U.S. dollars
2006 2005 2006
0.95% to 6.00% loans from banks, due through 2008
Secured ¥ — ¥ 341 $ —
Unsecured 6,900 654 58,733
4.32% to 6.00% loans from the Pension Welfare Service Public Corporation due through 2009 12 3 102
2.625% bonds, due 2008 10,000 10,000 85,121
Zero coupon convertible bonds, due 2024 12,000 12,000 102,145
0.710% bonds, due to 2009 240 — 2,043
29,152 22,998 248,144 Less-current maturities included in
Current liabilities (902) (498) (7,678)
Total ¥28,250 ¥22,500 $240,466
The conversion price of the unsecured convertible bonds is ¥1,557.00 ($13.25) as of March 31, 2006, subject to adjustment to reflect stock splits and certain other events. Convertible bonds outstanding at March 31, 2006 were convertible into 7,707,129 shares of common stock of the Company at the above conversion price.
At March 31, 2006 and 2005, assets, net of accumulated depreciation, pledged as collateral for secured short-term loans, long-term debt and other commit-ments were as follows:
Thousands of Millions of yen U.S. dollars
2006 2005 2006
Cash and cash equivalents ¥ — ¥ 50 $ —
Land 264 524 2,247
Buildings and structures 213 430 1,813
Total ¥477 ¥1,004 $4,060
Secured short-term loans and long-term debt ¥ — ¥1,261 $ —
45
Kokuyo Co., Ltd. Annual Report 2006
The aggregate annual maturities of long-term debt at March 31, 2006 were as follows:
Thousands of
Year ended March 31, Millions of yen U.S. dollars
2007 ¥ 902 $ 7,678
2008 501 4,265
2009 10,217 86,968
2010 528 4,494
2011 and thereafter 17,004 144,739
Total ¥29,152 $248,144
Note 07 >> Retirement benefits
The Company and domestic consolidated subsidiaries have been provid-ing three kinds of post-employment benefit plans, unfunded lump-sum payment plans, a governmental welfare contributory pension plan (which would otherwise be provided by the Japanese government), and a funded
non-contributory pension plan, 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 liabilities for severance and retirement benefits included in the liabilities section of the consolidated balance sheets as of March 31, 2006 and 2005 consist of the following:
Thousands of Millions of yen U.S. dollars
2006 2005 2006
Retirement benefit obligation at end of year ¥ 20,628 ¥ 20,768 $ 175,587
Fair value of plan assets at end of year (5,145) (3,628) (43,795)
Retirement benefit trust (12,304) (12,160) (104,732)
Benefit obligation in excess of plan assets 3,179 4,980 27,060
Unrecognized actuarial differences (7,916) (8,572) (67,382)
Unrecognized prior service costs 3,108 3,083 26,456
Prepaid retirement and severance benefit expenses 3,525 2,464 30,005
Severance and retirement benefits in the consolidated balance sheet ¥ 1,896 ¥ 1,955 $ 16,139
Note: Some consolidated subsidiaries have adopted the allowed alternative treatment of the accounting standard for retirement benefits for small business entities.
Severance and pension costs of the Company and its consolidated subsidiaries included the following components for the years ended March 31, 2006 and 2005.
Thousands of Millions of yen U.S. dollars
2006 2005 2006
Service cost ¥1,215 ¥ 992 $10,342
Interest cost 293 366 2,494
Expected return on plan assets (449) (254) (3,822)
Amortization of actuarial differences 691 581 5,882
Amortization of prior service costs (credits) (260) (236) (2,213)
Other (including early retirement benefits) 437 398 3,720
Net benefit cost ¥1,927 ¥1,847 $16,403
Note: Contributions of employees to the governmental welfare contributory pension plan are not included in service cost.