Traded Stock Code
YUHO
REPORT
Fiscal Year Ended May 31, 2007
Traded TSE1
This report is based on the Company’s Japanese-language annual filing with the Financial Services Agency and supplemented with materials that facilitate comparison with the Company’s peers. The materials from the annual filing with the Financial Services Agency have been edited and reorganized in a format more familiar to the international investment community. All information contained in this report has been obtained from sources believed to be reliable, but the accuracy of the data and the translation and the completeness and timeliness of the information are not warranted by the Company, Pacific Associates, or PRONEXUS. None of the above parties shall be responsible for any error or omission or for results obtained from the use of this information.
Table of Contents
Profile ... 3
Financial highlights...3
Peer comparisons ...3
Common size statements...4
Business Overview ... 5
Contents of business...5
Group companies...7
History ...8
Risk factors ...10
Research and development ...12
Analysis of financial condition and results of operations ...14
Corporate governance...16
Directors ...25
Employees...26
Union ...26
Stock options...26
Acquisition of treasury stock ...27
Other issues ...28
Cash Flows... 29
Consolidated statement of cash flows...29
Capital expenditures...31
Dividend policy ...31
Consolidated Operations ... 32
Consolidated income statement...32
Consolidated statement of changes in net assets...34
Results of operations ...36
Segment information ...47
Issues requiring action ...49
Sales and procurement ...50
Selling, general and administrative expenses ...50
Leases...51
Capital Structure... 52
Consolidated balance sheet ...52
Market value of securities ...54
Derivatives...55
Facilities ...56
Debt...57
Retirement benefits ...57
Deferred taxes...58
Nonconsolidated Financial Statements ... 59
Nonconsolidated income statement ...59
Nonconsolidated statement of changes in net assets...61
Nonconsolidated CapitalStructure ... 63
Nonconsolidated balance sheet ...63
Trade credits ...67
Securities...69
Fixed assets ...71
Accounting Policies... 72
Share-related Information ... 74
Profile
Financial highlights
Years ended May 31; Millions of yen 2003 2004 2005 2006 2007
Changes 2003/2007
Consolidated
Net sales 46,842 46,281 46,357 46,042 46,671 100.4
Ordinary profit 2,892 2,356 2,309 1,951 1,378 209.9
Net income 848 1,536 1,581 534 194 437.1
Net assets 82,631 83,041 84,926 87,470 88,189 93.7
Total assets 99,978 96,092 98,067 101,841 102,796 97.3
Net assets per share (Yen) 1,644.75 1,676.18 1,715.49 1,765.63 1,780.28 92.4
Net income per share (Yen) 16.56 29.96 31.66 10.80 3.92 422.4
Net income per share, fully diluted (Yen) - - - 10.80 -
Net cash provided by (used in) operating activities 4,089 4,897 4,369 2,560 689 593.5 Net cash provided by (used in) investing activities (1,121) 3,021 (3,031) (5,153) (1,296) 86.5
Net cash provided by (used in) financing activities (2,162) (6,043) (679) 29 (910) 237.6
Cash and cash equivalents at year-end 6,615 8,467 9,198 6,862 5,428 121.9
Employees 1,726 1,790 1,733 1,679 1,711 100.9
Peer comparisons
Percentage 2003 2004 2005 2006 2007
Net income / net sales 1.8 3.3 3.4 1.2 0.4
Peers 3.6 3.2 4.2 2.3 0.6
Ordinary profit / net sales 6.2 5.1 5.0 4.2 3.0
Peers 7.2 6.4 5.8 4.6 4.3
Net income / assets 0.8 1.6 1.6 0.5 0.2
Peers 3.6 3.1 4.0 2.1 0.2
Ordinary profit / assets 2.9 2.5 2.4 1.9 1.3
Peers 7.5 6.3 5.5 4.3 3.7
Equity / assets 82.7 86.4 86.6 85.8 85.7
Peers 40.0 40.4 39.7 40.4 36.8
Net income / equity 1.0 1.9 1.9 0.6 0.2
Peers 7.0 6.9 8.6 4.4 (1.2)
Common size statements
Years ended May 31; Percent Consolidated
2005 2006 2007
Balance sheet
Assets 100.0 100.0 100.0
Current assets 47.9 47.1 47.3
Tangible fixed assets 30.9 30.8 29.7
Intangible fixed assets 1.0 2.2 1.9
Investments and other assets 20.2 19.9 21.1
Total fixed assets 52.1 52.9 52.7
Liabilities and shareholders' equity 100.0 100.0 100.0
Current liabilities 10.0 11.0 10.5
Long-term liabilities 2.5 3.1 3.7
Total liabilities 12.5 14.1 14.2
Minority shareholders' equity in consolidated companies 0.9 -
-Common stock 13.8 -
-Capital surplus 11.0 -
-Retained earnings 63.9 -
-Unrealized gains (losses) on other securities 1.6 -
-Foreign currency translation adjustments (1.6) -
-Treasury stock (2.1) -
-Total shareholders' equity 86.6 -
-Liabilities and net assets - 100.0 100.0
Common stock - 13.3 13.1
Capital surplus - 10.6 10.5
Retained earnings - 61.1 59.8
Treasury stock - (2.1) (2.0)
Total shareholders' equity - 82.9 81.4
Unrealized gains (losses) on other securities - 2.7 3.7
Foreign currency translation adjustments - 0.2 0.7
Total valuation/translation gains (losses) - 2.9 4.4
Minority shareholders' equity in consolidated companies - 0.1 0.0
Total net assets - 85.9 85.8
Income statement
Net sales 100.0 100.0 100.0
Cost of goods sold 53.8 52.4 53.0
Gross profit on sales 46.2 47.6 47.0
Selling, general and administrative expenses 42.4 45.8 46.4
Operating income 3.8 1.8 0.6
Nonoperating income 2.0 2.9 3.0
Nonoperating expenses 0.8 0.5 0.6
Ordinary profit 5.0 4.2 3.0
Extraordinary income - 0.8 0.7
Extraordinary losses 0.1 1.9 1.2
Income before taxes and other adjustments 4.9 3.1 2.5
Corporate, inhabitant and other taxes 1.4 2.0 2.1
Minority interest in income of consolidated companies 0.1 (0.1) (0.0)
Business Overview
Contents of business
The Corporate Group, composed of Sakata Seed Corporation (“the Company”), 44 subsidiaries and an affiliated company, is engaged in selling horticultural products and materials (vegetable seeds, flower seeds, bulbs, seedlings and agricultural and
horticultural products).
The Group’s businesses and the relationship of the Company and its affiliates to these businesses are outlined below.
The three divisions described below coincide with the categories used for segment information by type of business listed on page 47.
(1) Wholesaling (42 affiliated companies)
This division produces or procures vegetable seeds, flower seeds, bulbs, seedlings, and agricultural and horticultural products and wholesales these products to
nurseries, etc., in Japan and other countries around the world.
(2) Retailing (1 affiliated company)
The retailing division procures products for horticultural hobbyists and sells them to home improvement retailers in Japan. It also operates a mail-order sales business and conducts retailing through corporate-managed garden shops.
(3) Others (2 affiliated companies)
The following table presents an outline of the Group’s business segments and the companies participating in them.
Principal operations Main companies involved Wholesaling
Wholesaling of seeds and agricultural and horticultural products to nurseries and other producers
(Products: vegetable seeds, flower seeds, bulbs and seedlings)
SAKATA SEED CORPORATION
(Consolidated subsidiaries)
Kyoei Noji Co., Ltd., Brolead Co., Ltd., Sakata Seed America, Inc., Sakata Seed de Mexico, S.A., Sakata Centroamerica, S.A., Sakata Seed de Guatemala S.A., Alf Christianson Seed Co., Sakata Seed Sudamerica Ltda., Sakata Korea Co., Ltd., Sakata Vegetables Europe S.A.R.L., Sakata Ornamentals Europe A/S, Sakata Holland B.V., Sakata Seed Iberica S.L., Sakata UK Limited, Sakata Ornamentals UK Ltd., MayFord Seeds (Pty) Ltd. and 15 other companies
(Affiliated company) Sakata Polska Sp. z.o.o.
Wholesaling of agricultural and horticultural products to nurseries and other producers
(Products: agricultural and horticultural materials)
SAKATA SEED CORPORATION (Consolidated subsidiary)
Jiffy Pot Products Co. of Japan, Ltd.
Production of seeds and agricultural and horticultural products for nurseries and other producers
(Products: vegetable seeds, flower seeds, bulbs and seedlings)
(Consolidated subsidiaries)
Nakai Engei Ltd., Yamagata Celltop Co., Ltd., Nagano Celltop Co., Ltd., Hida Celltop Co., Ltd., Fukuoka Celltop Co., Ltd., Sakata Seed Chile S.A., Sakata Siam Seed Co., Ltd., Sakata Seed (Suzhou) Co., Ltd. and 1 other company
Retailing
Selling to horticultural hobbyists through home improvement retailers
SAKATA SEED CORPORATION (Consolidated subsidiary)
Nishio Shokubutsu Co., Ltd. Mail-order sales, corporate-managed garden shops SAKATA SEED CORPORATION
Others
Landscaping, insurance agency, temporary services agency SAKATA SEED CORPORATION
(Consolidated subsidiaries)
Group companies
Millions of yen or as indicated Capital stock Percent ownership
Kyoei Noji Co., Ltd. 30 100
Sakata Kosan Co., Ltd. 10 100
Nakai Engei Ltd. 10 100
Brolead Co., Ltd. 50 100
Yamagata Celltop Co., Ltd. 50 100
Nagano Celltop Co., Ltd. 60 70
Hida Celltop Co., Ltd. 70 51
Fukuoka Celltop Co., Ltd. 200 100
Jiffy Pot Products Co. of Japan, Ltd. 18 100
Nishio Shokubutsu Co., Ltd. 21 52
Sakata Techno Service Ltd. 13 100
Sakata Seed America, Inc. US$ 1,500 thousand 100
Sakata Seed de Mexico, S.A. Mex$ 450 thousand 100
Semillas Sakata de Mexico, Aric Mex$ 45 thousand 100
Productora de Semillas Sakata, Spr de Rl Mex$ 45 thousand 100
Agricola Sakata, Spr de Rl Mex$ 46 thousand 100
Sakata Centroamerica, S.A. CCO 10 million 100
Sakata Seed de Guatemala S.A. GTQ 1,541 thousand 100
Piloncito Verde S.A. GTQ 3,352 thousand 100
Sakata Seed Oceania Pty Ltd Aus$ 240 thousand 100
Alf Christianson Seed Co. US$ 7 thousand 100
Alfco, Inc. US$ 0 thousand 100
Seaward Investments, Inc. US$ 0 thousand 100
Quincy Investments, LLC US$ 103 thousand 100
European Sakata Holding S.A.S. EUR 36,050 thousand 100
Sakata Holland B.V. EUR 420 thousand 100
Sakata Vegetables Europe S.A.R.L. EUR 5,630 thousand 100
Sakata Ornamentals Europe A/S DKK 119 million 100
Frisa Planter A/S DKK 10 million 100
Sakata Ornamentals Chile Ltda. US$ 500 thousand 100
Sakata Seed Iberica S.L. EUR 3 thousand 100
Sakata UK Limited STG£ 100 thousand 100
Sakata Ornamentals UK Ltd. STG£ 1,200 thousand 100
MayFord Holdings (Pty) Ltd. ZAR 598 thousand 100
MayFord Seeds (Pty) Ltd. ZAR 19 thousand 100
The South African Seed Company (Pty) Ltd. ZAR 0 thousand 100
A Ford & Company (Pty) Ltd. ZAR 4 thousand 100
Zingel Properties (Pty) Ltd. ZAR 0 thousand 100
Sakata Vegenetics RSA (Pty) Ltd. ZAR 0 thousand 100
Sakata Seed Chile S.A. Ch$ 1,272 million 100
Sakata Seed Sudamerica Ltda. R$ 13,776 thousand 100
Sakata Siam Seed Co., Ltd. THB 20 million 98
Sakata Korea Co., Ltd. WON 18,540 million 100
History
Year Month Event
1913 July Takeo Sakata (the Company's founder) establishes Sakata Noen in Shirosato-mura, Kanagawa (currently, Rokkakubashi, Yokohama).
1916 Company name changed to T. Sakata & Co.
1923 September Company building lost in fire following the Great Kanto Earthquake.
1930 May Chigasaki Breeding Station established.
1942 December Merger of T. Sakata & Co., Atariya Noen, Fujita Zenbei & Co., Enomoto Tokujiro & Co. and Yomoto Co. completed to form T. Sakata & Company, capitalized at 195,000 yen.
1951 December Retail store operations begun (currently, Garden Center Yokohama).
1959 April Misato Research Station established.
1960 April Chogo Research Station established.
1966 August Hazawa Office established.
1967 August Fukuoka Branch opened.
1970 June Chogo Distribution Center established.
1971 June Kimitsu Research Station established.
July Sendai Branch opened.
1974 August Shirakawa Branch opened.
1975 October Shares of Jiffy Pot Products Co. of Japan, Ltd. acquired.
1976 January Okayama Branch opened.
1977 July Sakata Seed America, Inc. established.
1979 June Kyoei Noji Co., Ltd. established.
1980 October Florist Sakata Co., Ltd. established.
Sapporo Branch opened.
1982 July Nakai Engei Ltd. established.
1985 October Nagoya Branch opened.
1986 January Corporate name changed to Sakata Seed Corporation.
1987 January Yamagata Vegetable Center, Co., Ltd. (currently, Yamagata Celltop Co., Ltd.) established.
May Shares listed on the Second Section of the Tokyo Stock Exchange.
1988 January Sakata Kosan Co., Ltd. established.
June Higashimura Seed Co., Ltd. (currently, Brolead Co., Ltd.) established.
December European Representative Office established.
1989 September Shares of Yamaki Kogyo Co., Ltd. acquired.
1990 March European Representative Office upgraded to local subsidiary through establishment of Sakata Seed Europe B.V. (currently, Sakata Holland B.V.).
April Kakegawa Research Center established.
May Nagano Celltop Co., Ltd. established.
June Kanto-Kita Branch opened.
November Hokkaido Research Station established.
Shares listed on the First Section of the Tokyo Stock Exchange.
December Hida Celltop Co., Ltd. established.
1991 July Yokohama Branch opened.
August Sakata Seed Chile S.A. established.
1992 May Fukuoka Celltop Co., Ltd. established.
Year Month Event
1994 March Yamagata Distribution Center established.
April Kazo Distribution Center established.
May Shiga Breeding Branch Station of Kakegawa Research Center established.
June Shares of Naniwa Green Co., Ltd. acquired.
October Sakata Seed do Brasil Ltda. established.
November Shares of Agroflora S.A. (currently, Sakata Seed Sudamerica Ltda.) acquired by Sakata Seed do Brasil Ltda.
1995 February Corporate headquarters and head office moved to present site (Tsuzuki-ku, Yokohama).
1996 February Hokkaido Branch established (entailing move and change of name of Sapporo Branch).
Shares of Yurix Co., Ltd. acquired.
March Shares of Samuel Yates Ltd. (currently, Sakata UK Limited) acquired.
April Sakata Seed France S.A.R.L. (currently, Sakata Vegetables Europe S.A.R.L.) acquired.
June Osaka Branch opened.
Sakata Siam Seed Co., Ltd. established.
Sakata Seed Iberica S.L. established.
August YCC Distribution Center established.
September Shares of Flora Feliz S.A. in Costa Rica (currently, Sakata Centroamerica, S.A.) acquired.
October Number of shares comprising one trading unit of the Company's stock changed from 1,000 to 100.
1997 March Shares of Chung Won Seed Co., Ltd. (currently, Sakata Korea Co., Ltd.) acquired.
April Shares of Nishio Shokubutsu, Co., Ltd. acquired.
1998 October Garden Center Shonan opened.
1999 February Sakata Seed (Suzhou) Co., Ltd. established.
May Procedures for liquidation of Florist Sakata Co., Ltd. completed.
October Additional shares in Wilgro Nurseries Ltd. (currently, Sakata Ornamentals UK Ltd.) acquired.
Shiga Breeding Branch Station of Kakegawa Research Center closed.
December Shares of MayFord Holdings (Pty) Ltd. acquired.
2000 January Additional shares of Sakata Seed NZ Ltd. acquired.
December Additional shares of Piloncito Verde S.A. acquired.
2001 February Chiba Branch opened.
European Sakata Holding S.A.S. established.
June Sakata Vegenetics RSA (Pty) Ltd. established.
Merger of Sakata Seed do Brasil Ltda. and Sakata Seed Sudamerica Ltda. completed.
August Procedures for liquidation of Sakata Seed NZ Ltd. completed.
September Sakata Techno Service Ltd. established.
2002 March Chiba Branch closed.
April Narita Office opened.
Alf Christianson Seed Co. and Alfco, Inc. incorporated into Group as subsidiaries through share buyback and retirements.
Procedures for liquidation of Naniwa Green Co., Ltd. completed.
May Additional shares in Sakata Siam Seed Co., Ltd. acquired.
Shirakawa Branch closed.
Year Month Event
2003 May Procedures for liquidation of Yamaki Kogyo Co., Ltd. completed.
July Sakata Ornamentals Europe A/S established following acquisition of the flower division of L. Daehnfeldt A/S.
2004 May Okayama Office of the Nishi Nihon Branch closed.
2005 May Sakata Seed Oceania Pty Ltd. established.
October Shares of Qualiveg Seed Production, Inc. acquired.
November Garden Center Shonan closed.
2006 February YCC Distribution Center closed.
Yaita Distribution Center opened.
Procedures for liquidation of Yurix Co., Ltd. completed.
May Kanto-Kita Office of the Higashi Nihon Branch closed.
Nagoya Office of the Nishi Nihon Branch closed.
Chogo Distribution Center closed.
2007 May Qualiveg Seed Production, Inc. merged into Sakata Seed America, Inc.
Risk factors
The following is a discussion of factors that could negatively impact the Company’s financial performance and financial condition. The forward-looking statements in the discussion are based on judgments made by the Company as of the last day of the fiscal year reported.
1. Weather-related risks
• Climate changes around the world exert a significant impact on sales of vegetable seeds, flower seeds, bulbs and seedlings; poor weather conditions could thus erode sales and adversely affect the Company’s financial
performance.
• The Company carries out seed production in 19 countries around the world. In each region, the Company takes steps to disperse risk by consigning seed production to multiple outside producers. Despite these precautions, it may be unable to assure sufficient quality and quantity of production in the event of sudden changes in the local weather. Such circumstances may exert a significant negative impact on its financial results.
2. Impact of geopolitical and social systems
The Company is engaged in production, R&D and sales operations in 20 countries around the world. It operates six breeding and research stations in Japan and another 10 overseas (in nine countries). This extensive base of operations exposes the Company to the following kinds of risks, which could have a significant impact on the Group’s financial performance:
• Political and economic upheaval
• Social disorder caused by terrorism or other eruptions of violence
• Earthquakes or other natural disasters
• Information age-related problems, including computer viruses and information leakage
3. Development risks, including those related to human resources
• The long-term nature of cultivar development (over 10 years) exposes the Company to the following kinds of risk:
1) Investment risk—that economic payoffs may fall short of expectations
2) Development risk—that efforts may fail to produce the desired cultivar
3) Market risk—that market needs may change during the course of development
4) Competitive risk—that a product may fare unfavorably against a product developed by another company
• In addition to access to genetic resources, successful development hinges to a large extent on the abilities of individual breeders. There is a risk that a breeder may leave the Company midway through a project, thus raising obstacles to its successful completion. Failure to produce an intended high-quality variety could have a significant impact on the Company’s financial performance.
4. Risks related to safety
• The Company’s creed, articulated by its founder Takeo Sakata, is “Quality, Reliability and Service.” With this as a basis, the Company seeks to gain customers’ confidence in the quality and safety of its products. Accordingly, it responds quickly and effectively when complaints arise, and works diligently to prevent problems from occurring.
• Because the Company’s products are examples of “living genetics,” however, appropriate levels of quality or uniformity may not always be achieved.
Safety-related problems could also arise from environmental factors or manufacturing technologies, rather than from the seeds themselves.
Safety-related problems could have a significant impact on the Company’s financial performance.
5. Risks related to currency fluctuations
• Currency fluctuations may also impair the Company’s ability to procure raw materials and merchandise and pose obstacles to exporting. To minimize such impacts, the Sakata Group maintains a close watch over trends in the foreign exchange markets. Sudden and unexpected market turns could, however, negatively affect the Company’s financial performance despite these efforts.
Research and development
Product development for the Company’s main vegetables and flowers is coordinated by the Company’s R&D Division, which develops new varieties for markets worldwide. In Japan, research is carried out at six farms, led by the Company’s principal farm at Kakegawa, Shizuoka Prefecture. Overseas, the company operates 10 research farms in North America and other regions.
Throughout the Group, approximately 400 people are involved in research and development. Total R&D expenditures amounted to ¥3,516 million during the fiscal year reported .
Wholesaling
Vegetables
• In Japan, the Company announced the following new cultivars
1) NATSU ŌGI POWER, an early maturing single-stalk leek that is easy to grow and
achieves a high ratio of superior-quality plants. The NATSU ŌGI POWER
“elongates” and “fattens” well during cold periods. It was awarded a special first prize at a national competition sponsored by the Japan Seed Trade Association.
2) TRITON, a spinach for spring planting with Race 7 resistance to downy mildew
and resistance to fusarium wilt.
• Overseas, the Company is cultivating new varieties at farms in the United States, France, Spain and South Africa as well as in Brazil, Korea and Thailand; at each farm, new cultivars are being developed that suit the cultural, climatic and soil conditions of the respective countries
Flowers
• The addition of two new colors—“spotted salmon” and “lavender”—to the three existing colors in the SunPatiens series, which features luxuriant growth and superior heat resistance
• Special first-prize winners at the national competition sponsored by the Japan Seed Trade Association:
1) FLUNA LAVENDAR-MAGIC series of Viola
• Winners at Japan Flower Selections, an event sponsored by the Japan Flower Promotion Center
1) The SUN BELINA PETITE MORPHO Viola won the event’s first Flower of the
Year Award in the flower bed division
2) Other prize-winning varieties cultivated by the Company were the following:
a) Various colors of the PROFUSION DOUBLE Zinnia
b) YOKU SAKU SUMIRE pansies
c) SUN PATIENS in “spotted salmon” and “lavender”
d) The CARMEN ROUGE, CHOU CREAM and ORIHIME MINI Lisianthus series
Agricultural and horticultural products
• The Positive List System for Agricultural Chemical Residues: with the enforcement of this system in May 2006, food safety awareness has spread to the consumer level. Under the new system, the chemicals in any food product that contains chemical residues above a prescribed level can be traced through each step of the cultivation process, even to the seed store where the seeds were purchased.
• In this environment, the Company pursued R&D in the following areas, guided by a philosophy of “peace of mind and safety.”
1) In its “Eco-Product Series”: worked on commercializing products that assist in organic farming at each stage of the cultivation process, from planting to
seedling cultivation to harvesting: e.g., Gold/Silver Organic, Organic Liquid
Fertilizer and Organic Soil
2) In its energy-saving and environmentally compatible products: the Plant Plug
and Box Plug products sold by Jiffy Pot Products of Japan, Ltd., a Sakata
subsidiary, have attracted great interest in the market. Based on this response, the Company plans to build a production facility in Japan and to expand sales
through a focus on cost, quality and real-time delivery.
3) Biosensor for soil diagnosis—timeline
a) March 2004: announcement of a technology for measuring the activity of microorganisms in soil (the result of a joint research project with the National Institute of Advanced Industrial Science and Technology and the Tokyo University of Technology)
b) May 2006: announcement of an improved version of the biosensor
d) By April 2007: Acquisition by a number of public and private buyers, including the Ministry of Agriculture, Forestry and Fisheries, Ibaraki Prefecture, and a number of seed stores
e) Further evaluations by research institutes and by the Company’s Chogo Experimental Station
4) Biosensor for soil diagnosis—product capabilities
a) Capable of measuring relationships and affinities between soil and microorganisms
b) In addition to physiochemical data, therefore, this device makes it possible for the first time to derive microbial data from soil.
c) The device has been shown by several research institutes to generate valid data for measuring the maturity of compost.
5) Live Coat
a) November 2005: announcement of a seed coating technology (patent
pending) in which live microorganisms are applied onto seeds (joint research project with the Hyogo Prefectural Technology Center for Agriculture, Forestry and Fisheries)
b) April 2007: launch of an R&D project involving 11 participating
institutions, including universities, agricultural research centers and three biopesticide manufacturers
Analysis of financial condition and results of operations
1. Significant accounting policies and estimates
• The Sakata Group’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in Japan.
• In preparing these statements, the Company makes all necessary estimates based on rational standards.
2. Results of operations (year on year, percentage changes)
• Net sales: by region, Japan accounted for ¥29,590 million (up 0.1%) while overseas markets accounted for ¥17,081 million (up 3.7%). For a breakdown of overseas sales, please see the discussion under “Results of operations” above.
• SG&A expenses: increased by ¥613 million to ¥21,682 million (up 2.9%)
• Operating income: declined by ¥568 million to ¥273 million. On a parent
company basis, operating income increased by ¥492 million (up 428.2%) to ¥607 million due to reductions in SG&A expenses.
• Nonoperating income and expenses: nonoperating income remained roughly unchanged from the year-earlier level, declining by ¥4 million (down 0.4%) to ¥1,105 million.
• Ordinary profit: declined by ¥572 million (down 29.4%) to ¥1,378 million 3. Financial condition
• Total assets: increased by ¥955 million to ¥102,796 million due to an increase in buildings
• Equity ratio: decreased by 0.1% to 85.7% 4. Strategic situation and forecasts
• Overseas sales and profits: outlook calling for recovery or growth in all markets 1) Projecting higher levels of profitability based on expanded sales of broccoli,
carrots and tomatoes in North America and on recovery in pepper sales to Mexico
2) Return to profitability in Europe based on continued strong sales of vegetable seeds and progress in reorganizing the flower business
3) Improved results in South America based on a projected increase in tomato sales
• Domestic operations: projected higher sales and profits
1) In wholesaling, securing profitability through increased sales of vegetable and flower seeds
2) In retailing, taking steps to improve profitability through increased sales to home centers
5. Cash flow: cash and cash equivalents decreased by ¥1,433 million
• Net cash provided by operating activities: ¥689 million
• Net cash used in investing activities: ¥1,296 million
6. Liquidity, financing and use of capital
• Liquidity: sufficient cash and marketable securities are kept on hand to meet emergency needs.
• Financing: domestic subsidiaries and key overseas companies are given the leeway to raise capital in ways appropriate to conditions in their respective markets.
• Use of capital: primarily to finance operating needs
7. Management’s assessment of issues and its future policies: strengthening the Sakata brand and increasing enterprise value through adaptation to two major trends
• Intensifying competition amid a more rapidly realigning seed industry
1) Putting resources into a global strategy that includes use of M&A activities and into strengthening of the management structure
2) Developing high-quality and easy-to-grow products
3) Developing product control methods that ensure product safety
• Rapid globalization and the increasingly key role played by IT 1) Expanding production and sales in newly developing nations
2) Rebuilding sales strategies through incorporation of IT
3) Strengthening corporate governance within the Company and its overseas subsidiaries through better internal control
Corporate governance
1. Basic views regarding corporate governance
The Sakata Group’s management policy is “to become the top seed company in the world” by “helping to improve the everyday life and culture of the world’s people through the provision of high-quality products and services.” Based on its
long-honored creed, “Quality, Reliability and Service,” it is taking active steps to establish a healthier financial structure, more efficient operations and a stronger system of compliance. To enhance the public’s understanding of the Sakata Group, it is also devoting additional resources to improving its public information and investor relations capabilities.
2. Governing entities and system of internal control
• Basic explanation of the Company’s governing bodies
2) The Company employs a system of corporate auditors; two of its three corporate auditors are appointed from outside the Company.
3) The Company establishedan internal Auditing Office in January 2007 to support the operations of its corporate auditors and its Board of Corporate Auditors.
• Governing bodies and internal control system
1) The Company’s governing bodies and their meeting schedules are as follows. On June 1, 2007, the Company introduced a new system of corporate
executive officers to expedite decision-making, devolve authority for execution of operations and make the most of up-and-coming younger managers.
a) Monthly meetings of the Board of Directors, where decisions are made on basic management policy and other important issues; all corporate auditors also in attendance
b) Monthly senior management meetings, attended by all directors above the rank of managing director and by the standing corporate auditors
c) Monthly general managers’ meetings, attended by general managers, branch managers and standing corporate auditors
d) Monthly corporate executive officers’ meetings, attended by directors, corporate auditors and corporate executive officers
2) Internal auditing and oversight
a) The Auditing Office, composed of two employees, audits the Company and its domestic subsidiaries in accordance with internal regulations; the Auditing Office, which formerly reported directly to the president, now reports to the senior management meeting.
b) When the need arises for expert judgments, advice is sought from consulting attorneys, tax accountants and others.
• Internal audits; audits by corporate auditors
2) Coordination
a) To coordinate the various audits—by the Auditing Office, corporate auditors and financial auditors—the corporate auditors and members of the Auditing Office meet on an as-needed basis to exchange information. b) The financial auditors and corporate auditors also meet on an as-needed
basis to discuss findings and exchange relevant information.
• Financial audits
1) Conducted by the following certified public accountants and 14 assistants (four CPAs, seven junior accountants and three others)
2) The Company asks KPMG AZSA & Co. to conduct its audits in accordance with the Corporation Law.
Name Affiliation
No. of consecutive years of auditing
Designated partner/engagement partner: Hiroshi Kawai
KPMG AZSA & Co. -
Designated partner/engagement partner: Shigemori Akiyama
KPMG AZSA & Co. -
Because the auditing relationships have been in place for less than seven years, information on the number of consecutive years of auditing has been omitted.
• Relationships between the Company and its external directors and corporate auditors
1) The newly elected external director, Atsushi Hachiboshi, served as one of the Company’s external corporate auditors from August 2003 to August 2007; he is neither a former employee of the Company or of any of its affiliates nor a shareholder in the Company.
2) Kunihiko Maeda, one of the two external corporate auditors, was elected as Atsushi Hachiboshi’s replacement; he is neither a former employee of the Company or of any of its affiliates nor a shareholder in the Company.
3) External corporate auditor Yoshinobu Sato’s term of office expired and he was reelected; he is neither a former employee of the Company or of any of its affiliates nor a share holder in the Company.
3. Status of risk management system
• Development of a Risk Management Manual to ensure quick and effective responses to risks facing the enterprise
1) When an event occurs and is reported, a Crisis Management Headquarters will be established.
• Procedures for the protection and acquisition of rights related to the intellectual property of the Company and its affiliates are
1) Coordinated by the Legal Department and the Research and Development Headquarters and
2) Conducted with the aim of responding in an appropriate and timely manner to changes that occur in every country around the world.
• System to ensure ethical behavior and to foster the development of a healthy openness in the corporate culture
1) Preparation and distribution of a Compliance Manual
2) Adoption of measures to educate employees and to encourage ethical behavior
• Customer Relations Office organized to improve customer satisfaction 1) Central collection point for complaints received by other departments or
directly from customers
2) Reporting to the Board of Directors
3) Responsible for enhancing customer satisfaction and reducing response time
4. Basic policies regarding internal control and measures adopted to improve internal control
At its meeting of May 19, 2006, the Board of Directors adopted the following basic eight-point policy related to the development of internal systems as prescribed under Articles 362-4-6 and 362-5 of the Corporation Law. These articles of the
Corporation Law require companies to establish systems to ensure that the directors, in executing their duties, act in compliance with the relevant laws and ordinances and in compliance with their Articles of Incorporation. The eight-point policy has also been developed in accordance with ministerial ordinances of the Ministry of Justice, which aim to ensure the appropriateness of other activities by joint stock corporations.
(1) Mechanisms to ensure that, in executing their duties, the directors and
employees act in accordance with all relevant laws and ordinances and with the Company’s Articles of Incorporation
1) Preparation of a Compliance Manual and other regulations to ensure the development of, and widespread adherence to, a system of compliance; the directors and employees closely follow the provisions of this manual and these regulations.
a) The committee decides on all important policies regarding training, education and other compliance-related programs.
b) It reports all required information to the Board of Directors.
3) Establishment of compliance consultation offices both within and outside the Company, where any employee of the Sakata Group can go to consult about and/or report on actions that appear questionable from the standpoint of legal or ethical compliance
a) The Company strictly protects the secrecy of such reports and/or consultations.
b) It does not treat whistleblowers in any way that violates the
Whistleblower Protection Act or other laws or ordinances, or in any way that violates the Company’s internal regulations.
(2) Mechanisms to ensure the preservation and control of information related to the directors’ execution of duties
1) Preservation of all documents and related materials that bear on the
execution of duties by directors (including documents recorded on electronic media)
a) Preservation for periods prescribed under the Company’s Regulations on the Management of Documents; and preservation in the departments or sections indicated by such regulations
b) Ensuring that such documents are available for inspection on an as-needed basis
2) Management of documents is carried out in accordance with the:
a) Standards for Establishing Information Security Measures and
b) Regulations on the Management of Personal Information.
(3) Regulations and other structures to protect against the risk of losses
1) The Company recognizes and evaluates a number of specific risks, including:
a) Weather-related risks
b) Risks associated with geopolitical and societal change in regions where it does business
c) R&D-related risks
d) Risks related to infringements of intellectual property rights
f) Foreign exchange risks
2) Each division (for research, production and distribution, quality control, domestic sales, and international sales and management) identifies and manages the risks specific to its particular area of operations.
a) When necessary, manuals are created and operating regulations established.
b) Weather-related risks have a special bearing on agricultural enterprises; since weather cannot be predicted or controlled, the Company deals with these risks through diversification; i.e., by establishing production areas in different countries around the world.
c) In an emergency, the Company implements solutions by following procedures spelled out in its Risk Management Manual:
- Establishment of a Crisis Management Headquarters headed by the President
- Construction of an information-conveyance mechanism
(4) Mechanisms that ensure the efficient execution of duties by the directors
1) The directors execute their duties in a manner stipulated under the
Company’s Regulations Concerning the Division of Duties and its Table of Standards Related to Personal Authority.
2) To enable the directors to carry out their duties efficiently, the Company permits collaboration with other directors and employees through
committees and project teams.
3) The Company also promotes efficiency through the rationalization and computerization of operations.
4) When the Company meets the conditions specified under Article 370 of the Corporation Law, it permits resolutions of the Board of Directors to be adopted though written communications.
(5) Mechanisms that ensure the appropriate conduct of operations of the Corporate Group (comprising the Company and its subsidiaries)
1) Operations of subsidiaries managed and overseen by the Office of Management and Planning
2) In accordance with its Regulations Concerning the Management of
Subsidiaries, the Company takes steps such as the following to ensure sound, effective operation of the Corporate Group:
b) Establishment of a system of collaboration, including personnel exchanges
c) Provision of appropriate levels of management guidance for subsidiaries
(6) Matters with respect to the employees concerned when the corporate auditors request the assistance of employees in carrying out their auditing duties; matters related to ensuring the independence of such employees from the directors
1) When requested to do so by a corporate auditor, the Company shall establish a position to be filled by employees with responsibility for assisting the corporate auditors with their duties
2) The directors shall consult with the Board of Corporate Auditors regarding each of the following matters:
a) The numbers and ranks of such employees
b) The lines of authority under which they operate
c) Compensation
d) Personnel transfers
(7) Mechanisms related to reporting by the directors and employees to the corporate auditors; and to other instances of reporting to the corporate auditors
1) When they discover facts that could cause significant harm to the Company, directors shall report such facts to the corporate auditors.
2) Directors shall also report all dishonest activities by directors and all activities by directors that are in violation of laws or ordinances or the Articles of Incorporation.
3) To enable the corporate auditors to execute their duties smoothly and effectively, directors and employees shall report important
management-related matters to the corporate auditors; they shall also provide the corporate auditors with status reports on operations.
4) The corporate auditors shall be allowed to participate in the following:
a) Senior management meetings and other important management meetings
b) Compliance Committee meetings, where they shall receive reports on the operations of the Compliance Consultation Offices; the kinds of issues under consultation at these offices; and the improvements being made as a result of such consultations
1) The directors and corporate auditors shall endeavor to meet regularly and to improve their mutual communication.
2) When the corporate auditors deem it necessary for reasons concerning operations, they shall receive reports on audits and the status of operations from the following and shall exchange information on such matters with them:
a) Persons responsible for the Internal Auditing Division
b) Corporate auditors of subsidiaries
c) Other persons in equivalent positions
3) When they deem it necessary, the corporate auditors shall have the authority to appoint attorneys, CPAs or other outside experts independently for the purpose of auditing operations.
The following measures have been adopted to improve internal control.
(1) Through the distribution of compliance manuals and through improved, more effective training sessions, steps are being taken to ensure complete observance of the law and of Sakata Seed’s Code of Conduct.
(2) Electronic records and other documents related to minutes of the Board of Directors, ringi approval documents, etc., are preserved and managed in accordance with the Articles of Incorporation and other internal regulations.
(3) In the event of a crisis situation, the Company will immediately establish a central response headquarters headed by the President and will deal smoothly and expeditiously with the problem.
(4) To expedite decision-making and improve the efficiency of execution of operations, the Company has introduced a system of corporate executive officers.
(5) The departments and directors involved in overseeing affiliated companies have a firm grasp of the operating conditions of these affiliates, based on
communications with the directors, etc., of the affiliates in question; they manage these affiliates appropriately, in accordance with regulations governing the management of affiliated companies.
(6) A Corporate Auditors’ Office has been established to support the work of the corporate auditors.
(8) From time to time, the directors and corporate auditors exchange information on management-related issues, including the status of risk management efforts within the Company and within affiliated companies. Through such exchanges, the directors and corporate auditors are endeavoring to establish more effective communication.
5. Directors’ compensation
Directors Corporate auditors Millions of yen Number Amount Number Amount
Compensation paid to directors and corporate auditors 13 78 4 22
Retirement bonuses paid to directors and corporate auditors in accordance with resolutions of the General Meeting of Shareholders
1 26 1 5
Employees' salaries and bonuses
Employee compensation paid to directors who are also employees
90
6. Professional fees paid to financial auditors
Millions of yen
Compensation for audit certification as stipulated under Article 2-1 of the Certified Public Accountants Law
36
Other payments
-7. Content of agreements limiting liability
• In accordance with Article 423-1 of the Corporation Law, the Company has entered into agreements with all of its outside corporate auditors limiting their liability.
• These agreements contain a maximum liability for the payment of damages by corporate auditors, which is the minimum amount prescribed under Article 425-1 of the Corporation Law.
8. Necessary number of directors
The Company has stipulated in its Articles of Incorporation that there shall be no more than 11 directors.
9. Resolutions for the election of directors
Regarding resolutions for the election of directors, the Company has stipulated in its Articles of Incorporation that approval of such resolutions shall require that
10. Requirements for special resolutions at the General Meeting of Shareholders
With respect to special resolutions by the General Meetings of Shareholders, as provided under Article 309-2 of the Corporation Law, the Company has stipulated in its Articles of Incorporation that approval of such resolutions shall require that shareholders holding one-third or more of the voting rights of all shareholders eligible to vote be in attendance, and that two-thirds of the shareholders present vote in the affirmative. The aim of this rule is to promote a smoother transaction of business at General Shareholders Meetings.
Directors
Name Title
Date joined company
Previous or current
employers/occupations Date of birth Term
Thousand shares
Hiroshi Sakata President and Representative Director
May-81 The Dai-Ichi Kangyo Bank Ltd.
14-Feb-52 9 years 65.3
Makoto Ohta Representative Senior Managing Director
Jul-90 The Sanwa Bank Ltd. 21-Oct-48 11 years 7.6
Hiroshi Arakawa Managing Director Apr-69 20-Jan-46 12 years 10.4
Ryoichi Kojima Director Apr-69 30-Oct-46 7 years 6.9
Seiko Tasaki Director Sep-92 16-Dec-48 6 years 1.9
Seiji Miyazaki Director Apr-70 1-May-46 2 years 7.3
Atsushi Hachiboshi Director Aug-03 Mizuho Bank, Ltd.,
Mizuho Research Institute
4-Sep-49 - 1.0
Akishige Sekiya Standing Corporate Auditor
Apr-70 3-Sep-47 1 year 5.9
Yoshinobu Sato Corporate Auditor Aug-03 Nissho Iwai Corp., Shin Mitsui Sugar
30-Jun-41 4 years 1.0
Kunihiko Maeda Corporate Auditor Aug-07 Mizuho Bank, Ltd., AEON Mall Co., Ltd.
5-Jul-41 -
-107.3
Current assignments and previous positions in the Company have been omitted.
Under law, the Company is required to have a certain number of corporate auditors. To prepare for the possibility that it might not be able to fill the required number of seats, the Company has elected an alternate corporate auditor in accordance with Article 329-2 of the Corporation Law.
Name Title
Date joined company
Previous or current
employers/occupations Date of birth
Thousand shares
Tadashi Suzuki Alternate Corporate Auditor
Employees
Consolidated 2007
Business segment Number
Wholesaling 1,386
Retailing 104
Others 14
Corporate staff 207
1,711
Parent Total or average
Number 571
Average age 37.1
Average years of service 14.0
Average annual salary (thousands of yen) 5,980
Average annual salary includes bonuses and overtime pay.
Union
Sakata Seed Corporation’s union is an intra-company union independent of any outside umbrella organization. The Company enjoys amicable labor relations.
Stock options
(1) Details of stock options
Stock options in 2002 Categories and numbers of persons
granted options
22 directors of consolidated subsidiaries; 14 employees of the Company
No. of stock options* Common stock: 45,900 shares
Date granted October 2, 2002
Conditions for establishment of option rights
That grantees continue their employment from the date the options are granted (October 2, 2002) until the date the option rights are established (September 30, 2004)
Employment period affected Two years (from October 2, 2002 to September 30, 2004)
Period for exercise of options October 1, 2004 to August 31, 2007
(2) Total number of stock options and changes in outstanding options
Expressed as the number of shares that would result from the exercise of options outstanding during the years ended May 2006 and 2007.
Shares; Yen Stock options in 2002 No. of stock options (shares)
After the establishment of option rights
As of the end of the fiscal year to May 2005 45,900
Option rights established
-Rights exercised
-Options that have lapsed
-Balance of unexercised options 45,900
Price information (¥)
Exercise price 1,485
Average stock price at time of exercise
-Acquisition of treasury stock
Types of shares, etc.
The acquisition of common stock as prescribed under Article 155-7 of the Corporation Law
Acquisitions which are not based on resolutions adopted by the General Meeting of Shareholders or the Board of Directors
Yen No. of shares Total value
Treasury stock acquired during the year under review 2,904 4,224,252
Disposal and ownership of treasury stock
Fiscal year under review Period under review
Yen
Number of shares
Total value of disposed shares
Number of shares
Total value of disposed shares
Acquired treasury stock sold to underwriters - - -
-Treasury stock that has been acquired and cancelled - - -
-Acquired treasury stock transferred though mergers, share exchanges or corporate breakups
- - -
-Other
(Treasury stock acquired in response to
shareholders’ requests for the purchase shares of less than one unit)
152 224,425 -
-No. of treasury shares held 1,418,462 - 1,418,875
-Other issues
Cash Flows
Consolidated statement of cash flows
Years ended May 31; Millions of yen 2005 2006 2007 Net cash provided by (used in) operating activities
Net income before taxes and other adjustments 2,274 1,435 1,180
Depreciation expenses 1,991 2,083 2,343
Amortization of consolidation differences (113) (130)
-Amortization of negative goodwill - - (97)
Allowance for doubtful accounts 25 (21) (173)
Interest and dividend income (420) (419) (480)
Interest expenses 74 94 138
Foreign exchange losses (gains) (4) (22) (12)
Impairment losses - 273 362
Loss on valuation of investment securities - 207
-Gain on sales of investment securities - (374) (33)
Gain from investment securities portfolio - - (150)
Decrease (increase) in trade receivables 359 800 89
Decrease (increase) in inventory 1,098 (958) (1,301)
Increase in notes and accounts payable (575) (616) (942)
Others 421 550 (228)
5,130 2,902 694
Interest and dividends received 405 437 491
Interest paid (71) (92) (151)
Income taxes and others paid (1,094) (686) (345)
4,369 2,560 689
Net cash provided by (used in) investing activities
Increase in time deposits (1,953) (3,973) (1,555)
Proceeds from decrease in time deposits 2,260 3,973 1,161
Payments for purchase of marketable securities (3,681) (372) (95)
Proceeds from sales of marketable securities 3,637 129 355
Payments for acquisition of tangible fixed assets (1,637) (2,491) (984)
Proceeds from sales of tangible fixed assets - - 455
Payments for acquisition of intangible fixed assets (227) (767) (498)
Proceeds from redemption of marketable securities - - 1,099
Payments for purchase of investment securities (3,379) (3,010) (1,308)
Proceeds from sales of investment securities 662 858 66
Proceeds from redemption of investment securities 762 2,092
-Payments for acquisition of subsidiaries' capital (105) (774) (0)
Payments for loans and advances (10) (7) (28)
Proceeds from collection of short-term loans 22 24 35
Payments for acquisition of shares of a newly consolidated subsidiary - (507)
-Others 618 (325) 1
Years ended May 31; Millions of yen 2005 2006 2007 Net cash provided by (used in) financing activities
Increase (decrease) in short-term borrowings 227 813 98
Payments for purchase of treasury stock (33) (3) (3)
Dividend payments (842) (1,038) (990)
Others (32) 259 (14)
(679) 29 (910)
Effects of exchange rate changes on cash and cash equivalents 72 226 84
Increase (decrease) in cash and cash equivalents 731 (2,336) (1,433)
Cash and cash equivalents at beginning of year 8,467 9,198 6,862
Cash and cash equivalents at end of year 9,198 6,862 5,428
Relationship between the balance of cash and cash equivalents as of term-end and balance sheet items
Years ended May 31; Millions of yen 2005 2006 2007
Cash and deposits 14,371 13,094 13,672
Time deposits, etc., of 3 months or longer (5,173) (6,231) (8,243)
Cash and cash equivalents 9,198 6,862 5,428
Principal assets and liabilities of a recently acquired company that has become a newly consolidated subsidiary
Breakdown of assets and liabilities of Qualiveg Seed Production, Inc., at the time of initial consolidation; relationship between the acquisition value of the newly acquired company and the expenditures (net) required for its acquisition.
Years ended May 31; Millions of yen 2005 2006 2007
Current assets - 133
-Fixed assets - 587
-Consolidation translation adjustments - 212
-Current liabilities - (131)
-Long-term liabilities - (293)
-Acquisition value of shares of Qualiveg Seed Production, Inc. - 508
-Cash and cash equivalents of Qualiveg Seed Production, Inc. - (0)
-Balance: Expenditures required for the acquisition of Qualiveg Seed Production, Inc.
-Capital expenditures
The Sakata Group spent ¥672 million on capital investment projects in Japan,
principally in the wholesaling business. Its major expenditures were: ¥345 million for a companywide integrated information system; ¥75 million for machinery and equipment at the Yaita Distribution Center; ¥40 million for greenhouses for farm use; and ¥31 million for renovation-related construction at the Hazawa Office.
Dividend policy
The seeds, seedlings and other products handled by the Company are constantly
exposed to risks related to the weather and other natural phenomena. These risks affect the Company’s operations throughout the operating cycle, from production to sales. The Company is also facing rapid changes in its operating environment: increasingly, seed companies are affiliating themselves with industrial groups in Japan and
elsewhere, consumption is expanding in Asia and so forth.
Under these conditions, the Company has long maintained a basic policy of retaining sufficient earnings to strengthen its management structure and its base of operations. Its aim has been to position itself to sustain future business development and to adapt to sudden and drastic changes in the business environment. At the same time, its basic policy with respect to the distribution of earnings has been to maintain the most stable payout possible. In line with this basic policy, it is endeavoring to respond to the support provided it by its shareholders by making payouts that are commensurate with its belief in the importance of returning profits to shareholders.
Accordingly, the Company has decided to pay a dividend for the term of ¥20 yen per share, which includes the ¥10 per share it paid as an interim dividend. The
decision-making bodies with respect to dividends are the General Meeting of
Shareholders for year-end dividends and the Board of Directors for interim dividends.
The Company has amended its Articles of Incorporation to include the following statement: “Based on a resolution of the Board of Directors, the Company shall be allowed to pay an interim dividend each year to shareholders of record as of November 30.”
The dividends paid for the year under review are as shown below.
Date of decision Dividend payout Dividend per share
(Millions of yen) (Yen)
January 9, 2007
Resolution of Board of Directors
494 10
August 30, 2007
Resolution of General Meeting of Shareholders
Consolidated Operations
Consolidated income statement
Years ended May 31; Millions of yen 2005 2006 2007
Net sales 46,357 46,042 46,671
Cost of goods sold 24,935 24,132 24,716
Gross profit on sales 21,421 21,910 21,955
Selling, general and administrative expenses 19,644 21,068 21,682
Operating income 1,776 841 273
Nonoperating income
Interest income 286 237 259
Dividend income 134 181 220
Rental income 121 192 190
Amortization of consolidation differences 113 130
-Amortization of negative goodwill - - 97
Foreign exchange gains - 285 346
Gain from investment securities portfolio - - 150
Others 249 318 137
905 1,347 1,403
Nonoperating expenses
Interest expenses 74 93 137
Foreign exchange losses 38 -
-Sales discount - - 38
Others 260 143 122
372 237 298
Ordinary profit 2,309 1,951 1,378
Extraordinary income
Gain on sales of fixed assets - - 76
Gain on sales of investment securities - 374 33
Gain on reversal of allowance for doubtful accounts - - 91
Insurance claims received - - 44
Gain on reversal of allowance for retirement benefits at overseas
subsidiaries - - 64
Others - - 50
Years ended May 31; Millions of yen 2005 2006 2007 Extraordinary losses
Impairment losses - 273 362
Loss on disposal of fixed assets 17 -
-Loss on office relocation - - 77
Special retirement allowances for directors and corporate auditors at overseas subsidiaries
- - 72
Past service costs at overseas subsidiaries - 266
-Loss on valuation of investment securities 17 207
-Compensation expenses - 141
-Others - - 46
34 889 558
Income before taxes and other adjustments 2,274 1,435 1,180
Corporate, inhabitant and other taxes 841 588 532
Deferred taxes (194) 340 456
646 928 989
Minority interest in income of consolidated companies 46 (27) (2)
Consolidated statement of changes in net assets
Shareholders' equity
Millions of yen; May 31, 2007 Common stock Capital surplus Retained earnings Treasury stock
Total shareholders' equity
Balance as of May 31, 2006 13,500 10,823 62,178 (2,090) 84,410
Changes during the term
Dividends - - (989) - (989)
Net income (loss) - - 194 - 194
Acquisition of treasury stock
- - - (4) (4)
Disposal of treasury stock - (0) - 0 0
Other changes in non-shareholders' equity items during the term (net)
- - - -
-Total changes during the term - (0) (795) (3) (799)
Balance as of May 31, 2007 13,500 10,823 61,382 (2,094) 83,611
Valuation/translation gains (losses)
Millions of yen; May 31, 2007
Unrealized gains (losses) on other securities
Foreign currency translation adjustments
Total valuation/translation gains (losses)
Minority shareholders' equity in consolidated
companies Total net assets
Balance as of May 31, 2006 2,808 170 2,979 80 87,470
Changes during the term
Dividends - - - - (989)
Net income (loss) - - - - 194
Acquisition of treasury
stock - - - - (4)
Disposal of treasury stock - - - - 0
Other changes in non-shareholders' equity items during the term (net)
950 569 1,519 (1) 1,518
Total changes during the term 950 569 1,519 (1) 718
Shareholders' equity
Millions of yen; May 31, 2006 Common stock Capital surplus Retained earnings Treasury stock
Total shareholders' equity
Balance as of May 31, 2005 13,500 10,823 62,696 (2,086) 84,933
Changes during the term
Dividends - - (544) - (544)
Dividends (interim) - - (494) - (494)
Directors' and corporate auditors' bonuses
- - (13) - (13)
Net income (loss) - - 534 - 534
Acquisition of treasury
stock - - - (3) (3)
Disposal of treasury stock - 0 - 0 0
Other changes in non-shareholders' equity items during the term (net)
- - - -
-Total changes during the term - 0 (518) (3) (522)
Balance as of May 31, 2006 13,500 10,823 62,178 (2,090) 84,410
Valuation/translation gains (losses)
Millions of yen; May 31, 2006
Unrealized gains (losses) on other securities Foreign currency translation adjustments Total valuation/translation gains (losses) Minority shareholders' equity in consolidated
companies Total net assets
Balance as of May 31, 2005 1,520 (1,527) (7) 836 85,762
Changes during the term
Dividends - - - - (544)
Dividends (interim) - - - - (494)
Directors' and corporate auditors' bonuses
- - - - (13)
Net income (loss) - - - - 534
Acquisition of treasury
stock - - - - (3)
Disposal of treasury stock - - - - 0
Other changes in non-shareholders' equity items during the term (net)
1,288 1,698 2,986 (755) 2,230
Total changes during the term 1,288 1,698 2,986 (755) 1,708
Results of operations
Fiscal year ended May 31, 2007
Net sales, up 1.4% to ¥46,671 million; ordinary profit, down 29.4% to ¥1,378 million; net income, down 63.7% to ¥194 million.
Economic and other factors affecting operations
1. Recovery in Japanese economy, led by higher capital spending and strong growth in exports:
• Improving corporate profitability
• Rising consumer spending
2. Critical changes in the Company’s operating environment
• In the Japanese seed industry, the emergence of large corporate farms and a trend toward more land consolidation to increase productivity
• Advancing maturity of the food market, reflecting Japan’s aging population, and, against this background, increasing concerns about food safety and demands for worry-free food among consumers
• Continuing deterioration of the business environment for seed stores: 1) Changes in modes of distribution
2) A combination of lower product prices and higher costs of production as a result of high oil prices
3. Globally, the entry of multinational chemical companies into the ornamental seed market
• Increasing numbers of acquisitions and mergers, including acquisitions of Japanese seed companies by foreign interests
• Increasing importance of financial strength as a key factor in developing and marketing seeds
Financial analysis (year on year, percentage changes)
1. A moderate increase in overseas sales is offset by weak sales domestically.
• Sales of vegetable seeds up 1.9%, highlighted by:
2) These positives were offset by a significant falloff in sales of spinach and melons in Japan; the weakness in spinach and melons in Japan also offset higher sales of tomatoes, broccoli and carrots in the domestic market.
3) Sales of highly profitable peppers to Mexico declined precipitously, as the price of fresh peppers fell in the face of large imports of low-priced dried peppers from China; in addition, hurricane-related flooding affected pepper sales by reducing the amount of acreage in production by Mexican farmers.
• Sales of flower seeds down by 0.7%, amid a continuing worldwide downturn in the profitability of the flower business
1) Problems were particularly severe in the European and Japanese wholesaling divisions
2) In Europe, while competition severely depressed sales of pansies, primulas and lisianthus, the integration of the Company’s existing markets with those formerly served by L. Daehnfeldt did not go well. To improve the situation there, the Company initiated urgent efforts to reconstruct its strategy on the ground in Europe.
• Seedlings, bulbs and agricultural and horticultural products
1) Seedlings: higher sales in the northern European market and strong sales by the Japanese retailing division
2) Bulbs: reduced wholesaling revenue due to low profitability of farming tulips and lilies in Japan (bulbs sold only in Japan)
3) Agricultural and horticultural products: reduced demand from farmers due to higher prices of petroleum-based products
2. Both operating income and ordinary profit declined sharply as a result of:
• A revision of the method used to calculate unrealized profits on inventories in intra-company transactions, leading to a sharp decline in gross profit
• Higher SG&A expenses, principally in Europe; these higher expenses in Europe reflected the incurrence of increased spending to expand sales accompanied by a significant weakening of the yen against the euro
• No change in the contribution from non-operating accounts 3. Extraordinary losses sharply eroded net income:
• Restructuring-related expenses in Europe; retirement expenses in South America
Segment information by business (year on year, percentage changes)
1. Wholesaling: net sales, down 0.1% to ¥34,121 million; operating income, down 13.0% to ¥5,401 million
• Vegetable seeds: sales growth was very rapid in Europe, but sales fell sharply in North America; sales were generally on target in South America and Asia but declined in Japan.
1) Domestic market: the decline primarily reflected a fall in spinach sales, which resulted from a delay in introducing a disease-resistant variety; but there was continued steady growth in sales of other strategically important products; e.g. tomatoes, carrots, corn and leeks.
2) Overseas markets: introduction of a new broccoli variety contributed to stronger sales and profits in Europe.
• Flower seeds: sales declined in all regions amid intensifying competition. 1) Sales of mainstay pansies and Primulas were particularly weak in North
America, Europe and Japan; this weakness was exacerbated by ordering delays from sellers in North America, which pushed sales into the next fiscal year.
2) Sales of Lisianthus declined in Europe but increased in Japan. Sales of Gerberas in Europe and of Begonias in North America were higher.
• Bulbs: replacement of unprofitable lines continued; sales of Tulips and frozen lily bulbs declined sharply; the Company reported good results for its original Ranunculus and Gladiolus varieties.
• Seedlings
1) Sales increased in Denmark and the UK.
2) In Japan, higher sales of seedling sets containing Sakata’s original varieties and higher sales of flower-bed seedlings
3) Sales of plug seedlings declined due to lower demand from producers.
• Agricultural and horticultural products
1) Because of declining profitability, producers refrained from purchasing petroleum-related products, whose prices remained stuck at high levels.
