1 SUMITOMO DENSETSU CO., LTD. AND SUBSIDIARIES Consolidated Financial Statements
2 Report of Independent Public Accountants To the Board of Directors of Sumitomo Densetsu Co., Ltd. : We have audited the consolidated balance sheets of Sumitomo Densetsu Co., Ltd. (a Japanese corporation, the Company ) and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, shareholders equity and cash flows for the years then ended, expressed in Japanese yen. Our audits were made in accordance with generally accepted auditing standards in Japan and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the consolidated financial statements referred to above present fairly the consolidated financial position of the Company and subsidiaries as of March 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in Japan (Note 1) applied on a consistent basis during the periods, except for the changes in accounting policies, with which we concur, and adoption of new accounting standards referred to in the following paragraph. As explained in Note 2 (c), during the year ended March 31, 2002, the Company changed its method of presentation of revenue from insurance agency. Also as explained in Note 2 (e), during the year ended March 31, 2002, the Company changed its method of accounting for certain construction contracts when losses are expected, and provided for allowance for such losses. During the year ended March 31, 2001, the Company and its domestic consolidated subsidiaries adopted new Japanese accounting standards for foreign currency translation, financial instruments and employees pension and severance costs as explained in Note 2. Also, in our opinion, the U.S. dollar amounts in the accompanying consolidated financial statements have been translated from Japanese yen on the basis set forth in Note 1. Osaka, Japan June 27, 2002
3 SUMITOMO DENSETSU CO., LTD. CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2002 AND 2001 (Note 1) ASSETS Current Assets: Cash and cash equivalents 12,054 11,091 $ 90,462 Trade notes and accounts receivable (Note 11) 59,664 67, ,760 Allowance for doubtful receivables (218) (210) (1,636) Costs on uncompleted contracts 10,586 13,898 79,445 Deferred tax assets (Note 7) 1, ,294 Other current assets 7,062 6,197 52,998 Total current assets 90,653 99, ,323 Property and Equipment, at cost (Note 5): Land 8,532 8,949 64,030 Buildings and structures 7,520 7,575 56,435 Machinery and equipment 6,420 6,427 48,180 Construction in progress ,472 22, ,645 Less-accumulated depreciation (9,232) (9,038) (69,283) 13,240 13,923 99,362 Investments and Other Assets: Intangible assets 2,170 1,164 16,285 Investments in and advances to non-consolidated subsidiaries and affiliates ,674 Investments in securities (Notes 3): 6,579 6,628 49,373 Deferred tax assets (Note 7) 2,980 2,805 22,364 Other assets 7,731 7,762 58,019 Allowance for doubtful receivables (1,757) (1,429) (13,186) 17,926 17, , , ,921 $ 914,214 The accompanying notes to consolidated financial statements are an integral part of these statements.
4 SUMITOMO DENSETSU CO., LTD. CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2002 AND 2001 LIABILITIES (Note 1) AND SHAREHOLDERS EQUITY Current Liabilities: Short-term borrowings (Note 5) 18,582 17,709 $ 139,452 Current portion of long-term debt (Note 5) 4,456 4,733 33,441 Notes and accounts payable 48,837 54, ,506 Accrued expenses 2,364 2,640 17,741 Advances received on uncompleted contracts 3,180 6,898 23,865 Accrued income taxes (Note 7) ,351 Provision for losses on construction contracts 1,420-10,657 Other current liabilities 4,694 3,041 35,227 Total current liabilities 83,713 89, ,240 Long-term Liabilities: Long-term debt (Notes 5) 8,948 9,970 67,152 Accrued pension and severance costs (Note 8) 7,224 7,743 54,214 Other long-term liabilities 196 1,028 1,471 16,368 18, ,837 Minority Interests ,049 Contingent Liabilities (Note 9) Shareholders Equity (Note 6): Common stock; Authorized -73,000,000 shares Outstanding - 35,635,879 shares in 2002 and ,440 6,440 48,330 Additional paid-in capital 6,038 6,038 45,314 Retained earnings 7,674 8,500 57,591 Net unrealized holding gains on investments in securities (available-for-sale securities) (Note 3) 969 1,165 7,272 Foreign currency translation adjustments (188) (370) (1,411) Treasury stock, at cost; 1,392 shares in 2002 and 48 shares in 2001 (1) (0) (8) Total shareholders equity 20,932 21, , , ,921 $ 914,214
5 SUMITOMO DENSETSU CO., LTD. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2002 AND 2001 (Note 1) Net Sales (Note 11) 161, ,378 $ 1,215,340 Cost of Sales 150, ,281 1,130,867 Gross profit 11,256 12,097 84,473 Selling, General and Administrative Expenses 9,597 10,293 72,023 Operating income 1,659 1,804 12,450 Other Income (Expenses): Interest expense, net (556) (968) (4,173) Dividends received Foreign exchange gain ,036 Equity in net income (loss) of affiliates (94) 46 (705) Devaluation of investments in securities (42) (94) (315) Provision for losses on construction contracts (1,420) - (10,657) (Loss) gain on sales of securities, net (Note 3) (10) 102 (75) Write-off of initial transition cost of pension and severance plans (Note 8) - (5,319) - Devaluation of golf memberships - (1,095) - Loss on interest swap agreements - (808) - Other, net (458) 121 (3,437) (2,361) (7,467) (17,718) Loss before Income Taxes and Minority Interests (702) (5,663) (5,268) Provision for income taxes (Note 7): Current ,398 Deferred (918) (2,524) (6,889) (332) (2,148) (2,491) Minority Interests 34 (138) 255 Net Loss (404) (3,377) $ (3,032) Per Share of Common Stock (Note 6) Yen (Note 1) Net loss (11.34) (94.77) $ (0.09) Cash dividends applicable to the year $ 0.06 The accompanying notes to consolidated financial statements are an integral part of these statements.
6 SUMITOMO DENSETSU CO., LTD. CONSOLIDATED SHAREHOLDERS EQUITY FOR THE YEARS ENDED MARCH 31, 2002 AND 2001 (Note 1) Common Stock: Beginning balance 6,440 6,440 $ 48,330 Ending balance 6,440 6,440 $ 48,330 Additional paid-in capital: Beginning balance 6,038 6,038 $ 45,314 Ending balance 6,038 6,038 $ 45,314 Retained earnings: Beginning balance 8,500 12,371 $ 63,790 Net loss for the year (404) (3,377) (3,032) Cash dividends (356) (428) (2,672) Bonuses to directors and corporate auditors (66) (66) (495) Ending balance 7,674 8,500 $ 57,591 Net unrealized holding gains on investments in securities: Beginning balance 1,165 - $ 8,743 Net (decrease) increase (196) 1,165 (1,471) Ending balance 969 1,165 $ 7,272 Foreign currency translation adjustments: Beginning balance (370) - $ (2,777) Net increase (decrease) 182 (370) 1,366 Ending balance (188) (370) $ (1,411) Treasury stock, at cost: Beginning balance (0) (0) $ (0) Net increase (1) (0) (8) Ending balance (1) (0) $ (8) The accompanying notes to consolidated financial statements are an integral part of these statements.
7 SUMITOMO DENSETSU CO., LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2002 AND 2001 (Note 1) Cash Flows from Operating Activities: Loss before income taxes and minority interests (702) (5,663) $ (5,268) Adjustments to reconcile loss before income taxes to net cash provided by operating activities: Depreciation and amortization ,795 Interest expense, net ,173 Dividends received (81) (102) (608) Loss (gain) on sales of securities, net 10 (102) 75 Equity in net loss (income) of affiliates 94 (46) 705 Devaluation of investments in securities Decrease (increase) in trade notes and accounts receivable 8,428 (9,287) 63,250 Decrease in inventories 3,735 1,014 28,030 Increase in allowance for doubtful receivables 330 1,163 2,477 (Decrease) increase in trade notes and accounts payable (5,633) 8,260 (42,274) Decrease in advances received on uncompleted contracts (3,764) (606) (28,248) Decrease in accrued prior service pension cost - (2,525) - Increase in provision for loss on construction contracts 1,420-10,657 (Decrease) increase in provision for retirement benefits (479) 7,589 (3,595) Other, net (157) (500) (1,178) Sub-total 4, ,306 Interest and dividends received ,426 Interest paid (1,087) (998) (8,158) Income taxes paid (907) (816) (6,807) Net cash provided by (used in) operating activities 2,634 (800) 19,767 Cash Flows from Investing Activities: Acquisition of property and equipment (285) (427) (2,139) Proceeds from sale of property and equipment ,895 Purchase of intangible assets (1,120) - (8,405) Purchase of investments in securities (336) (168) (2,522) Proceeds from sale of investments in securities ,041 Proceeds from sale of investments in subsidiaries and affiliates (104) (111) (780) Other, net ,312 Net cash used in investing activities (746) (458) (5,598) Cash Flows from Financing Activities: Net increase in short-term borrowings 635 1,280 4,765 Proceeds from long-term debt 1,950 3,600 14,634 Repayment of long-term debt (4,749) (3,091) (35,640) Proceeds from issuance of bonds 1,453-10,905 Cash dividends paid (356) (428) (2,672) Cash dividends paid to minority shareholders (37) (4) (277) Other, net (1) 0 (8) Net cash (used in) provided by financing activities (1,105) 1,357 (8,293) Effect of exchange rate changes on cash and cash equivalents ,351 Net increase (decrease) in cash and cash equivalents ,227 Cash and cash equivalents at beginning of year 11,091 10,957 83,235 Cash and cash equivalents at end of year 12,054 11,091 $ 90,462 The accompanying notes to consolidated financial statements are an integral part of these statements.
8 SUMITOMO DENSETSU CO., LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2002 AND BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS Sumitomo Densetsu Co., Ltd. (the "Company") and its consolidated domestic subsidiaries maintain their official accounting records in Japanese yen and in accordance with the provisions set forth in the Japanese Commercial Code and accounting principles and practices generally accepted in Japan ("Japanese GAAP"). The accounts of overseas subsidiaries are based on their accounting records maintained in conformity with generally accepted accounting principles and practices prevailing in the respective countries of domicile. Certain accounting principles and practices generally accepted in Japan are different from International Accounting Standards and standards in other countries in certain respects as to application and disclosure requirements. Accordingly, the accompanying financial statements are intended for use by those who are informed about Japanese accounting principles and practices. The accompanying financial statements have been restructured and translated into English (with some expanded descriptions and the inclusion of 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 financial statements. The translation of the Japanese yen amounts into are included solely for the convenience of readers, using the prevailing exchange rate at March 31, 2002, which was to U.S. $1.00. 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 at this or any other rate of exchange. 2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (a) Principles of consolidation The consolidated financial statements include the accounts of the Company and all of its significant subsidiaries. All significant inter-company transactions and accounts have been eliminated. The excess of cost over underlying net assets at the date of acquisition is amortized over a period of 20 years on a straight-line basis. If the amount is immaterial, the excess of cost is expensed at the period of acquisition. Investments in significant affiliates are accounted for by the equity method. Investments in insignificant non-consolidated subsidiaries and affiliates are stated at cost. (b) Translation of foreign currencies Foreign currency monetary assets and liabilities are translated into Japanese yen at the exchange rate in effect at each fiscal year end and the resulting translation gains or losses are included in net loss. All assets, liabilities, revenues and expenses of overseas subsidiaries and affiliates are translated into Japanese yen at the current exchange rate of the respective fiscal year end, and shareholders' equity is translated at historical rates. The
9 resulting foreign currency translation adjustments are shown as a separate component of shareholders' equity and included in minority interests. Effective April 1, 2000, the Company and its domestic consolidated subsidiaries adopted the revised accounting standard for foreign currency translation. In accordance with the new standard, foreign currency translation adjustments, which were included in assets in the prior year, have been included in the shareholders equity, net of minority interest. The effect of adopting the new accounting standard in fiscal 2001 was to decrease loss before income taxes by 52 million. (c) Revenue recognition Revenue on construction contracts is recognized on the percentage-of-completion method for long-term and large-scale construction contracts exceeding 12 months and 100 million. Revenue on other contracts is recognized on the completed-contract method. Revenue from insurance agency is recognized when the insurance contracts are made. Effective April 1, 2001, the Company reclassified the revenue from insurance agency from other income to sales. This reclassification is in consideration of the increasing revenue from insurance agency and more fairly presents the results of current period operations. The effect of this reclassification was to increase sales and operating income by 303 million (US$2,274 thousand) and decrease other income by the same amount. (d) Allowance for doubtful receivables The allowance for doubtful receivables is provided based upon estimated uncollectible amounts for individually identified doubtful receivables and historical loss experience for other receivables. (e) Provision for loss on construction contracts Accounting change During the year ended March 31, 2002, the Company changed its accounting method and began to assess and record a provision for construction contracts when estimated costs will exceed contract revenue. This change relates to certain large construction projects, which are unlikely to be profitable due to changes in the environment. This change will more fairly present the results of current period operations and financial position on a more conservative basis. The effect of this change was to increase net loss by 1,420 million (US$10,657 thousand). (f) Marketable securities, investments in subsidiaries and affiliates, and investments in securities Equity securities issued by subsidiaries and affiliates, which are not consolidated or accounted for using the equity method, are stated at cost. Available-for-sale securities with quoted market values are stated at fair market value. Unrealized gains and losses on sales of these securities are reported, net of related income taxes, as a separate component of shareholders equity. Realized gains and losses on sale of such securities are computed using the average cost. Available-for-sale securities with no available fair market value are stated at the average cost. Available-for-sale securities maturing within one year from the balance sheet date and highly liquid investment funds are included in current assets, and other securities are included in investments in and advances to non-consolidated subsidiaries and affiliates and investments in securities. Effective April 1, 2000, the Company and domestic consolidated subsidiaries adopted the new Japanese accounting standard Accounting Standard for Financial Instruments ( Opinion Concerning the Establishment of
10 Accounting Standard for Financial Instruments issued by the Business Accounting Deliberation Council on January 22, 1999). The new standard requires accounting for the securities as described above while the former method was to carry marketable securities at the lower of moving average cost or market. The effect of adopting the new accounting standard in fiscal 2001 was to record unrealized gains on available-for-sale securities, net of related income taxes and minority interests, of 1,165 million in shareholders equity. (g) Derivative and hedging transactions Derivative financial instruments are stated at fair value. If derivative financial instruments meet hedging criteria, the Company defer the recognition of gains or losses until the hedged transactions occur. The Company utilize hedge accounting for foreign currency forward exchange contracts hedging foreign currency monetary assets and interest rate swap contracts hedging interest on borrowings. The Company utilize hedging instruments to hedge future risks of changes in foreign exchange rates and interest rates in accordance with respective internal policies and procedures on risk control. The Company assess the effectiveness of each hedge contract by comparing the total cash flow fluctuation of hedging instruments and hedged items. The new accounting standard Accounting Standard for Financial Instruments, effective from the year ended March 31, 2001, requires companies to state derivative financial instruments at fair value and to recognize changes in fair value as gains or losses in the statement of operations unless derivative financial instruments are used for hedging purposes. The effect of adopting the new accounting standard in fiscal 2001 was to increase loss before income taxes and minority interests by 808 million. (h) Depreciation The Company and its domestic consolidated subsidiaries principally use the straight-line method for depreciation of buildings and the declining-balance method for other properties. Overseas subsidiaries principally use the straight-line method. (i) Leases Finance leases, which do not transfer ownership or that do not have bargain purchase option provisions, are accounted for in the same manner as operating lease. Certain foreign subsidiaries account for such leases as purchase transactions. (j) Income taxes The provision for income taxes is based on income for financial statement purposes. 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 incom e tax purposes. (k) Pension and severance costs The Company and most of its domestic consolidated subsidiaries have pension, retirement and termination allowance plans to provide benefits for substantially all employees. The benefits of the plans are, in general, determined on the basis of length of service and compensation at the time of termination or retirement. Payments of the benefits are made under an unfunded termination and retirement allowance plan and trusteed contributory and non-contributory funded plans. Under the plans, employees are entitled to lump-sum payments at the time of termination of their employment or to pension payments.
11 Effective April 1, 2000, the Company and its consolidated domestic subsidiaries adopted the new Japanese accounting standard Accounting for Retirement Benefits ( Opinion Concerning the Establishment of Accounting Standard for Retirement Benefits issued by the Business Accounting Deliberation Council on June 16, 1998). In accordance with the new accounting standard, the Company and its domestic consolidated subsidiaries provide for employees severance and pension costs commencing at March 31, 2001, based on the estimated amounts of projected benefit obligation reduced by the fair value of the pension plan assets at the fiscal year end. In prior years, the Company and its consolidated subsidiaries provided for the termination allowances based on the amount required if all employees involuntarily terminated at the year end under the unfunded termination and retirement allowance plan. Also, the payments of contributions to the funded plans were charged to income as paid and past service costs of the Company s pension plan were recorded on the accrual basis. In fiscal 2001, the Company and its consolidated subsidiaries wrote off the initial transition cost of 5,319 million, in connection with the adoption of the new standard, and included the amount in other expenses. In addition, directors and corporate auditors of the Company and certain subsidiaries receive lump-sum payments upon termination of their services under unfunded termination plans. The payments to directors and corporate auditors are subject to shareholders approval. The amount required based on length of service and remuneration to date under these plans is fully accrued. (l) Research and development Expenses related to research and development are charged to selling, general and administrative expenses as incurred and amounted to 696 million (US$5,223 thousand) and 763 million for the years ended March 31, 2002 and 2001, respectively. (m) 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 a maturity not exceeding three months at the time of purchase are considered to be cash and cash equivalents.
12 3. SECURITIES The carrying amounts of investments in securities at March 31, 2002 and 2001, consist of the following: Available-for-sale securities, which have quoted market values 6,147 6,174 $ 46,131 Non-marketable equity securities ,234 Non-marketable debt securities and other ,579 6,628 $ 49,373 The following is a summary of available-for-sale securities, which have quoted market values, at March 31, 2002 and 2001: Gross unrealized gains Gross unrealized losses Acquisition Book value 2002 cost (Market value) Equity securities 4,474 1,955 (282) 6,147 Gross Gross Acquisition unrealized unrealized Book value 2002 cost gains losses (Market value) Equity securities $ 33,576 $ 14,671 $ (2,116) $ 46,131 Gross Gross Acquisition unrealized unrealized Book value 2001 cost gains losses (Market value) Equity securities 4,162 2,106 (94) 6,174 Proceeds from sales of available-for-sales securities were 11 million (US$ 83 thousand) for the year ended March 31, The gross realized gains on those sales were 7 million (US$ 53 thousand). Proceeds from sales of available-for-sales securities were 245 million for the year ended March 31, The gross realized gains and losses on those sales were 134 million and 32 million, respectively. 4. DERIVATIVE TRANSACTIONS The derivative contracts, which do not meet the criteria for hedge accounting, are as follows: Interest rate swap contracts, not traded on exchanges: Pay fixed and receive variable rates Contracted amount Fair value Recognized loss Contracted amount Fair value Recognized loss Contracted amount Fair value Recognized loss 10,000 (407) (407) 10,000 (808) (808) $75,047 $(3,054) $(3,054)
13 5. SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings are primarily from banks and are represented by overdrafts and short-term notes, principally of 90 days maturity, bearing interest at average annual rates of approximately 1.46% and 1.50% in 2002 and 2001, respectively. The Company and its consolidated subsidiaries have had no difficulty in renewing such notes upon maturity. Long-term debt at March 31, 2002 and 2001, consists of the following: Unsecured bonds, payable in yen, due 2009, interest 1.66% 1,500 - $ 11,257 Secured loans from banks, insurance companies and other financial institutions, due 2002 to 2006, interest 2.17% ,203 Unsecured loans from banks, insurance companies and other financial institutions, due 2002 to 2008, interest 0.78%-4.80% 11,344 14,023 85,133 13,404 14, ,593 Less: current portion of long-term debt (4,456) (4,733) (33,441) 8,948 9,970 $ 67,152 Substantially all of the loans from banks are made under basic agreements, customary in Japan, which provide that, with respect to all present or future liabilities to the banks, the Company and its consolidated subsidiaries shall provide collateral or a third-party guarantee at the request of any such bank, that any collateral provided under any agreement will be applicable to all indebtedness to the banks and that lending banks have the right to offset deposits with them against any debt or obligation that becomes due and, in case of default and certain other specified events, against all debts payable to the banks. The aggregate annual maturities of long-term debt outstanding at March 31, 2002, are as follows: March ,671 $ 27, ,364 10, ,300 9, , , and thereafter 1,500 11,257 8,948 $ 67,152 The following assets are pledged as collateral for secured long-term debt, including current portion, at March 31, 2002 and Property and equipment, net of accumulated depreciation 1,353 1,373 $ 10,154
14 6. SHAREHOLDERS EQUITY Under the Japanese Commercial Code (the Code ), the entire amount of the issue price of shares is required to be accounted for as capital, 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. Effective October 1, 2001, the 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 reserve until the total amount of legal reserve and additional paid-in capital equals 25% of common stock. The legal reserve and additional paid-in capital may be used to eliminate or reduce a deficit by resolution of the stockholders' meeting or may be capitalized by resolution of the Board of Directors. On condition that the total amount of legal reserve and additional paid-in capital remains being equal to or exceeding 25% of common stock, they are available for dividends by the resolution of shareholders' meeting. Legal 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 unconsolidated financial statements of the Company in accordance with the Japanese Commercial Code. The Code allows a company to retire a portion of its outstanding shares upon approval of shareholders at the annual general meeting of shareholders or of the Board of Directors if stipulated in the Articles of Incorporation. Net loss per share is computed based on the weighted average number of shares of common stock outstanding during each period. On June 27, 2002, the Company s shareholders approved the payment of year-end cash dividends totaling 107 million (US$803 thousand) to the Company s shareholders of record at March 31, INCOME TAXES The Company and its consolidated domestic subsidiaries are subject to several taxes based on income which, in the aggregate, result in statutory tax rates of approximately 42% for the years ended March 31, 2002 and The following table summarizes the significant differences between the statutory tax rates and the effective tax rates for financial statement purposes for the years ended March 31, 2002 and 2001: Statutory tax rates 42.0% 42.0% Permanent nondeductible expenses (21.3) (2.8) Permanent nontaxable income Foreign tax credit Effect of lower tax rates of overseas subsidiaries Equity in net loss of affiliates (13.4) - Per capita inhabitant tax (12.3) (1.6) Other (10.9) (2.2) Effective tax rates 47.3 % 37.9 %
15 Significant components of the deferred tax assets and liabilities at March 31, 2002 and 2001, are as follows: Deferred tax assets: Accrued pension and severance costs 2,803 3,128 $ 21,036 Provision for loss on construction contracts 596-4,473 Allowance for doubtful receivables ,255 Accrued bonuses ,985 Loss on construction contracts on the percentage-of-completion method 240-1,801 Foreign tax credit 199-1,493 Net operating loss carry forwards ,441 Other ,792 5,500 4,759 41,276 Less-valuation allowance (112) (270) (841) Total deferred tax assets 5,388 4,489 40,435 Deferred tax liabilities: Unrealized holding gains and losses on investment securities (702) (845) (5,268) Reserve for deferred gains on sales of fixed assets (87) (95) (653) Other (114) (127) (856) Total deferred tax liabilities (903) (1,067) (6,777) Net deferred tax assets 4,485 3,422 $ 33, PENSION AND SEVERANCE COSTS The Company and its domestic consolidated subsidiaries have defined benefit pension plans. The plans comprise funded pension plans and unfunded lump-sum severance plans. The benefits are mostly determined by reference to rates of pay, length of service and conditions under which the terminations occur. The following tables set forth the changes in benefit obligation, plan assets and funded status of the Company and its consolidated subsidiaries at March 31, 2002 and Benefit obligation at end of year (26,120) (24,101) $ (196,022) Fair value of plan assets at end of year 13,844 13, ,895 Funded status: Benefit obligation in excess of plan assets (12,276) (10,445) (92,127) Unrecognized actuarial losses 5,887 2,858 44,180 Unrecognized prior service cost (707) - (5,306) Sub-total (7,096) (7,587) (53,253) Advances to funded pension plans Accrued pension and severance costs for employees in the consolidated balance sheets (7,110) (7,589) $ (53,358)
16 Pension and severance costs of the Company and its consolidated subsidiaries consist of the following components for the years ended March 31, 2002 and Service cost 1,034 1,014 $ 7,760 Interest cost ,064 Expected return on plan assets (528) (817) (3,963) Amortization: Transition obligation at date of adoption of new accounting standard - 5,319 - Prior service cost (353) - (2,649) Actuarial losses 190-1,426 Net periodic pension and severance cost 1,151 6,270 $ 8,638 Assumptions used in the accounting for the defined benefit plans for the years ended March 31, 2002 and 2001, are as follows: Method of attributing benefits to periods of service Straight - line basis Straight - line basis Discount rate 3.0% 3.5% Long-term rate of return on fund assets 4.0% 6.0% Amortization period for prior service cost 3 years - Amortization period for actuarial losses 15 years 15 years Amortization period for translation obligation - 1 year In addition, retirement benefits for directors and corporate auditors of the Company and certain subsidiaries of 114 million ($856 thousand) and 154 million are included in accrued pension and severance costs in fiscal 2002 and 2001, respectively. 9. CONTINGENT LIABILITIES The Company and subsidiaries were contingently liable, as of March 31, 2002, for trade notes receivable which were discounted or endorsed of 170 million (US$1,276 thousand), and as guarantors for borrowings of 1,252 million (US$9,396 thousand) by certain employees. 10. LEASES Information relating to finance leases, except those for which the ownership of the leased assets is considered to be transferred to lessee. a) Finance Leases as Lessee Information assuming capitalization of lease obligations for non-capitalized finance leases, including finance charges, at March 31, 2002 and 2001, is as follows: Acquisition cost* 1,425 1,190 $ 10,694 Accumulated depreciation ,450 Net book value* $ 6,244 *Including assumed future interest
17 Payments due within one year $ 2,004 Payments due after one year , $ 6,244 Lease payments under such leases for the years ended March 31, 2002 and 2001, were 273 million (US$2,049 thousand) and 292 million, respectively. 11. RELATED PARTY TRANSACTIONS Transactions with Sumitomo Electric Industries, Ltd. which is the major shareholder of the Company for the years ended March 31, 2002 and 2001, were as follows: Sales 9,902 15,808 $ 74,311 Amounts due from Sumitomo Electric Industries, Ltd. at March 31, 2002 and 2001, were as follows: Trade notes and accounts receivable at year end 5,595 9,374 $ 41, SEGMENT INFORMATION Overseas sales are those of the Company and its subsidiaries in countries other than Japan, including overseas subsidiaries sales to overseas third parties. Overseas sales for the year ended March 31, 2002 were as follows: 2002 Asia & Others Total Overseas sales 16,683 16,683 Consolidated net sales - 161,944 Ratio of overseas sales to consolidated net sales 10.3% 10.3% 2002 Asia & Others Total Overseas sales $ 125,201 $ 125,201 Information regarding overseas sales is omitted for fiscal 2001 since total overseas sales were less than 10 percent of consolidated total sales for the year.