Japan Vilene Company, Ltd. and Subsidiaries

Transcription

1 Japan Vilene Company, Ltd. and Subsidiaries Notes to Consolidated Financial Statements Year Ended March 31, BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations and in accordance with accounting principles generally accepted in Japan ("Japanese GAAP"), which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards. In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan. In addition, certain reclassifications have been made in the 2014 consolidated financial statements to conform to the classifications used in The consolidated financial statements are stated in Japanese yen, the currency of the country in which Japan Vilene Company, Ltd. (the "Company") is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of 120 to $1, the approximate rate of exchange as of March 31, Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements as of March 31, 2015, include the accounts of the Company and all subsidiaries (together, the "Group"). Under the control and influence concepts, those companies in which the Company, directly or indirectly, is able to exercise control over operations are fully consolidated, and those companies over which the Group has the ability to exercise significant influence are accounted for by the equity method. Investments in 9 associated companies are accounted for by the equity method. Investments in the remaining associated companies are stated at cost. If the equity method of accounting had been applied to the investments in these companies, the effect on the accompanying consolidated financial statements would not be material. The excess of the cost of acquisition over the fair value of the net assets of an acquired subsidiary at the date of acquisition is being amortized over a period of 5 years. The accounts of foreign subsidiaries are included on the basis of their fiscal year-end as of December 31. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is also eliminated Japan Vilene Company, Ltd. 27

2 Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements In May 2006, the Accounting Standards Board of Japan (the "ASBJ") issued ASBJ Practical Issues Task Force (PITF) No. 18, "Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements." PITF No. 18 prescribes that the accounting policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circumstances should in principle be unified for the preparation of the consolidated financial statements. However, financial statements prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or generally accepted accounting principles in the United States of America tentatively may be used for the consolidation process, except for the following items that should be adjusted in the consolidation process so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions that has been recorded in equity through other comprehensive income; (c) expensing capitalized development costs of R&D; (d) cancellation of the fair value model accounting for property, plant and equipment and investment properties and incorporation of the cost model accounting; and (e) exclusion of minority interests from net income, if contained in net income. Unification of Accounting Policies Applied to Foreign Associated Companies for the Equity Method In March 2008, the ASBJ issued ASBJ Statement No. 16, "Accounting Standard for Equity Method of Accounting for Investments." The new standard requires adjustments to be made to conform the associate's accounting policies for similar transactions and events under similar circumstances to those of the parent company when the associate's financial statements are used in applying the equity method unless it is impracticable to determine such adjustments. In addition, financial statements prepared by foreign associated companies in accordance with either International Financial Reporting Standards or generally accepted accounting principles in the United States of America tentatively may be used in applying the equity method if the following items are adjusted so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions that has been recorded in the equity through other comprehensive income; (c) expensing capitalized development costs of R&D; (d) cancellation of the fair value model accounting for property, plant and equipment and investment properties and incorporation of the cost model accounting; and (e) exclusion of minority interests from net income, if contained in net income. Business Combinations In October 2003, the Business Accounting Council issued a Statement of Opinion, "Accounting for Business Combinations," and in December 2005, the ASBJ issued ASBJ Statement No. 7, "Accounting Standard for Business Divestitures" and ASBJ Guidance No. 10, "Guidance for Accounting Standard for Business Combinations and Business Divestitures." The accounting standard for business combinations allowed companies to apply the pooling-of-interests method of accounting only when certain specific criteria are met such that the business combination is essentially regarded as a uniting-of-interests. For business combinations that do not meet the uniting-of-interests criteria, the business combination is considered to be an acquisition and the purchase method of accounting is required. This standard also prescribes the accounting for combinations of entities under common control and for joint ventures. In December 2008, the ASBJ issued a revised accounting standard for business combinations, ASBJ Statement No. 21, "Accounting Standard for Business Combinations." Major accounting changes under the revised accounting standard are as follows: (1) The revised standard requires accounting for business combinations only by the purchase method. As a result, the pooling-of-interests method of accounting is no longer allowed. (2) The previous accounting standard required research and development costs to be charged to income as incurred. Under the revised standard, in-process research and development costs (IPR&D) acquired in the business combination are capitalized as an Japan Vilene Company, Ltd.

3 intangible asset. (3) The previous accounting standard provided for a bargain purchase gain (negative goodwill) to be systematically amortized over a period not exceeding 20 years. Under the revised standard, the acquirer recognizes the bargain purchase gain in profit or loss immediately on the acquisition date after reassessing and confirming that all of the assets acquired and all of the liabilities assumed have been identified after a review of the procedures used in the purchase price allocation. The revised standard was applicable to business combinations undertaken on or after April 1, Cash Equivalents Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits and certificate of deposits, all of which mature or become due within three months of the date of acquisition. Inventories Inventories are stated at the lower of cost, determined by the average method, or net selling value. Inventories of subsidiaries are stated principally at the lower of latest purchase cost or net selling value. Investment Securities Investment securities are classified and accounted for, depending on management's intent, as available-for-sale securities. Available-for-sale securities are carried at fair value as of the balance sheet date, with unrealized gain and loss, net of applicable taxes, reported in a separate component of equity. Available-for-sale securities whose fair value is not readily available are carried at cost. The cost of securities sold is determined by the moving-average method. Property, Plant and Equipment Property, plant and equipment are stated at cost. Significant renewals and additions are capitalized, and maintenance and repairs are charged to income as incurred. Depreciation of property, plant and equipment is principally computed by the declining-balance method except for buildings. The Company uses the straight-line method for depreciation of buildings. The domestic subsidiaries use the straight-line method for depreciation of buildings acquired after March 31, The declining-balance method was used for buildings acquired prior to April 1, Depreciation of property, plant and equipment of foreign subsidiaries is principally computed by the straight-line method. The ranges of the estimated useful lives are as follows: Buildings and structures Machinery and equipment 38 to 50 years Principally 7 years Long-Lived Assets The Group reviews its long-lived assets for impairment whenever events or changes in circumstance indicate the carrying amount of an asset or asset group may not be recoverable. An impairment loss is recognized if the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the asset or the net selling price at disposition. Retirement and Pension Plans Liabilities for employees' retirement benefits of the Company and its subsidiaries are provided based on the projected benefit obligations and the fair value of pension plan assets as of the balance sheet date. Prior service cost is amortized by the straight-line method over stated years that do not exceed the average remaining service period of the eligible employees (5 years) Japan Vilene Company, Ltd. 29

4 Actuarial gain and loss are amortized in the year following the year in which the gain or loss is recognized by the straight-line method over stated years that do not exceed the average remaining service period of the eligible employees (10 years). Retirement allowances for directors in some subsidiaries are recorded as a liability at the amount that would be required if the directors retired at each balance sheet date. In May 2012, the ASBJ issued ASBJ Statement No. 26, "Accounting Standard for Retirement Benefits" and ASBJ Guidance No. 25, "Guidance on Accounting Standard for Retirement Benefits," which replaced the accounting standard for retirement benefits that had been issued by the Business Accounting Council in 1998 with an effective date of April 1, 2000, and the other related practical guidance, and were followed by partial amendments from time to time through (a) Under the revised accounting standard, actuarial gains and losses and past service costs that are yet to be recognized in profit or loss are recognized within equity (accumulated other comprehensive income), after adjusting for tax effects, and any resulting deficit or surplus is recognized as a liability (liability for retirement benefits) or asset (asset for retirement benefits). (b) The revised accounting standard does not change how to recognize actuarial gains and losses and past service costs in profit or loss. Those amounts are recognized in profit or loss over a certain period no longer than the expected average remaining service period of the employees. However, actuarial gains and losses and past service costs that arose in the current period and have not yet been recognized in profit or loss are included in other comprehensive income and actuarial gains and losses and past service costs that were recognized in other comprehensive income in prior periods and then recognized in profit or loss in the current period are treated as reclassification adjustments (see Note 20). (c) The revised accounting standard also made certain amendments relating to the method of attributing expected benefit to periods, the discount rate, and expected future salary increases. This accounting standard and the guidance for (a) and (b) above are effective for the end of annual periods beginning on or after April 1, 2013, and for (c) above are effective for the beginning of annual periods beginning on or after April 1, 2014, or for the beginning of annual periods beginning on or after April 1, 2015, subject to certain disclosure in March 2015, all with earlier application being permitted from the beginning of annual periods beginning on or after April 1, However, no retrospective application of this accounting standard to consolidated financial statements in prior periods is required. The Company applied the revised accounting standard and guidance for retirement benefits for (a) and (b) above, effective March 31, 2014, and for (c) above, effective April 1, With respect to (c) above, the Company changed the method of attributing the expected benefit to periods from a straight-line basis to a benefit formula basis, the method of determining the discount rate from using the period which approximates the expected average remaining service period to using a single weighted average discount rate reflecting the estimated timing and amount of benefit payment, and recorded the effect of (c) above as of April 1, 2014, in retained earnings. As a result, liability for retirement benefits as of April 1, 2014, increased by 1,486 million ($12,383 thousand), retained earnings as of April 1, 2014, decreased by 959 million ($7,992 thousand), and operating income and income before income taxes and minority interests for the year ended March 31, 2015, increased by 47 million ($392 thousand). In addition, basic net income per share for the year ended March 31, 2015, increased by 0.92 ($0.01) Japan Vilene Company, Ltd.

5 (Additional Information) The Company transferred a part of the defined benefit plan to the defined contribution pension plan on April 1, The Company adopted "Guidance on Accounting for Transfers between Retirement Benefit Plans" (ASBJ Application Guidance No. 1 issued on January 31, 2002) and "Practical Solution on Accounting for Transfer between Retirement Benefit Plans" (PITF No. 2 issued on February 7, 2007) to account for the transfer. As a result of this change, 274 million ($2,283 thousand) of other income was recorded for the year ended March 31, Asset Retirement Obligations In March 2008, the ASBJ issued ASBJ Statement No. 18, "Accounting Standard for Asset Retirement Obligations," and ASBJ Guidance No. 21, "Guidance on Accounting Standard for Asset Retirement Obligations." Under this accounting standard, an asset retirement obligation is defined as a legal obligation imposed either by law or contract that results from the acquisition, construction, development, and the normal operation of a tangible fixed asset and is associated with the retirement of such tangible fixed asset. The asset retirement obligation is recognized as the sum of the discounted cash flows required for the future asset retirement and is recorded in the period in which the obligation is incurred if a reasonable estimate can be made. If a reasonable estimate of the asset retirement obligation cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when a reasonable estimate of the asset retirement obligation can be made. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement cost is capitalized by increasing the carrying amount of the related fixed asset by the amount of the liability. The asset retirement cost is subsequently allocated to expense through depreciation over the remaining useful life of the asset. Over time, the liability is accreted to its present value each period. Any subsequent revisions to the timing or the amount of the original estimate of undiscounted cash flows are reflected as an adjustment to the carrying amount of the liability and the capitalized amount of the related asset retirement cost. Stock Options ASBJ Statement No. 8, "Accounting Standard for Stock Options" and related guidance are applicable to stock options granted on and after May 1, This standard requires companies to measure the cost of employee stock options based on the fair value at the date of grant and recognize compensation expense over the vesting period as consideration for receiving goods or services. The standard also requires companies to account for stock options granted to non-employees based on the fair value of either the stock option or the goods or services received. In the balance sheet, the stock options are presented as stock acquisition rights as a separate component of equity until exercised. Research and Development Costs Research and development costs are charged to income as incurred. Leases In March 2007, the ASBJ issued ASBJ Statement No. 13, "Accounting Standard for Lease Transactions," which revised the previous accounting standard for lease transactions. The revised accounting standard for lease transactions was effective for fiscal years beginning on or after April 1, Under the previous accounting standard, finance leases that were deemed to transfer ownership of the leased property to the lessee were capitalized. However, other finance leases were permitted to be accounted for as operating lease transactions if certain "as if capitalized" information was disclosed in the note to the lessee's financial statements. The revised accounting standard requires that all finance lease transactions be capitalized by recognizing lease assets and lease obligations in the balance sheet Japan Vilene Company, Ltd. 31

6 The Company applied the revised accounting standard effective April 1, All other leases are accounted for as operating leases. Bonuses to Directors Bonuses to directors are accrued at the end of the year to which such bonuses are attributable. Income Taxes The provision for income taxes is computed based on the pretax income included in the consolidated statement of income. 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 and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently enacted income tax rates to the temporary differences. The Company and certain domestic subsidiaries file a tax return under the consolidated corporate-tax system, which allows companies to base tax payments on the combined profits or losses of the parent company and its wholly owned domestic subsidiaries. Foreign Currency Transaction All short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the current exchange rate at the balance sheet date. The foreign exchange gains and losses from translation are recognized in the consolidated statement of income to the extent that they are not hedged by forward exchange contracts. Forward exchange contracts are separately accounted for in accordance with the accounting standard for financial instruments. Foreign Currency Financial Statements The balance sheet accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the current exchange rate as of the balance sheet date except for equity, which is translated at the historical rate. Differences arising from such translation are shown as "Foreign currency translation adjustments" under accumulated other comprehensive income in a separate component of equity. Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the average exchange rate. Derivatives and Hedging Activities The Group uses derivative financial instruments to manage its exposures to fluctuations in foreign exchange and interest rates. Foreign exchange forward contracts and interest rate swap contracts are utilized by the Group to reduce foreign currency exchange and interest rate risks. The Group does not enter into derivatives for trading or speculative purposes. Derivative financial instruments are classified and accounted for as follows: (1) all derivatives are recognized as either assets or liabilities and measured at fair value, and gains or losses on derivative transactions are recognized in the consolidated statement of income and (2) for derivatives used for hedging purposes, if such derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses on derivatives are deferred until maturity of the hedged transactions. Foreign currency forward contracts employed to hedge foreign exchange exposures for export sales and import purchases are measured at fair value and the unrealized gains or losses are recognized in income. Forward contracts designated as hedging forecasted (or committed) transactions are also measured at the fair value, but the unrealized gains or losses are deferred until the underlying transactions are completed. The interest rate swap contracts which qualify for hedge accounting and meet specific matching criteria are not remeasured at market value but the differential paid or received under the swap agreements is recognized and included in interest expense Japan Vilene Company, Ltd.

7 Per Share Information Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period, retroactively adjusted for stock splits. Diluted net income per share reflects the potential dilution that could occur if securities were exercised or converted into common stock. Cash dividends per share presented in the accompanying consolidated statement of income are dividends of the Company applicable to the respective years including dividends to be paid after the end of the year. Accounting Changes and Error Corrections In December 2009, the ASBJ issued ASBJ Statement No. 24, "Accounting Standard for Accounting Changes and Error Corrections," and ASBJ Guidance No. 24, "Guidance on Accounting Standard for Accounting Changes and Error Corrections." Accounting treatments under this standard and guidance are as follows: (1) Changes in Accounting Policies When a new accounting policy is applied following revision of an accounting standard, the new policy is applied retrospectively unless the revised accounting standard includes specific transitional provisions, in which case the entity shall comply with the specific transitional provisions. (2) Changes in Presentation When the presentation of financial statements is changed, prior-period financial statements are reclassified in accordance with the new presentation. (3) Changes in Accounting Estimates A change in an accounting estimate is accounted for in the period of the change if the change affects that period only, and is accounted for prospectively if the change affects both the period of the change and future periods. (4) Corrections of Prior-Period Errors When an error in prior-period financial statements is discovered, those statements are restated. New Accounting Pronouncements Accounting Standards for Business Combinations and Consolidated Financial Statements In September 2013, the ASBJ issued revised ASBJ Statement No. 21, "Accounting Standard for Business Combinations," revised ASBJ Guidance No. 10, "Guidance on Accounting Standards for Business Combinations and Business Divestitures," and revised ASBJ Statement No. 22, "Accounting Standard for Consolidated Financial Statements." Major accounting changes are as follows: (a) Transactions with noncontrolling interest A parent's ownership interest in a subsidiary might change if the parent purchases or sells ownership interests in its subsidiary. The carrying amount of minority interest is adjusted to reflect the change in the parent's ownership interest in its subsidiary while the parent retains its controlling interest in its subsidiary. Under the current accounting standard, any difference between the fair value of the consideration received or paid and the amount by which the minority interest is adjusted is accounted for as an adjustment of goodwill or as profit or loss in the consolidated statement of income. Under the revised accounting standard, such difference shall be accounted for as capital surplus as long as the parent retains control over its subsidiary. (b) Presentation of the consolidated balance sheet In the consolidated balance sheet, "minority interest" under the current accounting standard will be changed to "noncontrolling interest" under the revised accounting standard. (c) Presentation of the consolidated statement of income In the consolidated statement of income, "income before minority interest" under the current accounting standard will be changed to "net income" under the revised accounting standard, and "net income" under the current accounting standard will be changed to "net income attributable to owners of the parent" under the revised accounting standard Japan Vilene Company, Ltd. 33

8 (d) Provisional accounting treatments for a business combination If the initial accounting for a business combination is incomplete by the end of the reporting period in which the business combination occurs, an acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. Under the current accounting standard guidance, the impact of adjustments to provisional amounts recorded in a business combination on profit or loss is recognized as profit or loss in the year in which the measurement is completed. Under the revised accounting standard guidance, during the measurement period, which shall not exceed one year from the acquisition, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and that would have affected the measurement of the amounts recognized as of that date. Such adjustments shall be recognized as if the accounting for the business combination had been completed at the acquisition date. (e) Acquisition-related costs Acquisition-related costs are costs, such as advisory fees or professional fees, which an acquirer incurs to effect a business combination. Under the current accounting standard, the acquirer accounts for acquisition-related costs by including them in the acquisition costs of the investment. Under the revised accounting standard, acquisition-related costs shall be accounted for as expenses in the periods in which the costs are incurred. The above accounting standards and guidance for (a) transactions with noncontrolling interest, (b) presentation of the consolidated balance sheet, (c) presentation of the consolidated statement of income, and (e) acquisition-related costs are effective for the beginning of annual periods beginning on or after April 1, Earlier application is permitted from the beginning of annual periods beginning on or after April 1, 2014, except for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income. In the case of earlier application, all accounting standards and guidance above, except for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income, should be applied simultaneously. Either retrospective or prospective application of the revised accounting standards and guidance for (a) transactions with noncontrolling interest and (e) acquisition-related costs is permitted. In retrospective application of the revised standards and guidance, the accumulated effects of retrospective adjustments for all (a) transactions with noncontrolling interest and (e) acquisition-related costs which occurred in the past shall be reflected as adjustments to the beginning balance of capital surplus and retained earnings for the year of the first-time application. In prospective application, the new standards and guidance shall be applied prospectively from the beginning of the year of the first-time application. The revised accounting standards and guidance for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income shall be applied to all periods presented in financial statements containing the first-time application of the revised standards and guidance. The revised standards and guidance for (d) provisional accounting treatments for a business combination are effective for a business combination which occurs on or after the beginning of annual periods beginning on or after April 1, Earlier application is permitted for a business combination which occurs on or after the beginning of annual periods beginning on or after April 1, The Company expects to apply the revised accounting standards and guidance for (a), (b), (c) and (e) above from April 1, 2015, and for (d) above for a business combination which will occur on or after April 1, The effect of applying the revised accounting standards currently cannot be measured, as it may change depending on various factors in future Japan Vilene Company, Ltd.

9 CHANGES IN PRESENTATION Prior to April 1, 2014, other payable was included in other in the current liabilities section of the consolidated balance sheet. Since during this fiscal year ended March 31, 2015, its significance increased, such amount is disclosed separately in the current liabilities section of the consolidated balance sheet as of March 31, The amount included in other as of March 31, 2014, was 1,233 million. 4. BUSINESS COMBINATION On August 8, 2013, the Company acquired 100% of the outstanding shares of Oshitari Laboratory Inc. ("Oshitari"). Oshitari's main products include liquid filters for electric discharge machines, air filters for industrial use and filtration equipment. This acquisition was made to advance the strategy of fully entering into the industrial air filters market and of expanding air filters business to meet diverse customer needs as a comprehensive manufacturer of filters. The results of operations for Oshitari were included in the Company's consolidated financial statements from October 1, The Company accounted for this business combination by the purchase method of accounting. The acquisition cost was 348 million in cash in accordance with the share purchase agreement. The total cost of acquisition has been allocated to the assets acquired and the liabilities assumed based on their respective fair values. Gain on bargain purchase recorded in connection with the acquisition totaled 732 million and was reported within Industrial materials segment. The estimated fair values of the assets acquired and the liabilities assumed at the acquisition date were as follows: Current assets 1,360 Noncurrent assets 301 Total assets acquired 1,661 Current liabilities (571) Noncurrent assets (10) Total liabilities assumed (581 ) 5. INVESTMENT SECURITIES Investment securities as of March 31, 2015 and 2014, consisted of the following: U.S. Dollars Non-current: Marketable equity securities 1,234 1,133 $ 10,283 Non-marketable equity securities ,725 Total 1,441 1,322 $ 12, Japan Vilene Company, Ltd. 35

10 The cost and aggregate fair values of investment securities as of March 31, 2015 and 2014, were as follows: Cost 2015 Unrealized Gains Unrealized Losses Fair Value Securities classified as available-for-sale equity securities ,234 Cost 2014 Unrealized Gains Unrealized Losses Fair Value Securities classified as available-for-sale equity securities ,133 Cost U.S. Dollars 2015 Unrealized Unrealized Gains Losses Fair Value Securities classified as available-for-sale equity securities $4,642 $5,641 $ 10,283 The proceeds, realized gains and realized losses of the available-for-sale securities which were sold during the year ended March 31, 2015, were as follows: March 31, 2015 Proceeds Realized Gains Realized Losses Available-for-sale securities Equity securities Total March 31, 2015 U.S. Dollars Realized Realized Proceeds Gains Losses Available-for-sale securities Equity securities $ 508 $ 300 Total $ 508 $ Japan Vilene Company, Ltd.

11 INVENTORIES Inventories as of March 31, 2015 and 2014, consisted of the following: U.S. Dollars Merchandise and finished goods 4,472 4,094 $ 37,267 Work in process ,750 Raw materials and supplies 2,087 2,097 17,391 Total 7,249 6,954 $ 60, PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of March 31, 2015 and 2014, consisted of the following: U.S. Dollars Land 2,824 2,580 $ 23,534 Buildings and structures 24,793 24, ,608 Machinery, equipment and vehicles 41,886 39, ,050 Tools, furniture and fixtures 6,082 6,027 50,683 Construction in progress ,733 Total 76,033 73,764 $ 633,608 The Company booked expenses on reconstruction of its Shiga factory of 332 million ($2,767 thousand) and 114 million for the years ended March 31, 2015 and 2014, respectively, as the cost used for relocation, integration and disposal of production facilities. 8. SHORT-TERM BANK LOANS AND LONG-TERM DEBT Short-term bank loans represented borrowings under bank overdraft agreements and notes, bearing interest at rates ranging from 0.3% to 1.3% and from 0.4% to 1.3% per annum as of March 31, 2015 and 2014, respectively. Long-term debt as of March 31, 2015 and 2014, consisted of the following: U.S. Dollars % to 2.5% loans due through 2019 Unsecured 2,587 4,587 $ 21,558 Less current portion (745) (2,309) (6,208) Long-term debt, less current portion 1,842 2,278 $ 15, Japan Vilene Company, Ltd. 37

12 Annual maturities of long-term debt as of March 31, 2015, were as follows: Year Ending March 31 U.S. Dollars $ 6, , ,800 Total 2,587 $ 21, LIABILITY FOR RETIREMENT BENEFITS The Company adopted a cash balance pension plan and a point-method pension plan. The cash balance plan is a hybrid pension plan based on variable interest rates, enabling the Company to flexibly respond to market interest fluctuations. The Company contributes to the DIC pension funds under the cash balance plan. In addition, the Company transferred a part of the defined benefit plan to the defined contribution pension plan on April 1, The subsidiaries adopt defined benefit pension plans and retirement lump-sum plans. Further, certain subsidiaries have defined contribution pension plans. The Company participates in a multi-employer plan for which the Company can reasonably calculate the amount of plan assets corresponding to the contributions made by the Company. Therefore, it is accounted for using the same method as a defined benefit pension plan. The liability for retirement benefits at March 31, 2014, for directors was 10 million. The retirement benefits for directors were paid subject to the approval of the shareholders. (1) The changes in defined benefit obligation for the years ended March 31, 2015 and 2014, were as follows: U.S. Dollars Balance at beginning of year 15,049 13,556 $ 125,408 Current service cost ,575 Interest cost ,241 Actuarial losses ,692 Benefits paid (721) (849) (6,008) Increase due to newly consolidation 180 Effect of transfer to defined contribution pension plans (1,972) (16,433) Other Balance at end of year 13,039 13,563 $ 108, Japan Vilene Company, Ltd.

13 Notes: 1. Some subsidiaries adopt the simplified method when calculating liability for retirement benefits. 2. The balance of defined benefit obligation at the beginning of the year includes 1,486 million ($12,383 thousand) of the cumulative effect of accounting change. (2) The changes in plan assets for the years ended March 31, 2015 and 2014, were as follows: U.S. Dollars Balance at beginning of year 12,004 10,981 $ 100,033 Expected return on plan assets ,691 Actuarial gains ,292 Contributions from the employer ,842 Benefits paid (579) (823) (4,825) Increase due to newly consolidation 177 Effect of transfer to defined contribution pension plans (1,279) (10,658) Other Balance at end of year 12,061 12,004 $ 100,508 (3) Reconciliation between the liability recorded in the consolidated balance sheet and the balances of defined benefit obligation and plan assets U.S. Dollars Funded defined benefit obligation 12,844 13,267 $ 107,033 Plan assets (12,061) (12,004) (100,508) 783 1,263 6,525 Unfunded defined benefit obligation ,625 Net liability arising from defined benefit obligation 978 1,560 $ 8,150 U.S. Dollars Liability for retirement benefits 978 1,560 $8,150 Net liability arising from defined benefit obligation 978 1,560 $8, Japan Vilene Company, Ltd. 39

14 (4) The components of net periodic benefit costs for the years ended March 31, 2015 and 2014, were as follows: U.S. Dollars Service cost $2,575 Interest cost ,242 Expected return on plan assets (324) (335) (2,700) Recognized actuarial losses Net periodic benefit costs $1,925 (5) Amounts recognized in other comprehensive income (before income tax effect) in respect of defined retirement benefit plans for the years ended March 31, 2015 and 2014, were as follows: U.S. Dollars Actuarial gains 806 $6,717 Total 806 $6,717 (6) Amounts recognized in accumulated other comprehensive income (before income tax effect) in respect of defined retirement benefit plan as of March 31, 2015 and 2014, were as follows: U.S. Dollars Unrecognized actuarial gains 1, $ 11,200 Total 1, $ 11,200 (7) Plan assets a. Components of plan assets Plan assets as of March 31, 2015 and 2014, consisted of the following: Debt investments 22.3% 21.6% Equity investments Cash and cash equivalents General accounts of life insurance company Others Total 100.0% 100.0% Japan Vilene Company, Ltd.

15 b. Method of determining the expected rate of return on plan assets The expected rate of return on plan assets is determined considering the long-term rates of return which are expected currently and in the future from the various components of the plan assets. (8) Assumptions used for the years ended March 31, 2015 and 2014, were set forth as follows: Discount rate Mainly 1.1% Mainly 2.0% Expected rate of return on plan assets Mainly 3.0% Mainly 3.0% (9) The contributions paid to the defined contribution pension plans of the Company and the subsidiaries at March 31, 2015 and 2014, were 172 million ($1,433 thousand) and 66 million, respectively. 10. ASSET RETIREMENT OBLIGATIONS The changes in asset retirement obligations for the years ended March 31, 2015 and 2014, were as follows: 11. EQUITY U.S. Dollars Balance at beginning of year $1,275 Reconciliation associated with passage of time Other Balance at end of year $1,308 Japanese companies are subject to the Companies Act of Japan (the "Companies Act"). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below: a. Dividends Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders' meeting. For companies that meet certain criteria, the Board of Directors may declare dividends (except for dividends-in-kind) at any time during the fiscal year if the Company has prescribed so in its articles of incorporation. The Company meets all the criteria. The Companies Act permits companies to distribute dividends-in-kind (noncash assets) to shareholders subject to a certain limitation and additional requirements Japan Vilene Company, Ltd. 41

16 Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the Company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than 3 million. b. Increases/Decreases and Transfer of Common Stock, Reserve and Surplus The Companies Act requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends, until the total of aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be transferred among the accounts within equity under certain conditions upon resolution of the shareholders. c. Treasury Stock and Treasury Stock Acquisition Rights The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by a specific formula. Under the Companies Act, stock acquisition rights are presented as a separate component of equity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights. d. Issuance of New Shares In August 2014, the Company issued and allocated 3,000,000 new shares valued at 1,728 million ($14,400 thousand) to third parties. 12. STOCK OPTIONS The stock options outstanding as of March 31, 2015, are as follows: Stock Option Persons Granted Number of Option Granted Date of Grant Exercise Price Exercise Period 2005 Stock 8 directors 37,200 shares June 29, From August 1, 2005 Option ($0.01) to June 29, Stock 7 directors 28,400 shares September 15, 1 From September 16, Option 2006 ($0.01) 2006 to June 29, Japan Vilene Company, Ltd.

17 The stock option activity is as follows: Year Ended March 31, Stock Option 2006 Stock Option (Shares) Non-vested April 1, 2013 Outstanding Granted Canceled Vested March 31, 2014 Outstanding Vested April 1, 2013 Outstanding 4,300 3,600 Vested Exercised Canceled March 31, 2014 Outstanding 4,300 3,600 Year Ended March 31, 2015 Non-vested March 31, 2014 Outstanding Granted Canceled Vested March 31, 2015 Outstanding Vested March 31, 2014 Outstanding 4,300 3,600 Vested Exercised Canceled March 31, 2015 Outstanding 4,300 3,600 Exercise price 1 1 ($0.01) ($0.01) Average stock price at exercise Fair value price at grant date 615 ($5.13) Japan Vilene Company, Ltd. 43

18 INCOME TAXES The Company and its domestic subsidiaries are subject to Japanese national and local income taxes which, in the aggregate, resulted in normal effective statutory tax rates of approximately 35.4% and 37.8% for the years ended March 31, 2015 and 2014, respectively. Foreign subsidiaries are subject to income taxes of the countries in which they operate. The tax effects of significant temporary differences and loss carryforwards which resulted in deferred tax assets and liabilities as of March 31, 2015 and 2014, are as follows: U.S. Dollars Deferred tax assets: Accrued bonuses $ 2,666 Liability for retirement benefits ,650 Loss on valuation of investment securities ,650 Loss on valuation of long-lived assets ,400 Tax loss carryforwards ,650 Asset retirement obligations Impairment loss of goodwill Foreign exchange loss on long-term bank loan ,133 Deemed dividend from a subsidiary Unpaid transferring cash for defined contribution pension plans Other ,250 Less valuation allowance (469) (519) (3,908) Total deferred tax assets 1,728 1,538 14,400 Deferred tax liabilities: Unrealized gain on available-for-sale securities (211) (202) (1,758) Differences on land revaluation (239) (263) (1,992) Accelerated depreciation on foreign subsidiary (969) (783) (8,075) Reserve for special depreciation (280) (3) (2,333) Retained earnings of foreign affiliates (191) (165) (1,592) Other (130) (126) (1,084) Total deferred tax liabilities (2,020 ) (1,542 ) (16,834 ) Net deferred tax liabilities (292 ) (4 ) $ (2,434 ) Japan Vilene Company, Ltd.

19 A reconciliation between the normal effective statutory tax rate and the actual effective tax rate reflected in the accompanying consolidated statement of income for the year ended March 31, 2015, with the corresponding figures for 2014, is as follows: Normal effective statutory tax rate 35.4% 37.8% Expense not deductible for tax purposes Accrued bonuses to directors Inhabitant tax per capita Withholding income tax of dividends from foreign subsidiaries and associated companies Tax credit (0.3) (1.6) Equity in earnings of associated companies ( 11.5) (8.6) Dividends from foreign subsidiaries eliminated for consolidation purpose Tax rate difference applied for consolidated subsidiaries (0.1) (1.3) Effect of tax rate reduction Gain on bargain purchase (6.3) Other net (0.9) 0.8 Actual effective tax rate 30.8% 24.9% New tax reform laws enacted in 2015 in Japan changed the normal effective statutory tax rate for the fiscal year beginning on or after April 1, 2015, to approximately 32.9% and for the fiscal year beginning on or after April 1, 2016, to approximately 32.1%. The effect of these changes was to decrease deferred tax assets, net of deferred tax liabilities by 37 million ($308 thousand) and increase accumulated other comprehensive income for unrealized gain on available-for-sale securities by 22 million ($183 thousand) and defined retirement benefit plans by 45 million ($375 thousand) in the consolidated balance sheet as of March 31, 2015, and to increase income taxes deferred in the consolidated statement of income for the year then ended by 104 million ($867 thousand). 14. RESEARCH AND DEVELOPMENT COSTS Research and development costs charged to income were 2,012 million ($16,767 thousand) and 1,833 million for the years ended March 31, 2015 and 2014, respectively. 15. LEASES The minimum rental commitments under noncancelable operating leases as of March 31, 2015 and 2014, were as follows: U.S. Dollars Due within one year $2,717 Due after one year ,041 Total $6, Japan Vilene Company, Ltd. 45

20 EXTRA RETIREMENT PAYMENTS A charge of 102 million ($850 thousand) recorded in the consolidated statement of income for the year ended March 31, 2015, is for extra retirement payments for certain employees of a subsidiary. 17. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES (1) Group Policy for Financial Instruments Cash surpluses, if any, are invested in low risk financial assets such as short-term deposits. Bank loans are used as funding in the group companies. Securities transactions are not used for speculative purposes. Derivatives are used, not for speculative purposes, but to mitigate market risks from changes in variable interest rates on loans or market risks of fluctuation in foreign currency exchange rates. (2) Nature and Extent of Risks Arising from Financial Instruments Receivables such as trade notes and trade accounts, are exposed to customer credit risk. Receivables in foreign currencies are exposed to the market risk of fluctuation in foreign currency exchange rates. The foreign exchange risk is reduced by using forward exchange contracts. Investment securities, mainly of customers and suppliers of the Company, are exposed to the risk of market price fluctuations. The Company examines the necessity of the appraisal loss and evaluates the marketable securities to the market price every end of the term. Payment terms of payables, such as trade notes, trade accounts and other payable, are less than one year. Though payables in foreign currency, such as accounts payable to purchase raw materials, are exposed to foreign exchange risk, the ratio of such payables is small. Loans are the main operating and equipment funds. Many of the loans are procured at floating rates. Therefore, they are exposed to the market risks from changes in variable interest rates. Derivatives mainly include interest rate swaps and forward foreign currency contracts, which are used to manage exposure to market risks from changes in interest rates of bank loans and from changes in foreign currency exchange rates of receivables and payables. Please see Note 18 for more details about derivatives. The Company guarantees funding from banks and accounts payable of subsidiaries and associates. Though the guarantees are exposed to the credit risk of such subsidiaries and associates, the risk is mitigated by monitoring their business conditions. (3) Risk Management for Financial Instruments Credit risk management (risk of customers' non-performance of contract) The Company monitors customers' business conditions based on credit exposure management regulation at the time of new dealings and for certain periods, and manages the term of payment and the balance of each customer. The consolidated subsidiaries also monitor using a similar method of management. The Company only deals with major international financial institutions to reduce the counterparty risk when a derivative transaction is used Japan Vilene Company, Ltd.