Omron Corporation
Annual Report 1998

Plain-text annual report

ANNUAL REPORT 1998 YEAR ENDED MARCH 31, 1998 A pioneer in the field of automation, OMRON Corporation is one of the world’s premier man- ufacturers of automation components, equip- ment, and systems with advanced computer, communications, and control technologies. OMRON’s versatile lineup of products includes relays, sensors, and switches; comput- er systems for factory automation (FA); and large-scale control and information systems. Our Seventh Mid-Term Management Plan is focused on achieving mid-to-long-term growth through structural reforms targeting three major goals: •creating a growth-oriented structure, •establishing an innovative cost structure, and •revitalizing corporate resources. Significant progress has been made in these three areas during the year under review. Financial Highlights ............................................................................. 1 To Our Shareholders ........................................................................... 2 Progress Report of the Seventh Mid-Term Management Plan ............. 5 Review of Operations.......................................................................... 8 Omron’s Commitment to Environmental Protection ..........................15 Board of Directors ...............................................................................18 Financial Section..................................................................................19 International Network .........................................................................43 Corporate Data ....................................................................................46 FINANCIAL HIGHLIGHTS OMRON Corporation and Subsidiaries Years ended March 31, 1998, 1997 and 1996 Millions of yen (except per share data) 1997 1996 1998 Thousands of U.S. dollars (Note 3) (except per share data) 1998 Net sales ................................................................................ ¥611,795 Income before income taxes and minority interests.............. 42,243 Net income............................................................................ 18,300 Net income per share (yen and U.S. dollars, Note 1): Basic .................................................................................. ¥69.8 Diluted............................................................................... 68.3 Cash dividends per share (yen and U.S. dollars, Note 2) ...... 13.0 Total assets ............................................................................ ¥579,663 Total shareholders’ equity ..................................................... 336,064 Capital expenditures ............................................................. 35,896 Research and development expenses ................................... 39,914 ¥594,261 39,248 15,739 ¥525,289 32,252 14,587 ¥60.1 58.8 13.0 ¥590,353 323,019 29,956 35,188 ¥55.7 54.5 13.0 ¥580,815 302,458 34,079 34,433 $4,634,811 320,023 138,636 $0.53 0.52 0.10 $4,391,386 2,545,939 271,939 302,379 Notes: 1. Net income per share amounts are computed based on the Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings per Share,” which is effective for the fiscal year ended March 31, 1998. The amounts for 1997 and 1996 have been restated to conform with the provisions of SFAS No. 128. 2. Cash dividends per share are the amounts applicable to the respective year, including dividends to be paid after the end of the year. 3. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at March 31, 1998, of ¥132=$1. NET SALES (Billion ¥) 2 1 4 6 9 5 5 2 5 0 9 4 1 6 4 INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS (Billion ¥) 2 4 9 3 2 3 5 2 NET INCOME (Billion ¥) TOTAL ASSETS (Billion ¥) 0 9 5 1 8 5 0 8 5 9 6 2 5 5 5 8 1 6 1 5 1 2 1 NET INCOME PER SHARE (DILUTED) (¥) 3 . 8 6 . 8 8 5 . 5 4 5 . 4 9 4 3 1 5 . 1 0 2 ’94 ’95 ’96 ’97 ’98 ’94 ’95 ’96 ’97 ’98 ’94 ’95 ’96 ’97 ’98 ’94 ’95 ’96 ’97 ’98 ’94 ’95 ’96 ’97 ’98 1 TO OUR SHAREHOLDERS Yoshio Tateisi President and Director innovative cost structure, and revitalize corporate resources. A progress report on those structural reforms and our mid-term management plan follows on pages 5 to 7. BUSINESS PERFORMANCE Sales by our Control Components and Systems Division rose 7.7%, to ¥313,642 million, accounting for just over half of consolidated net sales. In achieving sales growth, the division shrugged off weak domestic sales in the second half of the term due to the sudden economic down- turn in Japan and the overall negative impact of the currency crises in Southeast Asian countries. Favorable sales in North America and Europe throughout the fiscal year and an expanded product lineup provided support for this solid performance. The Social Business Division’s sales declined 4.8%, to ¥138,203 million, resulting from a slump in electronic fund transfer systems (EFTSs) sales in summer 1997 the decline in business confidence in reaction to the stalled economy resulted in a drop-off in private-sector capital investment. Consequently, the economy slowed overall despite growth in exports. In our global markets, the economic turmoil in Asian economies was in stark contrast to the continued expan- sion in the United States, which was driven by strong consumer spending and corporate capital investment. European economies were favorable in general, with the ripple effects of rising exports supporting a recovery process. Facing the volatile business environ- ment, OMRON entered the second year of its Seventh Mid-Term Manage- ment Plan in fiscal 1998. Through the plan, we are pursuing structural reforms that will support future growth and profitability. The objectives of those reforms are to create a growth- oriented structure, establish an 2 I t gives me great pleasure to report that, despite a lackluster Japanese economy and the eco- nomic downturn in Southeast Asia, OMRON Corporation achieved a record-high performance in fiscal 1998, ended March 31, 1998. Consolidated net sales rose 3.0%, to ¥611,795 mil- lion, marking the fourth consecutive year of growth. Sales gains can be attributed mainly to a strong overseas showing by our core operations— control components and systems— coupled with bullish domestic and international healthcare and medical equipment sales. This solid sales per- formance and Companywide cost-cut- ting efforts produced a 7.6% increase in income before income taxes and minority interests, to ¥42,243 million. Net income gained 16.3%, climbing to ¥18,300 million. During the fiscal year in review, the Japanese economy labored under slug- gish personal consumption and hous- ing investment. Moreover, beginning related to the troubled financial services industries in Japan and Korea, a major overseas market. Sales of Public Infor- mation and Transport Systems (PITSs), however, recorded considerable growth thanks to the construction of a new railway line in the Kansai area and greater use of multiroute stored fare (SF) card systems. Traffic man- agement systems sales remained the same as in fiscal 1997, hampered by strong competition and restraint in public construction programs. Sales by the Specialty Products Division rose 1.6%, to ¥47,263 million, thanks to solid global sales of automotive electronic components. In addition, the shift to digital color copiers and the increased manufacture of copiers overseas resulted in high demand from copy machine manufacturers. Sales by the Healthcare Division advanced 12.1%, to ¥40,793 million, boosted by a boom in the domestic sales of new products, such as body- fat monitors, massage chairs, and ear- type digital thermometers, as well as of traditional big sellers, including blood pressure monitors and pedome- ters. Vigorous overseas sales, particu- larly in the People’s Republic of China and the United States, also contributed to double-digit growth. The Open Systems Division posted sales of ¥50,131 million, held to ap- proximately last year’s level because of the further weakening of the Japa- nese economy and heightened com- petition produced by the slump in personal computer (PC) sales. Bright spots in performance included strong showings in the open systems platform market for PC servers and in the system planning and maintenance services areas. JAPANESE MARKET Our mid-to-long-term strategy for growth in domestic sales of control components and systems is to strengthen our solution proposal capabilities. The Company has a long-standing sales system using OMRON distributors that is unbeatable when it comes to providing a diverse range of customers with general-use components. To reinforce this com- petitive advantage, we have bolstered our personnel, financial, and material resource support to distributors who demonstrate superior solution-providing capabilities and have more than a specified number of sales engineers. The new system will help us better accommodate market needs. The OMRON distributor sales system, however, does not adequately specify customer needs. We addressed this problem through a reorganization of our sales system in October 1997. Specifically, we established a special sales team responsible for providing our semiconductor and automobile clients with more customized prod- ucts and solutions. This allows us to insert more direct sales approaches into our distributor sales system. OMRON is cooperating with distribu- tors in creating customized products for end users and vendors as well as selling directly to clients. Customer needs are now served more quickly by our ability to select the optimal method for providing specific prod- ucts to each customer in each market. In addition, we added staff to our sales organization to pursue direct sales approaches with the goal of strengthening our sensor business. 3 Through the well-balanced applica- tion of such measures, we are seeking to improve OMRON’s capabilities to find the best solution, both Company- wide and within such related compa- nies as OMRON distributors. During the reorganization of our sales system, we introduced a product manager system that permits finer control of profitability by managing the cost, profitability, and life cycle of product groups on an integrated basis. In addition, the Company has product marketing managers for indi- vidual areas, including Japan, who are responsible for working with product managers to ensure that OMRON supplies products that meet local requirements. Our short-term strategy for growth in domestic sales of control components and systems is to increase our empha- sis on industries and companies that are making relatively strong capital investments in new products or ratio- nalization. The sudden slowdown in Japan’s economy in the second half of fiscal 1998 after a strong first half initi- ated a decline in corporate capital investment that is ongoing. Due to the progressive polarization of busi- ness performances, even within in- dustries, however, some companies continue to make significant capital investments. SOUTHEAST ASIAN MARKET T he Southeast Asian market for control components and systems has contracted significantly because of the stagnation in the economies of the region spurred by the currency crises in the latter half of fiscal 1998. OMRON is steadily taking measures to cope with this immediate sign of recovery because of weak personal consumption and declining corporate capital invest- ment. On the other hand, the U.S. economy should continue to expand despite concerns that a slowdown is long overdue. Looking at Europe, economies there will continue down the path to recovery despite monetary policy restraint in the lead-up to mon- etary union. Asian economies will be implementing reforms, which we intend to watch carefully. Although the business environment appears daunting, we continue to focus on growth industries and com- panies. To reach our longer-term goal of becoming a competitive, high- quality growth company in the 21st century, we will further progress with our structural reforms. In addition, we will revise the allocations of manage- ment resources and the organization and strategies of our operations in preparing the Eighth Mid-Term Management Plan. June 25, 1998 Yoshio Tateisi, President and Director situation from a mid-to-long-term point of view. Over the past few years, OMRON has been strengthening its local sales organization in the region, setting up sales bases in each country to estab- lish a direct sales organization. Similar to the Company’s domestic opera- tions, this action has been taken to strengthen solution proposal capabili- ties in Southeast Asia. These efforts have met with favorable results. For example, direct marketing permits us to accurately gauge customer reaction to prices and other sales criteria, allowing us to make persuasive sales approaches that have been well received in local markets. Of course, these measures in themselves cannot produce profits amid the sudden fall in business. We are also introducing measures, such as increasing sales productivity and managing liabilities, to minimize declines in profitability. Overall, our fiscal 1998 sales to Southeast Asia rose, thanks to the growth achieved in the first half of the term. In light of the poor performance in the second half, however, we expect business conditions to be difficult in the current fiscal year. It will be nec- essary to adjust responses to the vary- ing pace of recovery in each country. In the mid-to-long term, we believe that the restructuring occurring in Southeast Asian economies will result in significant progress in industrializa- tion, thereby expanding markets for our control components and systems. We are implementing strategies that capitalize on the current opportunity to expand market share despite the shrinking market size. NORTH AMERICAN AND EUROPEAN MARKETS OMRON’s operations in North America and Europe are achieving stable growth. The U.S. and European markets account- ed for 10% and 12%, respectively, of consolidated net sales in fiscal 1998, and these percentages are rising annu- ally. They provide strong evidence that OMRON is steadily increasing its presence in these markets as a global corporation. In fiscal 1998, against the background of the growing economy in the United States, we strove to expand our mar- keting efforts there. These efforts resulted in a 17% upswing in sales, helped by the strengthening of the dollar against the yen. In Europe, OMRON’s strategy of strengthening its system solution capabilities to take advantage of the ongoing economic recovery was rewarded with sales growth. Overall sales in the region rose 10%, despite European currencies weakening slightly against the yen during the fiscal year under review. We expect U.S. and European markets to achieve relatively stable growth in the mid-to-long term. Accordingly, we will be implementing measures to boost our marketing efforts by strengthening our solution proposal capabilities. PERSPECTIVES The global business environ- ment in fiscal 1999 is again one of great contrast. Although there is hope that the measures being taken to stimulate the Japanese econ- omy will take hold, we expect no 4 Progress Report of the Seventh Mid-Term Management Plan Our Seventh Mid-Term Management Plan is focused on achieving mid-to-long-term growth through structural reforms targeting three major goals: • creating a growth-oriented structure, • establishing an innovative cost structure, and • revitalizing corporate resources. Significant progress has been made in these three areas during the year under review. CREATING A GROWTH-ORIENTED STRUCTURE In line with the ongoing shift in global industrial structures, from the manu- facturing to the service and software sectors, we are steadily expanding business derived from new integrated markets, which we develop by extend- ing the scope of or combining our existing technologies. These new inte- grated markets are steadily expanding, and their contributions to revenue are growing. Examples of new integrated markets include the development of applications for our control compo- nents for service-industry-related fields, such as video game equipment and solar inverters. As its key approach to creating a growth-oriented structure, OMRON has produced a set of visionary concepts. To further improve our growth-oriented structure over the mid-to-long term, 5 we must take advantage of the trend toward customer-oriented software and services, rapid advances in information technology, and the potential for growth as our customers expand their infrastructures. Moreover, it is impor- tant that we steadily invest in raising our competitiveness in high-growth, high-profit businesses in these areas. Accordingly, we have created a set of visionary concepts that indicate OMRON’s approach to high-growth fields in the 21st century and its strate- gies for success in competitive mar- kets. The visionary concepts fall under the headings of Intelligent Transport Systems (ITSs), multimedia-oriented factory automation (FA), cyber- community-related, total healthcare, and information sensing businesses. Revenues from these areas are gradual- ly increasing and were slightly less than ¥20 billion in fiscal 1998. We ex- pect these areas to enter their true growth phase during the Eighth Mid- Term Management Plan. ITS In preparation for creating growth- oriented structures in these fields, we are currently engaged in determining the appropriate allocation of resources, the most effective management struc- ture, and the required personnel train- ing programs based on our estimates of business volume. ITSs Business In the ITSs business, we are develop- ing sensors for automobile collision prevention systems and an automobile category identification system for no-stop automated electronic toll col- lection (ETC). The special ITSs organi- zation established in November 1996 was further bolstered in April 1997 with the addition of 60 additional staff members, mainly engineers. We built a special test course for our ETC system at our Ayabe factory and are steadily progressing toward being able to offer a commercial product. We were the first in the industry to be licensed as an auxiliary organization of the Ministry of Posts and Telecommuni- cations for wireless technology. Multimedia-Oriented FA Business Our multimedia-oriented FA business addresses emerging on-site manufac- turing needs. The increasingly sophisti- cated demands of this field include achieving more timely production in keeping with the trend toward small- lot flexible production and shorter product life cycles as well as making the maximum use of information tech- nology through “smart factories.” With this in mind, we are promoting more software-oriented components, such as personal-computer-based FA compo- nents, as well as versatile general-use components. We also are strengthening our system installation and manage- ment and maintenance services. Cyber-Community-Related Business In the cyber-community-related busi- ness field, we are expanding opera- tions that interface service providers and consumers in financial, public, and retail sectors. In addition, we are actively exploring the electronic money business. We are taking steps to estab- lish an infrastructure for this business, such as investing in the Japanese sub- sidiary of Cybercash Corporation, of the United States, and taking part in an experimental electronic money pro- gram launched in Tokyo as well as conducting other such test runs. Total Healthcare Business With the progressive graying of the world’s population and the growing interest in personal healthcare, we are keeping a close eye on business oppor- tunities in preventative medicine. Along with our popular hardware products, we intend to offer software products and services that contribute to the healthcare business as a whole. For example, we are progressing with 6 establishing such businesses as the Health Master service, which provides health management support services to households in a way similar to cor- respondence education courses; a health management system that targets corporations and organizations; and other businesses. Information Sensing Business The underlying theme of our visionary concepts is the development of high- growth markets through information sensing, one of our areas of core com- petence. Examples include a variety of automotive sensors for ITSs, the Register with counterfeit-detection capabilities Mid-Term Management Plan. However, this goal now seems difficult because the impact of the sudden downturn in the Japanese economy has offset the gains of our structural reforms. Accord- ingly, we also do not expect to reach our goal of a 7% return on sales in terms of income before income taxes and minority interests. Because of the difficult business envi- ronment, we are pursuing more effi- cient use of investment and operating expenditures. During the Eighth Mid- Term Management Plan, we will be looking to steadily and quickly recoup our investments in growth fields to in- crease our corporate worth, thereby achieving higher management goals. To provide additional momentum behind our drive to implement the necessary measures for boosting corporate worth, we established a set of guidelines during the fiscal year that require our directors and auditors to hold shares in OMRON commensurate with their management position. In fis- cal 1999, we are introducing a stock option plan for OMRON’s directors that will link the interests of manage- ment with those of shareholders, encouraging them to manage the Company in the shareholders’ best interests. We have also initiated a share buyback program. ultracompact pressure sensors used in our total healthcare business, and the currency note recognition sensors used in our cyber-community-related business. We are also seeking to create new mar- kets by introducing innovative sensing- technology-based products. ESTABLISHING AN INNOVATIVE COST STRUCTURE We are implementing innovations that will change OMRON’s fundamental cost structure over the mid-to-long term. Specifically, we are concentrat- ing on implementing profitability plan- ning and management functions for each product line, achieving thorough planning of basic costs, and establish- ing a globally diversified production organization. Profitability Planning and Manage- ment Functions by Product Line In our core business of control com- ponents and systems, we have intro- duced a product manager system under which product managers over- see the life cycle of a product line, from planning and development to production and marketing, on an inte- grated basis. By working together with product managers responsible for indi- vidual areas, we expect to substantially boost our sales performance. Thorough Planning of Basic Costs We are targeting the thorough control of product costs from the planning and development stages, including the centralization of procurement and the integration of development and production. Specifically, we will be implementing such measures as the relocation of product development sections to their production bases. A Globally Diversified Production Organization Looking to achieve an optimal balance between management effectiveness and marketing capabilities, we are building a globally diversified produc- tion organization that will increase OMRON’s cost efficiency. REVITALIZING CORPORATE RESOURCES To support reform of our growth- oriented and cost structures, we are targeting the maximum revitalization of our corporate resources—personnel as well as financial, information, and physical assets. In April 1996, OMRON introduced a performance-based—rather than seniority-based—salary system for senior management to motivate its employees. This system was expanded to include all managers in April 1997. To encourage the effective utilization of financial assets, we are advocating the Companywide use of a new man- agement accounting system that mea- sures business performance based on consolidated return on assets (ROA). One of the factors in evaluating perfor- mance is whether the set ROA target has been met. We are building a worldwide internal computer network system to bolster our information resources. Targeting enhanced administrative efficiency, the new system will assist in innovating business processes. MANAGEMENT GOALS We had set our overall management goal as a 7% return on shareholders’ equity (ROE) on a consolidated basis in fiscal 1999, the last year of the Seventh 7 REVIEW OF OPERATIONS 51.3% In fiscal 1998, sales of the Control Components and Systems Division rose 7.7%, to ¥313.6 billion. Following favorable business conditions during the first half of fiscal 1998, sales deteriorated in the second half under the impact of the sudden downturn in the Japanese economy following the business failure of several major financial institutions and the currency crises in Southeast Asia. However, this slack was taken up in part by the continued growth in sales to North American and European markets. CONTROL COMPONENTS Among major products, sales of relays expanded, particularly to overseas markets, such as North America, Europe, and China. Mechanical components also recorded sales growth based on favorable sales of pressure switches for gas meters and connectors in the domestic market and on sales of components for electric power tools in overseas markets. By introducing a line of narrow pitch connectors, we achieved double-digit growth in sales of connectors to the domestic amusement market in fiscal 1998. Overseas, demand has jumped for relays, with dramatic increases in shipments of compact, general-purpose, and printed circuit board (PCB) relays to home appliance and FA manufacturers in North America, Europe, and China. In addition, sales of trigger switches rose substantially, sup- ported by the favorable electric power tool markets in North America and Asia. Exports of mouse switches climbed, centered on North America and China. Among the new products and technologies that contributed significantly to sales during fiscal 1998 were the G6S telecom relays, which are true surface-mountable relays, and micro- machined pressure sensors for meters used in liquid petroleum gas and consumer gas systems. Our main strategy for relays and other control components in the current fiscal year will be to achieve strong sales in multimedia and amusement fields as well as expanding sales of new relays and other products to growth regions, such as Europe. Among sensors, sales of optoelectronic sensors attained double-digit growth, while sales of measuring inspection systems posted significant increases as well. Demand was high for the automization of inspections, with sales of printed web inspection systems and PCB sol- dering inspection systems advancing. In the semiconductor industry, technology enabling the manufacture of 300-millimeter wafers is creating a revolution in the field, while demand is growing for equipment to reduce pollution and conserve energy and materials. These factors are also generating increased demand for sensing technology. New photoelectronic sensors that contributed to sales during the term under review in- cluded the ultracompact E3T sensor inside amplifiers, a fiber sensor (EX-3NH) with an auto- tuning function, and a full color sensor (E3MC). Among other devices, a digital finescope Control Components and Systems Compact, highly functional G6S tele- com relays are used in telephone exchanges around the world. SALES (Billion ¥) 8 4 2 1 3 2 4 1 3 1 9 2 5 7 2 ’94 ’95 ’96 ’97 ’98 8 The E3T is an ultracompact photo- electric sensor inside amplifiers, fus- ing original OMRON technology in achieving wire conservation and lower costs. Including all the necessary functions and properties for temperature con- trol applications, the E5DN tempera- ture controller is now featured in a new size (far right). The SYSMAC system is an intelligent factory compatible controller incor- porating information exchange capabilities. (VC 2400) that features 360-degree viewing; a low-cost, high-performance vision sensor (F150); and a laser micrometer (NEW3Z4L) contributed significantly to sales. In our sensor operations, in April 1998 we established an application development group to improve our sensor application development capabilities. This group will facilitate our ability to provide solutions to customers’ problems more rapidly and lead to expanded sales of sen- sors. Our major strategy for sensors in fiscal 1999 is to focus on providing an expanded line of inspection and measurement sensors for growth markets, such as the semiconductor industry. Among supervisory control products, the domestic market for timers and counters was extremely difficult, but sales of power supply and temperature controllers continued to achieve growth in domestic and overseas markets. Among general-purpose components, sales of large switches and industrial relays were negatively affected by the decline in capi- tal investment, remaining at the previous fiscal year’s levels. By industry, demand expanded for machine-safety-related products, while power supply and specialty switches continued to sell well in the amusement industry. The growing popularity of numerical control appli- cations in response to the need for energy conservation and reduced labor related to envi- ronmental issues is expected to increase demand for temperature controllers and counters. Demand is also anticipated to grow for machine-safety-related components, thanks to heightened interest in working safety in Japan and Europe as well as the widening market penetration of these products. New products were introduced not only in Japan but also overseas during the fiscal year under review to strengthen sales, including a power supply series (S82J), temperature controllers (E5N series), and large switches (A16 and A22). Seeking market expansion, the division en- tered new fields with such products as FA vibration sensors, inclination sensors, and flexible monitors. Overseas, the division aimed for stronger sales by promoting global development in the markets for timers and counters by introducing products that target regional markets and by dispatching liaison personnel to shore up sales activities in North America, Europe, and China. SYSTEM COMPONENTS Favorable exports by the Japanese automobile and semiconductor industries—our major cus- tomers—helped system components record double-digit growth in global sales in fiscal 1998. Among our core products, programmable logic controllers (PLCs) posted double-digit growth in sales. The expansion in sales of our series of FA network (CompoBus/D) prod- ucts, which are used to line PLCs with component devices, was notable. Improving cost-competitiveness and efficiency by shortening product development time and utilizing flexible, small-lot production systems remained important trends during the fis- cal year under review. With advances in information technology and in global standardiza- tion, demand rose for virtual (premanufacturing testing) and more flexible (variable production) systems. The progressive downsizing of PLCs and the shift to open systems controllers and communication systems are producing heightened competition. In response, we are upgrading the features of our PLCs, including making them open system compatible. New products and technologies that contributed to sales during the fiscal year included CPT, our programmable support tool for PLCs, as well as the C200HX, E, G, and W series of upgraded SYSMAC (alpha) systems. The ISA bus compatible SYSMAC board, C200PC-ISA01- DRM, and the FA network family of CompoBus/D slave chips and multiple-I/O terminals also sold well. We have integrated product planning, production, and development to a single location to speed up our product development and enable us to focus on the release and sale of new versions of this division’s core products—PLCs and programmable terminals. 9 Social Business Since the start of Japan’s Big Bang financial regu- lations, we have devel- oped foreign currency exchange machines for the domestic market. SALES (Billion ¥) 5 4 1 8 3 1 7 2 1 6 2 1 0 2 1 22.6% As of April 1997, our Electronic Fund Transfer Systems (EFTS) Division and Public Information and Transfer Systems (PITS) Division were merged into a single division, the Social Business Division, to combine resources in developing new integrated mar- kets. Social Business Division sales declined in fiscal 1998, reflect- ing weak sales of financial systems. In the financial services market, domestic sales of automated teller machines (ATMs) to banks sank under diminished capital investment from the troubled banking industry. However, demand for ATMs remained strong in Japan’s consumer finance industry as com- panies expanded their ATM and unstaffed automated loan application machine networks to maintain their customer bases as competition heightened under deregulation in this current- ly profitable market. Overseas, the upheaval in the financial industry in South Korea, which has been an important market, resulted in lower overseas sales of ATMs. Among market trends, demand for low-cost and open systems products is growing in line with the trend of purchasing system solutions rather than packaged systems. The introduc- tion of a revised Foreign Exchange and Foreign Trade Law allowing companies other than banks to enter the foreign exchange market has prompted a rush in orders for foreign cur- rency exchange machines as well as for centralized surveillance and other systems. We have introduced an open systems version of our IX-ATM and new foreign currency ex- change machines to meet the broadened demand in the market. We also introduced a CX-ATM model that accepts integrated circuit (IC) cards to the South Korean market, where such cards have recently been standardized. In Taiwan, demand for an automatic deposit function for paper currency at ATMs led us to launch a new model of our AP-ATM, a low-cost machine designed for Asian markets, that features this function. In the retail systems market, capital investment declined because volume discount retail- ers and gas stations reduced their capital investment due to the fierce price competition in these markets. However, demand for credit authorization terminals (CATs) from consumer credit companies remained high, as these companies further expanded their operations. Overseas, orders for retail systems from major customers in Europe were favorable. The popularity of PC point-of-sale (POS) systems continued to grow in overseas markets, and we introduced the PC-POS Compact, including the RS6500 series, to meet this demand. Current demand for retail systems in the domestic market centers on achieving low-cost operations and minimizing functions. In response, we have developed purchase coupon vending machines, equipment, and systems with pared-down functions. Major strategies for expanding and improving the content of our EFTSs sales in the cur- rent fiscal year include full-scale efforts to secure new, major clients. We are also looking at developing new integrated markets, particularly in the area of overlap between the financial and retail sectors. To improve our cost structure, we are cutting fixed costs while expanding production and improving the operating efficiency of our business functions, such as sales, production, development, and maintenance. To achieve the most effective use of resources inside and outside the Company, we are considering appropriate alliances and the out- sourcing of certain business functions. In the public transportation systems market, the construction of a new subway line in the Kansai area and expansion of the number of stored fare (SF) systems, which allow passen- gers to travel on different companies’ lines with the same card, boosted sales of automated passenger gates (PGs) and ticket vending machines. ’94 ’95 ’96 ’97 ’98 10 Traffic control systems utilize information on traffic volume and con- gestion to achieve a smooth flow of traffic. The U-PG automated passenger gate is barless and features a new design as well as the high-speed processing of many types of tickets. Capital investment by railway and subway companies remained weak in reaction to a lack of growth in the number of passengers. However, there has been firm demand for SF systems, which increase the convenience of railway stations, and a check system for cheat- on-the-fare passengers. In response, we have developed and introduced new types of PGs that handle two or more tickets at one time and have enhanced the functions of existing models. In the traffic control systems market, sales remained approximately the same as in the previous year, due to increased competition for smaller public construction expenditures under fiscal reform measures by the government. We introduced a Ground View Sensor (GVS), which allows drivers to continuously monitor road conditions. The GVS was installed in a road patrol car displayed at the Nagano ITS Showcase during the 1998 Nagano Winter Olympic Games. We remain focused on developing the ITSs market. Utilizing advanced networking and communication technology to integrate the vehicle, driver, and road with the goal of im- proving traffic efficiency and safety, this market is one with immense growth potential. One area where we have concentrated our efforts is the electronic toll collection (ETC) system, which Japanese tolling agencies soon will begin installing on major domestic highways. Our medium-term strategies for the PITSs market include increasing the competitiveness of our core businesses through cost reductions. Using that firm base, we will improve our marketing and technology capabilities to provide our customers with new technologies and products in accordance with market needs in a timely manner. Our PITSs business is still mainly a domestic business, but, to achieve growth, we are planning to increase overseas business. For this purpose, and to maintain a leading position as more foreign companies are able to bid on public projects in Japan, we are strengthening our business system to en- sure our competitiveness under global standards. 11 Specialty Products The MT128-NET/D is a network terminal adapter that integrates router, TA, hub, analog port, and DSU functions. SALES (Billion ¥) 7 4 7 4 2 4 0 4 9 3 7.7% During fiscal 1998, sales by the Specialty Products Division edged up slightly. Domestic sales of automotive electronic components, including keyless entry systems, electric window switches, and re- lays, were favorable despite the severe downturn in the Japanese automotive industry. We attribute our firm performance to the di- vision’s marketing of innovative products rather than the mere de- velopment of products according to manufacturers’ requests. Overseas, sales of automotive electronic components were brisk, supported by the strong automotive industry in the United States. Sales were strong in the office automation (OA) industry, our other major domestic market, because of the current popularity of digital color copiers. In addition, domestic manufactur- ers were shifting overseas their production of analog copiers, thereby contributing to higher demand. Among our products for PCs, sales of peripheral equipment, including integrated service digital network (ISDN) adapters, high-speed modems, uninterruptible power supply units, and scanners, declined due to the cooling off of consumer spending, which produced a drop in the domestic PC market. In addition, overseas sales of scanners declined as a major customer revised its business. The Specialty Products Division is pursuing growth opportunities in the ITSs market, as are other divisions. In particular, the Advanced Safety Vehicle (ASV) project is expected to produce demand for automotive electronic components. In the OA market, we foresee that an ongoing shift to digital, color, and network systems will support firm demand for devices used in copiers. In the computer peripheral market, the revolution in information systems occurring through digital communication, the Internet, and multimedia will support contin- ued favorable demand for OMRON products. One of our key strategies for the current fiscal year is to expand sales of relays, con- trollers for rear defrosters and daytime running lights, and keyless entry systems to U.S. automakers in line with their higher production. In Canada, we are producing more power seat switches for sale to the Big Three U.S. automakers. Our European strategy focuses on the introduction of our air conditioner panel and our keyless entry system based on in- creased local production. We also are stressing greater sales of relays imported from our U.S. plant to manufacturers in the United Kingdom. Overseas, we will be reinforcing our copier operating base in Europe in the aftermath of the removal of antidumping taxes. Furthermore, we are aiming to expand assembly opera- tions in other areas, particularly that of facsimile machines. Our OA domestic strategy will revolve around the introduction of Windows 98® and the expected recovery in the discount PC market, which should support growth in peripheral equipment sales. This power window switch has an antipinching function to prevent it from closing on arms or other obsta- cles. When an obstacle is encountered, the switch causes the window to stop and reverse in motion. ’94 ’95 ’96 ’97 ’98 12 The Healthcare Division attained double-digit sales growth in fis- cal 1998, thanks to excellent performances in a wide range of product categories. 6.7% In the domestic market, sales of ultrasonic electronic pulse massagers, in- frared therapy devices, and electric toothbrushes declined, reflecting sluggish consumer spending. Sales of newly introduced body-fat monitors, massage chairs, and ear-type digital thermometers, however, soared. Traditionally popular blood pressure monitors and pe- dometers also recorded substantial sales growth, riding on the healthcare boom. Overseas, prompted by the weaker yen, we focused our efforts on developing sales routes in new markets, such as China, and on expanding sales by introducing new products. In particular, ear-type digital thermometers were a hit in the United States, contributing strongly to over- seas sales growth. A digital compact wrist blood pressure monitor that was introduced near the end of the fiscal year in review was also among the new products that contributed to sales growth in fiscal 1998. A significant market is developing for ear-type digital thermometers, especially in the United States, as these products gain global popularity. Moreover, our efforts to cre- ate a special market for our massage chairs were rewarded with greater sales than originally anticipated. Consumers continue to take a growing interest in maintaining and improving their health. Consequently, demand for healthcare services is increasingly focused on self-medication, particularly with the revision of regulations regarding medical nursing institutions. Providing better healthcare management services, therefore, is the core of our business development in this market. Our technology development also concentrates on this goal through ad- vances in sensing and healthcare management technologies. We expect our systems service business, which aims to provide comprehensive solutions to healthcare needs, to eventually become one of the division’s core businesses. The KAZ Healthcare Academy, which offers sophisticated healthcare counseling by healthcare professionals supported by advanced soft- ware for healthcare management, is one of the bases from which we are developing the systems service business. During fiscal 1999, our basic business aim is to achieve thorough customer satisfaction while building a solid foundation for developing OMRON’s visionary concepts, especially within the total healthcare business. More concretely, we will continue to promote the total healthcare business while nurturing the necessary technology and development capabilities to pursue growth based on our visionary concepts. Healthcare Ear-type digital thermometers take body temperature in seconds using advanced infrared sensor technology. SALES (Billion ¥) 1 4 6 3 2 3 9 2 9 2 Omron’s body-fat monitor creates a new alternative to the present standard for daily health checks. ’94 ’95 ’96 ’97 ’98 13 Open Systems The Open Systems Division maintained sales and profit levels in fiscal 1998 amid highly competitive markets. 8.2% With the consumer market for PCs stalled by stagnant consumer spend- ing, competitors refocused their sights on corporate information systems and network sales, creating a highly competitive environment in the information technology market. In the second half of the period under review, the slowdown in Japan’s economy further worsened conditions, resulting in falling performances in the PC-oriented wholesale market. The market for information systems to boost corporate competitiveness, however, remained firm as companies continued to make significant capital investment. During fiscal 1998, we cooperated with system integrator companies in winning large- scale company orders. Consequently, sales were favorable for open platform systems based on PC servers and for systems design and installation as well as operating and maintenance services. Although companies continue to expand their information systems, the process of setting up E-mail networks within major corporations is essentially complete. Customer demand has now turned from faster information-sharing and decision-making functions to improving customer services; various other activities, including sales methods; and strengthening ties with leading vendors. At present, capital investment in information systems and networks is focused on achiev- ing the maximum use of a company’s client-server system, including the thorough manage- ment of efficiency and security. At the same time, companies are rebuilding their business systems, such as core enterprise resource planning (ERP) systems and computer telephone integration (CTI) systems. Customers continued to be concerned with system costs, but their concern has shifted from start-up costs to overall running costs. Demand is currently high for network- and security-related equipment as well as for ERP and CTI packages. On the other hand, the increasing complexity of systems has given rise to a strong need for comprehensive maintenance and other services. To meet this demand, OMRON Alphatec Corporation, an associated company, introduced “Movice,” a comprehen- sive service for multivendor systems, during fiscal 1996. “Movice” allows customers to select the services they need from a menu of multiple support services that cover system design and installation to management and maintenance. The comprehensive service is highly eval- uated by manufacturers and customers. To effect further improvements, OMRON Alphatec is upgrading its menu by adding preventative maintenance, remote inspection and mainte- nance, a customer help desk, and 24-hour services. OMRON offers clients added value in information systems by combining the latest technology with comprehen- sive services. SALES (Billion ¥) 9 3 5 4 3 3 0 5 0 5 ’94 ’95 ’96 ’97 ’98 14 We are supporting a revolution in marketing methods based on infor- mation technology. OMRON’S COMMITMENT TO ENVIRONMENTAL PROTECTION ENVIRONMENTALLY SOUND TECHNOLOGY Through industrial and other activities, the global population is consuming increasingly large amounts of the world’s limited energy resources and damaging the earth’s environ- ment through the use and disposal of hazardous materials. However, through the adapta- tion of better technologies, it is possible to greatly reduce our energy consumption and limit the use and disposal of these materials. OMRON is creating such environmentally sound technologies and products. We are par- ticularly emphasizing the following three areas: • developing low energy consumption products, • minimizing energy consumption and eliminating hazardous materials in our production and manufacturing processes, and • reducing industrial waste through recycling. ACHIEVING ISO 14001 CERTIFICATION ISO 14001 environmental management systems certification is recognized around the world as the membership card of “green” corporations. Meeting ISO 14001 standards also indicates that a company has established environmental management systems that promote continual efforts to prevent pollution. OMRON established its Environmental Charter in 1994, having had organizations for the promotion of environmental protection activities since 1992. As of April 1998, 13 domestic and 3 overseas manufacturing sites had obtained ISO 14001 certification. We expect to achieve full certification for all 30 of the OMRON Group’s manufacturing sites by the end of the current fiscal year. MINIMIZING ENERGY CONSUMPTION To minimize the effect of its operations on global warming, OMRON has set 15% as its goal by which to reduce its electric energy consumption per unit of product shipments by the end of the current fiscal year, relative to the fiscal 1996 level. Thermal electric power gener- ation, which burns fossil fuels, is considered one of the main causes of global warming. Among other measures to diminish energy consumption, we are managing our use of air- conditioning, lighting, and office equipment; revising our production processes; and utiliz- ing solar power systems. In fiscal 1998, we achieved a 13.5% reduction in energy consumption per unit of product shipments compared with the fiscal 1996 level. REDUCING INDUSTRIAL WASTE Since fiscal 1997, we have made efforts to reduce the volume of industrial waste and to re- cycle resources. We now are practicing the thorough separation of waste by category to enable better re- cycling and the proper processing of nonrecyclables. Furthermore, we are developing appli- cations for recycled materials to improve our recycling ratio. In fiscal 1998, we achieved a 36% reduction in our industrial waste volume relative to the fiscal 1996 level, and our recy- cling ratio rose to 60%. Of course, our ultimate goal is zero emissions. OMRON’S ECO-PRODUCTS OMRON develops and improves upon technologies and products to help solve serious en- vironmental issues. The key words for these activities are the Four Rs: Reject, Reduce, Reuse, and Recycle. 15 Striving to obtain ISO 14001 certification for all 30 of the OMRON Group’s manufacturing sites by the end of fiscal 1999. Reduction in Electric Energy Consumption CO2 Emissions (Conversion) (t—c) 12,000 11,500 11,000 10,500 10,000 9,500 9,000 8,500 8,000 Reduction (%) 0 5 10 15 20 25 ~~ ~~ FY 1996 1997 1998 1999 2002 (Projected) Mishima Plant, in Japan CO2 emissions from electric power generation Reduction performance on product shipment basis Target performance reduction on product shipment basis Sensing Technology Sensor for Conserving Resources and Electric Energy (Proximity Switch) OMRON’s DC two-wire proximity sensor reduces the use of resources by 1/3 less copper and 1/4 less insulation than the three-wire sensor. The sensor is also highly electric energy ef- ficient, requiring 1/15 less electric energy than the three-wire sensor. CO2 Control Technology Clean Energy (Solar Power Conditioner) OMRON’s solar power conditioner converts environment-friendly clean electric power ob- tained from solar cells into usable commercial electric power to run electric appliances in the home. Intelligent Transport Systems (ITSs) Technology ITSs are designed to integrate driver, vehicle, and road in such a way as to solve many cur- rent traffic issues. One of the main objectives in the development of ITSs was environmental 16 Reduction in Waste and Recycling Ratio Weight (tons) Recycling Ratio (%) 6,000 5,000 4,000 3,000 2,000 1,000 0 100 75 50 25 0 (Projected) ~~ FY 1996 1997 1998 1999 2002 ~~ OMRON Manufacturing of the Netherlands B.V. PT OMRON Manufacturing of Indonesia Total of recycling resources and waste Waste Recycling performance Recycling target protection. In addition to their potential for improving safety, efficiency, and comfort, ITSs lessen CO2 emissions by reducing traffic jams, thereby mitigating global warming. OPTIMIZING TRAFFIC CONTROL Through the use of signal lights and information displays, traffic control centers ensure the smooth and safe movement of traffic, thus avoiding congestion. The centers also contribute significantly to reducing CO2 and NOx emissions, as engines burn cleaner when running smoothly. ELECTRONIC TOLL COLLECTION (ETC) SYSTEM OMRON’s no-stop automated ETC system allows tolls to be collected “on the run.” Because vehicles do not have to stop, the system eliminates bottlenecks on highways, which, in turn, helps reduce CO2 and NOx emissions. 17 BOARD OF DIRECTORS Seated (left to right): Nobuo Tateisi, Kohei Jinkawa, Yoshio Tateisi Standing (left to right): Norio Hirai, Tomoaki Nishimura, Hideki Masuda, Isao Hatano, Soichi Koshio Chairman and Director Nobuo Tateisi* Vice Chairman and Director Kohei Jinkawa* President and Director Yoshio Tateisi* Vice Presidents and Directors Isao Hatano* Soichi Koshio* Senior Managing Directors Hideki Masuda* Tomoaki Nishimura* Norio Hirai* Managing Directors Kiyohiko Watanabe Tsunehiko Tokumasu Tsutomu Narita Izuru Minami Noboru Sano Tadao Tateisi Tatsuro Ichihara Akio Imaizumi Directors Takao Abu Sadao Masuyoshi Masaaki Sadatomo Yoshikazu Tachi Masato Mori Shingo Akechi Yoshifumi Kajiya Hisao Sakuta Minoru Tamura Tsukasa Yamashita Fujio Tokita Yutaka Takigawa Keiichiro Akahoshi Fumio Tateisi 18 Standing Corporate Auditors Kinji Hanamoto Isao Suzuki Motoki Tamura Corporate Auditor Takayuki Yamashita *Representative Director FINANCIAL SECTION Five-Year Summary ..............................................................................20 Management’s Discussion & Analysis..................................................21 Consolidated Statements of Income....................................................25 Consolidated Balance Sheets ...............................................................26 Consolidated Statements of Shareholders’ Equity ...............................28 Consolidated Statements of Cash Flows..............................................29 Notes to Consolidated Financial Statements .......................................30 Independent Auditors’ Report.............................................................42 19 1FIVE-YEAR SUMMARY OMRON Corporation and Subsidiaries Years ended March 31 Net Sales: 1998 Millions of yen (except per share data) 1996 1995 1997 1994 Control Components and Systems ..................................... ¥313,642 ¥291,277 ¥275,149 ¥248,023 ¥230,983 120,429 Social Business.................................................................... 138,203 40,323 Specialty Products .............................................................. 47,263 28,919 Healthcare .......................................................................... 40,793 33,964 Open Systems ..................................................................... 50,131 6,251 Others................................................................................. 21,763 145,172 46,533 36,388 50,187 24,704 125,623 38,687 31,618 38,621 15,591 127,382 42,465 28,790 34,672 8,368 ................................................................................................ 611,795 594,261 525,289 489,700 460,869 Costs and Expenses: Cost of sales........................................................................ 387,445 Selling, general and administrative expenses ..................... 138,404 Research and development expenses ................................ 39,914 Interest expenses, net ........................................................ 682 Other, net ........................................................................... 3,107 388,005 130,163 35,188 1,591 66 342,500 109,117 34,433 2,044 4,943 324,666 100,333 31,223 5,102 3,428 312,248 100,193 28,698 6,428 240 ................................................................................................ 569,552 555,013 493,037 464,752 447,807 Income before Income Taxes, Minority Interests, and Cumulative Effect of Change in Accounting Principle................................... 42,243 Income Taxes ....................................................................... 23,775 Minority Interests................................................................ 168 39,248 22,952 557 32,252 17,039 626 24,948 12,358 438 13,062 8,822 134 Cumulative Effect of Change in Accounting Principle..................................... — — — — Net Income ........................................................................... 18,300 15,739 14,587 12,152 Net Income per Share (yen, Note 1): Basic .................................................................................. Diluted .............................................................................. Cash Dividends per Share (yen, Note 2) ........................... ¥69.8 68.3 13.0 ¥60.1 58.8 13.0 ¥55.7 54.5 13.0 ¥50.8 49.4 13.0 584 4,690 ¥20.3 20.1 13.0 Capital Expenditures (cash basis)....................................... ¥ 35,896 ¥ 29,956 ¥ 34,079 ¥ 30,954 ¥ 26,875 Total Assets........................................................................... 579,663 590,353 580,815 569,151 552,174 Total Shareholders’ Equity................................................. 336,064 323,019 302,458 288,086 230,706 Notes: 1. Net income per share amounts are computed based on the Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings per Share,” which is effective for the fiscal year ended March 31, 1998. All prior years’ data presented has been restated to conform with the provisions of SFAS No. 128. 2. Cash dividends per share are the amounts applicable to the respective year, including dividends to be paid after the end of the year. 20 MANAGEMENT’S DISCUSSION & ANALYSIS Sales The Japanese economy slowed in the second half of fiscal 1998, ended March 31, 1998, buffeted by domestic problems as well as the currency turmoil in Southeast Asia. Consumers displayed growing spending restraint in the face of deteriorating corporate performances caused by weak personal consumption. The recessionary mood was further reinforced by the string of major business failures precipitated by a troubled banking industry. The sud- den collapse in Asian currencies also contributed to a loss of confidence in the future direc- tion of Japan’s economy. Despite these significant swings in Japan’s economy as well as in certain Asian currencies, OMRON’s consolidated net sales rose 3.0%, to ¥611,795 million ($4,635 million). The weaker yen as well as economic growth in overseas markets, particularly in the United States and Europe, supported strong sales for the Company’s core control components and systems operations. The increase or decrease in sales of each product group or division is as follows: Control Components and Systems ............................. Social Business ........................................................... Specialty Products...................................................... Healthcare .................................................................. Open Systems............................................................. Others ........................................................................ The composition of net sales is as follows: Control Components and Systems ............................. Social Business ........................................................... Specialty Products...................................................... Healthcare .................................................................. Open Systems............................................................. Others ........................................................................ 1998 7.7% (4.8) 1.6 12.1 (0.1) (11.9) 1998 51.3% 22.6 7.7 6.7 8.2 3.5 1997 5.9% 15.6 20.3 15.1 29.9 58.5 1997 49.0% 24.5 7.8 6.1 8.4 4.2 1996 10.9% (1.4) (8.9) 9.8 11.4 86.3 1996 52.3% 23.9 7.4 6.0 7.4 3.0 Divisional performance was mixed in fiscal 1998. OMRON’s major product group, the Control Components and Systems Division, attained satisfactory growth—amid a difficult business climate, thanks to the beneficial effects of robust economies in the United States and Europe—in overseas sales as well as in exports of OMRON’s major domestic customers, the automotive and semiconductor industries. The division also made significant inroads in selling to the multimedia and amusement industries. In fiscal 1998, we combined our Electronic Fund Transfer Systems (EFTS) and Public Information and Transfer Systems (PITS) divisions into a single division, the Social Business Division, which posted a small decline during the fiscal year under review due mainly to weak domestic and overseas mar- kets for financial systems. The division recorded approximately the same level of traffic con- trol sales as in the previous fiscal year and continued to make headway developing the Intelligent Transport Systems (ITSs) market. Sales by the Specialty Products Division rose slightly overall because of the success of marketing efforts to a stagnant domestic automo- bile industry, supported by a strong overseas automobile market and the current boom in 21 digital and color copiers in the office automation (OA) industry. Sales of products for PCs declined because of consumer spending restraint. Healthcare Division sales achieved double- digit growth in fiscal 1998 thanks to strong domestic and overseas demand for new prod- ucts, such as body-fat monitors, massage chairs, and ear-type digital thermometers. Traditionally popular products, such as blood pressure monitors and pedometers, continued to sell well because of the global boom in self-healthcare. The Open Systems Division’s sales stalled in fiscal 1998 after three consecutive years of consolidated sales growth, re- maining approximately the same as in the previous year. Weak consumer spending de- pressed sales of PCs to individuals, causing a shift in emphasis from sales of PCs to individuals to corporate sales of information systems and networks, thus producing height- ened competition in this market. Strong overall demand in this area, however, helped the division maintain sales levels approximately the same as the previous fiscal year’s despite the economic downturn in the second half of the term. Sales by foreign subsidiaries rose 12.6% and generated 28.0% of net sales, compared with 25.6% of net sales in fiscal 1997 and 23.4% in fiscal 1996. Including direct exports from Japan, the overseas sales ratio climbed to 29.6% in fiscal 1998, from 27.3% in the previous fiscal year. Costs, Expenses, and Income Costs, expenses, and income as percentages of net sales were as follows: 1998 Net sales ......................................................................... 100.0% Cost of sales.................................................................... Gross profit..................................................................... Selling, general and administrative expenses................. Research and development expenses ............................ Interest expenses, net .................................................... Income before income taxes and minority interests ....... Income taxes .................................................................. Net income..................................................................... 63.3 36.7 22.6 6.5 0.1 6.9 3.9 3.0 1997 100.0% 65.3 34.7 21.9 5.9 0.3 6.6 3.9 2.6 1996 100.0% 65.2 34.8 20.8 6.6 0.4 6.1 3.2 2.8 Cost of sales declined marginally, to ¥387,445 million ($2,935 million), during the period under review. Because cost of sales remained flat while net sales gained 3.0%, the gross profit ratio improved to 36.7%, from 34.7% in fiscal 1997. Selling, general and administrative expenses rose 6.3%, to ¥138,404 million ($1,049 million), and research and development ex- penses increased 13.4%, to ¥39,914 million ($302 million). Interest expenses, net, dropped to ¥682 million ($5 million), mainly because of lower debt. Foreign exchange loss, net, to- taled ¥4,419 million ($33 million). Income before income taxes and minority interests was ¥42,243 million ($320 million), an increase of 7.6% from the previous fiscal year. Income taxes climbed slightly, reflecting greater corporate profits. Minority interests declined to ¥168 million ($1 million). Net income advanced 16.3%, to ¥18,300 million ($139 million). Basic net income per share rose from ¥60.1 to ¥69.8 ($0.53), and diluted net income per share rose from ¥58.8 to ¥68.3 ($0.52). Cash dividends per share applicable to the period were maintained at ¥13.0 ($0.10). ROA and ROE were 3.1% and 5.6%, respectively, com- pared with 2.7% and 5.0% in the previous fiscal year. 22 Financial Position Total current assets edged down 3.8%, to ¥327,372 million ($2,480 million), largely because of the declines in cash and cash equivalents and short-term investments. The inventory turnover rate, as determined by cost of sales divided by inventories at year-end, decreased to 4.1, from 4.5 at the previous fiscal year-end. Total current liabilities, however, dropped 8.0%, to ¥176,288 million ($1,336 million), mainly reflecting a large decline in the current portion of long-term debt. Working capital increased ¥2,295 million, to ¥151,084 million ($1,145 million), providing adequate liquidity for operations. The current ratio was 1.86, compared with 1.78 at the previous fiscal year-end. Cash and cash equivalents at beginning of the year were ¥79,288 million ($601 million). Net cash provided by operating activities declined to ¥32,086 million ($243 million). Depreciation and amortization, the main component of cash flows from operating activities, edged down 0.3%, to ¥31,129 million ($236 million). Net cash used in investing activities sunk to ¥17,631 million ($134 million), mainly because of a sharp drop in the purchase of short-term investments and investment securities. Capital expenditures rose 19.8%, to ¥35,896 million ($272 million). Net cash used in financing activities was ¥23,637 million ($179 million). Proceeds from is- suance of long-term debt were ¥648 million ($5 million), and repayments of long-term debt were ¥18,013 million ($136 million). Reflecting the above cash outflows and inflows, cash and cash equivalents at end of the year decreased to ¥68,365 million ($518 million). Total indebtedness—bank loans, current portion of long-term debt, and long-term debt— decreased 27.4%, to ¥54,544 million ($413 million). Long-term debt fell 19.9%, to ¥33,500 million ($254 million). Total shareholders’ equity grew 4.0%, to ¥336,064 million ($2,546 million), with higher re- tained earnings being offset somewhat by cumulative translation adjustments and minimum pension liability adjustment. Total shareholders’ equity as a percentage of total assets rose to 58.0%, compared with 54.7% at the end of fiscal 1997. ROE was 5.6%, compared with 5.0% at the previous fiscal year-end. OMRON is targeting an ROE of 6.0% by the end of its Seventh Mid-Term Management Plan. Capital Investments and Finance A total of ¥35,896 million ($272 million) in capital expenditures was made during fiscal 1998 and was principally invested in establishing a growth structure, in expanding our global net- work in Asia and other countries, and in plant and equipment. OMRON has not found it necessary to raise capital to fund its current capital expenditure program at this stage. 23 Research and Development Research and development expenses were ¥39,914 million ($302 million) during the fiscal year under review, representing 6.5% of net sales. Year 2000 Compliance The Company has developed plans to address the exposure of its computer systems to the so-called millennium bug. Key financial, information, and operational systems have been as- sessed, and detailed plans have been developed to achieve Year 2000 compliance by December 31, 1999. The financial impact of making the required system changes is not ex- pected to be material to the Company’s consolidated financial position, results of opera- tions, or cash flows. Share Buyback Program In accordance with a resolution passed at the general meeting of shareholders in June 1998, OMRON will repurchase and retire shares up to a maximum of ¥10 billion, or five million shares, during the period before the next general shareholders’ meeting. In addition, the Company’s Articles of Incorporation have been amended to allow future share repurchases up to a total of 25 million additional shares. Stock Option Plan The Company has introduced a stock option plan for its directors to further motivate them to consider growth in investors’ value as their chief management goal and to otherwise manage in a manner that is in the best interest of shareholders. A maximum of 158,000 shares, or ¥500 million, will be allocated for this purpose in accordance with a resolution passed at the general meeting of shareholders. The exercise period will run from July 1999 to the end of June 2001. 24 CONSOLIDATED STATEMENTS OF INCOME OMRON Corporation and Subsidiaries Years ended March 31, 1998, 1997 and 1996 1998 Millions of yen 1997 1996 Thousands of U.S. dollars (Note 2) 1998 Net Sales ................................................................................... ¥611,795 Costs and Expenses: ¥594,261 ¥525,289 $4,634,811 Cost of sales .......................................................................... Selling, general and administrative expenses ....................... Research and development expenses ................................... Interest expenses, net (Note 5) ............................................ Foreign exchange loss, net ................................................... Other income, net ................................................................. 387,445 138,404 39,914 682 4,419 (1,312) 388,005 130,163 35,188 1,591 860 (794) 342,500 109,117 34,433 2,044 5,027 (84) 2,935,189 1,048,515 302,379 5,167 33,477 (9,939) Total ................................................................................. 569,552 555,013 493,037 4,314,788 Income before Income Taxes and Minority Interests ....... 42,243 Income Taxes (Note 9)............................................................ 23,775 Income before Minority Interests........................................ 18,468 Minority Interests ................................................................... 168 39,248 22,952 16,296 557 32,252 17,039 15,213 626 320,023 180,114 139,909 1,273 Net Income .............................................................................. ¥ 18,300 ¥ 15,739 ¥ 14,587 $0,138,636 Net Income per Share (Note 11): Basic ...................................................................................... Diluted .................................................................................. Cash Dividends per Share (Note 11)..................................... ¥69.8 68.3 13.0 ¥60.1 58.8 13.0 ¥55.7 54.5 13.0 $0.53 0.52 0.10 Yen U.S. dollars (Note 2) See notes to consolidated financial statements. 25 CONSOLIDATED BALANCE SHEETS OMRON Corporation and Subsidiaries March 31, 1998 and 1997 ASSETS Current Assets: Millions of yen Thousands of U.S. dollars (Note 2) 1998 1997 1998 Cash and cash equivalents......................................................................... ¥ 68,365 Short-term investments (Note 4) ............................................................... 4,767 Notes and accounts receivable—trade...................................................... 138,149 Allowance for doubtful receivables........................................................... (3,301) Inventories (Note 3) .................................................................................. 94,981 Deferred income taxes (Note 9)................................................................ 11,798 Other current assets .................................................................................. 12,613 ¥ 79,288 25,970 133,771 (3,023) 85,966 10,139 8,310 $ 517,917 36,114 1,046,583 (25,008) 719,553 89,379 95,553 Total Current Assets .......................................................................... 327,372 340,421 2,480,091 Property, Plant and Equipment: Land ........................................................................................................... Buildings .................................................................................................... Machinery and equipment......................................................................... Construction in progress ........................................................................... 50,166 107,974 143,809 4,124 51,169 107,036 143,736 2,746 Total ..................................................................................................... 306,073 304,687 380,045 817,985 1,089,462 31,242 2,318,734 Accumulated depreciation ........................................................................ (135,591) (134,277) (1,027,205) Net Property, Plant and Equipment................................................ 170,482 170,410 1,291,529 Investments and Other Assets: Investments in and advances to associates................................................ Investment securities (Note 4) .................................................................. Leasehold deposits .................................................................................... Deferred income taxes (Note 9)................................................................ Other ......................................................................................................... 1,843 43,245 11,730 7,507 17,484 Total Investments and Other Assets ............................................... 81,809 2,098 42,198 11,809 6,945 16,472 79,522 13,962 327,614 88,864 56,871 132,455 619,766 Total.............................................................................................................. ¥579,663 ¥590,353 $4,391,386 See notes to consolidated financial statements. 26 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Millions of yen Thousands of U.S. dollars (Note 2) 1998 1997 1998 Bank loans (Note 5) ................................................................................... ¥ 12,578 Notes and accounts payable—trade .......................................................... 88,756 Accrued expenses ..................................................................................... 23,117 Income taxes payable ................................................................................ 15,011 Other current liabilities ............................................................................. 28,360 Current portion of long-term debt (Note 5) .............................................. 8,466 ¥ 15,302 95,552 22,478 16,236 24,040 18,024 $ 95,288 672,394 175,129 113,720 214,848 64,136 Total Current Liabilities .................................................................... 176,288 191,632 1,335,515 Long-Term Debt (Note 5) ........................................................................... 33,500 41,821 253,788 Deferred Income Taxes (Note 9)............................................................... 5,531 4,214 41,902 Termination and Retirement Benefits (Note 7)...................................... 24,913 22,909 188,735 Other Long-Term Liabilities...................................................................... 367 108 2,780 Minority Interests in Subsidiaries ........................................................... 3,000 6,650 22,727 Shareholders’ Equity (Note 8): Common stock with ¥50 par value: Authorized—500,000,000 shares; Issued and outstanding—262,107,214 shares in 1998 and 1997 .......... Additional paid-in capital........................................................................... Legal reserve.............................................................................................. Retained earnings ...................................................................................... Cumulative translation adjustments .......................................................... Minimum pension liability adjustment (Note 7) ....................................... 64,079 98,702 6,314 174,282 (5,912) (1,401) 64,079 98,702 5,963 159,741 (3,320) (2,146) 485,447 747,742 47,833 1,320,318 (44,787) (10,614) Total Shareholders’ Equity ............................................................... 336,064 323,019 2,545,939 Total ............................................................................................................. ¥579,663 ¥590,353 $4,391,386 27 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY OMRON Corporation and Subsidiaries Years ended March 31, 1998, 1997 and 1996 Millions of yen Number of common shares issued and outstanding Common stock Additional paid-in capital Legal reserve Retained earnings Cumulative translation adjustments Minimum pension liability adjustment Balance, April 1, 1995 .................... 262,100,942 ¥64,075 ¥98,696 ¥5,087 ¥137,107 ¥(16,879) ¥ —) Shares issued upon conversion of bonds .................... Net income .................................... Cash dividends, ¥13.0 per share .... Transfer to legal reserve ................ Translation adjustments ................ Adjustment to minimum pension liability............................ 6,272 4 6 14,587 (3,408) (386) 386 Balance, March 31, 1996 ................ 262,107,214 64,079 98,702 5,473 Net income .................................... Cash dividends, ¥13.0 per share .... Transfer to legal reserve ................ Translation adjustments ................. Adjustment to minimum pension liability............................ 490 Balance, March 31, 1997 ................ 262,107,214 64,079 98,702 5,963 Net income .................................... Cash dividends, ¥13.0 per share .... Transfer to legal reserve ................ Translation adjustments ................. Adjustment to minimum pension liability............................ 351 147,900 15,739 (3,408) (490) 159,741 18,300 (3,408) (351) 7,822 (4,639) (9,057) (4,639) 5,737 2,493 (3,320) (2,146) (2,592) 745 Balance, March 31, 1998 ................ 262,107,214 ¥64,079 ¥98,702 ¥6,314 ¥174,282 ¥ (5,912) ¥(1,401) Thousands of U.S. dollars (Note 2) Common stock Additional paid-in capital Legal reserve Retained earnings Cumulative translation adjustments Minimum pension liability adjustment Balance, March 31, 1997...................................... $485,447 $747,742 $45,174 $1,210,159 $(25,152) $(16,258) Net income ............................................................. Cash dividends, $0.10 per share.............................. Transfer to legal reserve .......................................... Translation adjustments........................................... Adjustment to minimum pension liability ............... 138,636 (25,818) (2,659) (19,635) 2,659 5,644 Balance, March 31, 1998...................................... $485,447 $747,742 $47,833 $1,320,318 $(44,787) $(10,614) See notes to consolidated financial statements. 28 CONSOLIDATED STATEMENTS OF CASH FLOWS OMRON Corporation and Subsidiaries Years ended March 31, 1998, 1997 and 1996 Operating Activities: Net income .................................................................................. ¥18,300 Adjustments to reconcile net income to net cash provided by operating activities: ¥15,739 ¥14,587 $138,636 Millions of yen 1997 1996 1998 Thousands of U.S. dollars (Note 2) 1998 Depreciation and amortization ................................................ 31,129 Loss on sales of property, plant and equipment...................... 268 Valuation loss on property held for sale .................................. — Net (gain) loss on sale of short-term investments and investment securities ...................................................... Termination and retirement benefits....................................... Deferred income taxes............................................................. Minority interests ..................................................................... Changes in assets and liabilities: (1) 2,004 (230) 168 Notes and accounts receivable—trade, net ......................... Inventories ........................................................................... Other assets.......................................................................... Notes and accounts payable—trade .................................... Income taxes payable .......................................................... Accrued expenses and other ............................................... Other, net................................................................................. (3,537) (8,412) (7,004) (4,315) (1,998) 4,425 1,289 31,234 771 2,040 (2,828) 4,574 (62) 557 (7,927) (4,163) (2,080) 12,000 4,711 3,232 (629) 30,196 677 — 22 (154) (1,242) 626 (16,936) (7,289) 494 5,841 1,455 (706) (798) Total adjustments................................................................. 13,786 41,430 12,186 Net cash provided by operating activities ....................... 32,086 57,169 26,773 Investing Activities: Proceeds from sales or maturities of short-term investments and investment securities .......................................................... 21,285 Purchase of short-term investments and investment securities.... (1,427) Capital expenditures.................................................................... (35,896) Decrease in leasehold deposits .................................................... 5 Proceeds from sales of property, plant and equipment............... 1,335 Acquisition of minority interests.................................................. (2,933) 43,671 (45,904) (29,956) 285 2,818 (312) 70,382 (45,625) (34,079) 57 3,427 (1,056) Net cash used in investing activities ................................ (17,631) (29,398) (6,894) Financing Activities: Net (repayments) borrowings of short-term bank loans ............. (2,864) Proceeds from issuance of long-term debt ................................. 648 Repayments of long-term debt..................................................... (18,013) Dividends paid ............................................................................. (3,408) 3,738 5,446 (43,634) (3,407) 5,141 1,050 (26,525) (3,355) Net cash used in financing activities................................ (23,637) (37,857) (23,689) Effect of Exchange Rate Changes on Cash and Cash Equivalents ................................................................. (1,741) 1,510 1,618 Net Decrease in Cash and Cash Equivalents ............................ (10,923) (8,576) (2,192) Cash and Cash Equivalents at Beginning of the Year............. 79,288 87,864 90,056 235,826 2,030 — (8) 15,182 (1,742) 1,273 (26,795) (63,727) (53,061) (32,689) (15,136) 33,523 9,763 104,439 243,075 161,250 (10,811) (271,939) 38 10,114 (22,220) (133,568) (21,697) 4,902 (136,462) (25,811) (179,068) (13,189) (82,750) 600,667 Cash and Cash Equivalents at End of the Year ........................ ¥68,365 ¥79,288 ¥87,864 $517,917 See notes to consolidated financial statements. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OMRON Corporation and Subsidiaries 1. Summary of Significant Accounting Policies Basis of Financial Statements The accompanying consolidated financial statements, stated in Japanese yen, include certain adjustments, not recorded on the books of account, to present these statements in accordance with accounting principles as generally accepted in the United States, except for the omission of segment information as required by the Statement of Financial Accounting Standards (“SFAS”) No. 14, “Financial Reporting for Segments of a Business Enterprise,” and except that the recog- nition and measurement provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” have not been applied (see Note 4). The principal adjustments include accrual of certain expenses, recognition of the value of warrants issued with bonds, accounting for termination and retirement benefits, accrual of deferred income taxes relating to these adjustments and other temporary differences, and accounting for prior years’ stock dividends at market value. Certain reclassifications have been made to accounts previously reported in order to conform to 1998 classifications. Principles of Consolidation The consolidated financial statements include the accounts of OMRON Corporation (the “Company”) and its subsidiaries (together the “Companies”). All significant intercompany accounts and transactions have been eliminated. Costs in excess of the fair value of net assets acquired are amortized on a straight-line basis over five years. The Companies’ investments in companies in which ownership is from 20% to 50% (associates) are stated at cost plus equity in undistributed net income or loss. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents Cash equivalents consist of highly liquid investments with original maturities of three months or less, including time deposits, securities purchased with resale agreements and money market instruments. Short-Term Investments and Investment Securities Marketable equity securities are carried at the lower of aggregate cost or market. Other investments are stated at the lower of cost or estimated net realizable value (see Note 4). The cost of securities sold is determined on the average cost basis. Inventories or market. Inventories are stated at the lower of cost, determined by the first-in, first-out method, Property, plant and equipment is stated at cost. Depreciation of Property, Plant and Equipment property, plant and equipment has been computed principally on the declining balance method based upon the estimated useful lives of the assets. Advertising Costs Advertising costs are charged to earnings as incurred. Advertising expenses were ¥10,329 million ($78,250 thousand), ¥8,473 million and ¥7,477 million for the years ended March 31, 1998, 1997 and 1996, respectively. Termination and Retirement Benefits Termination and retirement benefits are accounted for in accordance with SFAS No. 87, “Employers’ Accounting for Pensions.” Provision for termination and retirement benefits includes those for directors and corporate auditors of the Company. Income Taxes Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. Future tax bene- fits, such as net operating loss carryforwards, are recognized to the extent that such benefits are more likely than not to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 30 Derivatives Currency derivatives (foreign exchange forward contracts and currency option con- tracts) are used to manage currency risk. Gains and losses on hedges of existing assets or liabilities denominated in foreign currencies are recognized currently in income, as are the offsetting foreign exchange losses and gains on the items hedged. Gains and losses related to qualifying hedges of firm commitments denominated in foreign currencies are deferred and are recognized as adjustments to the hedged transaction when such transaction occurs. Derivative contracts that do not qualify as hedges are marked to market with the related gains and losses included in Foreign exchange loss, net, in the consolidated statements of income. Interest rate swaps are used to manage exposure to fluctuations in interest rates arising from the Companies’ existing debt. The amounts receivable or payable under interest rate swap agreements are recognized as adjustments to interest expenses. Cash Dividends Cash dividends are reflected in the consolidated financial statements at proposed amounts in the years to which they are applicable, even though payment is not approved by sharehold- ers until the annual general meeting of shareholders held early in the following fiscal year. Resulting dividends payable are included in Other current liabilities in the consolidated balance sheets. Nature of Operations The Company is a multinational manufacturer of automation components, equipment and systems with advanced computer, communications and control technologies. The Company conducts business in more than 30 countries around the world and strategically manages its worldwide operations through five regional management centers: Japan, North America, Europe, Asia- Pacific and China. Products, classified by type and market, are organized into five principal business units, as described below. Control Components and Systems include a wide range of products, including sensors, relays, switches, printed circuit boards and computer systems for factory automation. These products are pri- marily used by manufacturers of electronic and high-technology equipment with certain products aimed at the consumer and industrial markets. Social Business encompasses the production and sale of automated teller machines, credit autho- rization terminals, point-of-sale systems and card readers for both domestic and overseas markets. Automated passenger gates and ticket vending machines as well as electronic panels and terminal dis- plays for traffic information and monitoring purposes are also produced for the domestic market. Specialty Products include the production of automotive electronic components for use by the auto- motive industry and high-technology electronic components and equipment directed at the office automation industries. Healthcare includes blood pressure monitors, nebulizers and infrared therapy devices aimed at both the consumer and institutional markets. Open systems supply network and PC systems to institutional and individual consumers. In July 1997, the Financial Accounting Standards Board issued SFAS New Accounting Standards No. 130, “Reporting Comprehensive Income,” and SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” These statements are effective for fiscal years beginning after December 15, 1997. The Companies will adopt SFAS No. 130 for the year beginning April 1, 1998, except for the effects on shareholders’ equity from the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Companies currently anticipate that the segment information required by SFAS No. 131 will not be provided. Neither of these statements will have an effect on the Company’s consolidated financial position or results of operations. 31 2. Translation into United States Dollars The consolidated financial statements are stated in Japanese yen, the currency of the country in which the Company is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for convenience and have been made at the rate of ¥132 to $1, the approximate free rate of exchange at March 31, 1998. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at the above or any other rate. 3. Inventories Inventories at March 31, 1998 and 1997 consisted of: 4. Short-Term Investments and Investment Securities Finished products ............................................................................................. ¥56,665 Work-in-process ................................................................................................ 17,707 Materials and supplies....................................................................................... 20,609 ¥46,564 19,731 19,671 Total .......................................................................................................... ¥94,981 ¥85,966 Millions of yen 1998 1997 Thousands of U.S. dollars 1998 $429,280 134,144 156,129 $719,553 The Companies have chosen not to adopt the recognition and measurement principles of SFAS No. 115 and have instead continued to account for investments in debt and equity securities under previ- ously accepted accounting principles. The Companies were of the opinion that the adoption of SFAS No. 115 would materially reduce the comparability of the financial statements with those of other Japanese companies that follow the Japanese accounting practice of reporting marketable debt and equity securities under the lower of cost or market method. Marketable securities included in short- term investments and investment securities at March 31, 1998 and 1997 would be classified as available-for-sale securities under SFAS No. 115. The recognition and measurement provisions of SFAS No. 115 require that the investments in debt and equity securities which are classified as available for sale be reported at fair value with unrealized gains and losses, net of related taxes, reported in a sepa- rate component of shareholders’ equity. If the Companies had followed SFAS No. 115, consolidated net income would have increased ¥404 million ($3,061 thousand) for the year ended March 31, 1998. There was no effect on income for the years ended March 31, 1997 and 1996, of not adopting SFAS No. 115. The effects on the consolidated balance sheets as of March 31, 1998 and 1997 of not adopting SFAS No. 115 were as follows: Shareholders’ equity as reported .................................................................. ¥336,064 Net increase in the carrying amount of short-term investments................... 1,375 Net increase in the carrying amount of investment securities ..................... 12,091 Net increase in deferred tax liabilities as a result ¥323,019 3,065 17,512 Millions of yen 1998 1997 Thousands of U.S. dollars 1998 $2,545,939 10,417 91,598 of the above net increases in short-term investments and investment securities............................................................................ Net increase in net income due to a change in enacted tax rates ................ (6,868) 404 (10,494) — (52,030) 3,061 Shareholders’ equity based on SFAS No. 115........................................ ¥343,066 ¥333,102 $2,598,985 32 The carrying amounts, gross unrealized holding gains and losses and fair value of securities, exclud- ing equity securities with no public market value, by major security type at March 31, 1998 and 1997 were as follows: Millions of yen 1998 1997 Carrying amount Gross unrealized gains Gross unrealized losses Fair value Gross Carrying unrealized unrealized gains amount losses Gross Fair value Short-term investments: Debt securities..................... ¥ 3,913 Asset-backed securities........ — Equity securities................... 854 ¥ — ¥ — ¥ 3,913 ¥13,746 ¥ — ¥ — ¥13,746 — 11,250 — 11,250 4,039 (30) 974 — 1,442 — 3,095 — (67) 2,229 Total short-term investments... 4,767 1,442 (67) 6,142 25,970 3,095 (30) 29,035 Marketable investment securities: Debt securities..................... Equity securities................... 25 39,447 — 17,675 — (5,584) 25 51,538 48 39,160 — 21,189 — (3,677) 48 56,672 Total marketable investment securities............................... 39,472 17,675 (5,584) 51,563 39,208 21,189 (3,677) 56,720 Total................................. ¥44,239 ¥19,117 ¥(5,651) ¥57,705 ¥65,178 ¥24,284 ¥(3,707) ¥85,755 Thousands of U.S. dollars 1998 Gross unrealized gains Gross unrealized losses Fair value Carrying amount Short-term investments: Debt securities..................... $ 29,644 $ Asset-backed securities........ Equity securities................... — 6,470 — $ — 10,925 — $ 29,644 — — 16,887 (508) Total short-term investments... 36,114 10,925 (508) 46,531 Marketable investment securities: Debt securities..................... 189 Equity securities................... 298,841 — 133,901 — (42,303) 189 390,439 Total marketable investment securities............................... 299,030 133,901 (42,303) 390,628 Total................................. $335,144 $144,826 $(42,811) $437,159 Net unrealized holding gains on available-for-sale securities, net of related taxes, decreased by ¥3,081 million ($23,341 thousand) and ¥5,653 million for the years ended March 31, 1998 and 1997, respectively. Debt securities classified as available-for-sale investment securities mature in various amounts through 2001. Proceeds from sales of available-for-sale securities were ¥21,160 million ($160,303 thousand), ¥43,671 million and ¥70,382 million for the years ended March 31, 1998, 1997 and 1996, respectively. Gross realized gains on those sales were ¥2,828 million and ¥1,269 million for the years ended March 31, 1997 and 1996, respectively, and were not material for the year ended March 31, 1998. Gross realized losses were ¥1,291 million for the year ended March 31, 1996 and were not material for the years ended March 31, 1998 and 1997. 33 5. Bank Loans and Long-Term Debt The weighted average annual interest rates of short-term bank loans at March 31, 1998 and 1997 were 5.2% and 4.4%, respectively. Long-term debt at March 31, 1998 and 1997 consisted of the following: Millions of yen 1998 1997 Thousands of U.S. dollars 1998 Unsecured debt: Convertible bonds at 1.7%, due 2004 ........................................................... ¥29,741 ¥29,741 $225,311 Notes: Loans from banks and other financial institutions, generally at 2.8% to 6.7%, due serially through 2004 ................................. Other................................................................................................................. 11,615 610 Total .......................................................................................................... 41,966 Less portion due within one year ..................................................................... 8,466 29,570 534 59,845 18,024 87,992 4,621 317,924 64,136 Long-term debt, less current portion ................................................................ ¥33,500 ¥41,821 $253,788 The annual maturities of long-term debt outstanding at March 31, 1998 were as follows: Year ending March 31, Millions of yen Thousands of U.S. dollars 1999 .............................................................................................................................. 2000 .............................................................................................................................. 2001 .............................................................................................................................. 2002 .............................................................................................................................. 2003 .............................................................................................................................. 2004 and thereafter ...................................................................................................... ¥ 8,466 2,161 844 272 229 29,994 Total.......................................................................................................................... ¥41,966 $ 64,136 16,371 6,394 2,061 1,735 227,227 $317,924 The convertible bonds may be purchased at any time by the Company or its subsidiaries principally at any price in the open market or otherwise and may be redeemed at the Company’s option prior to maturity. The convertible bonds are redeemable, in whole or in part, beginning October 1997 at 106% of face value, decreasing 1% per year. The number of contingently issuable shares of common stock related to the convertible bonds as of March 31, 1998 was 10,028,661 shares. The conversion price per share at March 31, 1998 was ¥2,965 ($22.47), subject to antidilutive provisions. As is customary in Japan, additional security must be given if requested by a lending bank, and banks have the right to offset cash deposited with them against any debt or obligation that becomes due and, in case of default and certain other specified events, against all debt payable to the banks. The Companies have never received any such requests. As is customary in Japan, the Company and domestic subsidiaries maintain deposit balances with banks with which they have short- or long-term borrowings. Such deposit balances are not legally or contrac- tually restricted as to withdrawal. Total interest cost incurred and charged to expenses for the years ended March 31, 1998, 1997 and 1996 amounted to ¥2,412 million ($18,273 thousand), ¥3,557 million and ¥5,075 million, respectively. 34 6. Leases 7. Termination and Retirement Benefits The Companies have operating lease agreements primarily involving offices and equipment for varying periods. Leases that expire generally are expected to be renewed or replaced by other leases. At March 31, 1998, future minimum rental payments applicable to noncancelable leases having initial or remaining noncancelable lease terms in excess of one year were as follows: Year ending March 31, Millions of yen Thousands of U.S. dollars 1999 .............................................................................................................................. 2000 .............................................................................................................................. 2001 .............................................................................................................................. 2002 .............................................................................................................................. 2003 .............................................................................................................................. 2004 and thereafter ...................................................................................................... Total.......................................................................................................................... ¥2,199 1,901 1,588 614 560 2,760 ¥9,622 $16,659 14,402 12,030 4,652 4,242 20,909 $72,894 Rental expense amounted to ¥13,917 million ($105,432 thousand), ¥11,105 million and ¥11,554 million for the years ended March 31, 1998, 1997 and 1996, respectively. In December 1997, the Company entered into an agreement with an outside service organization for outsourcing computer services. The contract requires an annual service fee of ¥4,460 million ($33,788 thousand) for the year ending March 31, 1999. The annual service fee will gradually decrease each year during the initial contract term of 10 years to ¥3,769 million for 2008. The contract is cancelable subject to a penalty of 15% of aggregate service fees payable for the remaining term of the contract. The Company and its domestic subsidiaries sponsor termination and retirement benefit plans which cover substantially all domestic employees. Benefits are based on the employee’s years of service, with some plans considering compensation and certain other factors. If the termination is involuntary, the employee is usually entitled to greater payments than in the case of voluntary termination. The Company and its domestic subsidiaries fund a portion of the obligations under these plans. The general funding policy is to contribute amounts computed in accordance with actuarial methods acceptable under Japanese tax law. The Company and substantially all domestic subsidiaries have a contributory termination and retirement plan which is interrelated with the Japanese government social welfare program and consists of a basic portion requiring employee and employer contributions plus an additional portion established by the employers. Periodic pension benefits required under the basic portion, prescribed by the Japanese Ministry of Health and Welfare, commence at age 60 and continue until the death of the surviving spouse. Benefits under the additional portion are usually paid in a lump sum at the earlier of termination or retirement, although periodic payments are available under certain conditions. The following table summarizes the financial status of the contributory termination and retirement plan and the amounts recognized in the consolidated balance sheets at March 31, 1998 and 1997: Millions of yen 1998 1997 Thousands of U.S. dollars 1998 Actuarial present value of benefit obligation: Vested........................................................................................................ ¥103,861 Nonvested ................................................................................................. 12,488 ¥ 94,024 12,800 $ 786,826 94,606 Accumulated benefit obligation .................................................................... Effect of projected future salary increases .................................................... 116,349 38,265 106,824 37,117 881,432 289,886 Projected benefit obligation for service rendered to date ............................ Less: trusteed fund assets at fair value, including cash equivalents, 154,614 143,941 1,171,318 bonds and stocks......................................................................................... 92,927 Projected benefit obligation in excess of plan assets.................................... Remaining unrecognized net obligation from April 1, 1989......................... Unrecognized net loss from past experience different from that assumed and effect of changes in assumptions .......................................... Adjustment to recognize minimum pension liability .................................... 61,687 (1,618) 85,316 58,625 (1,888) 703,992 467,326 (12,258) (41,121) 4,477 (41,496) 6,267 (311,523) 33,917 Recognized liabilities for contributory termination and retirement plans.... ¥ 23,425 ¥ 21,508 $ 177,462 35 The provisions of SFAS No. 87, “Employers’ Accounting for Pensions,” require the recognition of an additional minimum pension liability for each defined benefit plan to the extent that a plan’s accumu- lated benefit obligation exceeds the fair value of plan assets and accrued pension liabilities. The adjust- ment to recognize the minimum pension liability is partially offset by an intangible asset, equal to the unrecognized net obligation from the adoption of SFAS No. 87 of ¥1,618 million ($12,258 thousand) and ¥1,888 million at March 31, 1998 and 1997, respectively. The amount of the adjustment in excess of this amount is reflected as a separate reduction of shareholders’ equity, net of related deferred tax benefits. The unrecognized net obligation and the unrecognized net loss are being amortized over 15 years. Key assumptions utilized in calculating the actuarial present value of benefit obligations are as follows: Discount rate ....................................................................................................................... Compensation increase rate ................................................................................................ Long-term rate of return on plan assets............................................................................... 1998 4.0% 3.8 3.5 1997 4.0% 3.8 3.5 1996 4.0% 4.0 3.5 The expense recorded for the contributory termination and retirement plans included the following components for the years ended March 31, 1998, 1997 and 1996: Service cost, less employees’ contributions .................................... ¥ 7,680 Interest cost on projected benefit obligation .................................. 5,758 Actual return on plan assets ............................................................ (1,556) Net amortization and deferral.......................................................... 786 ¥ 7,795 5,440 (3,602) 3,557 Millions of yen 1997 1998 1996 ¥5,160 3,800 (5,254) 3,395 Net expense............................................................................. ¥12,668 ¥13,190 ¥7,101 Thousands of U.S. dollars 1998 $58,182 43,621 (11,788) 5,955 $95,970 The Companies also have unfunded noncontributory termination plans administered by the Com- panies. These plans provide lump-sum termination benefits and are paid at the earlier of the employee’s termination or mandatory retirement age, except for payments to directors and corporate auditors, which require approval by the shareholders before payment. The Companies record provi- sions for termination benefits sufficient to state the liability equal to the plans’ vested benefits, which exceed the plans’ accumulated benefit obligations. The consolidated liabilities for the noncontributory termination plans as of March 31, 1998 and 1997 were ¥1,488 million ($11,273 thousand) and ¥1,401 million, respectively. The consolidated expenses for the noncontributory termination and retirement plans for the years ended March 31, 1998, 1997 and 1996 were ¥146 million ($1,106 thousand), ¥420 million and ¥172 million, respectively. The Japanese Commercial Code (the “Code”) requires at least 50% of the issue price of new shares, with the minimum of the par value thereof, to be recorded as common stock. The portion which is to be recorded as common stock is determined by resolution of the Board of Directors. Proceeds in excess of the amounts designated as common stock have been credited to additional paid-in capital. Under the Code, the Company is required to record an amount at least equal to 10% of the amounts paid as an appropriation of retained earnings, including dividends and other distributions, to be appro- priated and set aside as a legal reserve until such reserve equals 25% of the common stock. This reserve is not available for dividends but may be used to eliminate or reduce a deficit by resolution of the shareholders or may be transferred to common stock by resolution of the Board of Directors. The Company may transfer portions of additional paid-in capital and legal reserve to common stock by resolution of the Board of Directors. The Company may also transfer portions of unappropriated retained earnings, available for dividends, to common stock by resolution of the shareholders. Under the Code, the amount legally available for dividends is based on retained earnings as recorded in the books of the Company for Japanese financial reporting purposes. At March 31, 1998, retained earnings amounting to ¥106,257 million ($804,977 thousand) were available for future dividends, subject to the legal reserve requirements. 36 8. Shareholders’ Equity 9. Income Taxes The provision for income taxes for the years ended March 31, 1998, 1997 and 1996 consisted of the following: Millions of yen 1997 1996 1998 Thousands of U.S. dollars 1998 Current income tax expense ........................................................... ¥24,579 Deferred income tax (benefit) expense, ¥22,915 ¥18,107 $186,205 exclusive of the following ............................................................. (1,305) 342 (337) (9,886) Change in the beginning of the year balance of the valuation allowance for deferred tax assets ............................ (176) (305) (731) (1,333) Adjustments of deferred tax assets and liabilities for change in enacted tax rates ..................................................... 677 — — 5,128 Total......................................................................................... ¥23,775 ¥22,952 ¥17,039 $180,114 The effective income tax rates of the Companies differ from the normal Japanese statutory rates as follows for the years ended March 31, 1998, 1997 and 1996: 1998 1997 1996 Normal Japanese statutory rates.......................................................................................... 51.0% 51.0% Increase (decrease) in taxes resulting from: 51.0% Permanently nondeductible items .................................................................................. Losses of subsidiaries for which no tax benefit was provided........................................ Difference in subsidiaries’ tax rates ................................................................................ Change in the beginning of the year balance of the valuation allowance for deferred tax assets ............................................................ Effects of change in enacted tax rates............................................................................. Other, net ........................................................................................................................ 6.0 1.0 (6.0) (0.4) 1.6 3.1 9.1 0.2 (3.7) (0.8) — 2.7 7.4 0.8 (5.4) (2.3) — 1.3 Effective tax rates ........................................................................................................ 56.3% 58.5% 52.8% The approximate effect of temporary differences and tax loss carryforwards that gave rise to deferred tax balances at March 31, 1998 and 1997 were as follows: Millions of yen 1998 1997 Thousands of U.S. dollars 1998 Deferred Deferred Deferred Deferred tax assets tax liabilities tax assets tax liabilities Deferred tax assets Deferred tax liabilities Inventory valuation ................................................ ¥ 1,476 Accrued bonuses and vacations............................. 2,188 Termination and retirement benefits ..................... 5,085 Enterprise taxes ..................................................... 1,129 Intercompany profits ............................................. 3,218 Marketable securities ............................................. Allowance for doubtful receivables ....................... Gain on sale of land................................................ Minimum pension liability adjustment .................. Other temporary differences ................................. Subsidiaries’ operating loss carryforwards............. Subtotal .................................................................. Valuation allowance............................................... 1,372 3,514 3,256 21,700 (2,642) Total ............................................................... ¥19,058 — — — — — 3,264 467 — 1,229 — 1,740 — 6,700 — ¥6,700 462 ¥0 0— ¥ 1,143 2,437 3,157 1,577 1,818 ¥ ,0— $ 11,182 16,576 38,523 8,553 24,379 — — — — — 2,469 419 — 1,306 — 509 — 4,703 — ¥4,703 480 2,233 3,005 5,312 21,162 (4,331) ¥16,831 $00,0— — — — — — 24,727 3,538 9,311 — 13,182 — 50,758 — $50,758 3,500 — 10,394 26,621 24,667 164,395 (20,015) $144,380 The total valuation allowance decreased by ¥1,689 million ($12,795 thousand), ¥715 million and ¥118 million in 1998, 1997 and 1996, respectively. As of March 31, 1998, certain subsidiaries had operating loss carryforwards approximating ¥8,539 million ($64,689 thousand) available for reduction of future taxable income, most of which expire in various amounts through 2010. 37 The Company has not provided for Japanese income taxes on unremitted earnings of subsidiaries to the extent that they are believed to be indefinitely reinvested. The unremitted earnings of the foreign subsidiaries which are considered to be indefinitely reinvested and for which Japanese income taxes have not been provided were ¥35,315 million ($267,538 thousand) and ¥29,282 million for the years ended March 31, 1998 and 1997, respectively. It is not practicable to estimate the amount of unrecog- nized deferred Japanese income taxes on these unremitted earnings. Dividends received from domestic subsidiaries are expected to be substantially free of tax. 10. Foreign Operations Net sales and total assets of foreign subsidiaries for the years ended March 31, 1998, 1997 and 1996 were as follows: 11. Amounts per Share Net sales .................................................................................. Total assets.............................................................................. ¥171,181 143,247 ¥151,992 132,714 ¥122,716 107,476 Millions of yen 1997 1996 1998 Thousands of U.S. dollars 1998 $1,296,826 1,085,205 The Company adopted SFAS No. 128, “Earnings per Share,” in the year ended March 31, 1998. SFAS No. 128 establishes standards for computing and presenting net income per share and simplifies the standards for computing net income per share previously found in APB Opinion No. 15, “Earnings per Share.” SFAS No. 128 replaces the presentation of primary net income per share with a presentation of basic net income per share. SFAS No. 128 also requires dual presentation of basic and diluted net income per share on the face of the statements of income for all entities with complex capital struc- tures and requires a reconciliation of the numerator and denominator of the basic and diluted net income per share computation. All prior years’ net income per share data presented were restated to conform with the provisions of SFAS No. 128. Basic net income per share has been computed by dividing net income available to common share- holders by the weighted average number of common shares outstanding during each year. Diluted net income per share reflects the potential dilution of all convertible bonds and has been computed on the basis that all convertible bonds were converted at the beginning of the year. A reconciliation of the numerators and denominators of the basic and diluted net income per share computation is as follows: Millions of yen 1997 1996 1998 Thousands of U.S. dollars 1998 Net income.................................................................................... ¥18,300 ¥15,739 ¥14,587 $138,636 Effect of dilutive securities: Convertible bonds, due 2004.................................................... 292 275 248 2,212 Diluted net income ....................................................................... ¥18,592 ¥16,014 ¥14,835 $140,848 1998 Number of shares 1997 1996 Average common shares outstanding ............................................. 262,107,214 262,107,214 262,107,214 Dilutive effect of: Convertible bonds, due 2004 ..................................................... 10,028,661 10,028,661 10,028,661 Diluted common shares outstanding .............................................. 271,135,875 272,135,875 272,135,875 Cash dividends per share are the amounts applicable to the respective year, including dividends to be paid after the end of the year. 38 12. Supplemental Supplemental cash flow information for the years ended March 31, 1998, 1997 and 1996 was as follows: Information for Cash Flows 13. Financial Instruments and Risk Management Interest paid..................................................................................... ¥ 2,347 Income taxes paid ........................................................................... 25,804 Noncash investing and financing activities: ¥ 3,718 18,151 ¥ 5,256 16,499 Millions of yen 1997 1996 1998 Thousands of U.S. dollars 1998 $ 17,780 195,485 Liabilities assumed in connection with capital expenditures...... Exchange of investment securities: Investment securities surrendered .......................................... Investment securities received ................................................ Conversion of convertible bonds into common stock ................ 4,547 5,602 4,269 34,447 — — — (1,989) 3,197 — — — 10 — — — Financial Instruments The following table presents the carrying amounts and estimated fair values as of March 31, 1998 and 1997 of the Companies’ financial instruments, both on and off the balance sheets. Millions of yen 1998 1997 Thousands of U.S. dollars 1998 Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Nonderivatives: Short-term investments ............................... ¥ 4,767 Investment securities for which ¥ 6,142 ¥25,970 ¥29,035 $ 36,114 $ 46,531 it is practicable to estimate fair value........ 39,472 51,563 39,208 56,720 299,030 390,628 Long-term debt, including current portion.......................................... (41,966) (42,170) (59,845) (59,885) (317,924) (319,470) Derivatives: Included in other current assets (other current liabilities): Options purchased.................................. Forward exchange contracts................... Interest rate swaps .................................. 288 (267) — 208 (307) (59) — (188) — 10 (186) (137) 2,182 (2,023) — 1,576 (2,326) (447) The following methods and assumptions were used to estimate the fair value of each class of finan- cial instruments for which it is practicable to estimate that value: Nonderivatives (1) Cash and cash equivalents, notes and accounts receivable, bank loans and notes and accounts payable: The carrying amounts approximate fair values. (2) Short-term investments and investment securities: The fair values are estimated based on quoted market prices or dealer quotes for marketable securi- ties or similar instruments. Certain equity securities included in investments have no public market value; as it is not practicable to estimate their fair values, they have been excluded from the preced- ing table. (3) Long-term debt: For convertible bonds, the fair values are estimated based on quoted market prices. For other issues, except capital lease obligations, the fair values are estimated using the present value of dis- counted future cash flow analysis, based on the Companies’ current incremental issuing rates for similar types of arrangements. 39 Derivatives The fair value of derivatives generally reflects the estimated amounts that the Companies would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotes are available for most of the Companies’ derivatives; other- wise, pricing or valuation models are applied to current market information to estimate fair value. The Companies do not use derivatives for trading purposes. (1) Interest rate swap contracts: The Companies enter into interest rate swap agreements to manage exposure to fluctuations in interest rates. These agreements involve the exchange of interest obligations on fixed and floating interest rate debt without exchange of the underlying principal amounts. The agreements generally mature at the time the related debt matures. The differential paid or received on interest rate swap agreements is recognized as an adjustment to interest expenses. Notional amounts are used to express the volume of interest rate swap agreements. The notional amounts do not represent cash flows and are not subject to risk of loss. In the unlikely event that the counterparty fails to meet the terms of an interest rate swap agreement, the Companies’ exposure is limited to the interest rate differential. Management considers the exposure to credit risk to be minimal since the counterparties are major financial institutions. At March 31, 1998 and 1997, the notional amounts on which the Companies had interest rate swap agreements outstanding aggregated ¥6,000 million ($45,455 thousand) and ¥12,500 million, respectively. The estimated fair values of interest rate swap contracts are based on the present val- ues of discounted future cash flow analysis. (2) Foreign exchange forward contracts and foreign currency options: The Companies enter into foreign exchange forward contracts and engage in the purchase and writing of foreign currency option contracts to hedge foreign currency transactions (primarily the U.S. dollar, the deutsche mark and other European currencies) on a continuing basis for periods consistent with their committed exposure. Some of the contracts involve the exchange of two for- eign currencies, according to local needs in foreign subsidiaries. The terms of the currency deriva- tives are rarely more than 10 months. The credit exposure of foreign exchange contracts and currency purchase options are represented by the positive fair value of the contracts at the report- ing date. Management considers the exposure to credit risk to be minimal since the counterparties are major financial institutions. The notional amounts of contracts to exchange foreign currency (forward contracts) and currency options purchased and written outstanding at March 31, 1998 and 1997 were as follows: Millions of yen 1998 1997 Thousands of U.S. dollars 1998 Related to receivables and future sales: Forward contracts......................................................................................... ¥24,867 Options purchased and written .................................................................... 8,885 ¥20,221 2,690 $188,386 67,311 The notional amounts do not represent the amounts exchanged by the parties to derivatives and are not a measure of the Companies’ exposure through their use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives. The Companies hedge certain exposures to fluctuations in foreign currency exchange rates that occur prior to conversion of foreign currency denominated monetary assets and liabilities into the functional currency. Prior to the conversion of the functional currency, these assets and liabilities are translated at the spot rates in effect on the balance sheet date. The effects of changes in spot rates are reported in earnings and included in Foreign exchange loss, net, in the consolidated statements of income. The Company hedges its exposure to changes in foreign exchange with forward contracts. Because monetary assets and liabilities are marked to spot and recorded in earnings, forward contracts designated as hedges of the monetary assets and liabilities are also marked to spot with the resulting gains and losses similarly recognized in earnings. Gains and losses on forward contracts are included in 40 Foreign exchange loss, net, in the consolidated statements of income and offset losses and gains on the net monetary assets and liabilities hedged. The Companies hedge future sales denominated in foreign currencies with purchased and written currency options to reduce the effective cost of the purchased options. The premiums paid for cur- rency options purchased and premiums received for currency options written are included in other assets and other liabilities, respectively, in the statements of cash flows and are amortized to Foreign exchange loss, net, in the consolidated statements of income over the terms of the agreements. Gains or losses on forward exchange contracts and currency options purchased and written that do not qual- ify for deferral for accounting purposes are recognized in income on a current basis and recorded in Foreign exchange loss, net, in the consolidated statements of income. Concentration of Credit Risk Financial instruments which potentially subject the Companies to concentrations of credit risk consist principally of short-term cash investments and trade receivables. The Companies place their short-term cash investments with high-credit-quality financial institutions. Concentrations of credit risk with respect to trade receivables, as approximately 75% of total sales are concentrated in Japan, are limited due to the large number of well-established customers and their dispersion across many industries. Bad debts have been minimal. The Company normally requires customers to deposit with it funds to serve as security for ongoing credit sales. Guarantees Contingent liabilities at March 31, 1998 with respect to loans guaranteed were ¥2,921 million ($22,129 thousand), of which ¥1,400 million ($10,606 thousand) are jointly and severally guaranteed with other unrelated companies. At the meeting of the Board of Directors (the “Board”) on May 18, 1998, the Board declared a plan to pur- chase the Company’s shares for the purpose of retirement of the shares, subject to approval at the gen- eral meeting of shareholders. The execution of the plan is at the Company’s discretion with a maximum limit of ¥10,000 million ($75,758 thousand), or 5,000,000 shares, for the period up to the date of the June 1999 general meeting of shareholders. In addition, the Board decided to propose an amendment to the Company’s Articles of Incorporation for approval at the general meeting of shareholders to allow the Board to authorize the purchase of up to an additional 25,000,000 of the Company’s shares for the purpose of retirement of the shares. Under the Code, all amounts paid to purchase the Company’s own shares for retirement are charged to retained earnings and thus are not available for future distribution to shareholders. The Board also resolved to introduce a stock purchase option plan for the Company’s directors, subject to approval at the general meeting of shareholders. All directors would be granted stock purchase options with certain restrictions. The Company would purchase its own shares with a maximum limit of ¥500 million ($3,788 thousand), or 158,000 shares, in order to sell them to directors upon exercise of the options. 14. Subsequent Events 41 INDEPENDENT AUDITORS’ REPORT To the Board of Directors and Shareholders of OMRON Corporation We have audited the accompanying consolidated balance sheets of OMRON Corporation and subsidiaries as of March 31, 1998 and 1997, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 1998, all expressed in Japanese yen. These financial state- ments are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. OMRON Corporation and subsidiaries have not adopted the recognition and measurement principles prescribed in Statement of Financial Accounting Standards (“SFAS”) No. 115 in accounting for certain investments in debt and equity securities. The effects on the consolidated financial statements of not adopting SFAS No. 115 are summarized in Note 4 to the consolidated financial statements. Certain information required by SFAS No. 14 has not been presented in the accompanying consolidated financial statements. In our opinion, presentation of various segment information regarding operations is required for a complete presentation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States. In our opinion, except for the effects of the departure from SFAS No. 115 and the omission of segment information as discussed in the preceding paragraphs, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OMRON Corporation and subsidiaries as of March 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998 in conformity with accounting principles generally accepted in the United States. Our audits also comprehended the translation of Japanese yen amounts into United States dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 2 to the consolidated finan- cial statements. Such United States dollar amounts are presented solely for convenience. Osaka, Japan May 18, 1998 42 INTERNATIONAL NETWORK A S I A - P A C I F I C REGIONAL HEADQUARTERS OMRON Asia Pacific Pte. Ltd. 83, Clemenceau Avenue, #11-01, UE Square, Singapore 239920, Singapore Phone: (65) 835-3011 Fax: (65) 835-2711 MARKETING AND/OR MANUFACTURING OF CONTROL COMPONENTS AND SYSTEMS OMRON Asia Pacific Pte. Ltd. 83, Clemenceau Avenue, #11-01, UE Square, Singapore 239920, Singapore Phone: (65) 835-3011 Fax: (65) 835-2711 ––Indonesia Representative Office W; isma Danamon Aetna Life Tower, Suite 1602, JL Jend. Sudirman Kav. 45-46, Jakarta 12930, Indonesia Phone: (21) 577-0838 Fax: (21) 577-0840 ––Vietnam Representative Office 6F, Vinaconex Bldg., 2 Lang Ha, Hanoi, Socialist Republic of Vietnam Phone: (4) 8313-121 Fax: (4) 8313-122 ––Philippines Representative Office 2F, Kings Court II Bldg., 2129 Pasong Tamo St. 1231, Makati City, Metro Manila, The Philippines Phone: (63) 2811-2831 Fax: (63) 2811-2582 ––India Representative Office 59 Hemkunt, Opp. Nehru Place, New Delhi 110 048, India Phone: (11) 623-8431 Fax: (11) 623-8434 OMRON Electronics Sales and Service (M) Sdn. Bhd. 10F, Block B Menara Pkns-Pj No. 17, Jalan Yong Shook Lin, 46050 Petaling Jaya, Selangor, Darul Ehsan, Malaysia Phone: (3) 754-7323 Fax: (3) 754-6618 OMRON Electronics Pty. Ltd. 71 Epping Road, North Ryde, NSW 2113, Australia Phone: (2) 9878-6377 Fax: (2) 9878-6981 OMRON Electronics Ltd. 65 Boston Road, Mt. Eden, Auckland, New Zealand Phone: (9) 358-4400 Fax: (9) 358-4411 OMRON Korea Co., Ltd. 3F, New Seoul Bldg., #618-3 Shin Sa-dong Kang Nam-gu, Seoul, South Korea Phone: (2) 549-2766 Fax: (2) 517-9033 OMRON Electronics Co., Ltd. 20F, Rasa Tower, 555 Phaholyothin Road, Ladyao, Chatuchak, Bangkok 10900, Thailand Phone: (2) 937-0500 Fax: (2) 937-0501 OMRON Malaysia Sdn. Bhd. Lot 15, Jalan SS 8/4 Sungei Way, Free Trade Zone, 47300 Petaling Jaya, Selangor, Darul Ehsan, Malaysia Phone: (3) 776-1411 Fax: (3) 777-4507 PT OMRON Manufacturing of Indonesia Ejip Industrial Park Plot 5C, Lemahabang, Bekasi 17550, West Java, Indonesia Phone: (21) 8970111 Fax: (21) 8970120 C H I N E S E E C O N O M I C A R E A MARKETING AND MANUFACTURING OF AUTOMOTIVE COMPONENTS OMRON Automotive Electronics Korea Co., Ltd. 272-2 Kyerukri, Miyangmyon, Ansong-gun, Kyonggi-Do, 456-840, South Korea Phone: (334) 677-4262 Fax: (334) 677-4268 MARKETING AND MANUFACTURING OF SOCIAL BUSINESS SYSTEMS OMRON Business Systems Singapore (Pte.) Ltd. 83, Clemenceau Avenue, #11-02, UE Square, Singapore 239920, Singapore Phone: (65) 736-3900 Fax: (65) 736-2736 OMRON Business Systems Malaysia Sdn. Bhd. No. 9, Jalan 16/11, Off Jalan Damansara, 46350 Petaling Jaya, Selangor, Malaysia Phone: (3) 460-9119 Fax: (3) 460-9559 OMRON Mechatronics of the Philippines Corporation Subic Techno Center Bldg., Along Argonaut Highway, Boton Area, Subic Bay Freeport Zone, 2222, The Philippines Phone: (63) 47-252-1490 Fax: (63) 47-252-1491 MARKETING OF HEALTHCARE EQUIPMENT OMRON Healthcare Singapore PTE Ltd. 83, Clemenceau Avenue, #11-02, UE Square, Singapore 239920, Singapore Phone: (65) 736-2345 Fax: (65) 736-2500 REGIONAL HEADQUARTERS OMRON (China) Group Co., Ltd. 601-9, Tower 2, The Gateway No. 25, Canton Road, Tsimshatsui, Kowloon, Hong Kong, S.A.R., China Phone: 2375-3827 Fax: 2375-1475 OMRON (China) Co., Ltd. 21F, Beijing East Ocean Centre, No. 24A Jian Guo Men Wai Da Jie, Chao Yang District, Beijing 100022, China Phone: (10) 6515-5788 Fax: (10) 6515-5799 MARKETING AND/OR MANUFACTURING OF CONTROL COMPONENTS AND SYSTEMS OMRON Electronics Asia Ltd. 601-9, Tower 2, The Gateway No. 25, Canton Road, Tsimshatsui, Kowloon, Hong Kong, S.A.R., China Phone: 2375-3827 Fax: 2375-1475 OMRON Taiwan Electronics Inc. 6F, Home Young Bldg., No. 363, Fu-Shing North Road, Taipei, Taiwan, R.O.C. Phone: (2) 715-3331 Fax: (2) 712-6712 Shanghai OMRON Automation System Co., Ltd. 500 Omron Road, Jinqiao Export Processing District, Pudong New Area, Shanghai 201206, China Phone: (21) 5854-0044 Fax: (21) 5854-2658 Shanghai OMRON Control Components Co., Ltd. 388 Omron Road, Jinqiao Export Processing District, Pudong New Area, Shanghai 201026, China Phone: (21) 5854-0012 Fax: (21) 5854-8413 OMRON (Shanghai) Co., Ltd. Block No. 77, Jinqiao Export Processing Area, Pudong, Shanghai 201206, China Phone: (21) 5854-0055 Fax: (21) 5854-0614 OTE ENGINEERING INC. No. 9, Lane 201, Sec. 2, Nankan Road, Lu-Chu Village, Tao-Yuan, Taiwan, R.O.C. Phone: (3) 352-4442 Fax: (3) 352-4239 YAMRON Co., Ltd. 3F, No. 86 Chien-Kuo North Road, Sec. 2 Taipei, Taiwan, R.O.C. Phone: (2) 505-5288 Fax: (2) 505-5675 43 RESEARCH AND DEVELOPMENT OMRON Shanghai Computer Corporation 14F, Meike Building, 1 Tianyaoqiao Road, Shanghai 200030, China Phone: (21) 6468-9626 Fax: (21) 6468-9489 LOGISTICS OMRON Trading (Shanghai) Co., Ltd. Room 1212, Rui-jin Building, 205 Mao Ming Road (South), Shanghai 200020, China Phone: (21) 6472-8812 Fax: (21) 6472-6959 South America MARKETING AND MANUFACTURING OF CONTROL COMPONENTS AND SYSTEMS OMRON Eletrônica do Brasil Ltda. Av. Santa Catarina, 935/939 04378-300, São Paulo, Brazil Phone: (11) 5564-6488 Fax: (11) 5564-7751 OMRON Componentes Eletro Eletrônicos da Amazônia Ltda. Av. Constantino Nery, 2800 Chapada, 69050-002-Manaus, Amazonas, Brazil Phone: (92) 236-5850 Fax: (92) 236-1356 MARKETING OF RETAIL SYSTEMS EQUIPMENT OMRON Business Sistemas Eletrônicos da América Latina, Ltda. Av. Paulista 949 12-Ander, conj. 122, CEP 01311-100, São Paulo, Brazil Phone: (11) 251-0073 Fax: (11) 251-1053 MARKETING OF SOCIAL BUSINESS SYSTEMS MANUFACTURING OF HEALTHCARE EQUIPMENT Beijing GOT Business Computer System Co., Ltd. 8F, Yujing Building, Xueqing Road, Haidian District, Beijing 10083, China Phone: (10) 6231-1985 Fax: (10) 6231-2177 OMRON (Dalian) Co., Ltd. No. 3 Song Jiang Road, Dalian Economic and Technical Development Zone, Dalian 116600, China Phone: (411) 761-4222 Fax: (411) 761-6602 T H E A M E R I C A S North America REGIONAL HEADQUARTERS OMRON Management Center of America, Inc. 1300 Basswood, Suite 100, Schaumburg, IL 60173, U.S.A. Phone: (847) 884-0322 Fax: (847) 884-1866 MARKETING AND/OR MANUFACTURING OF CONTROL COMPONENTS AND SYSTEMS OMRON Electronics Inc. 1 East Commerce Drive, Schaumburg, IL 60173, U.S.A. Phone: (847) 843-7900 Fax: (847) 843-7787 OMRON Canada Inc. 885 Milner Avenue, Scarborough, Ontario, M1B 5V8 Canada Phone: (416) 286-6465 Fax: (416) 286-6648 OMRON Manufacturing of America, Inc. 3705 Ohio Avenue, St. Charles, IL 60174, U.S.A. Phone: (630) 513-0400 Fax: (630) 513-1027 MARKETING AND/OR MANUFACTURING OF AUTOMOTIVE COMPONENTS OMRON Dualtec Automotive Electronics, Inc. 2270 Bristol Circle, Oakville, Ontario, L6H 5S3 Canada Phone: (905) 829-0136 Fax: (905) 829-0432 MARKETING OF OFFICE AUTOMATION EQUIPMENT OMRON Office Automation Products, Inc. 3945 Freedom Circle, Suite 700, Santa Clara, CA 95054, U.S.A. Phone: (408) 727-1444 Fax: (408) 970-1149 MARKETING OF SOCIAL BUSINESS SYSTEMS OMRON Systems, Inc. 55 East Commerce Drive, Schaumburg, IL 60173, U.S.A. Phone: (847) 843-0515 Fax: (847) 843-7686 MARKETING OF HEALTHCARE EQUIPMENT OMRON Healthcare, Inc. 300 Lakeview Parkway, Vernon Hills, IL 60061, U.S.A. Phone: (847) 680-6200 Fax: (847) 680-6269 OMRON Automotive Electronics Inc. RESEARCH AND DEVELOPMENT (MARKETING) 30600 Northwestern Hwy., Suite 250, Farmington Hills, MI 48334, U.S.A. Phone: (248) 539-4700 Fax: (248) 539-4710 (MANUFACTURING) 3709 Ohio Avenue, St. Charles, IL 60174, U.S.A. Phone: (630) 443-6800 Fax: (630) 443-6898 OMRON Advanced Systems, Inc. 3945 Freedom Circle, Suite 700, Santa Clara, CA 95054, U.S.A. Phone: (408) 727-6644 Fax: (408) 727-5540 OMRON Management Center of America, Inc. ––Information Technology Center 160 West Santa Clara Street, Suite 800, San Jose, CA 95113, U.S.A. Phone: (408) 271-1720 Fax: (408) 271-1721 44 OMRON Manufacturing of the Netherlands B.V. Zilvernberg 2, 5234 GM Den Bosch, The Netherlands Phone: (73) 6481811 Fax: (73) 6420195 OMRON Electronics Manufacturing of Germany G.m.b.H. Robert-Bosch Strasse 1, P.O. Box 1165, D-71154 Nufringen, Germany Phone: (7032) 8110 Fax: (7032) 81199 MARKETING AND MANUFACTURING OF OFFICE AUTOMATION EQUIPMENT OMRON Telford Ltd. Hortonwood 2, Telford, Shropshire TF1 4GW, U.K. Phone: (1952) 279444 Fax: (1952) 279456 MARKETING OF SOCIAL BUSINESS SYSTEMS OMRON Systems Europe G.m.b.H. Süder Strasse 16, 20097 Hamburg, Germany Phone: (40) 237050 Fax: (40) 23705120 OMRON Systems U.K. Ltd. Victory House, Cox Lane, Chessington, Surrey KT9 1SG, U.K. Phone: (181) 974-2166 Fax: (181) 974-1864 MARKETING AND MANUFACTURING OF HEALTHCARE EQUIPMENT OMRON Healthcare Europe B.V. Wegalaan 57, 2132, JD Hoofddorp, The Netherlands Phone: (23) 5681-200 Fax: (23) 5681-201 OMRON Medizintechnik Handelsgesellschaft G.m.b.H. Windeck Strasse, 81, 68613 Mannheim, Germany Phone: (621)-83348-8 Fax: (621)-83348-20 E U R O P E REGIONAL HEADQUARTERS OMRON Europe B.V. Wegalaan 67, N1-2132 JD Hoofddorp, The Netherlands Phone: (23) 5681-300 Fax: (23) 5681-391 MARKETING AND/OR MANUFACTURING OF CONTROL COMPONENTS AND SYSTEMS OMRON Europe B.V. Wegalaan 67, N1-2132 JD Hoofddorp, The Netherlands Phone: (23) 5681-300 Fax: (23) 5681-391 OMRON Electronics Ges.m.b.H. Altmannsdorfer Strasse 142, P.O. Box 323, A-1231, Vienna, Austria Phone: (1) 801900 Fax: (1) 8044846 OMRON Electronics N.V./S.A. Stationsstraat 24, B-1702 Groot-Bijgaarden, Belgium Phone: (2) 4662480 Fax: (2) 4660687 OMRON Electronics A.G. Sennweldstrasse 44, CH-6312 Steinhausen, Switzerland Phone: (41) 748-1313 Fax: (41) 748-1345 OMRON Electronics SPOL S.R.O. Srobarova 6, Prague 10, 101 00, Czech Republic Phone: (2) 6731-1254 Fax: (2) 7173-5613 OMRON Electronics G.m.b.H. P.O. Box 10 10 20, 40710 Hilden, Germany Phone: (2103) 203-3 Fax: (2103) 203-400 OMRON Electronics A/S Odinsvej 15, 2600 Glostrup, Denmark Phone: (43) 44-00-11 Fax: (43) 44-02-11 OMRON Electronics S.A. c/Arturo Soria 95, E-28027 Madrid, Spain Phone: (1) 377-7900 Fax: (1) 377-7956 OMRON Electronics S.a.r.l. BP33, 19, Rue du Bois-Galon 94121 Fontenay-Sous-Bois, Cedex, France Phone: (1) 4974-7000 Fax: (1) 4876-0930 OMRON Electronics S.r.l. Viale Certosa 49, 20149 Milano, Italy Phone: (2) 32-68-1 Fax: (2) 32-51-54 OMRON Electronics Sp. z.o.o. Ul Fortaczna 6, PL-01540 Warsaw, Poland Phone: (22) 6399810 Fax: (22) 6399813 OMRON Electronics, kft 1046 Budapest, Kiss Ern u.3, Hungary Phone: (1) 399-3050 Fax: (1) 399-3060 OMRON Electronics Norway A/S Ole Deviks Vei 4, P.O. Box 109, Bryn, N-0611 Oslo, Norway Phone: (22) 657500 Fax: (22) 658300 OMRON Electronics B.V. Wegalaan 61, Postbus 5822132 JD 2130 An Hoofddorp, The Netherlands Phone: (23) 5681-100 Fax: (23) 5681-188 OMRON Electronics Lda. Edificio OMRON, Rua de Sao Tomé, Lote 131, 2685 Prior Velho, Portugal Phone: (1) 942-9400 Fax: (1) 941-7899 OMRON Electronics A.B. Norgegatan 1, P.O. Box 1275, S-164 28 Kista, Sweden Phone: (8) 632-3500 Fax: (8) 632-3510 OMRON Electronics oy Metsänpojankuja 5, Fin 02130 Espoo, Finland Phone: (9) 5495-800 Fax: (9) 5495-8150 OMRON Electronics Ltd. 1 Apsley Way, Staples Corner, London NW2 7HF, U.K. Phone: (181) 450-4646 Fax: (181) 450-8087 OMRON Electronics Ltd. Acibadem Caddesi, Palmiye Sokak 12, TR-81020 Kadikoy, Istanbul, Turkey Phone: (216) 326-2980 Fax: (216) 326-2979 45 HEAD OFFICE Karasuma Nanajo, Shimogyo-ku, Kyoto 600-8530, Japan Phone: (075) 344-7000 Fax: (075) 344-7001 Telex: 542 2889 OMRON KJ TOKYO HEAD OFFICE 3-4-10, Toranomon, Minato-ku, Tokyo 105-0001, Japan Phone: (03) 3436-7227 Fax: (03) 3436-7165 Telex: 3242 4086, 3242 4087 OMRON TJ OSAKA OFFICE Osaka Center Bldg., 4-1-3, Kyutaro-cho, Chuo-ku, Osaka 541-0056, Japan Phone: (06) 282-2511 Fax: (06) 282-2789 KYOTO R&D LABORATORY 20, Igadera, Shimo-kaiinji, Nagaokakyo-shi, Kyoto 617-8510, Japan Phone: (075) 951-5111 Fax: (075) 957-2871 CORPORATE DATA DATE OF ESTABLISHMENT May 10, 1933 INDUSTRIAL PROPERTY RIGHTS Number of patents: 2,546 (Japan) 1,437 (Overseas) Number of patents pending: 7,714 (Japan) 596 (Overseas) NUMBER OF EMPLOYEES 24,048 PAID-IN CAPITAL ¥64,079 million COMMON STOCK Authorized: 500,000,000 shares Issued: 262,107,214 shares Number of shareholders: 25,961 STOCK LISTINGS Tokyo Stock Exchange Osaka Securities Exchange Kyoto Stock Exchange Nagoya Stock Exchange Frankfurt Stock Exchange TRANSFER AGENT The Mitsubishi Trust and Banking Corporation 1-4-5, Marunouchi, Chiyoda-ku, Tokyo 100-8388, Japan (As of March 31, 1998) 46 Karasuma Nanajo, Shimogyo-ku, Kyoto 600-8530, Japan Phone: (075) 344-7000 Fax: (075) 344-7001 Home page: http://www.omron.co.jp This annual report is printed on paper made using a mixture of bagasse and recycled paper. c4 Printed in Japan 

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