Omron Corporation Annual Report 1998

FY1998 Annual Report · Omron Corporation

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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

1
0
2

’94 ’95 ’96 ’97 ’98

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

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.

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

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,

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

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

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

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

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.

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

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.

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

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

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

Omron’s body-fat monitor
creates a new alternative
to the present standard for
daily health checks.

’94 ’95 ’96 ’97 ’98

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

’94 ’95 ’96 ’97 ’98

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.

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 (%)

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

Reduction in Waste
and Recycling Ratio

Weight (tons)

Recycling Ratio (%)

6,000

5,000

4,000

3,000

2,000

1,000

100

(Projected)

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.

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

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

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.

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:

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

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.

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.

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.

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.

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.

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

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

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.

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.

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.

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.

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

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.

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.

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

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

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.

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.

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

Dilutive effect of:

Convertible bonds, due 2004 .....................................................

10,028,661

Diluted common shares outstanding .............................................. 271,135,875

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.

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.

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

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

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

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

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

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

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)

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.

Printed in Japan