SOJITZ CORPORATION ¥2,521,680 $21,552,821 (Former SOJITZ ... · Operating income rode on the crest...

75

Annual Report 2006 Sojitz Corporation

F I N A N C I A L S E C T I O N

F I N A N C I A L S U M M A R YFor the years ended March 31, 2006 and 2005:

Thousands ofMillions of yen U.S. dollars

2006 2005 2006

Net sales (Total trading transactions) . . . . . . ¥4,972,060 ¥4,675,903 $42,496,239

Gross trading profit . . . . . . . . . . . . . . . . . . . 242,167 244,247 2,069,803

Operating income . . . . . . . . . . . . . . . . . . . . 76,202 65,522 651,299

Recurring profit . . . . . . . . . . . . . . . . . . . . . . 78,774 58,088 673,282

Net income (loss) . . . . . . . . . . . . . . . . . . . . . 43,706 (412,476) 373,556

As of March 31:

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,521,680 ¥2,448,478 $21,552,821

Total shareholders’ equity . . . . . . . . . . . . . . . 426,950 280,241 3,649,145

Interest-bearing debt . . . . . . . . . . . . . . . . . . 1,386,260 1,428,327 11,848,376

Yen U.S. dollars

Amounts per share:

Net income (loss) . . . . . . . . . . . . . . . . . . . . . ¥ 126.21 ¥ (1,876.48) $ 1.08

Shareholders’ equity . . . . . . . . . . . . . . . . . . . (368.95) (1,440.26) (3.15)

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —

ROA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8% (14.9)%

ROE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4% (138.3)%

Equity ratio . . . . . . . . . . . . . . . . . . . . . . . . . . 16.9% 11.4 %

Net DER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 times 3.6 times

SOJITZ CORPORATION

(Former SOJITZHOLDINGS CORPORATION)

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CONTENTS

Financial Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Management’s Discussion and Analysis of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Consolidated Statements of Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

75


76

Sojitz Corporation Annual Report 2006

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F O P E R A T I O N S

1. OVERVIEW

On October 1, 2005, the former Sojitz Holdings Corporation (the

Company) absorbed its wholly owned subsidiary, the former Sojitz

Corporation, through a merger, thereafter becoming an operating

company and taking the name of its former subsidiary Sojitz

Corporation. Since the former Sojitz Corporation was a consolidated

subsidiary, the merger had no impact on the Group. Business results

for the Sojitz Group for fiscal 2005, the fiscal year ended March 31,

2006, are presented as follows.

In the fiscal year under review, consolidated net sales amounted

to ¥4,972.1 billion, climbing 6.3% compared with the previous

fiscal year. Last year’s completion of the Group’s review of low-

profit transactions contributed to this advance. By type of trade,

export sales in the Machinery & Aerospace, Chemicals & Plastics and

other divisions edged down 0.7% year on year. All other types of

trade, however, posted growth: import sales in the Machinery &

Aerospace, Energy & Mineral Resources and other divisions expanded

7.2%; domestic sales in the Consumer Lifestyle Business, Chemicals

& Plastics, Energy & Mineral Resources and other divisions rose

7.9%; and offshore sales in Overseas Subsidiaries and the Machin-

ery & Aerospace, Consumer Lifestyle Business and other divisions

also increased 7.9%.

By industry segment, net sales in Energy & Mineral Resources rose

12.0% compared with the previous fiscal year on the strength of the

hikes in natural resource prices. Most other segments also scored

sales gains year on year: Consumer Lifestyle Business, up 10.6%;

Machinery & Aerospace, up 10.2%; Chemicals & Plastics, up 6.2%;

and Overseas Subsidiaries, up 3.4%. However, the Real Estate Devel-

opment & Forest Products segment posted a 13.3% decline in sales,

partially reflecting a slump in the forest products market, while the

Other segment’s sales were down 2.2%.

Looking at earnings in fiscal 2005, although gross trading profit

retreated slightly, operating income and recurring profit recorded

double-digit growth and net income moved into the black. Gross

trading profit was ¥242.2 billion, edging down 0.9% compared with

the previous fiscal year. The decline was marginal despite the sale of

Nakau Co., Ltd., because of a favorable performance by the Energy &

Mineral Resources Division and a recovery in the earnings of Overseas

Subsidiaries. In contrast to a lower gross trading profit, operating

income rose 16.3% year on year, to ¥76.2 billion, bolstered by lower

selling, general and administrative (SG&A) expenses. The sale of

Nakau Co., rationalization efforts, and decreased depreciation and

amortization expenses due to disposal of fixed assets were among the

factors contributing to the ¥12.8 billion decline in SG&A expenses.

Recurring profit soared 35.6% to ¥78.8 billion with the support of an

improvement in net interest income and expenses due to a reduction

in interest-bearing debt and contributions from equity in earnings of

unconsolidated subsidiaries and affiliates, particularly Metal One

Corporation. Special gains in fiscal 2005 totaled ¥20.0 billion, including

a ¥9.5 billion gain on sale of investment securities and a ¥5.8 billion

gain on reversal of allowance for doubtful accounts. Special losses

amounted to ¥29.4 billion, including an ¥11.6 billion loss, and provi-

sion for loss, on dissolution of subsidiaries and affiliates arising from

the continued review of low-profit businesses, including overseas

investments and loans, under the selection and focus initiatives of the

previous medium-term management plan. Other special losses were a

¥5.5 billion restructuring loss, a ¥3.4 billion loss on sale of investment

securities, and ¥3.0 billion in dilution losses from changes in equity

interest. Due to the adoption of accounting standards for impair-

ment of fixed assets in the fiscal year under review, there also was a

¥2.0 billion impairment loss on fixed assets. In total, therefore, special

losses, net amounted to ¥9.4 billion. As a result of these and other

factors, income before income taxes and minority interests for the

fiscal year under review was ¥69.4 billion. After accounting for

income taxes of ¥16.5 billion, deferred income taxes of ¥5.8 billion,

and minority interests in consolidated subsidiaries totaling ¥3.4 billion,

Sojitz Corporation posted net income of ¥43.7 billion in fiscal 2005.

2. INDUSTRY SEGMENT INFORMATION

Machinery & Aerospace

Sales in this segment rose 10.2% from the previous fiscal year, to

¥958.3 billion. Operating income followed suit, rising 30.0%, to

¥16.0 billion, boosted by expanded gross trading profit resulting

from strong sales of automobile-related subsidiaries.

NET SALES BY TYPE OF TRADE (Year ended March 31, 2006)

(% of Net sales)(Billions of yen)

Export

Import

Domestic

Offshore

¥ 764.2

¥1,215.0

¥2,008.2

¥ 984.7

(15.4%)

(24.4%)

(40.4%)

(19.8%)

77


Energy & Mineral Resources

Sales in the energy business climbed 12.0% to ¥1,207.0 billion,

capitalizing on higher natural resource prices and increased produc-

tion. Operating income jumped 69.6%, to ¥18.0 billion.

Chemicals & Plastics

Building on increases in raw material and product prices, sales in

this segment advanced 6.2% year on year, to ¥632.9 billion.

Operating income rode on the crest of the robust market in raw

materials for chemicals and lower SG&A expenses, improving 5.8%,

to ¥16.6 billion.

Real Estate Development & Forest Products

Despite the expansion in condominium sales, sales in this segment

declined 13.3% compared with the previous fiscal year to ¥419.7

billion due to the Company’s exit from an unprofitable business in

forest products. Similarly, the favorable earnings from the condo-

minium business were not enough to overcome the impact of the

sluggish forest products market, causing operating income to fall

11.4% year on year to ¥9.6 billion.

Consumer Lifestyle Business

Acquisition of new distribution rights in the tobacco business, and a

full year of operations at a textile sector subsidiary newly consolidated

in the second half of fiscal 2004 supported a 10.6% year-on-year

increase in the sales of this segment, to ¥868.1 billion. Poor per-

formance by a certain sector of the Company’s apparel businesses

and higher SG&A expenses, however, resulted in operating income

falling 29.8% from the previous fiscal year, to ¥8.0 billion.

Overseas Subsidiaries

Sales recorded by Overseas Subsidiaries totaled ¥768.5 billion, an

increase of 3.4% compared with the previous fiscal year, reflecting

strong performances by companies in China and other parts of Asia.

Operating income advanced 10.6%, to ¥4.6 billion.

Other

Sales in Other declined 2.2% year on year, to ¥117.5 billion,

reflecting the loss of rental revenues because of disposal of the fixed

assets used in the rental business. Operating income also felt the

impact of the loss of rental revenues, dropping 34.7%, to ¥2.6 billion.

3. SCOPE OF CONSOLIDATION

As of March 31, 2006, the Sojitz Group comprised 513 companies,

a decline of 3 companies compared with the end of the previous

fiscal year. Of this number, 321 companies (115 in Japan, 206 over-

seas) were consolidated subsidiary companies, and 192 companies

(60 in Japan, 132 overseas) were affiliated companies accounted for

under the equity method.

Of all companies included in the scope of consolidation, 240

companies, or 74.8%, of consolidated subsidiary companies (242

companies, or 73.8%, at March 31, 2005) and 143 companies, or

74.5%, of equity-method affiliates (141 companies, or 75.0%, at

March 31, 2005) reported net income in the fiscal year ended

March 31, 2006. On an overall basis, 74.7% (74.2% in the previous

fiscal year) reported net income for the fiscal year under review. As

a result of further progress in efforts to create a robust asset port-

folio, the number of companies that reported a net loss fell by three

companies year on year to 130 companies. The operating perfor-

mance of companies included in the scope of consolidation is

presented as follows (Please refer to P.78).

Net Sales by Industry Segment (Year ended March 31, 2006)

(% of Net sales)

Machinery & AerospaceEnergy & Mineral ResourcesChemicals & PlasticsReal Estate Development & Forest ProductsConsumer Lifestyle Business

Overseas Subsidiaries

Other

(Billions of yen)

958.3

1,207.0

632.9

419.7

868.1

768.5

117.5

Machinery & Aerospace 19.3%

Energy & Mineral Resources 24.3%

Chemicals & Plastics 12.7%

Real Estate Development & Forest Products 8.4%

Consumer Lifestyle Business 17.5%

Overseas Subsidiaries 15.4%

Other 2.4%

78



4. FINANCIAL POSITION

(1) Capital resources, liquidity and financing

To reform its earnings structure, the Company is making further

progress with its efforts to be selective and focused in its allocation

of resources under the expansion of its business portfolio strategy

and to invest those management resources into growth areas, tar-

geting improvement in its risk-return indicator Sojitz Corporation

Value Added (SCVA). The Company is also working on enhancing

its debt structure, aiming to achieve a stable funding structure,

improving its current ratio and its long-term debt ratio. Among the

steps the Company is taking for that purpose are the diversification

of its funding methods by procuring new long-term loans through

large-scale syndicated loan agreements and other methods and by

issuing corporate bonds. As a result of these efforts, the Company’s

current ratio improved from 81% to 107% during the fiscal year

under review.

In addition, the Company has committed itself to reorganizing its

capital structure to improve its share value through controlling

potential dilution accompanying increases in common stock due to

conversion of outstanding preferred shares. For that purpose, the

Company issued ¥60.0 billion of convertible bonds in June 2005,

which were fully converted into common stock by the end of

September 2005. The Company then acquired ¥40.0 billion of the

outstanding ¥52.6 billion of 1st Series Class I Preferred Shares for a

price of ¥44.0 billion, corresponding to the amount of capital raised

by the conversion of the convertible bonds. The preferred shares

were canceled in January 2006.

(2) Cash Flows

Following efforts to improve the quality of assets in the previous

fiscal year and in spite of changing circumstances in the Company’s

business environment, cash flows improved during the fiscal year

under review. Net cash provided by operating activities was ¥43.2

billion, compared with ¥19.8 billion used in the previous fiscal year.

This turnaround was achieved on the back of 16.3% growth in

operating income and increased collection of trade receivables.

Net cash provided by investing activities amounted to ¥99.2

billion. During the fiscal year the Company worked to accumulate

funds necessary for new investments to reorganize the business

portfolio. In addition to the proceeds from the disposal of assets

related to write-offs made in the previous fiscal year, the Company

collected on outstanding loans and sold investment securities. A

time lag in cash outflows related to the fiscal year also contributed

to net cash provided by investing activities. As a result, free cash

flow was ¥142.3 billion.

Net cash used in financing activities was ¥55.9 billion. During

fiscal 2005, the Company continued efforts to improve its debt

structure through such methods as improving its current ratio and

long-term debt ratio. Within that process, it worked to establish a

stable and efficient funding structure by procuring new long-term

loans through syndicated loans and corporate bond issues.

Consequently, cash and cash equivalents at the end of the year

amounted to ¥506.3 billion, increasing ¥97.0 billion from the previ-

ous fiscal year.

(3) Liquidity and Funds Procurement

The Company’s fundamental policy during its previous medium-

term management plan was to improve the stability of its funding

structure. One of the measures employed to achieve that goal was

to diversify the methods of procuring funds, and to that end the

Company targeted more direct funding from capital markets. Since

making a public offering of a ¥30 billion bond issue in June 2005,

the Company has undertaken a full-scale funding program in the

corporate bond market, making six issues for a total of ¥95.0 billion.

In terms of indirect financing, the Company actively procured

new long-term loans from finance institutions and diversified its

sources by developing the syndicated loan market in Japan, which is

expanding rapidly. In March 2006, the Company arranged a ¥148.1

billion syndicated loan. It also repaid short-term debt to reduce interest-

bearing debt, thus supporting the Company’s quest for a more

stable and efficient funding structure.

EARNINGS OF GROUP COMPANIES (Year ended March 31, 2006)

Profitable Unprofitable TotalNumber of Number of Number ofcompanies Net income companies Net loss companies Net income (loss)(% of total) (Billions of yen) (% of total) (Billions of yen) (% of total) (Billions of yen)

Consolidated subsidiaries . . . . . . . . . . . 240 (74.8%) 57.1 81 (25.2%) (9.9) 321 (100.0%) 47.2

Companies accounted for by

the equity method . . . . . . . . . . . . . . . 143 (74.5%) 26.9 49 (25.5%) (8.1) 192 (100.0%) 18.8

Total . . . . . . . . . . . . . . . . . . . . . . . . . . 383 (74.7%) 84.0 130 (25.3%) (18.0) 513 (100.0%) 66.0

Note: Net income and net loss figures relating to companies accounted for by the equity method represent equity in earnings of subsidiaries and affiliated companies.

79


5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of the Company and its

subsidiaries are prepared in conformity with accounting principles

generally accepted in Japan. The reported amounts relating to

assets and liabilities, disclosure of contingent liabilities, and the

reported amounts relating to revenues and expenses for the report-

ing period used in the preparation of the consolidated financial

statements are based on estimates and assumptions as determined

by the Company’s management. The Company constantly reviews

and verifies estimates and assumptions relating to the evaluation of

receivables, investments and inventories, fixed assets, recognition of

revenue, income taxes, deferred tax assets, Group business reorga-

nization, and structural reform costs including those for affiliated

companies, retirement and severance benefits, contingent liabilities,

and other items. Estimates, assumptions and decisions made by the

Company are based on historic performance and other factors that

are deemed most relevant to the situation. In the event that insuffi-

cient facts exist to enable the Company to make an objective decision

regarding the accounting for assets and liabilities and income and

expenses, the Company bases its decisions on estimates and

assumptions. Accordingly, differing assumptions and changes in

conditions may cause estimates and actual results to differ.

The following are significant accounting policies adopted by the

Company and its consolidated subsidiaries.

(1) Evaluation of Receivables

To provide for potential losses arising from uncollectible notes and

accounts receivable and loans receivable, the Company maintains

an allowance for doubtful accounts based on historical loss ratios

over the preceding three years. For doubtful receivables, the

Company records an allowance after evaluating the probability of

recovery, considering the estimated realization value of collateral

and amounts to be recovered by guarantees. In order to accurately

assess the allowance for doubtful receivables, the Company periodi-

cally verifies each customer’s financial position, credit rating,

conditions for collection of receivables, changes in payment terms

and conditions, economic trends in the industry, conditions in the

region in which the customer operates, and all other relevant infor-

mation. The Company’s management believes that the Company

maintains sufficient and adequate allowances for doubtful receivables.

(2) Evaluation of Investment Securities

The Company maintains a significant level of investments that are

classified according to the purpose for which they are held, with

valuation subject to a variety of assumptions. Available-for-sale

securities with available market values are stated at fair value based

on market prices as of the balance sheet date with unrealized valua-

tion gains and losses, net of tax, included in shareholders’ equity in

the consolidated balance sheet. The Company recognizes impair-

ment losses on investment securities whose values have declined by

at least 50% of their book value. In cases in which the values have

declined 30% to 50%, and where conditions remain substantially

unchanged from the previous fiscal period, the Company’s manage-

ment evaluates the probability of recovery, and recognizes impairment

losses except when the value is deemed to be recoverable.

Available-for-sale securities without available market value are

valued at cost using the moving-average method. The Company

assesses these securities by comparing its equity in the net worth of

the issuer with the book value of the investment. In the event the

Company’s equity in the net worth of the issuer has declined by more

than 50% of book value, the Company’s management assesses the

probability of recovery considering each situation, such as tempo-

rary declines due to initial losses in the start-up of companies, and

recognizes impairment losses except when the value is deemed to be

recoverable. Furthermore, in the event the Company’s equity in the

net worth of the issuer has declined to less than 50% of book value,

and there is no probability of recovery, the Company recognizes the

impairment loss. In the case of bonds, the amortized cost method is

applied on an individual basis and a loss recognized for the estimated

non-redeemable portion based on credit risk. In recognizing impair-

ment losses on investment securities, the Company considers the

financial position, industrial trends and specific factors pertaining to

the industry, location and region of the issuer.

(3) Evaluation of Inventories

Inventories are stated at cost mainly using the specific identification

method or the moving-average method. In the event that market

value has declined more than 50%, inventories shall be recorded

at market value unless a recovery is deemed possible. At certain

overseas subsidiaries inventories are stated at the lower of cost or

market using the specific identification method.

Market value of real estate for sale is valued on an individual

property basis taking into consideration various conditions at the

time of appraisal, such as sales price, appraisal amount, official

announced value, and value for inheritance tax purposes. In the

event conditions are unchanged, market price is carried forward to

the following fiscal year.

80



Recovery in market prices is subject to a number of factors

including economic conditions, trends in land prices, feasibility for

property development, developments in close proximity, and

changes in general real estate conditions.

(4) Depreciation and Valuation of Property, Equipment and

Intangible Assets

The Company and its domestic consolidated subsidiaries principally

depreciate property and equipment by the declining-balance

method and intangible fixed assets by the straight-line method

based on the estimated useful lives of the respective assets.

However, buildings and structures acquired after April 1, 1998, are

depreciated by the straight-line method. In addition, certain consoli-

dated subsidiaries amortize mining rights based on the production

output method. Overseas consolidated subsidiaries depreciate prop-

erty and equipment and other intangible assets in accordance with

generally accepted standards in each subsidiary’s country of domicile.

Certain domestic consolidated subsidiaries revalue commercial-use

land pursuant to Law No. 34 published on March 31, 1998. The

related unrealized gains or losses are recorded as land revaluation

difference in shareholders’ equity in the consolidated balance sheets.

This revaluation method is applied using the appraisal value as pre-

scribed in Article 2-5 of the Guidelines for Enforcement Regulations

No. 119 (March 31, 1998).

From the fiscal year ended March 31, 2006, the Company

applied accounting standards relating to the impairment of fixed

assets: “Opinion on Establishment of Accounting Standards for

Impairment of Fixed Assets” (Business Accounting Council of Japan,

August 9, 2002) and “Implementation Guidance Relating to

Accounting Standards for Impairment of Fixed Assets” (Business

Accounting Standard Implementation Guidance No. 6, October 31,

2003). Impairment losses are determined by comparing the carrying

amount of assets or an asset group with their undiscounted esti-

mated future cash flows. If the undiscounted estimated future cash

flows are less than the carrying amount, the difference between the

higher of either net selling price or the recoverable amount corre-

sponding to current value of future projected cash flows and the

carrying amount is recognized as an impairment loss. Accumulated

impairment losses are deducted directly from the corresponding assets.

(5) Deferred Tax Assets and Liabilities

Where temporary differences exist between the amount of assets

and liabilities for financial reporting purposes and the bases of such

assets and liabilities as measured by tax laws, deferred tax assets

and liabilities are recorded taking into account the tax loss

carryforwards in accordance with tax-effect accounting standards.

The Company evaluates the probability of realization of the

benefits of those deferred tax assets based on future taxable income

estimates and tax planning. A valuation allowance is established to

reduce certain deferred tax assets relating to deductible temporary

differences and net operating loss carryforwards where it is more

likely to be unable to realize the benefits of those deferred tax

assets as a result of rigorous assessment by the Company’s manage-

ment. As for tax losses carried forward, although the Company can

utilize them as benefits in seven subsequent years under Japanese

Corporate Tax Law, the Company records the deferred tax assets to

the extent that they can be utilized in the subsequent five years.

Although the Company’s management believes that the realiza-

tion of deferred tax assets, less amount of valuation allowance, is

probable, the valuation allowance may change depending on

changes of estimates for future taxable income.

(6) Employees’ Retirement and Severance Benefits

Employees’ retirement and severance benefits are accrued based on

the estimates of retirement and severance benefit obligations and

plan assets at the end of the accounting period.

In line with the enactment of the “Defined Contribution Pension

Law,” the former Nissho Iwai changed its pension plan from a

“Defined Benefits Pension Plan” to a “Defined Contribution Pension

Plan” and “Prepaid Retirement Allowance Plan” in April 2002. In

September 2003, the former Nichimen changed its pension plan

from a “Defined Benefits Pension Plan” to a “Defined Contribution

Pension Plan” and “Prepaid Retirement Allowance Plan.” From April

1, 2006, however, Sojitz changed its plan to adopt a “Defined

Contribution Pension Plan” with a “Lump-sum Payment Plan” or a

“Prepaid Retirement Allowance Plan.”

Certain domestic consolidated subsidiaries maintain employees’

welfare pension fund plans, tax qualified pension plans and lump-

sum payment plans as defined fund plans. Some consolidated

subsidiaries have established a retirement allowance trust. Some

foreign consolidated subsidiaries also have defined benefit plans.

6. RISK

The Company is engaged in a wide and diverse range of activities

including general trading; the purchase, sale and trade of goods

and commodities; and the manufacture and sale of a wide variety of

products in Japan and overseas. The Company also provides com-

prehensive services to a variety of industries on a global scale. In

addition, it is engaged in planning and arranging projects, and

investing in a variety of business fields and financial activities.

81


In light of its activities, the Company is confronted by numerous

risks. These risks include: market risk relating to fluctuations in

foreign exchange rates, interest rates, commodity market condi-

tions, and stock prices; credit risk relating to non-payment and

collection; investment risk; country risk; and other risks. These risks

are to a certain degree unpredictable, and as they cannot be con-

firmed, can impact the performance and results of the Company.

Although risk cannot be entirely avoided, the Company is rein-

forcing and enhancing risk management to address wide-ranging

business risks where possible. The Company recognizes that a uni-

fied and integrated approach across the Sojitz Group is critical to

comprehensive risk management. This also entails quantifying risk

based on ongoing integrated risk management as a vital element of

operations and as a means to manage the Company. Additionally,

in October 2005, the Company established the Internal Control

Administration Office to build internal control systems, reinforce the

compliance structure and strengthen the management of risk that

can not be quantified.

The Company is confronted by the following risks in the execu-

tion of its daily business activities:

(1) Market Risk

The Company is engaged in global business development and trade

and is accordingly exposed to a variety of market risks. Certain

transactions are denominated in foreign currencies and as such are

subject to exchange rate risks. The Company is also susceptible to

movements in interest rates in connection with funds procurement

and its investment activities. In its daily operating activities, the

Company enters into purchase agreements, maintains inventories,

and is exposed to commodity price risk. In addition, the Company is

exposed to stock price risk due to its holdings of marketable and

other securities. As a result, the Company is subject to a variety of

market risks, and transactions susceptible to market risk are not

limited to those identified above.

The Company, however, works to avoid market risk-related

losses by maintaining specific limits on the position (short/long) that

each business unit may assume and by setting loss-cut points. As well

as managing these positions and any related losses, the Company

strictly adheres to the loss-cut rule: if a loss greater than the loss-cut

point occurs, the position is immediately dissolved and new transac-

tions are prohibited during the applicable fiscal year. In order to

minimize market risks related to its general marketing and finance

activities, the Company stipulates the basic principles that it

matches buying and selling transactions for commodities, adopts a

matching principle for its assets and liabilities, and applies derivative

financial instruments including forward foreign currency contracts,

commodity futures and interest rate swaps.

(2) Credit Risk

In the course of its business, the Company extends to a large

number of customers in Japan and overseas credit facilities, which in

turn exposes the Company to credit risk. As part of efforts to manage

and control this risk, the Company has established an 11-tier credit

assessment system. The Company objectively determines a credit

rating for each customer and based on this rating, it sets the level of

credit for the individual transaction. In addition, the Company strives

to implement strict security and other collateral requirements in line

with the credit status for each customer. Furthermore, the Com-

pany undertakes periodic assessment of credit risk related to

deferred payment, finance and guarantees based on risk/return

considerations. When the risk/return ratio is considered insufficient,

steps shall be taken to improve returns and to reduce risks.

(3) Investment Risk

One of the major business activities of the Company is investing in a

variety of business fields, which are exposed to risks of changes in

investment values. The Company has established a rigid credit

approval process to ascertain the merits and risks of each invest-

ment proposal, and a monitoring system to follow up investments.

Clearly defined standards have also been formulated with regard to

withdrawal from an investment. Through these initiatives, the Com-

pany is working to prevent and reduce loss.

The Company has established a system to adequately consider

and select new business investment opportunities. On evaluating

each proposal, the relevant business plan, including cash flow projec-

tions, is comprehensively examined. Profitability is also strictly

assessed by setting a hurdle rate to be compared with the internal

rate of return (IRR) of the investment.

Proposals that have been approved and implemented are periodic-

ally reviewed to ensure the early detection of issues and problems.

In the event an issue or problem arises, steps are taken to ensure

minimum loss. In addition, in order to ensure early detection and in

an effort to avoid issues and problems, guidelines are established at the

early stages of investments to define acceptable risk and return, to

identify conditions for withdrawal, and to minimize loss for write-offs.

(4) Country Risk

The Company is exposed to country risk in its trading operations

and activities. In order to minimize country risk, the Company avoids

excessive investment in any one country or region. To this end, the

Company evaluates each country and region and assigns a risk

rating for each. Even in countries with a low risk rating, an upper

limit is set and net exposure is kept within the limit. In addition, for

countries whose country risk rating is high, certain measures such as

trade insurance are implemented for each proposal.

82



7. MANAGEMENT ISSUES, POLICIES AND COUNTERMEASURES

(1) Overview of the previous medium-term management plan

The Sojitz Group’s previous medium-term management plan,

launched in fiscal 2004, targeted enhanced corporate value by

implementing two fundamental policies: radically strengthen the

Company’s financial position, and implement reforms to achieve a

good quality earnings structure. As a result of the success of these

measures, we successfully managed to exceed the final-year finan-

cial targets of the plan ahead of schedule.

Recurring profit: ¥75.0 billion (plan) ¥78.8 billion (result)

Net DER: Approximately 3 times (plan) 2.0 times (result)

To radically strengthen our financial position, we undertook

measures to restore asset portfolio quality which, combined with

higher earnings for the period than originally projected, resulted in

net DER of 2.0 times—a substantial improvement—in the second

year of the plan. We also worked to improve funding stability during

fiscal 2005 with measures that included issuing straight bonds totaling

¥95.0 billion and concluding syndicated loan contracts amounting

to ¥148.1 billion. Furthermore, on June 3, 2005, we issued ¥60.0

billion of 2nd Series unsecured convertible bonds with stock acquisi-

tion rights. The entire amount was converted to common stock, and

on January 13, 2006, we used the capital raised to acquire ¥40.0

billion of the outstanding 1st Series Class I Preferred Shares for a

purchase price of ¥44.0 billion. The preferred shares thus acquired

were subsequently cancelled.

Implementing reforms to achieve a good quality earnings struc-

ture entailed optimizing our business portfolio by employing SCVA

(Sojitz Corporation Value Added), our own risk/return indicator, to

drive forward our selection and focus initiatives. As a result, we

successfully established a stable earnings structure, typified by recur-

ring profit—one of the plan’s financial targets—exceeding initial

projections. We also undertook new investment and loans worth

over ¥100 billion as the first step in creating new sources of earnings

in the future.

As detailed above, the policies implemented under the previous

medium-term management plan produced steady results and we

attained our main financial targets a year ahead of schedule.

Building on this achievement, we drew up our new medium-term

management plan New Stage 2008, to start from fiscal 2006.

(2) New medium-term management plan

Having successfully improved its financial health dramatically under

the previous medium-term management plan, the Company recog-

nizes that its major issue is to carry out the measures of the new

medium-term management plan New Stage 2008 on schedule. The

plan aims to deliver sustained growth by targeting the enhancement

of corporate value through: 1) further enhancing growth strategies,

2) accelerating capital and financial strategies, and 3) upgrading risk

management.

Further enhancing growth strategies

Cultivating new dimensions in the growth of its businesses, the

Company is striving to make its growth mechanisms more robust.

Through greater application of SCVA as a growth-management

tool, and the pursuit of returns commensurate with risk, the Com-

pany is working to maximize shareholder value and build an efficient

and sound business portfolio.

Accelerating capital and financial strategies

Through the strategy for outstanding preferred shares, which is

explained in more detail later, the Company plans to reorganize its

capital structure in a single stroke while also contributing to further

stabilization of its funding, aiming to achieve its targets for the

current ratio and the long-term debt ratio.

Upgrading risk management

The Company will establish comprehensive risk management by

introducing more sophisticated risk management systems through-

out its Group companies. As a result, the Group will be able to

control risks and to maintain a high quality portfolio.

Under its policy of further enhancing growth strategies, the Com-

pany plans to achieve its goals by including in its three-year

management plan the growth strategies for each business based on

enhancing functions and expanding business investments. The

Company will then build a follow-up organization to execute these

growth strategies.

DAMPENING THE EFFECT OF DILUTION

(Billions of shares)

2nd Series Class I

1st Series Class II

1st Series Class IV

2nd Series Class V

Approximately 0.42 billion shares

Dilution dampening effect:The higher the conversion price, the greater the dampening effect on dilution

Increased number of shares of common stock after conversion at the following prices:2nd-4th Series Class I, 1st Series Class II: ¥2621st Series Class IV and V, 2nd Series Class V: ¥696 (Based on closing price on March 31, 2006)

CB conversion¥300 billion of convertible bonds issued, and proceeds used to repurchase and cancel preferred shares. The two cases below show the effect of conversion at minimum and maximum prices.

Case 1: Increased number of shares of common stock at the conversion price of ¥341.3 (minimum conversion price determined on May 16, 2006).

Case 2: Increased number of shares of common stock at the conversion price of ¥2,047.5 (maximum conversion price determined on May 16, 2006).

Assuming conversion as preferred shares

Approximately 1.15 billion shares

Increased number of shares of common stock if the preferred shares were converted

Case 1 Case 2

Assuming conversion as CB

––

0

0.3

0.6

0.9

1.2

1.5

83


To accelerate capital and financial strategies, the Company

intends to engage in a dialog with the markets to reorganize its

capital structure and improve its funding stability. In its capital reor-

ganization efforts, it is acquiring and canceling preferred shares and

controlling the dilution of share value. At the same time, the Com-

pany is procuring funds from external sources to minimize the

reduction of shareholders’ equity, and improve the capital structure.

To upgrade risk management the Company is extending the

following fundamental measures taken in fiscal 2005 across the

Group: reforms of the risk control framework, credit approval

process and monitoring system, establishment of an internal

control system and a compliance system, and improvement of

portfolio management.

By institutionalizing SCVA-based management, the Company will

work toward reforming its earnings structure and improving busi-

ness portfolio management. Utilizing the SCVA risk-return indicator,

the Company will exit from low-margin businesses and consistently

focus on businesses in which it has a competitive advantage.

Reorganizing the company’s capital structure by eliminating

preferred shares

To smooth the way for the strategies and issues of its new medium-

term management plan, the Company decided that its capital

structure, which was overburdened with preferred shares, needed

to be reorganized. With regard to ¥560.4 billion of the ¥576.0

billion in outstanding preferred shares at April 28, 2006, we entered

into the “Agreement Concerning the Acquisition of Preferred

Shares” with all relevant preferred shareholders. Under the agreement

it was agreed that Sojitz would acquire the preferred shares at a

price of ¥342.9 billion (up to a maximum of ¥354.1 billion, depend-

ing on the time of acquisition). Acquiring all preferred shares that

become eligible for conversion in or after May 2008 will accelerate

the reorganization of the Company’s capital structure in one step.

In accordance with this action, the Company received approval

of the following items at the Ordinary General Shareholders’ Meeting

held on June 27, 2006.

1) Establishment of authorized limits for acquisition of its own

shares of 1st Series Class II Preferred Shares and 2nd Series

through 4th Series Class I Preferred Shares;

2) Amendment of the Articles of Incorporation to add acquisition

clauses for 1st Series Class IV and Class V Preferred Shares and

2nd Series Class V Preferred Shares; and

3) Reduction of stated capital and additional paid-in capital to

secure adequate capital surplus necessary for the aforemen-

tioned acquisition.

Moreover, in relation to the elimination of the preferred shares,

the Company has resolved to issue a total of ¥300.0 billion of 3rd

Series and 4th Series Convertible Bonds (hereinafter referred to as

“the CB”) by allocation to a third party.

This measure for eliminating the outstanding preferred shares

aims at minimizing the decrease in shareholders’ equity and further

expanding shareholders’ equity by acquiring preferred shares in an

Outstanding Preferred Shares (as of March 31, 2006) Measures for Preferred Shares

1st Series Class I

Outstanding amount (Billions of yen)

12.6

52.6

52.6

52.6

52.6

199.5

130.5

20.0

560.4

3.0

576.0

262

262

262

262

262

TBD

TBD

TBD

503

2006/5/14

2008/5/14

2010/5/14

2012/5/14

2014/5/14

2024/10/29

2019/10/29

2015/10/29

2004/5/14

48,092

200,763

200,763

200,763

200,763

286,638

187,500

28,736

1,305,927

5,964

1,359,983

11.9%

49.7%

49.7%

49.7%

49.7%

70.9%

46.4%

7.1%

323.2%

1.5%

336.5%

Conversion price (yen)

Starting date of conversion period

Latent stock (thousands of shares)

Ratio

2nd Series Class I

3rd Series Class I

4th Series Class I

1st Series Class II

1st Series Class IV

1st Series Class V

2nd Series Class V

Subtotal

1st Series Class III

Total preferred shares outstanding

• In FY2005, we repurchased and cancelled ¥40 billion of preferred shares out of a total ¥52.6 billion (issue price)

• Sojitz entered an agreement with holders of preferred shares to repurchase preferred shares totaling ¥560.4 billion by paying ¥342.9 billion to ¥354.1 billion (maximum) on April 28, 2006.

• Approved for reduction of capital and capital reserve at the Ordinary General Shareholders' Meeting held on June 27, 2006.

• Issued convertible bonds (¥300 billion) through private placement on May 25, 2006.

#1: Based on maximum conversion price of ¥262 for 1st Series Class I, 2nd Series Class I, 3rd Series Class I, 4th Series Class I, 1st Series Class II and a conversion price of ¥503 for 1st Series Class III preferred shares.

#2: Based on estimates for conversion of latent stock from 1st Series Class IV, 1st Series Class V, 2nd Series Class V at ¥696, the closing price on March 31, 2006.#3: Latent stock as a percentage of total outstanding common stock of 404,208 thousand (as of March 31, 2006). (Latent stock / Outstanding shares X 100) #4: The outstanding balance of the 1st Series Class I amounted to ¥12.6 billion, which was fully converted to common stock as of May 15, 2006.

#3#2#1

#4

CAPITAL STRATEGY: SPEED UP CAPITAL REORGANIZING (CONCRETE MEASURES)

84



amount corresponding to the amount of capital raised by the con-

version of the CB. By minimizing overall the dilution arising from the

future conversion of preferred shares to common stock, the Com-

pany is seeking to boost the value of Sojitz stock, and at the same

time, it is reducing the burden of dividend payments to preferred

shareholders and avoiding the risk of the acquisition price for the

preferred shares rising in future. These advantages will significantly

contribute to the accumulation of shareholders’ equity during the

course of the New Stage 2008 medium-term management plan.

(3) Corporate Governance

Fundamental Concept

The Company recognizes corporate governance as an important

management issue. To strengthen the effectiveness of this function,

the Company takes steps to clarify management responsibility and

accountability to shareholders and other stakeholders and to estab-

lish a highly transparent management structure. At the same time,

the Company implements a variety of measures aimed at improving

the profitability of the entire Group and maximizing corporate value.

In accordance with Japanese laws, the Company has elected to

adopt an internal auditing system based on a Board of Corporate

Auditors. The Board comprises five members, three of whom are

outside corporate auditors. In addition, three of the corporate

auditors on the board are standing auditors. Independent from the

Board of Directors, the corporate auditors audit the business perfor-

mance of directors.

The Company also has Nomination and Remuneration commit-

tees that act as consultative bodies to the Board of Directors.

Chaired by outside directors of the Company, these committees

ensure appropriateness and transparency in selection of candidates

for directorships and the level of remuneration for directors.

The Board of Directors is chaired by the president and comprises

nine directors, two of whom are outside directors. The Board of

Directors is the foremost decision-making body of the Company and

is responsible for considering and determining basic policies and

those matters most important to the Group’s management.

The Company also has introduced an executive officer system.

This system serves to clarify authority and responsibilities of senior

executives and management by separating managerial decision-

making and business execution functions, and to increase the speed

of decision-making and implementation. Moreover, to respond

quickly and appropriately to sudden changes in the business envi-

ronment and to clarify management responsibilities, the tenure of

directors and executive officers has been set at one year.

To tackle management issues that affect its entire organization,

the Company has established various internal committees. Among

these internal committees are the Security Trade Control, Environment,

Internal Control, Compliance, and CSR Promotion committees.

Basic Policy on, and Status of, Internal Control System

Basic Policy

The Company has been continuously working to improve its internal

control system by reviewing and reinforcing its internal rules, orga-

nization and arrangements. On May 12, 2006, the Board of Directors

resolved the following points as the Company’s basic policy on a

system ensuring proper and ethical business operations in compliance

with the new corporate law of Japan.

i. Compliance by directors and employees:

• The Company establishes the Sojitz Group Compliance Code of

Conduct, the Sojitz Group Compliance Manual for the Compli-

ance Code of Conduct and the Sojitz Group Compliance Program

to ensure that directors and employees comply with laws and

regulations, the Articles of Incorporation, and internal rules.

• The Compliance Committee leads the reinforcement and improve-

ment of the legal compliance system. Also, the Company makes

clear the responsibility of each department so that any amendment

of laws and regulations relating to the Company’s operations will

be closely followed and tightly observed.

• With regard to important laws and regulations such as security

export control and insider trading, the Company establishes

respective internal rules to ensure strict compliance.

ii. Retention of information relating to the execution of

directors’ duties:

• With respect to important documents relating to the execution of

directors’ duties such as the minutes of the Board of Directors

meetings and approval documents, the Company prescribes in the

Board of Directors rules and the internal rules for document

retention a retention period that is equal to, or longer than, that

required by the relevant law or regulation. The Company also desig-

nates the department in charge of such retention, and documents

are made available as review or examination becomes necessary.

85


iii. Rules and systems for managing potential risk for losses:

• In order to prevent and, when impossible to prevent, to minimize

economic losses, the Company analyzes and categorizes potential

risks for economic losses both inside and outside its operations. It

establishes internal rules or manual, and assigns a department for

managing the risks in each category.

• Credit risk and business investment risk are assessed and appro-

priately handled in accordance with the internal rules for risk

management. Market risk is controlled to ensure it is minimized in

accordance with applicable internal rules. The Company prepares

for natural disasters by establishing internal rules and drawing up

disaster manuals.

• The Company periodically reviews the effectiveness of internal

rules and handling procedures, and revises them if required.

Further, in the event that a new type of risk emerges due to

changes in the business environment, the Company promptly

appoints a person and/or department in charge, and prescribes

appropriate internal rules with regard to the new risk.

iv. Efficiency in execution of directors’ duties:

• The Company makes clear the responsible fields or departments

of each director and executive officer and the responsibility of

each department, as well as chains of command, scopes of

authority and decision making rules.

• The Company clearly prescribes in the Board of Directors rules

important matters requiring Board resolutions, and convenes the

Management Committee and other committees to deliberate and

decide other important matters. Also, matters to be reported to

the Board of Directors are set forth in the Board of Directors rules.

• Top management policy is promptly announced to all directors

and employees of the Company through the Management Com-

mittee or Corporate Planning Department, and through other oral

or written methods.

v. Proper and ethical business operations in the Sojitz Group:

• The Company establishes a department to oversee the manage-

ment structure of Sojitz Group companies, ensuring the sound

management of each Group company. The Company is enhancing

its Audit Department to audit Group companies, ensuring the

proper and ethical conduct of their business operations.

• The Compliance Code of Conduct and Compliance Program apply

to all the Sojitz Group companies and are fully observed by their

directors and employees.

• The Company reviews, and directs necessary improvement of, the

business processes of each Group company in the light of internal

controls relating to consolidated financial reporting.

vi. Employees assisting corporate auditors and their

independence from directors:

• The Company establishes the Corporate Auditors Office to assist

corporate auditors and assigns the necessary employees. These

employees work under the direction of corporate auditors, and

their performance evaluations and personnel changes require the

consent of corporate auditors.

vii. Reports to corporate auditors:

• The Board of Directors rules include a rule that any director must

immediately report to corporate auditors when he/she learns a

fact which may cause significant damage to the Company. The

Audit Department provides corporate auditors with a copy of the

internal audit report upon completion of each internal audit.

• The Board of Corporate Auditors is entitled to request a report

from an independent auditor, director or other person, as they

deem necessary.

viii. Other arrangements to ensure efficient auditing by the

corporate auditors:

• One or more of the corporate auditors attends every meeting of

the Board of Directors and expresses opinions as may be neces-

sary. They may also attend the Management Committee and

other important meetings, directly observing the discussions and

reporting on important matters.

• Representative directors regularly meet with corporate auditors

and exchange opinions on key issues for the Company, as well as

on the conditions of, and important issues relating to, audits by

corporate auditors.

86


Progress With Improvements

i. Outline:

The Company has been working on improving various aspects of its

internal control system. Measures include reviewing and reinforcing

the legal compliance system led by the Compliance Committee,

advancing the risk management system led by the Risk Manage-

ment Department, the Risk Management Planning Office and the

Legal Department, and increasing Audit Department personnel.

In November 2005, the Company established the Internal Control

Committee chaired by the president to monitor the status of the

Company’s internal controls and formulate policy with regard to its

internal control system. This Committee is also directing the devel-

opment of an internal control system for the entire Sojitz Group and

is preparing to meet the expected requirements of the “Assessment

and Audit of Internal Control System for Financial Reporting” rules

under the new Financial Instruments and Exchange Law.

ii. Compliance:

The Company has been working on improving its legal compliance

system as follows:

• The Company has distributed to the officers and employees of the

Sojitz Group companies the Sojitz Group Compliance Code of

Conduct in booklet form, as well as the Sojitz Group Manual for

the Compliance Code of Conduct. It also provides them with

periodical education programs on legal compliance, as appropri-

ate to the level of their responsibility.

• The Company has set up hotlines to the Chief Compliance Officer

and to outside legal counsel for prevention, or early discovery and

resolution, of illegal actions in Sojitz Group operations.

• The Audit Department considers “compliance” to be a major

focus of its audits, and audits Sojitz and its Group companies on

their observance of laws, and of their respective Articles of Incor-

poration and internal rules.

iii. Risk management:

The Company has been working on improving its risk management

system as follows:

• The Company established its own credit ratings for customers and

manages credit risk on a customer by customer basis.

• The Company established its own country ratings and sets an

exposure limit for each country.

• The Company established its own conservative criteria in the form

of IRR for business investments whereby it analyzes, among others,

country risk, partners in the investment and any special features of

the business. It also periodically reviews ongoing business invest-

ments, and applies its own exit rules.

• The Company quantifies its overall risk assets according to its

comprehensive risk management system, and keeps the volume of

such assets under the level of its shareholders’ equity.

iv. Group business management:

The Company has been working on improving its Group business

management system as follows:

• In April 2006, the Company established the Group Planning &

Administration Department to improve and reinforce the Group

business management system.

• Corporate auditors efficiently monitor Sojitz Group companies in a

manner appropriate for management on a consolidated basis by,

among others, obtaining from the Audit Department its audit

reports on Sojitz Group companies and exchanging information

with the corporate auditors of Sojitz Group companies.

v. Credibility of financial reporting:

Under the direction of the Internal Control Committee, basic plans

for a project to inspect and assess the internal control system to

ensure the credibility of financial reporting have been formulated,

and are being implemented. The Company has determined to

reinforce its internal control system based on the assessment resulting

from the project, and establishes a framework to routinely monitor

the system.

8. OUTLOOK

The Company has entered a new stage in its corporate history as it

launches the first year of its new medium-term management plan,

New Stage 2008. Targeting sustained growth under the plan, the

Company will work earnestly to adopt a proactive stance. The Com-

pany will realize its business vision and pursue its policies of further

enhancing growth strategies, accelerating capital and financial

strategies, and upgrading risk management. Leveraging the special

capabilities of each of its businesses, the Company is developing its

growth strategies globally by expanding business functions and

investment. The entire Company is working together, focused on its

goal of attaining sustained growth. As part of the new medium-

term management plan’s drive for further expansion of its growth

strategies, the Company will undertake ¥300.0 billion in new invest-

ments and loans over the three years of the plan to steadily expand

new business domains. These funds will be invested in growth areas

that play to the Company’s strengths to: acquire additional resource

interests; strengthen existing businesses capabilities to create added

value; and collaborate with business partners, leveraging the

Company’s proprietary information network to expand its commer-

cial interests and business. In addition, the Company will introduce

more sophisticated risk management systems—the platform on

which its growth strategies rest— throughout the Sojitz Group to

manage various risks and maintain a high quality portfolio. By pur-

suing its capital and financial strategies, including the elimination of

outstanding preferred shares, the Company aims to progress with

the reorganization of its capital structure to enable it to be more

aggressive in its growth strategies.


87


By steadily pursuing the previously mentioned strategies of New

Stage 2008, the Company is targeting net income of ¥60.0 billion

and shareholders’ equity of ¥500.0 billion in fiscal 2008.

The information on future performance (forward-looking state-

ments) is based on information available to management at the

time of its disclosure. Accordingly, readers are advised that actual

results may differ from forward-looking statements due to a wide

variety of factors including but not limited to conditions in the

Company’s principal overseas and domestic markets, economic

conditions, and changes in foreign currency exchange markets.

9. BASIC POLICY ON DIVIDENDS

The stable payment of dividends to shareholders, steady increase in

shareholder value, and adequate retained earnings to ensure corpo-

rate competitiveness are key issues for management. The Company

determines its dividend payout ratio after full consideration of its

capital base, profit growth, and the demand for investment funds

and working capital.

The Company is committed to achieving optimal balance among

its ongoing actions to improve profits. Those actions include improv-

ing its financial position, further expanding its growth strategies,

and ensuring adequate retained earnings to accelerate the progress

of its capital and financial strategies. Committed to achieving accu-

mulation of profits throughout the current and ensuing fiscal years,

the Company will work diligently toward the payment of dividends

in fiscal 2006.

88


Thousands of U.S.Millions of yen dollars (Note 1)

ASSETS 2006 2005 2006

Current Assets:Cash and cash equivalents (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 506,255 ¥ 409,266 $ 4,326,966Time deposits (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,405 23,126 182,949Short-term investments (Notes 3 and 4) . . . . . . . . . . . . . . . . . . . . . . . . . 922 841 7,880Receivables:

Trade notes and trade accounts (Note 4) . . . . . . . . . . . . . . . . . . . . . . . 602,940 607,037 5,153,333Loans (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,366 34,856 165,521Unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . 35,445 17,194 302,949Allowance for doubtful receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,173) (10,958) (129,684)

Inventories (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,164 194,694 1,830,462Advance payments to suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,754 40,612 339,778Deferred tax assets (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,887 7,483 75,957Other current assets (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,490 98,978 653,761

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,510,455 1,423,129 12,909,872

Investments and Long-term Receivables:Investment securities (Notes 3 and 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . 314,664 274,340 2,689,436Investments in and advances to unconsolidated

subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,353 204,686 1,883,359Long-term loans, receivables and other (Note 4) . . . . . . . . . . . . . . . . . . . 227,463 374,179 1,944,128Allowance for doubtful receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (122,957) (237,332) (1,050,914)

Total investments and long-term receivables . . . . . . . . . . . . . . . . . . 639,523 615,873 5,466,009

Property and Equipment, at Cost (Note 4):Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,973 76,679 580,966Buildings and structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,565 95,866 782,607Property leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325 506 2,778Equipment, fixtures and others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207,381 190,818 1,772,487Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,921 2,288 24,966Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (123,500) (119,505) (1,055,556)

Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246,665 246,652 2,108,248

Other Non-current Assets:Consolidated adjustments (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,898 79,990 657,248Deferred tax assets (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,881 58,052 204,111Intangible assets and deferred charges . . . . . . . . . . . . . . . . . . . . . . . . . . 24,258 24,782 207,333

Total other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,037 162,824 1,068,692Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,521,680 ¥2,448,478 $21,552,821

See accompanying notes to consolidated financial statements.

C O N S O L I D A T E D B A L A N C E S H E E T SSojitz Corporation and Consolidated SubsidiariesAs of March 31, 2006 and 2005

89



LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS’ EQUITY 2006 2005 2006

Current Liabilities:Short-term debt, principally unsecured (Notes 4 and 6) . . . . . . . . . . . . . . ¥ 545,072 ¥ 764,219 $ 4,658,735Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,200 139,200 249,573Current portion of long-term debt (Notes 4 and 6) . . . . . . . . . . . . . . . . . 239,842 211,933 2,049,932Payables:

Trade notes and trade accounts (Note 4) . . . . . . . . . . . . . . . . . . . . . . . 443,816 467,190 3,793,299Unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . 7,623 5,324 65,154

Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,200 13,116 95,727Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,775 7,644 66,453Advances received from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,331 38,135 276,333Deferred tax liabilities (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 422 350Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,816 107,499 853,128

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,416,716 1,754,682 12,108,684

Non-current Liabilities:Long-term debt, less current portion (Notes 4 and 6) . . . . . . . . . . . . . . . 572,145 312,977 4,890,128Employees’ retirement and severance benefits (Notes 2 and 7) . . . . . . . . 25,558 29,046 218,444Deferred tax liabilities (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,999 7,544 119,650Other non-current liabilities (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,186 30,639 249,453

Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 640,888 380,206 5,477,675

Contingent liabilities (Note 13)Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,126 33,349 317,317

Shareholders’ Equity:Common and preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,550 336,123 1,115,812Common stock (Note 9)

Authorized—989,000,000 sharesIssued—404,208,888 shares

Preferred stockClass I

Authorized—90,000,000 sharesIssued—85,200,000 shares

Class IIAuthorized—33,000,000 sharesIssued—26,300,000 shares

Class IIIAuthorized—11,000,000 sharesIssued—1,500,000 shares

Class IVAuthorized—40,000,000 sharesIssued—19,950,000 shares

Class VAuthorized—15,000,000 sharesIssued—12,875,000 shares

Class VIAuthorized—1,000,000 sharesIssued—0 shares

Capital surplus (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,754 487,686 1,425,248Land revaluation difference (Note 18) . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,620) (4,870) (22,393)Retained earnings (Accumulated deficit) . . . . . . . . . . . . . . . . . . . . . . . . . 92,487 (492,048) 790,487Net unrealized gains on available-for-sale securities . . . . . . . . . . . . . . . . . 90,547 32,630 773,906Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . (50,655) (79,194) (432,949)Treasury stock: 223,777 shares and 179,560 shares at March 31,2006 and 2005, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (113) (86) (966)

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426,950 280,241 3,649,145Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,521,680 ¥2,448,478 $21,552,821

90



2006 2005 2006

Net Sales (Total Trading Transactions) . . . . . . . . . . . . . . . . . . . . . . . . . . ¥4,972,060 ¥4,675,903 $42,496,239Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,729,893 4,431,656 40,426,436

Gross Trading Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242,167 244,247 2,069,803

Selling, General and Administrative Expenses (Note 10) . . . . . . . . . . . . 165,965 178,725 1,418,504

Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,202 65,522 651,299

Other Income (Expenses):Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,214 18,431 112,940Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,144) (48,754) (343,111)Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,817 3,654 58,265Equity in earnings of unconsolidated subsidiaries and affiliates . . . . . . . . . 19,149 10,741 163,667Gain on sale of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,051 2,761 17,530Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,485 5,733 12,692

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,572 (7,434) 21,983

Recurring Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,774 58,088 673,282

Special Gains (Losses) (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,359) (438,167) (79,991)

Income (Loss) Before Income Taxes and Minority Interests . . . . . . . . . . 69,415 (380,079) 593,291

Income Taxes (Note 8):Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,485) (11,331) (140,897)Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,840) (18,288) (49,915)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,325) (29,619) (190,812)

Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,384) (2,778) (28,923)

Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 43,706 ¥ (412,476) $ 373,556

Yen U.S. dollars

Net income (loss) per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 126.21 ¥ (1,876.48) $ 1.08Net income per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99.55 — 0.85Cash dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —


C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N SSojitz Corporation and Consolidated SubsidiariesFor the years ended March 31, 2006 and 2005

91



2006 2005 2006

Common and Preferred Stock (Note 9):Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 336,123 ¥ 150,606 $ 2,872,846Issuance of capital stock and conversion of bonds withstock acquisition rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,550 185,517 261,111

Capital reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (236,123) — (2,018,145)Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,550 336,123 1,115,812

Capital Surplus (Note 9):Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487,686 346,620 4,168,256Increase:

Issuance of capital stock and conversion of bonds withstock acquisition rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,450 185,483 260,256

Excess of capital reduction over disbursement . . . . . . . . . . . . . . . . . . . . . . 180,304 — 1,541,060Gains on sale of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 10 —

Decrease:Effect from mergers within the consolidated group . . . . . . . . . . . . . . . . . . — (15,228) —Transfer to accumulated deficit, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (487,686) (29,199) (4,168,256)Elimination of purchased preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . (44,000) — (376,068)

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,754 487,686 1,425,248

Land Revaluation Difference (Note 18):Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,870) (5,469) (41,624)Decrease in land revaluation difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,250 599 19,231Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,620) (4,870) (22,393)

Retained Earnings (Accumulated Deficit) (Note 9):Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (492,048) (104,802) (4,205,538)Increase:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,706 — 373,556Excess of capital reduction over disbursement . . . . . . . . . . . . . . . . . . . . . . 55,819 — 477,085Transfer from capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487,686 29,199 4,168,256Effect arising from changes of subsidiaries and affiliates for consolidation . . . . — 3,041 —Minimum pension liability adjustment (Note 15) . . . . . . . . . . . . . . . . . . . . 279 — 2,385Net unrealized gains on derivatives of overseas subsidiariesand affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 22 1,402

Decrease:Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (412,476) —Bonuses to directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16) (22) (137)Reversal of land revaluation difference . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,250) (886) (19,231)Effect from mergers within the consolidation group . . . . . . . . . . . . . . . . . — (5,947) —Effect from changes of consolidated subsidiaries and affiliatesaccounted for under the equity method and others . . . . . . . . . . . . . . . . . (546) — (4,667)

Effect from changes of accounting policy for overseas subsidiaries . . . . . . (307) — (2,624)Minimum pension liability adjustment (Note 15) . . . . . . . . . . . . . . . . . . . . — (177) —

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,487 (492,048) 790,487Net Unrealized Gains on Available-for-sale Securities:

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,630 16,692 278,889Increase in net unrealized gain on available-for-sale securities . . . . . . . . . . . . 57,917 15,938 495,017Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,547 32,630 773,906

Foreign Currency Translation Adjustments:Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (79,194) (87,380) (676,872)Increase in foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . 28,539 8,186 243,923Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,655) (79,194) (432,949)

Treasury Stock:Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (86) (32) (735)Sale of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27) (54) (231)Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ (113) ¥ (86) $ (966)


C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T YSojitz Corporation and Consolidated SubsidiariesFor the years ended March 31, 2006 and 2005

92



2006 2005 2006

Cash Flows from Operating Activities:Income (loss) before income taxes and minority interests . . . . . . . . . . . . . . . . . . ¥ 69,415 ¥(380,079) $ 593,291Adjustments to reconcile income (loss) before income taxes and minorityinterests to net cash provided by (used in) operating activities:Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,959 24,785 221,872Loss on revaluation of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950 13,416 8,120Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,984 4,453 34,051Decrease (increase) in allowance for doubtful receivables . . . . . . . . . . . . . . . (110,811) 64,122 (947,102)Decrease in employees’ retirement and severance benefits . . . . . . . . . . . . . . (3,630) (7,844) (31,026)Interest and dividend income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,030) (22,085) (171,197)Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,144 48,754 343,111Foreign exchange loss (gain)—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321 (323) 2,744Equity in earnings of unconsolidated subsidiaries and affiliates . . . . . . . . . . . (19,149) (10,741) (163,667)Gain (loss) on sale of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,025) 361 (34,402)Gain (loss) on sale and disposal of property and equipment . . . . . . . . . . . . . . (2,239) 95,496 (19,137)Losses on revaluation of property and equipment . . . . . . . . . . . . . . . . . . . . . — 24,651 —Impairment loss on fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,022 — 17,282Decrease in trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,492 7,172 226,427Increase (decrease) in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,493) 45,103 (72,590)Decrease in trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (34,979) (15,771) (298,965)Bonuses to directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22) (25) (188)Other, net (Note 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,593 127,460 962,333

¥ 78,502 ¥ 18,905 $ 670,957Interest and dividends received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,762 22,006 186,000Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,674) (49,859) (347,640)Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,434) (10,827) (140,462)

Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . 43,156 (19,775) 368,855Cash Flows from Investing Activities:

Decrease in time deposits, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,542 9,833 21,726Decrease (increase) in marketable securities, net . . . . . . . . . . . . . . . . . . . . . . . . (1,152) 18,111 (9,846)Payments for property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,519) (8,358) (218,111)Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 16,463 77,420 140,709Payments for purchase of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . (24,380) (17,936) (208,376)Proceeds from sale/redemption of investment securities . . . . . . . . . . . . . . . . . . 59,272 80,361 506,598Payments for acquisition of newly consolidated subsidiaries (Note 17) . . . . . . . . (296) (2,013) (2,530)Net increase (decrease) from sale of consolidated subsidiaries . . . . . . . . . . . . . . 938 (1,224) 8,017Decrease in short-term loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,023 58,177 230,966Increase of long-term loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,717) (8,181) (83,051)Collection of long-term loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,546 26,810 320,906Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,436 8,109 140,479

Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,156 241,109 847,487Cash Flows from Financing Activities:

Increase (decrease) in short-term debt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (233,618) 85,255 (1,996,735)Decrease in commercial paper, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (110,000) (2,000) (940,171)Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487,025 203,706 4,162,607Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (262,602) (487,734) (2,244,462)Proceeds from issuance of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,873 9,999 1,323,701Redemption of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (46,031) (40,088) (393,427)Proceeds from issuance of common/preferred stock . . . . . . . . . . . . . . . . . . . . . — 19,389 —Proceeds from issuance of common stock to minority shareholders . . . . . . . . . . 57 155 487Payment for purchase of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44,000) — (376,068)Dividends paid to minority shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (805) (913) (6,880)Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27) (33) (231)Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (678) — (5,795)

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,806) (212,264) (476,974)Effect of Exchange Rate Changes on Cash and Cash Equivalents . . . . . . . . . 11,921 (882) 101,889Net Increase in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,427 8,188 841,257Effect of Change in Scope of Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . (1,438) (162) (12,291)Cash and Cash Equivalents at the Beginning of the Year . . . . . . . . . . . . . . . 409,266 401,240 3,498,000Cash and Cash Equivalents at the End of the Year . . . . . . . . . . . . . . . . . . . . . ¥ 506,255 ¥ 409,266 $ 4,326,966


C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W SSojitz Corporation and Consolidated SubsidiariesFor the years ended March 31, 2006 and 2005

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The accompanying consolidated financial statements of Sojitz Corporation(the ”Company“) and consolidated subsidiaries are prepared on thebasis of accounting principles generally accepted in Japan (”JapaneseGAAP“), which are different in certain respects as to the application anddisclosure requirements of International Financial Reporting Standards,and are compiled from the consolidated financial statements prepared bythe Company as required by the Securities and Exchange Law of Japan.

The accounts of overseas subsidiaries are based on their accountingrecords maintained in conformity with generally accepted accountingprinciples prevailing in the respective countries of domicile. The accom-panying consolidated financial statements have been reclassified andtranslated into English (with some expanded descriptions and theinclusion of consolidated statements of shareholders’ equity) from theconsolidated financial statements of the Company prepared in accor-dance with Japanese GAAP and filed with the appropriate Local FinanceBureau of the Ministry of Finance as required by the Securities andExchange Law of Japan. Some supplementary information included in thestatutory Japanese language consolidated financial statements, but notrequired for fair presentation, is not presented in the accompanyingconsolidated financial statements.

Certain reclassifications and modifications have been made topresent the accompanying consolidated financial statements in a formatwhich is familiar to readers outside Japan.

For the convenience of readers outside Japan, the accompanyingconsolidated financial statements are also presented in United Statesdollars by translating Japanese yen amounts at the exchange rate of¥117 to U.S.$1 prevailing at the end of March 31, 2006.

The translation should not be construed as a representation that theJapanese yen amounts could be converted into United States dollars atthe above or any other rate.

In the year ended March 31, 2006, the Company and consolidateddomestic subsidiaries adopted the new accounting standard for impair-ment of fixed assets (“Opinion Concerning Establishment of AccountingStandard for Impairment of Fixed Assets” issued by the Business Account-ing Deliberation Council on August 9, 2002) and the implementationguidance for accounting standard for impairment of fixed assets (theFinancial Accounting Standard Implementation Guidance No. 6 issuedby the Accounting Standards Board of Japan on October 31, 2003).

As a result, the income before income taxes and minority interestshas been reduced by ¥2,022 million (U.S.$17,282 thousand). The accu-mulated impairment losses are directly deducted from the balances of therelated fixed assets.

1. BASIS OF PRESENTING FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

■ Principles of consolidationThe consolidated financial statements include the accounts of theCompany and its 321 (329 for 2005) significant majority-owned domes-tic and foreign subsidiaries. All significant intercompany transactions andaccounts have been eliminated.

Investments in 192 (188 for 2005) unconsolidated subsidiaries andaffiliates, with minor exceptions, are accounted for by use of the equitymethod.

The excess of the cost of the Company’s investment in the consoli-dated subsidiaries and in the above unconsolidated subsidiaries andaffiliates over its equity in net assets is being amortized over a period of5 to 20 years using the straight-line method.

As for consolidated subsidiaries whose fiscal year-end date is threemonths or more previous to March 31, 2006, the accounts of those subsid-iaries were included in consolidation with reasonable adjustments thatwould have been made to conform to the accounts as of March 31, 2006.

■ Cash equivalentsThe Company considers time deposits and highly liquid investments thatare readily convertible to cash with a maturity of three months or less atthe time of acquisition to be cash equivalents.

■ Foreign currency translationCurrent and non-current receivables and payables in foreign currenciesare translated at current rates prevailing at the balance sheet date andthe resulting exchange gains or losses are recognized in earnings.

Translations of foreign consolidated subsidiaries’ financial statementsare made at the year-end rate for balance sheet items, except for share-holders’ equity, which is translated at historical rates, and at the annualaverage rate for revenues and expenses. Resulting translation adjustmentsare reflected in the consolidated financial statements as foreign currencytranslation adjustments. The foreign currency translation adjustments arepresented in shareholders’ equity and minority interests.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

■ Allowance for doubtful receivablesThe allowance for doubtful receivables is provided in an amount suffi-cient to cover credit losses, based on the collectibility of individualreceivables and the allowance for other receivables, based on past creditloss experience.

■ InventoriesInventories are stated at cost on the specific-identification or movingaverage basis except for certain foreign subsidiaries which state invento-ries at the lower of specific-identified cost or market.

■ Capitalization of interest costsInterest costs on certain real estate under construction are capitalized untilsales realization to achieve a better measure of acquisition costs of realestate for sale and to result in a better matching of revenue and costs.

■ Short-term investments and investment securitiesShort-term investments and investment securities are classified as either(a) securities held for trading purposes (hereinafter referred to as“Trading Securities”) (b) debt securities intended to be held to maturity(hereinafter referred to as “Held-to-Maturity Debt Securities”) or (c)securities other than the above (hereinafter referred to as “Available-for-Sale Securities”).

Trading Securities, Held-to-Maturity Debt Securities and the Available-for-Sale Securities are stated in the following manner:

(1) Trading Securities are stated at fair value. Gains and losses real-ized on disposal and unrealized gains and losses from marketvalue fluctuations are recognized as gains or losses in the periodof the change.

(2) Held-to-Maturity Debt Securities are stated at amortized cost.(3) Available-for-Sale Securities with available fair market values are

stated at fair value.“Net unrealized gains on available-for-sale securities” are stated,

net of tax, in shareholders’ equity on the balance sheet. Available-for-Sale Securities with no readily available fair market value arestated at cost using the moving-average method.

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T SSojitz Corporation and Consolidated Subsidiaries

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(4) Certain write-downs of securities are recognized in earnings whenthe securities have substantial losses and are not expected torecover such losses in the near future.Investments in a limited partnership for investment or a similarpartnership (that can be considered as marketable securities inaccordance with Article 2, Paragraph 2 of the Securities and Trans-action Law) are stated at their net equity value on the most recentfinancial statements that are available on the settlement reportday as specified in the partnership agreement.

MMFs and commercial paper are included in cash and cashequivalents. The amount as of March 31, 2006 was ¥5,722 million(U.S.$48,906 thousand).

■ Deferred chargesPre-operating and start-up costs of domestic consolidated subsidiariesare amortized by the period determined by the Commercial Code ofJapan. Pre-operating and start-up costs of foreign consolidated subsid-iaries are amortized in accordance with local accounting standards. Allcosts incurred in connection with the issuance of new shares are amor-tized over three years using the straight-line method. Bond issueexpenses are amortized on the straight-line method over whichever isshortest, the period through redemption or three years. Bond issuediscounts are deferred and amortized on the straight-line method overthe period through redemption.

■ Property and equipmentProperty and equipment are principally depreciated by the declining-balance method, except that the buildings acquired after March 31,1998 are depreciated by the straight-line method.

■ Intangible assetsThe Company and its consolidated subsidiaries include internal use soft-ware in intangible assets and amortize it on the straight-line method overthe estimated useful life of five years. Some consolidated subsidiariesamortize mining rights on activity-based depreciation.

■ Finance lease transactions without transfer of ownershipFinance lease transactions, other than those where ownership of the leaseproperty is regarded as being transferred to the lessee, are accounted forin the same way as operating lease transactions. Certain foreignsubsidiaries account for such leases as sale and purchase transactions.

■ Employees’ retirement and severance benefitsThe Company and certain consolidated subsidiaries have unfunded sever-ance payment plans and funded non-contributory pension plans covering alleligible employees.

Certain consolidated subsidiaries provide for retirement benefitsbased on the present value of projected benefit obligations attributableto employee services rendered by the end of the year and the fair valueof the pension plan assets.

■ Net sales (total trading transactions) and gross trading profitAs general trading companies, the Company and certain of itsconsolidated subsidiaries act either as principal or agent in trading trans-actions. Net sales represents the sales volume of all those transactions inwhich the companies participate, whether as principal or agent. Grosstrading profit consists of the gross margin (sales less cost of sales) ontransactions in which the companies act as principal and commissionson transactions in which the companies serve as agent.

■ Income taxesDeferred tax assets and liabilities are recognized for the estimated futuretax effects attributable to temporary differences between the carryingamounts and the tax bases of assets and liabilities, and tax losses whichcan be carried forward, and are measured using the enacted tax ratewhich will be in effect when the differences are expected to be recov-ered or settled. The Company and domestic subsidiaries have adoptedthe consolidated tax return reporting system.

■ Net income (loss) per shareThe computation of net income (loss) per share is based on the weightedaverage number of shares of common stock outstanding in each period.Diluted net income per share is based on the weighted average number ofshares of common stock outstanding plus any potentially dilutive securities.

■ Derivative financial instrumentsThe Company and certain of its consolidated subsidiaries state deriva-tive financial instruments at fair value and recognize changes in fairvalue as gains or losses unless derivative financial instruments are usedfor hedging purposes.

If derivative financial instruments are used as hedges and meetcertain hedging criteria, the Company and its consolidated subsidiariesdefer recognition of gains or losses resulting from changes in fair valueof derivative financial instruments until the related losses or gains on thehedged items are recognized.

If interest rate swap contracts are used as hedges and meet certainhedging criteria, the net amount to be paid or received under the inter-est rate swap contract is added to or deducted from the interest on theassets or liabilities for which the swap contract was executed.

3. SHORT-TERM INVESTMENTS AND INVESTMENT SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Information regarding each category of securities classified as trading, available-for-sale, and held-to-maturity at March 31, 2006 and 2005 is as follows:

Millions of yen

Cost Unrealized Unrealized FairYear ended March 31, 2006 gains losses value

Securities classified as:Available-for-sale with available fair market values:

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥107,509 ¥125,010 ¥(1,929) ¥230,590Debt securities

Government bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 799 — (1) 798Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 — — 333Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,529 223 (118) 1,634

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,833 941 (19) 3,755Held-to-maturity securities with available fair market values . . . . . . . . . . . . . . . . 1,973 498 — 2,471Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥114,976 ¥126,672 ¥(2,067) ¥239,581

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

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Thousands of U.S. dollars



Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $918,880 $1,068,462 $(16,487) $1,970,855Debt securities

Government bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,829 — (8) 6,821Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,846 — — 2,846Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,068 1,907 (1,009) 13,966

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,214 8,043 (163) 32,094Held-to-maturity securities with available fair market values . . . . . . . . . . . . 16,863 4,257 — 21,120Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $982,700 $1,082,669 $(17,667) $2,047,702

Proceeds from the sale of held-to-maturity securities with available fair market values in the year ended March 31, 2006 amounted to ¥4,364million (U.S.$37,299 thousand) of which the sales cost amounted to ¥3,665 million (U.S.$31,325 thousand) and the related gain amounted to ¥699million (U.S.$5,974 thousand).

The sale was intended to finance group companies.Total proceeds from the sale of available-for-sale securities in the year ended March 31, 2006 amounted to ¥51,780 million (U.S.$442,564 thou-

sand) and the related gains and losses amounted to ¥7,488 million (U.S.$64,000 thousand) and ¥3,694 million (U.S.$31,573 thousand), respectively.

Millions of yen



Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥115,353 ¥51,056 ¥(2,810) ¥163,599Debt securities

Government bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410 — 0 410Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,342 217 — 1,559Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,939 119 (110) 1,948

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,553 527 (7) 3,073Held-to-maturity securities with available fair market values . . . . . . . . . . . . 6,050 1,017 (5) 7,062Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥127,647 ¥52,936 ¥(2,932) ¥177,651

In addition to the securities listed above, the Company and consolidated subsidiaries held trading securities of ¥157 million which are equal totheir fair value, as of March 31, 2005. The net unrealized holding losses on trading securities included in earnings for the year ended March 31, 2005amounted to ¥6 million.

Total proceeds from the sale of available-for-sale securities in the year ended March 31, 2005 amounted to ¥77,383 million and the related gains andlosses amounted to ¥11,339 million and ¥14,313 million, respectively.

Non-traded investment securities at March 31, 2006 and 2005 are as follows:


2006 2005 2006

Held-to-maturity securities:Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 34 ¥ 30 $ 291Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 500 4,273

Securities:Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,069 63,854 419,393Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 3 0Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1,731 26Domestic bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,475 2,598 29,701Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,392 8,119 123,009Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,085 3,488 17,820

96


Debt securities classified as available-for-sale (those which have maturities) and held-to-maturity securities at March 31, 2006 and 2005 matureas follows:


2006 2005 2006

Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥4,433 ¥3,494 $37,889Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793 1,012 6,778Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,151 5,995 18,385Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,605 2,525 13,718

4. PLEDGED ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

At March 31, 2006, the following assets are pledged as collateral for short-term debt and trade notes and accounts payable of ¥43,053 million(U.S.$367,974 thousand), long-term debt and other liabilities of ¥74,592 million (U.S.$637,538 thousand) and transactions and other guarantees:


2006 2005 2006

Cash equivalents and time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 14,172 ¥ 13,777 $ 121,128Trade notes and trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,814 7,793 58,239Short-term investments and investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,032 109,255 1,436,171Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,418 16,349 217,248Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518 471 4,427Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 264 2,470Property and equipment, less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,074 48,608 436,530Guaranty deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 — 1,872

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥266,536 ¥196,517 $2,278,085

Also pledged are the shares of consolidated subsidiaries amounting to ¥26,912 million (U.S.$230,017 thousand) and loans receivable from con-solidated subsidiaries of ¥16,205 million (U.S.$138,504 thousand) that are eliminated in consolidation.

Japanese banks hold a security interest in Sojitz Corporation of America’s trade accounts receivable, inventories and other personal properties forSojitz Corporation of America’s loans payable amounting to ¥45,019 million (U.S.$384,778 thousand) and ¥26,774 million as of March 31, 2006and 2005, respectively.

5. IMPAIRMENT LOSS ON FIXED ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The impairment of fixed assets for the year ended March 31, 2006 resulted primarily from a significant decrease in the market value of theCompany’s land as well as from overall deterioration of its business environment.

Regional breakdown of loss on impairment of fixed assets for the year ended March 31, 2006 is as follows:


2006

Kanto region in JapanIdle properties and business properties

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 565 $ 4,829Building, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 991

Tohoku region in JapanIdle properties and business properties

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299 2,556Building, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 1,162

Other regions in JapanIdle properties and business properties

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490 4,188Building, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416 3,556

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,022 $17,282

Impairment loss was recorded at the amount by which the acquisition cost of each asset exceeded its estimated fair value based on real estateappraisal standards or future cash flows from on going utilization and subsequent disposition discounted at 5%.

Loss on the impairment of fixed assets for the year ended March 31, 2006 is recorded as special loss.


97


A summary of long-term debt at March 31, 2006 and 2005 is as follows:


2006 2005 2006

Convertible bonds with warrant attached due 2005 payable in Japanese yen(*1) . . . . . . . . . . . . . ¥ — ¥ 1,000 $ —3.00% bonds due 2006 payable in Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 25,000 —2.21% bonds due 2008 payable in Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 — 256,4102.16% bonds due 2008 payable in Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 — 170,9401.86% bonds due 2008 payable in Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 — 128,2052.41% bonds due 2010 payable in Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 — 85,4701.56% bonds due 2009 payable in Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 — 85,4702.20% bonds due 2010 payable in Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 — 85,470Swap contract rate minus 0.89% bonds due 2007 payable in Japanese yen . . . . . . . . . . . . . . . . 500 500 4,2733.00% bonds due 2005 payable in Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,800 —2.70% bonds due 2005 payable in Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 8,400 —2.00% bonds with early redemption clause due 2005 payable in Japanese yen . . . . . . . . . . . . . — 100 —3.00% bonds with early redemption clause due 2006 payable in Japanese yen . . . . . . . . . . . . . — 5,000 —Notes under medium-term note programmes maturing serially through2007 at interest rates of 0.45% to 8.00%(*2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,155 16,780 103,889

Bonds maturing through 2010 at interest rates of 0.26% to 1.24%(*3) . . . . . . . . . . . . . . . . . . . . 740 520 6,325Long-term loans, principally from commercial and trust banks and insurancecompanies, maturing through 2025 at the average interest rate of 2.50% . . . . . . . . . . . . . . . . 624,037 379,439 5,333,650

Long-term loans, from governmental financial institutions, principally Japan Bank forInternational Corporation, maturing through 2039 at an average interest rate of 2.62% . . . . . 49,441 53,200 422,573

Other long-term indebtedness, maturing through 2028 at an average interest rate of 3.05% . . . . 30,114 33,171 257,385Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 811,987 524,910 6,940,060

Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239,842 211,933 2,049,932Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥572,145 ¥312,977 $4,890,128

(*1) The issuance was ¥5,000 million (U.S.$42,735 thousand). However, by last term ¥4,000 million (U.S.$34,188 thousand) were converted into common stock during the period.This term, ¥1,000 million (U.S.$8,547 thousand) were converted into common stock during the period.In addition, the Company issued bonds with warrants due 2007 payable in yen on June 3, 2005; however, all of the bonds were converted into common stock.

(*2) The amounts include notes issued by Sojitz UK Plc., Sojitz International Finance (Cayman) Ltd., and Sojitz HK (Cayman) Ltd.(*3) The amounts include notes issued by the Company, Sojitz GMC Corporation, Tokyo Yuso Corporation and Pla Matels Corporation.

The aggregate annual amounts of long-term debt maturing in the years ending March 31, 2007 to 2012 and thereafter, are as follows:

Years ending March 31 Millions of yen Thousands of U.S.dollars

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥239,842 $2,049,932

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,784 1,587,898

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,672 1,655,316

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,340 353,333

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,920 1,084,786

2012 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,429 208,795

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥811,987 $6,940,060

Short-term debt is represented by short-term notes, generally for 90 days,bearing interest at an annual average rate of 3.58% at March 31, 2006.

As is customary in Japan, long-term and short-term bank borrowings aremade under general agreements which provide that additional security andguarantees for present and future indebtedness will be given upon the

request of the bank, and that any collateral so provided will be applicable toall indebtedness due to such bank. In addition, the agreements provide thatthe bank has the right to off-set cash deposited against long-term borrow-ings that become due, and in case of default and certain other specifiedevents, against all other debts payable to the bank.

6. SHORT-TERM DEBT AND LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

98


7. EMPLOYEES’ RETIREMENT AND SEVERANCE BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The company has defined contribution pension plans. Certain domesticconsolidated subsidiaries have defined benefit plans, i.e., tax-qualifiedpension plans and lump-sum payment plans, covering substantially allemployees who are entitled to lump-sum or annuity payments, theamounts of which are determined by reference to their basic rate of pay,length of service and the conditions under which termination occurs.

Some foreign consolidated subsidiaries also have defined benefitplans. Some consolidated subsidiaries have established a retirementallowance trust.

The liability of employees’ retirement benefits at March 31, 2006 and2005 consist of the following:


2006 2005 2006

Retirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥(32,861) ¥(35,962) $(280,863)Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,287 6,032 62,282Unfunded retirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,574) (29,930) (218,581)Unamortized net retirement benefit obligation at transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603 763 5,154Unrecognized actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (542) 182 (4,632)Net retirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,513) (28,985) (218,059)Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 61 385Employees’ retirement and severance benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥(25,558) ¥(29,046) $(218,444)

The components of retirement benefit expenses for the years ended March 31, 2006 and 2005 are as follows:Thousands of

Millions of yen U.S. dollars

2006 2005 2006

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥1,991 ¥2,035 $17,017Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 167 1,915Other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,254 1,216 10,718Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (82) (78) (701)Amortization of net retirement benefit obligation at transition . . . . . . . . . . . . . . . . . . . . . . . . . . 33 140 282Amortization of actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 55 419Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 7 —Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥3,469 ¥3,542 $29,650

The assumed discounted rates are 0.4–2.5% for the year ended March 31, 2006, and 2.0–2.5% for the year ended March 31, 2005.The expected return on assets is 1.0–3.5% for the years ended March 31, 2005 and 2006.


99


8. INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

As of March 31, 2006 and 2005 the major components of deferred tax assets and deferred tax liabilities are as follows:


2006 2005 2006

Deferred tax assets:Allowance for doubtful receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 41,287 ¥ 105,523 $ 352,880Employees’ retirement and severance benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,333 5,198 45,581Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269,395 206,165 2,302,521Losses on revaluation of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,116 34,333 274,496Loss from merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,281 20,516 113,513Land revaluation difference (Note 18) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 882 —Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,718 36,785 219,812Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387,130 409,402 3,308,803Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (274,007) (289,109) (2,341,940)Offset to deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (80,355) (54,758) (686,795)

Total deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,768 65,535 280,068

Deferred tax liabilities:Profit from merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,301 30,758 258,983Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,545 6,745 38,846Unrealized gains on available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,384 18,296 430,633Land revaluation difference (Note 18) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445 — 3,803Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,720 6,925 74,530Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,395 62,724 806,795Offset to deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (80,355) (54,758) (686,795)

Total deferred tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,040 7,966 120,000Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 18,728 ¥ 57,569 $ 160,068

As of March 31, 2006 and 2005, the amounts of the net deferred tax assets are shown in the following accounts in the consolidated balance sheet.


2006 2005 2006

Deferred tax assets—current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 8,887 ¥ 7,483 $ 75,957Deferred tax assets—non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,881 58,052 204,111Deferred tax liabilities—current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 422 350Deferred tax liabilities—non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,553 7,544 115,838

The differences between the statutory tax rate of 41.0% and the effective rate of income taxes reflected in the accompanying consolidated state-ments of operations of 32.2% for the year ended March 31, 2006 are as follows:

Statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.0 %Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20.6) %Effect of taxation in dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3 %Difference of tax rates for foreign subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7.6) %Effect of consolidated tax return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 %Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 %Effective rate of income taxes reflected in the accompanying consolidated statements of operations . . . . . . . . . . . . . . . . . . . . . . . . . . 32.2 %

100


10. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Details of “Selling, general and administrative expenses” in the consolidated statements of operations for the years ended March 31, 2006 and 2005are as follows:


2006 2005 2006

Directors’ remuneration and salaries for employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 54,504 ¥ 57,994 $ 465,846Employees’ retirement and severance benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,238 3,207 27,675Welfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,893 10,056 84,556Travelling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,362 7,924 71,470Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,360 19,013 131,282Legal and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,990 12,002 111,026Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,547 11,342 73,051Provision for doubtful receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,225 1,837 27,564Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,984 4,453 34,051Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,861 50,897 391,975

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥165,964 ¥178,725 $1,418,496

11. SPECIAL GAINS (LOSSES). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Classification of special gains (losses) are in accordance with Japanese GAAP. The following are the components of special gains (losses):


2006 2005 2006

Gain (loss) on sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 4,929 ¥ (4,144) $ 42,128Loss on devaluation of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (950) (13,416) (8,120)Gain (loss) on sale and disposal of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,239 (95,496) 19,137Loss, and provision for loss, on dissolution of subsidiaries and affiliates . . . . . . . . . . . . . . . . . . (11,646) (62,266) (99,538)Restructuring losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,482) (224,120) (46,855)Dilution losses (gains) from changes in equity interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,954) 1,044 (25,248)Reversal of allowance for retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,869 —Loss on devaluation of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (24,651) —Loss on settlement of derivative transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (17,987) —Gain on reversal of allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,798 — 49,556Gain on bad debt recovered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 — 957Impairment loss on fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,022) — (17,282)Gain on sale of certain overseas receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617 — 5,274

Special gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ (9,359) ¥(438,167) $(79,991)

Note: Loss on devaluation of property and equipment consisted of expected loss on sale based on agreement of sale.

The Commercial Code of Japan provides that:(a) The entire issue price of shares may be credited to the stated capital,with the provision that, by resolution of the Board of Directors, up toone-half of such issue price may be credited to additional paid-in capital,which is included in capital surplus, and(b) An amount equal to at least 10% of cash appropriations of retainedearnings shall be set aside as legal reserve until the total of such reserveand additional paid-in capital equals 25% of the stated capital. Additionalpaid-in capital and legal reserve may be used to eliminate or reduce adeficit, if any, by resolution of the shareholders, or it may be capitalized byresolution of the Board of Directors. On condition that the total amountof legal reserve and additional paid-in capital remains being equal to orexceeding 25% of common stock, they are available for dividends by theresolution of shareholders’ meeting. Legal reserves of the Company and

domestic consolidated subsidiaries are reflected in the consolidatedfinancial statements as a reduction in the accumulated deficit.(c) The Commercial Code of Japan does not have a definition about theclassification of paid-in capital between common stock and preferredstock. Accordingly, the Company states its capital in the total amountpaid by issuing common stock and preferred stock.

At the June 28, 2005 shareholders’ meeting of the Company, theshareholders approved a proposal to eliminate the Company’s accumu-lated deficit of ¥563,058 million (U.S.$4,812,462 thousand) by anadjustment to the capital of ¥55,818 million (U.S.$477,077 thousand)and additional paid-in capital of ¥507,240 million (U.S.$4,335,385thousand) as permitted by the Commercial Code of Japan. At March 31,2006, an accumulated deficit of ¥563,058 million (U.S.$4,812,462thousand) would have existed had the Company not consummated theaforementioned transaction.

9. SHAREHOLDERS’ EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


101


To avoid adverse effects of fluctuations of the market risk associatedwith financial activities and commodity trading activities, the Companyand its consolidated subsidiaries enter into foreign exchange contracts,currency options, swaps and various types of interest rates, bonds,equity and commodity-related forwards, futures and options. The Com-pany and its consolidated subsidiaries utilize these derivative transactionsto reduce the risk inherent in their assets and liabilities and hedge effec-tively so that these transactions are not likely to have a major impact onthe performance of the Company and its consolidated subsidiaries.

In accordance with the Company’s internal regulations on derivativetransactions, the Finance Division of the Company is responsible formanaging market and credit risks of these transactions, and this divisionmanages position limits, credit limits and status of derivative transactions.The Companies select highly ranked financial institutions, exchanges andbrokers as counter parties to minimize credit risk exposure. The Companyand each consolidated subsidiary’s accounting sections also confirm theoutstanding positions and fair values with counter parties. The results ofthese procedures are reported to the Company’s audit section. TheCompanies evaluate hedge effectiveness semi-annually by comparing thecumulative changes in cash flows or the changes in fair value of hedgeditems and the corresponding changes in the derivative instruments.

The following summarizes hedging derivative financial instrumentsused by the Companies and items hedged:Hedging instruments:

Currency-related contracts: Foreign exchange contracts andcurrency swap contracts

Interest rate-related contracts: Interest rate swap contracts andoption (cap) contracts

Commodity-related contracts: Future contracts and forwardcontracts

Hedged items:Currency-related contracts: Foreign currency receivables and

debts and foreign currency fore-casted contracts

Interest rate-related contracts: Interest on financial assets andliabilities

Commodity-related contracts: Commodity trading contracts

The following tables summarize market value information as ofMarch 31, 2006 and 2005 of derivative transactions for which hedgeaccounting has not been applied.

12. DERIVATIVE TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Currency related Millions of yen Thousands of U.S. dollars

Contract Fair Unrealized Contract Fair UnrealizedYear ended March 31, 2006 value value gains (losses) value value gains (losses)

Forward exchange contracts:Selling:

U.S. dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥28,150 ¥28,422 ¥(272) $240,598 $242,923 $(2,325)Thai baht . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,020 3,465 (445) 25,812 29,615 (3,803)Australian dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,616 2,547 69 22,359 21,769 590U.K. pound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,548 1,555 (7) 13,231 13,291 (60)Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,534 1,550 (16) 13,111 13,248 (137)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,436 3,455 (19) 29,368 29,530 (162)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥40,304 ¥40,994 ¥(690) $344,479 $350,376 $(5,897)

Buying:U.S. dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥60,330 ¥60,770 ¥ 440 $515,641 $519,402 $ 3,761U.K. pound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,313 13,542 229 113,786 115,743 1,957Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,132 5,247 115 43,863 44,846 983Australian dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,762 2,692 (70) 23,607 23,009 (598)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,168 4,213 45 35,624 36,009 385

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥85,705 ¥86,464 ¥ 759 $732,521 $739,009 $ 6,488

Interest rate related Millions of yen Thousands of U.S. dollars


Interest rate swap agreements:Receipt—Variable rate/payment—Fixed rate . . . . . . . . . . . . . . . . ¥10,034 ¥(116) ¥(116) $ 85,761 $(991) $(991)Receipt—Variable rate/payment—Variable rate . . . . . . . . . . . . . . 2,219 (0) (0) 18,965 (0) (0)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥12,253 ¥(116) ¥(116) $104,726 $(991) $(991)

102



Commodity related Millions of yen Thousands of U.S. dollars


Futures trading:Metals:

Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 474 ¥ 534 ¥ (60) $ 4,051 $ 4,564 $ (513)Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 461 22 3,752 3,940 188

Oils:Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,570 ¥2,618 ¥ (48) $21,966 $22,376 $ (410)Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 726 738 12 6,205 6,308 103

Foods:Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,512 ¥2,488 ¥ 24 $21,470 $21,265 $ 205Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,692 1,693 1 14,462 14,471 9

Total:Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥5,556 ¥5,640 ¥ (84) $47,487 $48,205 $ (718)Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,857 ¥2,892 ¥ 35 $24,419 $24,719 $ 300

Forwards trading:Metals:

Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,263 ¥2,391 ¥(128) $19,342 $20,436 $(1,094)Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,370 2,532 162 20,256 21,641 1,385

Oils:Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥1,053 ¥1,095 ¥ 42 $ 9,000 $ 9,359 $ 359

Total:Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,263 ¥2,391 ¥(128) $19,342 $20,436 $(1,094)Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥3,423 ¥3,627 ¥ 204 $29,256 $31,000 $ 1,744

Currency related Millions of yen

Contract Fair UnrealizedYear ended March 31, 2005 value value gains (losses)

Forward exchange contracts:Selling:

U.S. dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 32,763 ¥ 33,307 ¥ (544)Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,052 1,062 (10)Thai baht . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,156 3,159 (3)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,721 2,840 (119)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 39,692 ¥ 40,368 ¥ (676)

Buying:U.S. dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 94,308 ¥ 96,516 ¥2,208Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,786 4,846 60U.K. pound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,400 6,707 307Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,962 2,997 35

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥108,456 ¥111,066 ¥2,610

Interest rate related Millions of yen


Interest rate swap agreements:Receipt—Fixed rate/payment—Variable rate . . . . . . . . . . . . . . . ¥ 2,042 ¥ 57 ¥ 57Receipt—Variable rate/payment—Fixed rate . . . . . . . . . . . . . . . 18,591 (504) (504)Receipt—Variable rate/payment—Variable rate . . . . . . . . . . . . . 6,878 (46) (46)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥27,511 ¥(493) ¥(493)

103


Commodity related Millions of yen


Futures trading:Metals:

Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥3,682 ¥3,759 ¥ (77)Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,878 2,970 92

Oils:Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥1,818 ¥1,928 ¥(110)Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,808 1,900 92

Total:Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥5,500 ¥5,687 ¥(187)Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥4,686 ¥4,870 ¥ 184

Forwards trading:Metals:

Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 648 ¥ 693 ¥ (45)Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,331 1,372 41

Total:Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 648 ¥ 693 ¥ (45)Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥1,331 ¥1,372 ¥ 41

13. CONTINGENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Contingent liabilities at March 31, 2006 and 2005 are as follows:


2006 2005 2006

For notes discounted and endorsed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 29,417 ¥34,029 $251,427For guarantees of indebtedness to:

Unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,403 14,733 80,367Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,728 46,206 288,274

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 43,131 ¥60,939 $368,641

Contingent liabilities for guarantees of indebtedness consist of obligations under letters of guarantee letters of awareness, and otherstandby agreements.

14. LEASES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Information on finance leases of the Companies at March 31, 2006 and 2005 are as follows:

Thousands ofNon-capitalized finance leases, as lessee: Millions of yen U.S. dollars

EquipmentYear ended March 31, 2006 and Fixtures Other Total Total

Assumed purchase cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,425 ¥3,822 ¥6,247 $53,393Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,642 1,899 3,541 30,265Impairment loss on fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 21 32 274Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 772 1,902 2,674 22,855Future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,561 30,436Portion due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,549 13,239Annual lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥1,276 $10,906

Millions of yen

EquipmentYear ended March 31, 2005 and Fixtures Other Total

Assumed purchase cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,062 ¥4,355 ¥6,417Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,163 2,388 3,551Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 899 1,967 2,866Future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,299Portion due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,675Annual lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥1,532

104


15. MINIMUM PENSION LIABILITY ADJUSTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

In the event the balance of pension assets is less than the pension liabilities for companies adopting generally accepted accounting principles in theUnited States (US-GAAP) included in the scope of consolidation, an adjustment was made to stockholders’ equity in accordance with US-GAAP[Statement of Financial Accounting Standards No. 87]. The amount of the adjustment is ¥279 million (U.S.$2,385 thousand) in 2006 and ¥177million in 2005.

16. SEGMENT INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The activities of the Company and consolidated subsidiaries include worldwide trading in various commodities, financing for customers and suppliersrelating to such trading activities, and organizing and coordinating industrial projects on an international basis in conjunction with trading activities.

■ Industry segmentsClassification of business segmentation was changed to achieve the last medium-term management plan correctly and streamline the Group’smanagement structure on April 1, 2005. Details of this follow:• The former Construction & Urban Development Division and Forest Products & Building Materials Division are combined into Real Estate Develop-

ment & Forest Products Division.• The former Textiles Division, Foods Division and General Commodities & Consumer Business Division are combined into Consumer Lifestyle

Business Division.• A part of steel-related business formerly included in Other is now included in Energy & Mineral Resources Division.


Thousands ofFinance leases, as lessor: Millions of yen U.S. dollars

EquipmentYear ended March 31, 2006 and Fixtures Other Total Total

Lease properties, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥440 ¥263 ¥ 703 $6,009Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284 214 498 4,256Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 49 205 1,752Future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,164 9,949Portion due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 633 5,410Annual lease payments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 226 $1,932

Millions of yen

EquipmentYear ended March 31, 2005 and Fixtures Other Total

Lease properties, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥482 ¥254 ¥ 736Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 148 300Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330 106 436Future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,845Portion due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632Annual lease payments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 126

At March 31, 2006 as lessee, under noncancelable operating leases, future minimum lease payments are ¥6,872 million (U.S.$58,735 thousand)of which ¥1,363 million (U.S.$11,650 thousand) is due within one year. And as lessor, future minimum lease payments to be received under operat-ing leases were ¥4,148 million (U.S.$35,453 thousand) of which ¥764 million (U.S.$6,530 thousand) is due within one year.

105


Industry segment information for the years ended March 31, 2006 and 2005 is as follows:

Millions of yenEnergy & Real Estate Consumer

Machinery & Mineral Chemicals Development & Lifestyle Overseas Elimination &Year ended March 31, 2006 Aerospace Resources & Plastics Forest Products Business Subsidiaries Other Total Unallocated Consolidated

Net sales:Outside customers . . . . . . . . . . . . . . . . ¥958,344 ¥1,207,032 ¥632,862 ¥419,746 ¥868,055 ¥ 768,547 ¥117,474 ¥4,972,060 ¥ — ¥4,972,060Inter-segment . . . . . . . . . . . . . . . . . . . . 12,434 10,280 46,355 3,105 14,015 318,326 20,792 425,307 (425,307) —

Total . . . . . . . . . . . . . . . . . . . . . . . . . ¥970,778 ¥1,217,312 ¥679,217 ¥422,851 ¥882,070 ¥1,086,873 ¥138,266 ¥5,397,367 ¥(425,307) ¥4,972,060

Cost of sales and selling, general andadministrative expenses . . . . . . . . . . . . . ¥954,737 ¥1,199,295 ¥662,660 ¥413,244 ¥874,096 ¥1,082,227 ¥135,698 ¥5,321,957 ¥(426,099) ¥4,895,858

Operating income . . . . . . . . . . . . . . . . . . 16,041 18,017 16,557 9,607 7,974 4,646 2,568 75,410 792 76,202

Total assets . . . . . . . . . . . . . . . . . . . . . . . 325,063 462,959 360,940 232,052 292,281 441,054 176,165 2,290,514 231,166 2,521,680Depreciation and amortization . . . . . . . . . 6,286 4,839 4,718 1,296 1,370 546 4,493 23,548 2,411 25,959Impairment loss on fixed assets . . . . . . . . 6 1,326 111 453 48 — 78 2,022 — 2,022Capital expenditures . . . . . . . . . . . . . . . . . ¥ 5,646 ¥ 12,759 ¥ 5,481 ¥ 1,883 ¥ 1,182 ¥ 434 ¥ 3,850 ¥ 31,235 ¥ — ¥ 31,235

Thousands of U.S. dollarsEnergy & Real Estate Consumer


Net sales:Outside customers . . . . . . . . . . . . . . . . $8,190,974 $10,316,512 $5,409,077 $3,587,573 $7,419,274 $6,568,778 $1,004,051 $42,496,239 $ — $42,496,239Inter-segment . . . . . . . . . . . . . . . . . . . . 106,274 87,863 396,197 26,538 119,786 2,720,736 177,709 3,635,103 (3,635,103) —

Total . . . . . . . . . . . . . . . . . . . . . . . . . $8,297,248 $10,404,375 $5,805,274 $3,614,111 $7,539,060 $9,289,514 $1,181,760 $46,131,342 $(3,635,103) $42,496,239

Cost of sales and selling, general andadministrative expenses . . . . . . . . . . . . . $8,160,145 $10,250,384 $5,663,761 $3,532,000 $7,470,906 $9,249,805 $1,159,811 $45,486,812 $(3,641,872) $41,844,940

Operating income . . . . . . . . . . . . . . . . . . 137,103 153,991 141,513 82,111 68,154 39,709 21,949 644,530 6,769 651,299

Total assets . . . . . . . . . . . . . . . . . . . . . . . 2,778,316 3,956,915 3,084,957 1,983,350 2,498,128 3,769,693 1,505,684 19,577,043 1,975,778 21,552,821Depreciation and amortization . . . . . . . . . 53,726 41,359 40,325 11,077 11,709 4,667 38,402 201,265 20,607 221,872Impairment loss on fixed assets . . . . . . . . 51 11,333 949 3,872 410 — 667 17,282 — 17,282Capital expenditures . . . . . . . . . . . . . . . . . $ 48,256 $ 109,052 $ 46,846 $ 16,094 $ 10,103 $ 3,709 $ 32,906 $ 266,966 $ — $ 266,966

Millions of yenEnergy & Real Estate Consumer


Net sales:Outside customers . . . . . . . . . . . . . . . . ¥869,771 ¥1,077,758 ¥596,144 ¥484,403 ¥784,551 ¥ 743,119 ¥120,157 ¥4,675,903 ¥ — ¥4,675,903Inter-segment . . . . . . . . . . . . . . . . . . . . 16,845 34,200 29,809 4,564 18,158 290,456 16,032 410,064 (410,064) —

Total . . . . . . . . . . . . . . . . . . . . . . . . . ¥886,616 ¥1,111,958 ¥625,953 ¥488,967 ¥802,709 ¥1,033,575 ¥136,189 ¥5,085,967 ¥(410,064) ¥4,675,903

Cost of sales and selling, general and

administrative expenses . . . . . . . . . . . . . . . . ¥874,280 ¥1,101,335 ¥610,307 ¥478,130 ¥791,348 ¥1,029,375 ¥132,258 ¥5,017,033 ¥(406,652) ¥4,610,381

Operating income . . . . . . . . . . . . . . . . . . 12,336 10,623 15,646 10,837 11,361 4,200 3,931 68,934 (3,412) 65,522

Total assets . . . . . . . . . . . . . . . . . . . . . . . 326,471 428,164 355,287 276,409 279,227 474,875 165,940 2,306,373 142,105 2,448,478Depreciation and amortization . . . . . . . . . . . 7,321 2,839 4,710 1,077 1,480 916 6,184 24,527 258 24,785Capital expenditures . . . . . . . . . . . . . . . . . ¥ 1,082 ¥ 11,288 ¥ 3,715 ¥ 1,323 ¥ 571 ¥ 657 ¥ 1,968 ¥ 20,604 ¥ 44 ¥ 20,648

Notes: 1. Industry segment figures are presented in conformity with the current form of industry segmentation, which was revised on April 1, 2005.

2. The operating income of each segment was adjusted in accordance with the changes in the distribution method of corporate administrative expenses.

3. Total assets in the elimination & unallocated column was adjusted in accordance with the changes in distribution method of corporate assets.

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■ Geographic segmentsTrading transactions that are attributed to areas based on the locations of the assets producing revenues and long-lived assets for the years endedMarch 31, 2006 and 2005 are as follows:

Millions of yen

North Asia & Elimination &Year ended March 31, 2006 Japan America Europe Oceania Other Total Unallocated Consolidated

Net sales:Outside customers . . . . . . . . . ¥3,796,591 ¥361,726 ¥186,530 ¥580,645 ¥46,568 ¥4,972,060 ¥ — ¥4,972,060Inter-area . . . . . . . . . . . . . . . . 276,223 122,563 43,018 199,906 262 641,972 (641,972) —

Total . . . . . . . . . . . . . . . . ¥4,072,814 ¥484,289 ¥229,548 ¥780,551 ¥46,830 ¥5,614,032 ¥(641,972) ¥4,972,060

Cost of sales and selling, generaland administrative expenses . . . . . . ¥4,033,021 ¥475,152 ¥223,513 ¥766,947 ¥39,260 ¥5,537,893 ¥(642,035) ¥4,895,858

Operating income . . . . . . . . . . . 39,793 9,137 6,035 13,604 7,570 76,139 63 76,202Total assets . . . . . . . . . . . . . . . . ¥1,884,885 ¥199,847 ¥176,433 ¥272,108 ¥47,266 ¥2,580,539 ¥ (58,859) ¥2,521,680

Thousands of U.S. dollars


Net sales:Outside customers . . . . . . . . . $32,449,495 $3,091,675 $1,594,274 $4,962,778 $398,017 $42,496,239 $ — $42,496,239Inter-area . . . . . . . . . . . . . . . . 2,360,881 1,047,547 367,675 1,708,598 2,239 5,486,940 (5,486,940) —

Total . . . . . . . . . . . . . . . . . . $34,810,376 $4,139,222 $1,961,949 $6,671,376 $400,256 $47,983,179 $(5,486,940) $42,496,239

Cost of sales and selling, generaland administrative expenses . . . . . . $34,470,265 $4,061,128 $1,910,368 $6,555,102 $335,555 $47,332,418 $(5,487,478) $41,844,940

Operating income . . . . . . . . . . . 340,111 78,094 51,581 116,274 64,701 650,761 538 651,299Total assets . . . . . . . . . . . . . . . . $16,110,129 $1,708,094 $1,507,974 $2,325,709 $403,983 $22,055,889 $ (503,068) $21,552,821

Millions of yen


Net sales:Outside customers . . . . . . . . . ¥3,542,472 ¥350,122 ¥142,877 ¥598,290 ¥42,142 ¥4,675,903 ¥ — ¥4,675,903Inter-area . . . . . . . . . . . . . . . . 249,906 112,244 37,929 210,404 345 610,828 (610,828) —

Total . . . . . . . . . . . . . . . . ¥3,792,378 ¥462,366 ¥180,806 ¥808,694 ¥42,487 ¥5,286,731 ¥(610,828) ¥4,675,903

Cost of sales and selling, generaland administrative expenses . . . . . . ¥3,749,992 ¥457,867 ¥177,112 ¥795,050 ¥37,152 ¥5,217,173 ¥(606,792) ¥4,610,381

Operating income . . . . . . . . . . . 42,386 4,499 3,694 13,644 5,335 69,558 (4,036) 65,522Total assets . . . . . . . . . . . . . . . . ¥1,917,529 ¥193,592 ¥234,599 ¥272,003 ¥48,843 ¥2,666,566 ¥(218,088) ¥2,448,478

Notes: 1. The operating income of each segment was adjusted in accordance with the changes in the distribution method of corporate administrative expenses.

2. Total assets in the elimination & unallocated column were adjusted in accordance with the changes in distribution method of corporate assets.

The principal countries or areas included in each region are as follows:

2006 2005

North America . . . . . . . . . . . . . . . . . . U.S.A. and Canada U.S.A. and CanadaEurope . . . . . . . . . . . . . . . . . . . . . . . U.K. and Russia U.K. and GermanyAsia & Oceania . . . . . . . . . . . . . . . . . Singapore and China Singapore and ChinaOther . . . . . . . . . . . . . . . . . . . . . . . . Central and South America and Africa Central and South America and Africa

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17. ADDITIONAL CASH FLOW INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Cash flow from acquisition and sale of consolidated subsidiariesThe following are the amounts of assets and liabilities of newly consolidated subsidiaries at the time of acquisition for the years ended March 31,2006 and 2005, the acquisition cost of those companies and the amounts of net expenditure for acquisition.


2006 2005 2006

Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 748 ¥ 47,500 $ 6,393Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 18,928 1,667Goodwill recognized on consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 4,666 940Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (361) (26,083) (3,085)Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (107) (7,401) (915)Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (156) (21,106) (1,333)

Acquisition cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429 16,504 3,667Cash and cash equivalents of acquired companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (133) (14,491) (1,137)

Net expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 296 ¥ 2,013 $ 2,530

The following are the amounts of assets and liabilities of subsidiaries excluded from the consolidation scope at the time the Companies soldinvestment securities in consolidated subsidiaries, for the years ended March 31, 2006 and 2005.


2006 2005 2006Current assets . . . . . . . . . ¥ 5,027 ¥12,933 $ 42,966Non-current assets . . . . . . 11,508 7,505 98,359Total . . . . . . . . . . . . . . . . ¥16,535 ¥20,438 $141,325


2006 2005 2006Current liabilities . . . . . . . ¥ 4,369 ¥11,075 $ 37,342Non-current liabilities . . . . 16,396 3,356 140,137Total . . . . . . . . . . . . . . . . ¥20,765 ¥14,431 $177,479

■ Overseas trading transactionsOverseas trading transactions for the years ended March 31, 2006 and 2005 are as follows:


2006 2005 2006

North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 324,212 ¥ 313,841 $ 2,771,043Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164,008 221,808 1,401,777Asia & Oceania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,011,596 905,238 8,646,120Other areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,088 241,351 2,128,957Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥1,748,904 ¥1,682,238 $14,947,897

The principal countries or areas included in each region are as follows:

2006 2005

North America . . . . . . . . . . . . . . . . . . U.S.A. and Canada U.S.A. and CanadaEurope . . . . . . . . . . . . . . . . . . . . . . . U.K. and Netherlands U.K. and GermanyAsia & Oceania . . . . . . . . . . . . . . . . . China and Singapore China and SingaporeOther . . . . . . . . . . . . . . . . . . . . . . . . Central and South America and Central and South America and

Middle and Near East Middle and Near East

Overseas trading transactions are defined as trading transactions of the Company and consolidated subsidiaries completed outside of Japan.

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18. LAND REVALUATION DIFFERENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For some of the subsidiaries, revaluation of land for business was carriedout in accordance with the Law Concerning Revaluation of Land and onthe basis of the amendment to the Law on March 31, 2002.

With respect to the evaluation difference, amounts equivalent totaxes related to the evaluation difference were included in “Deferred taxassets on land revaluation.” The difference between the previous bookvalue and the revalued amount net of the deferred tax assets was presentedas “Land revaluation difference” in shareholders’ equity.

• Method of revaluation: Calculations were made in accordance withthe Law Concerning Revaluation of Land.

• Date of revaluation: March 31, 2002• The difference between the market value as of March 31, 2006

and the book value of land after revaluation: ¥1,073 million(U.S.$9,171 thousand).

19. SUBSEQUENT EVENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(a) The company entered into the agreement on acquisition of the Company’s Preferred Shares below on April 28, 2006 with the authorization givenby the resolution of its Board of Directors held on April 28, 2006.(1) Type of shares

The Company’s 2nd Series Class I Preferred SharesThe Company’s 3rd Series Class I Preferred SharesThe Company’s 4th Series Class I Preferred SharesThe Company’s 1st Series Class II Preferred SharesThe Company’s 1st Series Class IV Preferred SharesThe Company’s 1st Series Class V Preferred SharesThe Company’s 2nd Series Class V Preferred Shares

(2) Significant non-cash transactions(a) Conversion of convertible bonds


2006 2005 2006

Increase in capital stock by conversion of convertible bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥30,550 ¥ 500 $261,111

Increase in capital surplus by conversion of convertible bonds . . . . . . . . . . . . . . . . . . . . . . . . . . 30,450 500 260,257

Decrease in convertible bonds by conversion of convertible bonds . . . . . . . . . . . . . . . . . . . . . . 61,000 1,000 521,368

Convertible bonds of ¥60 billion (U.S.$512,821 thousand) that had been issued in the fiscal year ended March 31, 2006 had been converted toour common stock in the full amount by March 31, 2006.

Convertible bonds of ¥10 billion (U.S.$85,470 thousand) that had been issued in the fiscal year ended March 31, 2005 had been converted to ourcommon stock in the full amount by March 31, 2005.(b) ¥340 billion (U.S.$2,905,983 thousand) out of common and preferred stock of ¥360 billion (U.S.$3,076,923 thousand) had been issued in the

year ended March 31, 2005. A related contribution was made as the result of a conversion of loans from The UFJ Bank Limited and The Bank ofTokyo-Mitsubishi, Limited.

(3) “Other, net” of cash flows from operating activities“Other, net” of cash flows from operating activities for the year ended March 31, 2006 mainly includes a decrease in non-performing receivables bysales and write-off.“Other, net” of cash flows from operating activities for the year ended March 31, 2005 mainly includes loss and provision for loss on dissolution ofsubsidiaries and affiliates and restructuring losses.


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(2) Acquisition Price of Shares and Number of SharesAcquisition Price

Type per share Number of Shares

2nd Series Class I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 2,160 (U.S.$18.46) 26,300,000 shares

3rd Series Class I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 2,120 (U.S.$18.12) 26,300,000 shares

4th Series Class I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 2,080 (U.S.$17.78) 26,300,000 shares

1st Series Class II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 2,040 (U.S.$17.44) 26,300,000 shares

1st Series Class IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 2,300 (U.S.$19.66) 19,950,000 shares

1st Series Class V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 5,160 (U.S.$44.10) 10,875,000 shares

2nd Series Class V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥10,000 (U.S.$85.47) 2,000,000 shares

(Note) In case acquisition is implemented after October 2007, acquisition price per share will be added by equivalent to 2% of the issue price of each preferred share.

(3) Companies From Which the Company Will Acquire Shares and Number of Shares1st Series Class II and 2nd Series Class I thorough 4th Series Class I (same portion for all series and classes of preferred shares)

Number of sharesName of companies from which the Company will acquire shares to be acquired

The Bank of Tokyo-Mitsubishi UFJ Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,500,000 shares

Mizuho Corporate Bank Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000 shares

Resona Bank Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,000 shares

Mitsubishi UFJ Trust & Banking Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 shares

Norinchukin Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 shares

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,300,000 shares

1st Series Class IVNumber of shares

Name of companies from which the Company will acquire shares to be acquired


1st Series Class VNumber of shares



2nd Series Class VNumber of shares



Mizuho Corporate Bank Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 shares

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 shares

(4) Acquisition DateMarch 30, 2007, a day to be determined by the Company between April 1, 2007 and the day prior to the June 2007 Ordinary GeneralShareholders’ Meeting, September 28, 2007 and March 31, 2008.

(5) Total Acquisition Amount on Each Acquisition DateTo be determined by the Company based on the conversion amount of CBs in the period from the preceding acquisition date (if firstacquisition, from the date of issue of convertible bond) to the current acquisition date.

(6) Acquisition Order2nd Series Class I, 3rd Series Class I, 4th Series Class I, 1st Series Class II, 2nd Series Class V, 1st Series Class IV, 1st Series Class V

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(7) Acquisition MethodClass I and Class II: Based on Ordinary General Shareholders’ Meeting approval for acquisition of our own shares.Class IV and Class V: Acquisition clauses added to the Article of Incorporation.

(8) Conditions PrecedentAcquisition of preferred shares by the Company based on the agreement is subject to all following conditions:1) All CB, the issue of which was approved on April 28, 2006, are issued,2) The proposal of amendment to the Company’s Articles of Incorporation to increase the number of shares authorized to be issued and the

number of shares of Common Stock to be issued is approved at the Ordinary General Shareholders’ Meeting held on June 27, 2006(hereinafter referred to as “This General Meeting of Shareholders”), and resolution of the General Meetings of Class Shareholders requiredunder the new Corporate Law of Japan, which superseded the Commercial Code and was enacted May 1, 2006, are passed,

3) Each proposal with regard to reductions of stated capital and additional paid-in capital is approved at this General Meeting of Shareholders,and reductions of stated capital and additional paid-in capital become effective,

4) The proposal of “Establishment of authorized limits for acquisition of own shares” with regard to Class I/Class II Preferred Shares at thisGeneral Meeting of Shareholders is approved,

5) With regard to outstanding preferred shares which were not acquired in accordance with this agreement on the acquisition date of March30, 2007 and additional acquisition date (in case the Company specifies it), the proposal of “Establishment of authorized limits for acquisi-tion of own shares” is approved at Ordinary General Shareholders’ Meeting or other General Shareholders’ Meeting immediately after thisGeneral Meeting of Shareholders,

6) The proposal of amendment to the Company’s Articles of Incorporation to add a provision for acquisition of Class IV/Class V PreferredShares by the Company at this General Meeting of Shareholders is approved, and consent from all the relevant Class Shareholders isobtained, and also the acquisition of preferred shares is legally possible under the Commercial Code and the new Corporate Law of Japan.

(9) Period of AgreementFrom April 28, 2006 until whichever date comes first among the following:1. The date on which acquisition and settlement of all preferred shares are completed in accordance with this agreement.2. The date on which conditions precedent mentioned in (8) were determined not to be fulfilled.3. On March 31, 2008

(b) On April 28, 2006, the Board of Directors of the Company resolved to propose at the Ordinary General Shareholders’ Meeting held on June 27,2006 on establishing authorized limits for acquisition of our own shares pursuant to the provisions of Article 210 of the Commercial Code withregard to the preferred shares below.(1) Classes of Shares and Number of Shares to be Acquired:

Total number of shares Portion to the total numberClass to be acquired of outstanding shares

2nd Series Class I Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Up to 26,300,000 shares 100%

3rd Series Class I Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Up to 26,300,000 shares 100%

4th Series Class I Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Up to 26,300,000 shares 100%

1st Series Class II Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Up to 26,300,000 shares 100%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Up to 105,200,000 shares

(2) Total Amount of the Acquisition Price of Shares:¥220,920,000,000 (U.S.$ 1,888,205 thousand) maximum

(3) Companies From Which the Company Will Acquire Shares:The Bank of Tokyo-Mitsubishi UFJ Ltd., Mizuho Corporate Bank Ltd., Resona Bank Ltd., Mitsubishi UFJ Trust & Banking Corporation,Norinchukin Bank


111


(c) On April 28, 2006, the Board of Directors of the Company resolved to propose at the Ordinary General Shareholders’ Meeting held on June 27,2006 on amending the Articles of Incorporation to add acquisition clauses with regard to the preferred shares below.

Class of Shares to Which the Acquisition Clauses are Added and Acquisition PriceAcquisition price before Acquisition price after

Class September 30, 2007 October 1, 2007

1st Series Class IV Preferred Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 2,300 (U.S.$19.66) ¥ 2,500 (U.S.$21.37)

1st Series Class V Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 5,160 (U.S.$44.10) ¥ 5,400 (U.S.$46.15)

2nd Series Class V Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥10,000 (U.S.$85.47) ¥10,200 (U.S.$87.18)

(d) On April 28, 2006, the Board of Directors of the Company resolved to propose at the Ordinary General Shareholders’ Meeting held on June 27,2006 on reduction of stated capital and additional paid-in capital.(1) Purpose of Reducing Stated Capital and Additional Paid-in Capital

The Company has been studying the capital quality improvement as one of its top priorities. On April 28, 2006, the Board of Directors of theCompany resolved to repurchase the outstanding preferred shares subject to the condition that authorized limits for acquisition of our ownshares shall be approved and adopted at the Ordinary General Shareholders’ Meeting held on June 27, 2006. To do this, the Company pro-poses to transfer certain amounts to “Other Capital Surplus” by way of “Reduction of Stated Capital” and “Reduction of Additional Paid-inCapital” in order to secure adequate capital surplus legally required for such repurchase.

With regard to repurchasing preferred shares, it is a pre-condition that the capital will be increased by the conversion into common stockof the convertible bonds whose issuance was separately resolved by the Board of Directors on April 28, 2006.

(2) Reduction of Stated Capital1) Summary of Reduction of Stated Capital

Pursuant to the provision of Article 375, Paragraph 1 of the Corporate Law, ¥120,549,826,669 (U.S.$ 1,030,340 thousand) will be reducedwithout charge from the amount of stated capital of ¥130,549,826,669 (U.S.$ 1,115,810 thousand) resulting in the amount of¥10,000,000,000 (U.S.$ 85,470 thousand). The entire amount to be reduced will be transferred to “Other Capital Surplus.”

2) Capital Reduction MethodOnly the amount of capital will be reduced without any change in the total number of public notice for outstanding shares.

(3) Reduction of Additional Paid-in CapitalPursuant to the provision of Article 289, Paragraph 2 of the Corporate Law, ¥89,176,808,017 (U.S.$ 762,195 thousand) will be reduced fromthe amount of additional paid-in capital of ¥91,676,808,017 (U.S.$ 783,562 thousand), and such reduced amount will be transferred to“Other Capital Surplus.”

The amount of additional paid-in capital after such reduction will be ¥2,500,000,000 (U.S.$ 21,368 thousand). This amount is equivalentto 1/4 of the Company’s stated capital after reduction, ¥10,000,000,000 (U.S.$ 85,470 thousand).

The above reductions of stated capital and additional paid-in capital only transfer between certain items within the “Capital” section onthe balance sheet and do not immediately change the net asset amount of the Company, nor do they change the number of the outstandingshares. Therefore, net asset value par share does not change due to the proposed reduction.

(e) On April 28, 2006, the Board of Directors of the Company resolved to issue convertible bonds (bonds with stock acquisition rights) throughallotment to a third party as follows:(1) Bonds to be issued 3rd Series Unsecured Convertible Bonds (bonds with stock acquisition rights)(2) Total amount of bonds ¥150 billion (U.S.$ 1,282,051 thousand)(3) Issue date May 25, 2006

(f) On April 28, 2006, the Board of Directors of the Company resolved to issue convertible bonds (bonds with stock acquisition rights) throughallotment to a third party as follows:(1) Bonds to be issued 4th Series Unsecured Convertible Bonds (bonds with stock acquisition rights)(2) Total amount of bonds ¥150 billion (U.S.$ 1,282,051 thousand)(3) Issue date May 25, 2006

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SOJITZ CORPORATION ¥2,521,680 $21,552,821 (Former SOJITZ ... · Operating income rode on the crest...

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Transcript of SOJITZ CORPORATION ¥2,521,680 $21,552,821 (Former SOJITZ ... · Operating income rode on the crest...