hirose electric co., ltd. 1999 annual report - HIROSE USA

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hirose electric co., ltd. 1999 annual report - HIROSE USA

HIROSE ELECTRIC CO., LTD. 1999 ANNUAL REPORT


Profile

HIROSE ELECTRIC is a specialist in industrial-use connectors for electronic equipment.

The company has a long history of original product development. Globally, it is one of the

leading suppliers of connectors for computer and communications equipment, factory and

office automation equipment, instrumentation, amusement devices, and automotive and consumer

electronic equipment. Its high-quality connectors are suitable for every conceivable type

of application. In recent years, Hirose Electric has been developing new markets, in consumer

electronics and other spheres.

The main product range consists of multi-pin connectors. These come in all shapes and

sizes—circular and rectangular, for nylon and ribbon cable, and for printed circuit boards and

integrated circuit memory cards. High-performance coaxial and optical fiber connectors form the

second principal product range. They are used in a wide variety of microwave and other highfrequency

signal applications. The company also manufactures various specialized devices and

instruments.

Corporate Data

Date of Incorporation

June, 1948

Head Office

5-23, Osaki 5-chome, Shinagawa-ku, Tokyo 141-8587, Japan

Telephone: (03) 3491-5300

Facsimile: (03) 3495-5230

Stock Exchange Listings

Tokyo Stock Exchange

Transfer Agent

The Sumitomo Trust and Banking Co., Ltd.

4-4, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-8233, Japan

Contents

Financial Highlights ________________________________________ 1

To Our Shareholders________________________________________ 2

Five-Year Summary ________________________________________ 4

Financial Review __________________________________________ 4

Consolidated Balance Sheets _________________________________ 6

Consolidated Statements of Income ____________________________ 8

Consolidated Statements of Shareholders’ Equity _________________ 9

Notes to Consolidated Financial Statements _____________________ 10

Report of Independent Public Accountants

& Statement on Accounting Principles and Auditing Standards____ 14

Directors and Corporate Auditors _____________________________ 15

General Information ________________________________________ 16


Hirose Electric Co., Ltd. and Consolidated Subsidiaries

Financial Highlights

For the years ended March 31, 1999, 1998 and 1997

Millions of Yen

Thousands of

U.S. Dollars

1999 1998 1997 1999

Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 68,570 ¥ 74,832 ¥ 68,720 $ 568,810

Domestic market . . . . . . . . . . . . . . . . . . . . . . . 53,143 59,882 58,683 440,838

Overseas market . . . . . . . . . . . . . . . . . . . . . . . 15,427 14,950 10,037 127,972

Operating Income . . . . . . . . . . . . . . . . . . . . . . . 20,504 21,958 20,837 170,091

Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,535 10,874 10,018 87,393

At year-end:

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥145,830 ¥136,687 ¥130,969 $1,209,708

Shareholders’ equity . . . . . . . . . . . . . . . . . . . . 117,150 107,392 96,911 971,796

Per share of Common Stock:

(in yen and dollars)

Net income — Basic . . . . . . . . . . . . . . . . . . . . ¥ 265.4 ¥ 274.3 ¥ 254.5 $ 2.20

— Diluted . . . . . . . . . . . . . . . . . . 263.6 272.1 250.9 2.19

Shareholders’ equity . . . . . . . . . . . . . . . . . . . . 2,951.1 2,705.9 2,448.5 24.48

* U.S. dollar figures have been translated from yen, for convenience only, at the rate of ¥120.55=U.S.$1.

Net Sales Operating Income Net Income

(¥ millions)

80,000

(¥ millions)

25,000

(¥ millions)

12,500

60,000

20,000 10,000

15,000 7,500

40,000

10,000 5,000

20,000

5,000 2,500

0

95

0

96 97 98 99 95

0

96 97 98 99 95

96 97 98 99

1


To Our Shareholders

Business Conditions in Fiscal 1998

In the year ended March 31, 1999, Hirose Electric was adversely affected by falling prices caused by sluggish

consumption and capital investment, a result of the protracted recession in Japan. Consolidated net sales fell

8.4% to ¥68,570 million, and net income slid 3.1% to ¥10,535 million. In this harsh operating environment,

management continued efforts to further improve quality, cut costs and bolster sales, but was unable to prevent

falls in sales and profit.

Multi-pin connectors, our flagship product, come in circular, rectangular and other forms. They are used in a

wide variety of goods from industrial equipment such as computers and peripheral terminals to VTRs, audio equipment

and other consumer goods. Demand is likely to expand as electronics plays an increasing important role in our

lives thanks to the growth in use of computers and communications equipment. Coaxial connectors are a special

type of high-performance connector used primarily for microwave and other high-frequency signals. Their most

notable application is in mobile communications equipment. Nevertheless, in the year under review, Hirose was

affected by a fall-off in investment in mobile-phone networks and by production cutbacks, which depressed demand

for connectors.

The Other Products sector includes directional couplers, non-reflecting terminal equipment and other highfrequency

devices. This sector also encompasses low-frequency electronic equipment designed for medical treatment

applications. Here too, Hirose was hurt by a tailing off in capital investment, and in demand for medical for

medical equipment.

2


Putting Customers’ Profits First

As a specialist in connectors, Hirose Electric has been contributing to the development of the electronics sector for

over 50 years. Since I became president in 1971, I have had the same basic vision for our company: an organization

that emphasizes intelligence over size. It is rooted in the belief that we can take part in the rapid growth of the

electronics sector if we humbly recognize our limitations of scale, acquire expertise from outside and use it to hone

our specialist knowledge. In that way, we can make further advances in the rapidly evolving field of electronics.

Precisely because this is a time of uncertain economic prospects and increasing globalization of business, I believe

we must reaffirm our responsibilities as a parts maker. We must carry out carefully structured and well-timed

policies that demonstrate our commitment to placing the profits of our customers above all else. This is our mission.

Stabilizing our Performance

Although rapid growth is likely to continue in the electronics industry as digital and other advanced technologies

spread worldwide, a quick recovery in demand cannot be expected. Instead, the pitch of competition is likely to rise

still further. I believe we must focus on achieving steady improvement in our results. To this end, we are taking

measures such as introduction of a corporate executive officer system to separate the responsibilities and functions

of directors and executives who oversee operations. We are also tailoring product development more closely to

customer needs, adding more value to our products, becoming more cost competitive, developing new domestic

and foreign marketing channels, globalizing operations and strengthening our management base. We are treating

environmental protection as a corporate mission and responsibility, and will work to ensure that Hirose Electric is a

good corporate citizen.

I would like to thank shareholders for their support and understanding over the years. I pledge that every

employee of Hirose Electric will work to restore the company’s fortunes.

August 1999

Hideki Sakai

President and CEO

3


Hirose Electric Co., Ltd. and Consolidated Subsidiaries

Five-Year Summary

For the years ended March 31

Millions of Yen

For the year 1999 1998 1997 1996 1995

Net Sales . . . . . . . . . . . . . . . . . . . ¥ 68,570 ¥ 74,832 ¥ 68,720 ¥ 60,640 ¥ 51,583

Operating Income . . . . . . . . . . . . 20,504 21,958 20,837 18,425 14,301

Net Income . . . . . . . . . . . . . . . . . 10,535 10,874 10,018 8,475 6,514

At year-end: . . . . . . . . . . . . . . .

Shareholders’ equity . . . . . . . . ¥117,150 ¥107,392 ¥ 96,911 ¥ 85,824 ¥ 77,942

Total assets . . . . . . . . . . . . . . . 145,830 136,687 130,969 117,142 107,211

Per share of Common Stock:

Net income—

Basic . . . . . . . . . . . . . . . . . . ¥ 265.4 ¥ 274.3 ¥ 254.5 ¥ 222.4 ¥ 174.6

Diluted . . . . . . . . . . . . . . . . 263.6 272.1 250.9 218.4 –

Shareholders’ equity . . . . . . . . 2,951.1 2,705.9 2,448.5 2,189.8 2,088.7

Yen

Thousands of U.S. Dollars*

For the year 1999 1998 1997 1996 1995

Net Sales . . . . . . . . . . . . . . . . . . . $ 568,810 $ 620,755 $ 570,054 $503,028 $427,897

Operating Income . . . . . . . . . . . . 170,091 182,150 172,849 152,841 118,631

Net Income . . . . . . . . . . . . . . . . . 87,393 90,203 83,102 70,303 54,036

At year-end: . . . . . . . . . . . . . . .

Shareholders’ equity . . . . . . . . $ 971,796 $ 890,850 $ 803,907 $711,937 $646,553

Total assets . . . . . . . . . . . . . . . 1,209,708 1,133,861 1,086,429 971,730 889,349

U.S. Dollars*

Per share of Common Stock:

Net income—

Basic . . . . . . . . . . . . . . . . . . $ 2.20 $ 2.28 $ 2.11 $ 1.84 $ 1.45

Diluted . . . . . . . . . . . . . . . . 2.19 2.26 2.08 1.81 –

Shareholders’ equity . . . . . . . . 24.48 22.45 20.31 18.17 17.33

* U.S. dollar figures have been translated from yen, for convenience only, at the rate of ¥120.55=U.S.$1.

Financial Review

The Hirose Electric Co., Ltd. group consists of the parent, Hirose Electric, 12 subsidiaries and 2 affiliates. Of the

subsidiaries, four are consolidated: Tohoku Hirose Electric Co., Ltd., Koriyama Hirose Electric Co., Ltd., Ichinoseki

Hirose Electric Co., Ltd. and Aomori Denso Co., Ltd. One of the affiliates, Hirose Cherry Precision Co., Ltd., is

accounted for using the equity method.

Operating Environment

Economic prospects were unsettled in the year under review. Although the government took several measures to

invigorate the economy, including fund injections to stabilize the financial system, emergency public-spending

projects and income-tax cuts, private capital investment remained at a low ebb and the employment and income

outlook showed no signs of improvement. The electronics sector was not spared. Investments in the mobile

4


communications field tailed off and the lingering recession depressed personal spending and capital investment and

triggered production cutbacks. Demand slumped, product prices came under increasing downward pressure and

competition steadily intensified.

Net Sales and Net Income

Against this background, Hirose Electric strove to further strengthen its product development capacity and improve

quality to meet diversifying needs, especially in the sphere of industrial-use electronic devices. It undertook initiatives

across the whole range of operations to improve production efficiency, cut costs, develop new domestic and

foreign sales channels and strengthen marketing functions. However, these efforts were insufficient to offset the

poor operating environment; net sales fell 8.4% to ¥68,570 million (US$568,810 thousand) and net income fell

3.1% to ¥10,535 million (US$87,393 thousand).

Segment Information

Connector Manufacturing and Sales Business

Hirose Electric’s main business is manufacturing and selling connectors for electronics devices. These connectors

are used to link and separate various functional units and circuits in electrical and electronics equipment. They are

widely used in computers and peripheral equipment, office electronics and communications equipment.

Consolidated sales by connector type were as follows:

Year ended March 31 1999 1998 Uses

Multi-pin connectors . . . . . . . . . 84.0% 82.2% Circular, rectangular, print circuit boards

Coaxial connectors . . . . . . . . . . 12.2% 13.3% Coaxial, optical

Other . . . . . . . . . . . . . . . . . . . . . 3.8% 4.5% Coaxial components, crimp contacts, medical equipment etc.

Total . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%

Overseas Sales

Overseas sales rose 3.0% or ¥477 million compared with the previous year, to ¥15,427 million (US$127,972

thousand). Sales to North America and Europe fell, but those to Asia rose 23.1% or ¥1,725 million to ¥9,179

million (US$76,143 thousand).

Overseas sales as a percentage of consolidated net sales were as follows (millions of yen):

Millions of yen Share of total Millions of yen Share of total

Area 1999 consolidated sales 1998 consolidated sales

North America . . . . . . . . . . . . . ¥ 3,671 5.4% ¥ 4,655 6.2%

Asia . . . . . . . . . . . . . . . . . . . . . . 9,179 13.4% 7,454 10.0%

Europe . . . . . . . . . . . . . . . . . . . . 2,453 3.6% 2,706 3.6%

Other . . . . . . . . . . . . . . . . . . . . . 123 0.2% 134 0.2%

Total . . . . . . . . . . . . . . . . . . . . . ¥15,427 22.5% ¥14,950 20.0%

Financial Position

Total assets at the end of the year rose 6.7% to ¥145,830 million (US$1,209,708 thousand). Current assets rose

8.3% to ¥129,148 million (US$1,071,326 thousand), reflecting an increase in cash and deposits that offset a decrease

in marketable securities. Current liabilities rose 30.2% to ¥26,853 million (US$222,755 thousand). Shareholders’

equity rose 9.1% to ¥117,150 million (US$ 971,796 thousand), and the equity ratio increased 1.7% to 80.3%.

Equity per share increased by ¥245.1 from the previous year to ¥2,951.1 (US$24.48).

Year 2000 Compliance

Hirose Electric attaches the highest priority to the Year 2000 issue and is taking every precaution on a companywide

basis to ensure continuity of operations and ability to respond to customer needs. Hirose Electric began preparatory

work in 1996 and had completed all tests and remediation work on in-house information systems, production and

distribution facilities and devices depending on microchips by the end of June 1999. Hirose Electric aims to have

completed all tests involving outside entities with which it has computer connections by the end of September. It

aims to have set up a contingency plan by that date too.

5


Hirose Electric Co., Ltd. and Consolidated Subsidiaries

Consolidated Balance Sheets

March 31, 1999 and 1998

Thousands of

U.S. Dollars

Millions of Yen (Note 2)

At March 31 1999 1998 1999

ASSETS

Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 74,390 ¥ 41,605 $ 617,090

Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,202 40,429 184,173

Trade notes and accounts receivable . . . . . . . . . . . . . . . . . . . . . 24,056 26,241 199,550

Allowance for doubtful receivables . . . . . . . . . . . . . . . . . . . . . . (154) (210) (1,278)

Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,176 9,041 51,236

Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,478 2,139 20,555

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,148 119,245 1,071,326

Property, plant and equipment:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,452 1,452 12,046

Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,653 5,645 46,892

Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,550 31,146 278,312

Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 314 2,122

40,911 38,557 339,372

Less- Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . 28,419 25,603 235,747

12,492 12,954 103,625

Investments and other assets:

Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,632 2,883 21,837

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,558 1,605 12,920

4,190 4,488 34,757

¥145,830 ¥136,687 $1,209,708

6


Thousands of

U.S. Dollars

Millions of Yen (Note 2)

At March 31 1999 1998 1999

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of long-term indebtedness. . . . . . . . . . . . . . . . . ¥ 8,079 ¥ – $ 67,022

Trade notes and accounts payable . . . . . . . . . . . . . . . . . . . . . . . 10,055 10,808 83,412

Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,328 2,366 19,308

Accrued income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,207 5,783 43,191

Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,184 1,660 9,822

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,853 20,617 222,755

Long-term liabilities:

Long-term indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,571 8,432 13,032

Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 246 2,125

1,827 8,678 15,157

Commitments and contingent liabilities (Note 7)

Shareholders’ equity:

Common stock, par value ¥50 per share;

Authorized — 80,000,000 shares

Issued 1998 — 39,687,350 shares

1999 — 39,697,733 shares . . . . . . . . . . . . . . . . . . . . . 8,627 8,602 71,563

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,230 11,205 93,159

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,294 87,586 807,080

117,151 107,393 971,802

Less- Cost of common stock in treasury

79 shares in 1999 and 183 shares in 1998 . . . . . . . . . . . . . . . (1) (1) (6)

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . 117,150 107,392 971,796

¥145,830 ¥136,687 $1,209,708

The accompanying notes to consolidated financial statements are an integral part of these balance sheets.

7


Hirose Electric Co., Ltd. and Consolidated Subsidiaries

Consolidated Statements of Income

For the years ended March 31, 1999 and 1998

Thousands of

U.S. Dollars

Millions of Yen (Note 2)

Years ended March 31 1999 1998 1999

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥68,570 ¥74,832 $568,810

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,890 42,861 322,605

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,680 31,971 246,205

Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . 9,176 10,013 76,114

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,504 21,958 170,091

Other income (expenses):

Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,504 1,559 12,476

Equity in earnings of affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 24 334

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (771) (791) (6,399)

Loss on disposal of inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (956) (653) (7,932)

Loss on disposal of plant and equipment, net. . . . . . . . . . . . . . . . (209) (173) (1,733)

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29) 191 (240)

(421) 157 (3,494)

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,083 22,115 166,597

Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,548 11,241 79,204

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥10,535 ¥10,874 $ 87,393

U.S. Dollars

Yen (Note 2)

Per share of common stock:

Net income — Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥265.4 ¥274.3 $2.20

— Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263.6 272.1 2.19

Cash dividends, applicable to the year . . . . . . . . . . . . . . . . . . . . . 18.5 18.5 0.15

The accompanying notes to consolidated financial statements are an integral part of these statements.

8


Hirose Electric Co., Ltd. and Consolidated Subsidiaries

Consolidated Statements of Shareholders’ Equity

For the years ended March 31, 1999 and 1998

Thousands of

U.S. Dollars

Millions of Yen (Note 2)

Years ended March 31 1999 1998 1999

Common stock:

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 8,602 ¥ 8,342 $ 71,356

Conversion of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 260 207

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 8,627 ¥ 8,602 $ 71,563

Additional paid-in capital:

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥11,205 ¥10,945 $ 92,952

Conversion of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 260 207

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥11,230 ¥11,205 $ 93,159

Retained earnings:

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥87,586 ¥77,623 $726,550

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,535 10,874 87,393

Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (734) (821) (6,091)

Bonuses to directors and statutory auditors . . . . . . . . . . . . . . . . . . (93) (90) (772)

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥97,294 ¥87,586 $807,080

The accompanying notes to consolidated financial statements are an integral part of these statements.

9


Hirose Electric Co., Ltd. and Consolidated Subsidiaries

Notes to Consolidated Financial Statements

1. SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

(a) Basis of presenting consolidated financial statements

Hirose Electric Co., Ltd. (the “Company”) and its consolidated subsidiaries maintain their accounts

and records in accordance with the provisions set forth in the Japanese Commercial Code and the

Securities and Exchange Law and in conformity with accounting principles and practices generally

accepted in Japan, which are different from the accounting and disclosure requirements of International

Accounting Standards.

The accompanying consolidated financial statements are a translation of the audited consolidated

financial statements of the Company which were prepared in accordance with accounting principles

and practices generally accepted in Japan from the accounts and records maintained by the Company

and its consolidated subsidiaries and were filed with the Minister of Finance (“MOF”) as required by

the Securities and Exchange Law.

In preparing the accompanying consolidated financial statements, certain reclassifications have

been made in the consolidated financial statements issued domestically in order to present them in

a form which is more familiar to readers outside Japan. The consolidated statement of cash flows

has not been prepared, since such statement is not customarily prepared in Japan and is not required

to be filed with MOF.

(b) Principles of consolidation

The consolidated financial statements include the accounts of the Company and following four

subsidiaries:

Tohoku Hirose Electric Co., Ltd.

Koriyama Hirose Electric Co., Ltd.

Ichinoseki Hirose Electric Co., Ltd.

Aomori Denso Co., Ltd.

All significant intercompany transactions and accounts are eliminated in consolidation.

Hirose Cherry Precision Co., Ltd., which the Company owns 50% of equity, is accounted for by

the equity method.

(c) Marketable securities and investment securities

Marketable securities and investment securities mainly consist of investment trust, interest-bearing

bonds and equity securities. Marketable securities and investment securities are stated at cost being

determined by the moving average method. Unrealized gains, net of loss, for the marketable

securities and investment securities as of March 31, 1999 are approximately ¥3,714 million ($30,809

thousand) and ¥2,961 million ($24,562 thousand), respectively.

Investment securities includes securities of unconsolidated subsidiaries and affiliated companies.

(d) Inventories

Finished goods and work in process are stated at cost, being determined by the gross average method.

Raw material is stated at cost, being determined by the moving average method.

10


(e) Property, plant and equipment

Property, plant and equipment, including significant renewals and additions, are carried at cost.

Depreciation of property, plant and equipment is computed by using the declining-balance method

over their estimated useful lives. When retired or otherwise disposed of, the cost and related

depreciation are cleared from the respective accounts and the net difference is included in earnings.

Effective April 1, 1998, in accordance with revisions of the Corporation Tax Law, the Company

shortened the estimated useful lives of buildings, excluding building fixtures. The effect of this

change was to decrease operating income and income before income taxes by ¥13 million.

(f) Allowance for doubtful receivables

Allowance for doubtful receivables is provided at the maximum amount deductible for tax purposes,

plus the amount required for known uncollectible receivables.

(g) Pension plan

The Company has a funded pension plan covering its employees. Under the funded pension plan, it

is the Company’s policy to charge to income the annual pension payments to the trustee, including

prior service cost, which is being amortized within three years. The net assets of the pension plan as

of March 31, 1999 are ¥2,006 million. The amounts of benefits are determined based on length of

service and basic salary at the time of termination or retirement.

(h) Income taxes

Provision is made currently for income taxes applicable to all items of revenue and expense on the

basis of when such items are taxable or deductible.

(i) Accounting for leases

Lease transactions are accounted for as operating leases unless it is verified that the ownership of the

leased property is transferred to the lessee.

2. U.S. DOLLAR AMOUNTS

The translation of the Japanese yen amounts into U.S. dollars are included solely for the convenience

of the reader, using the prevailing exchange rate at March 31, 1999, which was ¥120.55 to U.S.$1.00.

The convenience translations should not be construed as representations that the Japanese yen

amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or

any other rate of exchange.

11


3. LONG-TERM INDEBTEDNESS

Long-term indebtedness as of March 31, 1999 and 1998 is as follows:

Conversion

Thousands of

Price Millions of Yen U.S. Dollars

(per share) 1999 1998 1999

Convertible bonds—

1.7% convertible bonds payable,

due September 2003 . . . . . . . . . . . . . . . . . . ¥4,813.80 ¥1,571 ¥1,621 $13,032

Loans payable—

Loans due in February 2000 . . . . . . . . . . . . . 8,079 6,811 67,022

9,650 8,432 80,054

Less-current portion included in current liabilities (8,079) – (67,022)

¥1,571 ¥8,432 $13,032

The convertible bonds are convertible into common stock at the option of the holders currently at

applicable conversion prices per share as listed in the above table.

4. INCOME TAXES

The Company is subject to several taxes based on income with an aggregate normal tax rate of 51% for

fiscal 1998 and 47% for fiscal 1999. Variance from the normal tax rate is mainly due to certain

permanently nondeductible expenses.

5. SHAREHOLDERS’ EQUITY

The Japanese Commercial Code provides that an amount equivalent to at least 10% of cash dividends

paid and of other cash outlays resulting from appropriations of retained earnings with respect to each

fiscal or interim six-month period be appropriated to a legal reserve until such reserve equals 25% of the

issued capital.

The Code also provides that neither additional paid-in capital nor legal reserve is available for cash

dividends, but may be used to reduce a capital deficit by resolution of the shareholders or may be

capitalized by resolution of the Board of Directors.

The Japanese Commercial Code provides that at least one-half of the issue price of new shares, with

a minimum of the par value thereof, be included in common stock. In conformity therewith, the principal

amount of the bonds converted into common stock was equally divided between common stock and

additional paid-in capital by resolution of the Board of Directors.

Semiannual cash dividends may be approved by the shareholders after the end of each fiscal period or

declared by the Board of Directors after the end of each interim six-month period. Such dividends are

payable to shareholders of record at the end of each fiscal or interim six-month period. In accordance

with the Commercial Code, the declaration of these dividends and the related appropriations of retained

12


earnings have not been reflected in the financial statements at the end of such fiscal or interim six-month

periods. In June 1999, the shareholders approved the declaration of a cash dividends and bonuses to

directors and statutory auditors applicable to the year ended March 31, 1999, totaling ¥377 million

($3,128 thousand) and 88 million ($730 thousand), respectively. In conformity with the Japanese

Commercial Code, this declaration of a cash dividend is not reflected in the consolidated financial

statements as of March 31, 1999.

6. PER SHARE DATA

Dividends per share shown in the consolidated statements of income have been presented on the accrual

basis and include, in each fiscal period, dividends approved after each balance sheet date, but applicable

to the fiscal period then ended.

Net income per share is based on the weighted average number of shares of common stock and

common stock equivalents. The 1.7% convertible bonds were considered as common stock equivalents.

In computing net income per share, net income is adjusted, net of income taxes, by interest expense when

the inclusions are dilutive.

7. COMMITMENTS AND CONTINGENT LIABILITIES

At March 31, 1999, the Company is contingently liable as guarantors of indebtedness of unconsolidated

subsidiaries aggregating ¥440 million ($3,650 thousand).

8. SEGMENT INFORMATION

(a) Business segment information

The Company and its consolidated subsidiaries primarily operate in one business segment of sales

and manufacturing connectors for electronic equipment.

(b) Geographic segment information

There are no consolidated subsidiaries located in countries other than Japan.

(c) Overseas sales information

The following is a breakdown of net sales:

Millions of Yen

North

Japan America Asia Europe Other Consolidated

Net Sales:

1998 . . . . . . . . ¥59,882 ¥4,655 ¥7,454 ¥2,706 ¥134 ¥74,832

1999 . . . . . . . . 53,143 3,671 9,179 2,453 123 68,570

(1) The area of North America includes United States of America.

(2) The area of Asia includes Korea and Republic of China.

(3) The area of Europe includes England and Germany.

(4) The area of others includes Australia.

13


Report of Independent Public Accountants

To the Board of Directors of Hirose Electric Co., Ltd.:

We have audited the accompanying consolidated balance sheets of Hirose Electric Co., Ltd.

(a Japanese corporation) and consolidated subsidiaries as of March 31, 1999 and 1998, and

the related consolidated statements of income and shareholders’ equity for the years then

ended, expressed in Japanese yen. Our audits were made in accordance with generally

accepted auditing standards in Japan and, accordingly, included such tests of the accounting

records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the financial statements referred to above present fairly the financial

position of Hirose Electric Co., Ltd. and consolidated subsidiaries as of March 31, 1999 and

1998, and the results of their operations for the years then ended in conformity with

accounting principles generally accepted in Japan (see Note 1) applied on a consistent basis.

Also, in our opinion, the translated amounts in the accompanying consolidated financial

statements translated into U.S. dollars have been computed on the basis set forth in Note 1.

Hitoshi Asakawa

Terukazu Sugishima

Tokyo, Japan

June 29, 1999

Statement on Accounting Principles and Auditing Standards

This statement is to remind users that accounting principles and auditing standards and their

application in practice may vary among nations and therefore could affect, possibly

materially, the reported financial position and results of operations. The accompanying

financial statements are prepared based on accounting principles generally accepted in Japan,

and the auditing standards and their application in practice are those generally accepted in

Japan. Accordingly, the accompanying financial statements and the auditors’ report presented

above are for users familiar with Japanese accounting principles, auditing standards

and their application in practice.

14


Directors and Corporate Auditors

(As of June 29, 1999)

Representative Director

Executive Managing Director

Managing Director

Directors

HIDEKI SAKAI

President and CEO

TATSURO NAKAMURA

Director

KUNIO YONEBAYASHI

Director, General Manager of Sales Division

MASAO HIROHASHI

Director, General Manager of Administrative Division

General Manager of Finance Department

NORIHIDE KAWANAMI

Director, General Manager of Engineering Division;

General Manager of SB Department

Corporate Auditors

KOJI WATANABE

HIDESATO SEKINE

YOSHIHIKO INUZUKA

(Dai-Tokyo Fire & Marine Insurance Co., Ltd.)

15


General Information

Manufacturing Plants and Research Facilities

Yokohama Office

Kikuna Engineering Center

Domestic Subsidiaries

TOHOKU HIROSE ELECTRIC CO., LTD.

KORIYAMA HIROSE ELECTRIC CO., LTD.

ICHINOSEKI HIROSE ELECTRIC CO., LTD.

AOMORI DENSO CO., LTD.

Overseas Subsidiaries

HIROSE ELECTRIC (TAIWAN) CO., LTD. (Taiwan)

HIROSE ELECTRIC MALAYSIA, SDN. BHD. (Malaysia)

P.T. HIROSE ELECTRIC INDONESIA (Indonesia)

Domestic Sales Offices and Subsidiaries

Yokohama Sales Office

Tachikawa Sales Office

Kita-Kanto Sales Office

Osaka Sales Office

Nagoya Sales Office

Yokohama Delivery Center

Overseas Sales Offices and Joint Ventures (non-consolidated)

Hong Kong Branch Office

Singapore Branch Office

HIROSE ELECTRIC (U.S.A.), INC.

HIROSE ELECTRIC GmbH (Stuttgart, Germany)

HIROSE ELECTRIC UK LTD. (Milton Keynes, England)

HIROSE KOREA CO., LTD. (joint venture with Dae Duck Industries)

Hirose Cherry Precision Co., Ltd. (Japan)

Shareholder Information

Hirose Electric common stock is listed on the First Section of the Tokyo Stock Exchange under the securities

code number 6806. As of March 31, 1999, approximately 39.61 million outstanding shares were held by 3,893

investors.

Foreign investors held 31.24% of shares outstanding.

Main Bank References

The Sumitomo Bank, Ltd.

The Long-Term Credit Bank of Japan, Limited

The Sumitomo Trust & Banking Co., Ltd.

16


5-23, Osaki 5-chome, Shinagawa-ku, Tokyo 141-8587, Japan

Telephone: (03) 3491-5300 Facsimile: (03) 3495-5230

Printed in Japan

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