YUHO REPORT
AnnualFiscal Year Ended

March 31, 2004

TradedTSE1Stock Code6419

MARS ENGINEERING CORPORATIONYUHOREPORTMars Engineering Corporation

Fiscal Year Ended

March 31, 2004

TradedTSE1Stock Code

6419

MARS

ENGINEERING

CORP ORATI ON

This report is based on the Company’s Japanese-language annual filing with the Financial Services Agency andsupplemented with materials that facilitate comparison with the Company’s peers. The materials from the annual filingwith the Financial Services Agency have been edited and reorganized in a format more familiar to the international
investment community. All information contained in this report has been obtained from sources believed to be reliable,
but the accuracy of the data and the translation and the completeness and timeliness of the information are not warrantedby the Company, Pacific Associates, or Asia Securities Printing. None of the above parties shall be responsible for any
error or omission or for results obtained from the use of this information.

Table of Contents
COMPANY PROFILE............................................................................................................3
Financial highlights............................................................................................................................................3
Common size statements..................................................................................................................................4

BUSINESS OVERVIEW ........................................................................................................5
Description of business .....................................................................................................................................5Group companies..............................................................................................................................................5
History ...............................................................................................................................................................6
Risk factors .......................................................................................................................................................7
Research and development ..............................................................................................................................7
Important agreements with third parties............................................................................................................9
Analysis of financial condition and results of operations ..................................................................................9
Corporate governance ....................................................................................................................................11
Directors ..........................................................................................................................................................14
Employees ......................................................................................................................................................14
Union ...............................................................................................................................................................14

CASH FLOWS ....................................................................................................................15
Consolidated statement of cash flows ............................................................................................................15
Capital expenditures .......................................................................................................................................16
Dividend policy ................................................................................................................................................17

OPERATIONS .....................................................................................................................18
Consolidated statement of income..................................................................................................................18
Consolidated statement of retained earnings .................................................................................................19
Results of operations ......................................................................................................................................20
Issues requiring action ....................................................................................................................................23
Production and sales.......................................................................................................................................24
Leases.............................................................................................................................................................25

CAPITAL STRUCTURE ......................................................................................................27
Consolidated balance sheet............................................................................................................................27
Market value of securities ...............................................................................................................................29
Derivatives ......................................................................................................................................................30
Facilities ..........................................................................................................................................................31
Borrowings ......................................................................................................................................................32
Retirement benefits .........................................................................................................................................33
Deferred taxes.................................................................................................................................................34

NONCONSOLIDATED FINANCIAL STATEMENTS...........................................................35
Nonconsolidated statement of income............................................................................................................35
Nonconsolidated appropriation of retained earnings ......................................................................................37
Cost of goods sold ..........................................................................................................................................37
Nonconsolidated balance sheet......................................................................................................................38
Trade credits ...................................................................................................................................................41
Securities ........................................................................................................................................................42
Tangible fixed assets ......................................................................................................................................43
Reserves .........................................................................................................................................................43

ACCOUNTING POLICIES...................................................................................................44
SHARE-RELATED INFORMATION....................................................................................46
YUHOREPORT is a trademark of Pacific Associates and Asia Securities Printing.
The translation is copyrighted by Pacific Associates.

2

MARS

ENGINEERING

CORP ORATI ON

Company Profile
Financial highlights
Years ended March 31;
Thousands of yen

2004

Change2004/2000

Net sales

13,070,881 19,774,357 21,404,851 24,959,669 30,723,810

235%

Ordinary profit

1,480,799

4,593,015

5,958,626

5,521,514

8,263,972

558%

Net income (loss)

1,211,055

1,810,623

3,030,640(714,837)

4,240,475

350%

Shareholders' equity

22,872,756 23,752,627 26,446,783 25,030,579 28,987,920

127%

Total assets

31,689,010 35,498,374 39,879,762 38,699,119 45,280,360

143%

2000

2001

2002

2003

Consolidated

Shareholders' equity per share (Yen)2,013.45

2,090.91

2,328.08

2,197.95

2,543.34

126%

Net income (loss) per share (Yen)

115.51

159.39266.78(68.38)364.85316%

Net income per share, fully diluted (Yen)

-

-

-

-

-

-

Net cash provided by (used in) operating
activities
Net cash provided by (used in) investing
activities
Net cash provided by (used in) financing
activities

2,192,265

4,793,955

4,158,507

1,853,845

8,948,394

408%(681,036) (1,011,079) (1,286,444) (1,030,841)(823,020)

121%

Cash and cash equivalents, end of term
Employees(1,592,541) (2,195,483) (2,043,303)

1,343,337(873,677)

55%

4,104,599

5,688,148

6,513,699

8,680,028 15,931,724

388%

433

448

483

3

510

520

120%

MARS

ENGINEERING

CORP ORATI ON

Common size statements
Years ended March 31; Percent

2002

Consolidated
2003
2004

2002

Parent
2003

2004

100.0

100.0

100.0

Balance sheet
Assets

100.0

100.0

100.0

Current assets

53.2

68.5

71.1

45.4

65.9

68.7

Tangible fixed assets

40.7

26.8

23.2

47.4

20.1

16.5

Intangible fixed assets

0.3

0.3

0.2

0.2

0.2

0.2

Investments and other assets

5.8

4.4

5.5

7.0

13.8

14.6

Total fixed assets

46.8

31.5

28.9

54.6

34.1

31.3

Liabilities and shareholders’ equity

100.0

100.0

100.0

100.0

100.0

100.0

Current liabilities

27.2

26.3

27.8

17.6

11.3

16.6

Long-term liabilities

6.1

8.5

7.4

2.4

1.9

2.3

Total liabilities

33.3

34.8

35.2

20.0

13.2

18.9

Minority interests

0.4

0.5

0.8

Common stock

19.9

-

-

23.5

-

-

Additional paid-in capital

21.0

-

-

24.8

-

-

1.1

-

-

Legal income reserves
Retained earnings

25.5

-

-

30.7

-

-

Unrealized gains or losses on other securities

(0.1)

-

-

(0.1)

-

-

Treasury stock

(0.0)

-

-

(0.0)

-

-

Common stock

-

20.5

17.5

-

26.9

22.6

Capital reserves

-

21.6

18.5

-

28.4

23.9

Retained earnings

-

22.9

27.5

-

31.9

34.0

Unrealized gains or losses on other securities

-

(0.3)

0.5

-

(0.4)

0.6

Treasury stock

-

(0.0)

(0.0)

-

(0.0)

(0.0)

66.3

64.7

64.0

80.0

86.8

81.1

Net sales

100.0

100.0

100.0

100.0

100.0

100.0

Cost of sales

52.4

54.8

53.7

50.4

54.3

56.2

Gross profit

47.6

45.2

46.3

49.6

45.7

43.8

Selling, general and administrative expenses

23.1

23.2

19.7

23.6

22.1

20.5

Operating income

24.5

22.0

26.6

26.0

23.6

23.3

Nonoperating income

4.2

0.3

0.4

5.2

0.5

0.5

Nonoperating expenses

0.8

0.2

0.1

0.9

0.2

0.0

Ordinary profit

27.8

22.1

26.9

30.2

23.9

23.8

Extraordinary income

0.1

-

0.0

0.1

-

0.0

Extraordinary losses

3.6

24.2

2.4

6.2

29.4

2.9

Income (loss) before taxes and other adjustments

24.4

(2.1)

24.5

24.1

(5.5)

20.9

9.9

0.5

10.2

10.4

(2.1)

8.9

Minority interest in income of consolidated companies

0.3

0.3

0.5

Net income (loss)

14.2

(2.9)

13.8

13.7

(3.4)

12.0

Total shareholders' equity

Statement of income

4

MARS

ENGINEERING

CORP ORATI ON

Business Overview
Description of business
The Mars Engineering Group consists of the Company (Mars Engineering
Corporation) and five subsidiaries, all consolidated. Its primary business is the
manufacture and sale of pachinko-related electronic products.
The Group’s businesses, and the relationship of the Company and its subsidiaries tothese businesses, are outlined below.
(1) Pachinko business
The Company, Mars Corporation, Mars Line-Tech Corporation, Mars
Techno-Science Corporation, and WINTEC Co., Ltd.
(2) Other business
Hotel Sunroute Hakata, Inc.

Group companies
Name

Operations

Common stock
Millions of yen

Percent
ownership(Consolidated subsidiaries)
Mars Corporation

Pachinko business

1,000

100

Mars Line-Tech Corporation

Pachinko business

10

100

Mars Techno-Science Corporation

Pachinko business

250

82

WINTEC Co., Ltd.

Pachinko business

107

80

Hotel Sunroute Hakata, Inc.

Other business

10

100

5

MARS

ENGINEERING

CORP ORATI ON

History
Year

Month

Event

1974

September

1975

DecemberMars Engineering Corporation is established in Shinjuku-ku, Tokyo, to design,
trial-manufacture, manufacture, and sell electronic devices.
Enters into an exclusive distributorship agreement with Casio Computer Co., Ltd. to sell
Casio business systems.

1980

AugustDevelops and begins selling a prize control system for amusement centers.

1981

OctoberEnters into a distributorship agreement with NEC Corp. to sell office computers.

1985
1987

February
October

1989

OctoberDevelops and begins selling counting machines.
Concludes agreement with Nippon Signal Co., Ltd. related to the development, manufacture,and sale of small magnetic-card readers and writers; develops and begins selling a magnetic
card-based prize control system.
Opens Higashi Fuji Plant in Gotemba, Shizuoka Pref.

1990
1992

October
March

1993

March

1994

November
July

1995

October

Registers shares for over-the-counter trading with Japan Securities Dealers Association.
Develops and begins selling computers for pachinko parlor management (parlor computer
systems).
Opens Technology and Distribution Center in Gotemba, Shizuoka Pref.

1996

July

Obtains ISO 9001 certification for meeting quality control standards.

AugustDevelops and begins selling “personal systems.”

September
November

Lists shares on the Second Section of the Tokyo Stock Exchange.
AM Planning Corp., which was established to operate pachinko parlors as antenna outlets for
the Company, becomes an affiliated company.
Completes construction of a new headquarters building and moves corporate headquarters
to the new site; establishes Mars Corporation (now a consolidated subsidiary) to engage inreal estate management and general leasing.
Opens Technology Center in Susono, Shizuoka Pref.

December

1997

April
October

1998

July

Develops and begins selling auto-dispenser systems; expands Higashi Fuji Plant.
Develops and begins selling a prize control system with membership management
capabilities.
Opens Technical Center in Mishima, Shizuoka Pref.

Acquires Asama Sangyo Inc., a leading developer and builder of pachinko ball replenishment
systems; incorporates company into Group as an affiliate (in Sept. 1998, changes its tradename to ASAMA Engineering Corp.).
Develops and begins selling a reusable pachinko cycle card (PCC) system.

October

Establishes Hotel Sunroute Hakata Inc. (now a consolidated subsidiary) to develop andoperate a business hotel; establishes KARD Information System Inc. to provide card
issuance and data management services for third parties.

1999

April

Completes construction of Hotel Sunroute Hakata.

2000

AugustJuly

Launches K1 Cycle Card system as part of the prepaid card business.
Acquires WINTEC Co., Ltd., a leading developer of peripheral devices for pachinko parlor
operations; incorporates company (now a consolidated subsidiary) into Group as affiliate.
Acquires RFID business (manufacture of IC cards and radio identification tags) from Toshiba
Chemical Corp.; establishes M&T Card Technology Corp. to sell RFID products.
Discontinues operations of AM Planning Corp., after concluding that it had achieved its
original objectives.

September
December
2001

September

Lists shares on the First Section of the Tokyo Stock Exchange.

2002

January

Liquidates AM Planning Corp.

March
April

KARD Information System Inc. absorbs operations of M&T Card Technology Corp.
KARD Information System Inc. changes its trade name to Mars Techno-Science Corp. (nowa consolidated subsidiary); ASAMA Engineering Corp. changes trade name to Mars
Line-Tech Corp. (now a consolidated subsidiary).

October

Expands Higashi Fuji Plant.

6

MARS

ENGINEERING

CORP ORATI ON

Risk factors
The following is a discussion of factors that could significantly affect judgments byinvestors.
(1) The Company is subject to certain indirect legal restrictions•

On its ball-dispensing devices installed between game consoles, which areconsidered to be a part of a pachinko machine•

Specifically, ball-dispensing devices are subject to “type testing” under National
Public Safety Commission Regulation No. 4(2) Testing can have a significant impact on the manufacture and sale of newball-dispensing devices because of•

The need to pass type testing overseen by the Security Electronics andCommunication Technology Association•

The need to pass type testing overseen by prefectural public safety commissions•

The fact that the Company’s customers (pachinko parlors) are subject torestrictions established under the Law Regulating Adult Entertainment
Businesses

Research and development
The Mars Engineering Group has shifted the focus of its new product development tobasic and applied technologies in the area of radio frequency identification. It has
successfully commercialized a number of products based on RF technology.
The Group spent a total of 573 million yen on research and development during theyear ended March 2004.
The Group’s R&D activities during the year can be summarized as follows:(1) Organization: R&D takes place principally at the Susono Technical Center, where
work is conducted on hardware and software development and on mechanicaldesign.

7

MARS

ENGINEERING

CORP ORATI ON(2) Major results of R&D—pachinko business•“MX-275K” token-issuing machine for installation between game consoles;
four-denomination bill reader incorporated•

Connection software to manage printer option•“MX-570i with 10-key option” counting machine, with personal identification
capabilities•

House card system for preferred customers (PCC)•“e9600” table-top auto dispenser system•“SL-735D” token-issuing machine for installation between game consoles•“FB-80” bill validator, for installation between game consoles•“ICU-35D” card reader with storage receptacle•“ICU-200” card reader with serial cable connections•“RIC-300” IC card reader unit with Leuco printer•“ICU-03RS” IC coin reader•

Development and demonstration tests of RFID system for apparel industry

The hotel business has no R&D program.

8

MARS

ENGINEERING

CORP ORATI ON

Important agreements with third parties(1) Technology development agreement
Name of licenser

Nature of agreement

Period of agreement

Nippon Signal Co., Ltd.

Joint development and manufacturing of
small magnetic-card readers and writers

Three years, beginning January 9, 1996
(automatically renewed on an annual basis
thereafter)(2) Marketing agreements
Name of licenser

Nature of agreement

Period of agreement

Casio Computer Co., Ltd.

Exclusive distributorship agreement related
to business machines and personal
computers

One year, beginning March 21, 1982
(automatically renewed on an annual basis
thereafter)

NEC Corp.

Distributorship agreement related to officeprocessors

Fifteen months, beginning January 1, 1989
(automatically renewed on an annual basis
thereafter)

Nippon Signal Co., Ltd.

Exclusive rights to sell jointly-developed
magnetic-card readers and writers; joint
development and manufacturing

Three years, beginning January 9, 1996
(automatically renewed on an annual basis
thereafter)

Name of licenser

Nature of agreement

Period of agreement

Sunroute Co., Ltd.

Sunroute Co., Ltd. agrees to allow the
Twenty years, beginning June 1, 1999
Company to use the “Hotel Sunroute xxx”
(automatically renewed every five years
name and to conduct business using its
thereafter)
trademarks, services, and other hotelmanagement know-how; the Company willcontinue to operate its hotels in accordancewith guidance and advice provided bySunroute, with the aim of achieving
prosperity for both companies.

(3) Franchise agreement

The franchise agreement noted above requires the Company to pay a certain percentage of its sales to cover franchise membership,
franchisee deposits, general planning charges, and royalties.

Analysis of financial condition and results of operations
Analysis of financial condition (year-on-year comparisons)(1) Current assets: increased by 5,663 million yen to 32,174 million yen•

3,347 million yen increase in cash and deposits, reflecting strong operating
performance•

3,708 million yen increase in marketable securities (“Marketable securities”
account includes 5,298 million yen in cash equivalents.)•

933 million yen decrease in income tax refunds receivable•

366 million yen decrease in deferred tax assets (because of tax effects of loss
carry forward)

9

MARS

ENGINEERING

CORP ORATI ON(2) Fixed assets: increased by 917 million yen to 13,105 million yen, largely due to869 million yen increase in investments and other assets.
•

Recognition of variance on asset reassessment at term-end•

Purchase of corporate bonds(3) Current liabilities: increased by 2,395 million yen to 12,566 million yen, primarily
because of 2,564 million yen increase in income taxes payable.
(4) Long-term liabilities: increased by 78 million yen to 3,362 million yen.
•

503 million yen increase due to recognition of allowance for directors’
retirement bonuses•

300 million yen decrease in long-term debt

(5) Shareholders’ equity: increased by 3,957 million yen to 28,987 million yen.
•

3,610 million yen increase in retained earnings•

346 million yen increase in unrealized gains or losses on other securities

Cash flow
Cash and cash equivalents increased by 7,251 million yen to 15,931 million yen, due
to an increase in income before taxes and other adjustments.
(1) Cash flow provided by operating activities increased by 7,094 million yen.
•

1,502 million yen decrease in income tax and others•

933 million yen income tax refunds(2) Cash flow used in investing activities amounted to 823 million yen (cf. 1,030
million yen used in year-earlier term).
•

504 million yen in corporate bonds purchased•

451 million yen to construct headquarters and factory of WINTEC Co., Ltd., asubsidiary(3) Cash flow used in financing activities amounted to 873 million yen (cf. cash
provided of 1,343 million yen in year-earlier term), primarily due to 1 billion yen
repayment of long-term debt during the year.

10

MARS

ENGINEERING

CORP ORATI ON

Analysis of results of operation
Compared to 23.1% increase in net sales, SG&A expenses increased by 4.4%. The
major increases in SG&A expenses were the following:(1) 188 million yen increase in bonuses to 525 million yen(2) 144 million yen increase in allowance for doubtful accounts to 158 million yen

Corporate governanceFundamental thinking regarding corporate governance(1) The Board of Directors (composed of nine members) must respond rapidly andeffectively to changes in the operating environment and create an efficient andhealthy state of operations•

Through decision-making on management policy and other important issues.

•

Through strengthened operations oversight.

(2) To achieve these goals, the Company instituted a system of corporate executive
officers in April 2002 that•

Clearly separates managerial decision-making from operational execution.

•

Enhances its ability to respond quickly to changes in the environment.

Measures adopted with regard to corporate governance(1) Related to decision-making, execution, oversight, etc.
•

Regarding the question of “company with committees” or statutory auditors:
adopts a system of statutory auditors•

Appointment of outside directors and statutory auditors: no outside directors,
but two outside auditors among the Company’s three statutory auditors•

Nature of committees (compensation, nominating, compliance, etc.): notapplicable•

Full-time staff for outside directors or auditors: none specifically designated, but
support provided by General Affairs Department

11

MARS

•

•

•

ENGINEERING

CORP ORATI ON

Mechanism for operations execution and oversight-

Directors convey to corporate executive officers decisions made at regularand extraordinary meetings of the Board of Directors.

-

When required, meetings between directors and corporate executive officers
are convened on specific issues.

Mechanism for internal control-

Under the president, two administrative divisions (manufacturing-sales
administration division and sales administration division)-

Office of internal auditing reporting directly to the president

Attorneys, financial auditors and other third parties-

Advisory agreement completed with external attorney’s office to provide
legal advice when the need arises-

Financial auditing by Tohmatsu & Co.

(2) Statement regarding relationships between the Company and its outside directors
and statutory auditors (personal, share ownership-based, commercial or other)•

The Company has no relationships—in terms of employment, financing,technology or commercial transactions—with any of its outside statutory
auditors or their close relatives, nor with any companies in which its statutory
auditors or their close relatives serve as directors.

•

The Company’s outside statutory auditors are not former employees of any
Mars Engineering Group company.

(3) Actions over the past year to enhance corporate governance•Regular monthly Board of Directors meetings, supplemented by special board
meetings as required•

Regular Group management meetings, which contribute to expediting
management decision-making through information exchange and operations
progress reports•

Regular general managers’ meetings, attended by directors, corporate executive
officers and general managers

12

MARS

ENGINEERING

CORP ORATI ON

Compensation to directors and statutory auditors
For the year ended March 2004, the Company paid the following amounts ofcompensation to its directors and statutory auditors and to its financial auditor:••

Directors’ compensation-

Compensation paid to directors: 110,400 thousand yen-

Compensation paid to statutory auditors: 14,730 thousand yen

Auditing fees-

Professional fees related to audit certification: 17,000 thousand yen

13

MARS

ENGINEERING

CORP ORATI ON

Directors
Date joined
company

Previous or current
employers/occupations

Date of birth

Chairman and
Representative
Director

Sep-74

TAKACHIHO KOHEKI

9-Apr-38

702.8

Shigeo Komiya

President andRepresentative
Director

Sep-74

TAKACHIHO KOHEKI

19-Dec-50

245.0

Teruo Gomi

Executive Vice
President

Apr-75

Hitachi, TAKACHIHOKOHEKI

10-Mar-44

225.0

Yoshikiyo Kawakami

Managing Director

Nov-7827-Sep-46

130.0

Akihiro Matsunami

Managing Director

Feb-95

1-Jul-65

500.0

Toshihisa Oya

Director

Sep-7429-Nov-44

194.0

Hiroshi Murakami

Director

Mar-96

5-Apr-62

124.0

Toshikatsu Terashima

Director

Jun-04

WINTEC

13-Mar-45-

Nobuo Takahashi

Director

Jun-04

Tokyo Tomin Bank

12-Apr-41

0.5

Toshiyuki Goto

Standing Statutory
Corporate Auditor

Sep-8922-Aug-41

5.0

Koichi Takemata

Statutory Corporate
AuditorJun-91

Tokai Bank

18-Nov-52-

Tsutomu Ikeda

Statutory Corporate
Auditor

Jun-00National Police Agency

9-Jan-39

-

Name

Title

Hirokazu Matsunami

Kawasho Corp.

Sharesowned (1,000)

2,126.3
Current assignments and previous positions in the Company have been omitted.

Employees
Consolidated
Business segment

NumberPachinko business

507

Other business

13
520

ParentTotal or average

Number426

Average age

32.1

Average years of service

8.1

Average annual salary (Yen)

5,596,676

The average annual salary includes bonuses.

Union
The Group has no labor union and enjoys amicable labor relations.

14

MARS

ENGINEERING

CORP ORATI ON

Cash Flows
Consolidated statement of cash flows
Years ended March 31; Thousands of yen

2002

2003

2004

5,217,201(530,895)

7,531,525

Depreciation

704,415

689,002568,510

Increase (decrease) in allowances

18,755(19,392)690,297

Interest and dividend income(22,977)(46,437)(72,762)Interest expenses

154,490

45,591

12,996

Partnership profits(811,993)--

Foreign exchange losses (gains)(1,345)

12-

Amortization of consolidation differences

9,052

9,529

9,529

-

52,18984,993

Valuation loss on investment securities

662,781

59,539-Loss on disposal and sales of tangible fixed assets

17,49912,1808,973-

5,779,387-(2,959,173)(782,305)(340,062)

Decrease (increase) in inventories

143,732(309,532)

336,470

Increase (decrease) in trade payables

831,677(872,402)(24,319)

1,697,342

415,200(168,670)

Director's bonuses(48,000)(47,000)(64,000)

Others413,277(414,756)

783,270

6,026,737

4,039,911

9,356,752

22,672

46,76371,676(242,288)(265,176)(14,388)(1,648,613)(1,967,652)(465,645)

4,158,507

1,853,845

8,948,394(1,100,000)(299,566)

199,168(232,960)(50,000)(540,000)

99,50048,649172,483(470,093)(701,644)(695,092)

7,633

-

-

Proceeds from liquidation of anonymous association

452,886--

Payments for acquisition of stock of consolidated subsidiary(44,820)

-

-

1,409

(28,280)

40,420(1,286,444)(1,030,841)(823,020)

Net cash provided by (used in) operating activities
Net income (loss) before taxes and other adjustments

Loss (gain) on sales of investment securities

Valuation loss on tangible fixed assets
Decrease (increase) in trade receivables

Increase (decrease) in advancesInterest and dividend income
Interest expenses
Income tax and others

Net cash provided by (used in) investing activities
Net change in holdings of negotiable securities
Payments for investments in securities
Proceeds from sales of investment securities
Payments for acquisition of tangible fixed assets
Proceeds from sales of tangible fixed assets

Others15

MARS

ENGINEERING

Years ended March 31; Thousands of yen

CORP ORATI ON

2002

2003

2004

(1,436,060)

913,368--

1,000,000-

Payments of long-term debt

(29,434)-(300,000)

Dividends(573,807)(566,031)(569,677)(4,000)(4,000)(4,000)(2,043,303)

1,343,337(873,677)

Net cash provided by (used in) financing activities
Net increase (decrease) in short-term borrowings
Proceeds from increase in long-term debt

Dividend payments to minority shareholders

Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents
Cash and cash equivalents, beginning of term
Net change due to elimination of subsidiary from consolidation
Cash and cash equivalents, end of term

1,345

(12)

-

830,105

2,166,328

7,251,696

5,688,148

6,513,699

8,680,028(4,554)--

6,513,699

8,680,028

15,931,724

Relationship between balance of cash and cash equivalents as ofterm-end and balance sheet items
Years ended March 31; Thousands of yen

2002

2003

2004

Cash and deposit accounts at end of term

3,419,786

7,286,078

10,633,446

Money management funds and medium-term government bondfunds included in the marketable securities account3,093,913

1,393,949-

Marketable securities at end of term--

7,134,206

Short-term investments with redemption periods longer than 3months--(1,835,928)

6,513,699

8,680,028

15,931,724

Cash and cash equivalents at end of term

Capital expenditures
The Group conducts necessary investments from a long-term perspective, focusing on
R&D projects and business operations that promise growth. During the consolidated
fiscal year ended March 2004, it spent 671 million yen on capital investments in theseareas.
The pachinko business invested 451 million yen to construct a headquarters plantfacility for WINTEC Co., Ltd. and 70 million yen on dies required for new products.
The Group recorded essentially no capital expenditures for its hotel business.
The headquarters plant facility for WINTEC Co., Ltd. was completed during the fiscal
year. There were no significant disposals or sales of facilities during the fiscal year.

16

MARS

ENGINEERING

CORP ORATI ON

Capital expenditure and disposal plan

The Group adopts capital investment plans based on a comprehensive assessment of
economic conditions, industry trends, investment efficiency and other factors.
Generally, each consolidated subsidiary formulates its own capital expenditure plan,with Mars Engineering Corp. functioning as a coordinator to prevent duplication on aGroup-wide basis.
As of year-end, the Company had no plans to add any important new facilities or todispose of or sell any important existing facilities.

Dividend policy
The Company considers its policy on dividends to be extremely significant. Its goalwith respect to dividends is to make payouts in a way that contributes to stablebusiness growth over the long term. This requires that it strengthen its financial
structure and pay dividends that more closely reflect changes in its financial
performance each term with due consideration given to maintaining a stable payout toits shareholders.
Accordingly, the Company took into consideration both its achievement of record highsales and net income during the year and its desire to mark a major milestone in its
history—the completion of its 30th year of operations. In recognition of the support it
has received from shareholders, the Company will pay a total dividend of 40 yen per
share, comprising a regular dividend of 20 yen, a special dividend of 10 yen, and acommemorative dividend of 10 yen.
When the interim dividend of 20 yen per share is included, the Company will therefore
pay a total dividend of 60 yen per share for the year to March 2004.
The Company intends to invest retained earnings in areas that will foster stable growth,
including measures aimed at strengthening its balance sheet and capital investments.
The Board of Directors’ resolution on interim dividends for the year ended March 31,
2004 was adopted on October 20, 2003.

17

MARS

ENGINEERING

CORP ORATI ON

Operations
Consolidated statement of income
Years ended March 31; Thousands of yen

Net sales

2002

2003

2004

21,404,851

24,959,669

30,723,810

Cost of goods sold11,218,613

13,687,741

16,510,304

Gross profit on sales

10,186,238

11,271,928

14,213,505

Selling, general and administrative expenses

4,948,792

5,783,601

6,038,483

Operating income

5,237,445

5,488,327

8,175,022

Interest income

21,002

43,832

69,364Foreign exchange gain

1,345

-

-

Nonoperating income

Profits from anonymous association

811,993---

13,51017,40060,77536,69425,528895,117

94,037112,292

Interest expenses

154,490

45,591

12,996

Others19,446

15,258

10,345

Rental income
OthersNonoperating expenses

173,936

60,84923,342

5,958,626

5,521,514

8,263,972

Gain on sales of tangible fixed assets

567

-

-

Gain on sale of investment securities

-

-

6,962

17,047

-

2,200

-

-

5,000

Ordinary profit
Extraordinary income

Reversal of allowance for doubtful accounts
Gain on sales of memberships
Others

-

-

1,000

17,614-

15,162

Valuation loss on fixed assets-

5,779,387-

Loss on disposal of inventories

13,776

145,408

158,081

Valuation loss on investment securities

662,781

59,539---91,956Extraordinary losses

Loss on sale of investment securities
Provision for directors' retirement allowances for prior years
Others--487,669

82,482

68,0759,902

759,039

6,052,410

747,610

Income (loss) before taxes and other adjustments

5,217,201(530,895)

7,531,525

Corporate, inhabitants and enterprise taxes

2,244,226

434,9883,029,952(119,398)(324,984)

104,940

2,124,828

110,004

3,134,892

Deferred taxes
Minority interest in income of consolidated companies
Net income (loss) for the term

18

61,73273,937

156,156

3,030,640(714,837)

4,240,475

MARS

ENGINEERING

CORP ORATI ON

Consolidated statement of retained earnings
March 31; Thousands of yen

2002

2003

2004

7,774,450

-

-

6,009

-

-

6,009

-

-

4,618

-

-

Dividends

567,996--

Directors' bonuses

45,000--617,614--

Net income

3,030,640--

Retained earnings, end of term

10,193,486

-

-

-

-

8,371,830-

8,371,830--

8,371,830

8,371,830-

8,371,830

8,371,830--

8,865,052-

10,193,486--

10,193,486

-

-

-

4,240,475--

4,240,475

Net loss-

714,837-

Dividends-

567,996

567,996

Directors' bonuses-

45,60062,000-1,328,434

629,996-

8,865,052

12,475,532

Retained earnings, beginning of term
Increase in retained earnings
Increase resulting from merger of subsidiaries

Reduction in retained earnings
Decrease resulting from liquidation of a subsidiary

Capital reserves
Capital reserves, beginning of term
Additional paid-in capital, beginning of term

Capital reserves, end of term

Retained earnings
Retained earnings, beginning of term
Retained earnings, beginning of term

Increase in retained earnings
Net income

Decrease in retained earnings

Retained earnings, end of term

19

MARS

ENGINEERING

CORP ORATI ON

Results of operations
Fiscal year ended March 31, 2004
Economic and other factors affecting operations(1) Mixed economic picture•

Recovery in corporate profits, and rising capital investment•

Offset by “structural” deflation in the economy, fostering:-

Uncertainty among people concerning employment-

Continued weakness in consumer spending(2) Trends in pachinko industry•

Declining customer traffic•

Year-on-year increases in bankruptcies and bankruptcy-related liabilities
reflecting

•

•

-

Shorter game-machine cycles-

Pressure on operators to make larger capital investments

Polarization of industry-

Growth in efficient large chains and a shakeout among smaller operators-

Resulting decrease in number of pachinko parlors

Growing popularity of “pachislot” machines leading to-Reversal of long-term slide in size of pachinko market-

Cessation of decline in number of persons who say they participate inpachinko as recreation

Marketing strategies and results (year-on-year percentage changes)(1) Development and sale of wide array of prepaid card (Cycle Card) systems to meetcustomer needs(2) Focus on prepaid card systems generating•

426 new customers for such systems during the year (+7.0%)•

Higher sales per parlor reflecting:-Sales to customers wishing to convert all machines (pachinko and pachislot)
to prepaid card systems-

Increased pachinko parlor size

20

MARS

ENGINEERING

CORP ORATI ON

Financial analysis (year-on-year percentage changes)(1) Achievement of record high sales and profits(2) Return on equity: 15.7%(3) Income statement•

Net sales: +23.1%•

Operating income: +49.0%•

Ordinary profit: +49.7%•

Net income: 4,240 million yen (cf. deficit of 714 million yen)Segment breakdown(1) Pachinko business: Sales increased 23.5% to 30,192 million yen, due principally to••

The Company’s increasing success in the market for prepaid card systems.
-

Under conditions of intense competition, more installations than any othercompany every month during the past two years-

As of the end of March 2004, 1,250 cumulative installations, constituting
10.6% of the market-

Emergence of many key functions of the Company’s systems as de facto
industry standards

The Company’s involvement in all aspects of marketing—from development
and manufacture to sales and maintenance(2) Other business: Hotel revenues increased 1.9% to 531 million yen.
•

Increase achieved despite flood-related suspension of operations in July.

•

Focused on enhancing quality (rooms, service) and on increasing room rates inaccordance with inflow of reservations.

•

Based on customer feedback, the hotel’s “front desk department” ranked No. 1
in the Sunroute chain in 2003.

Fiscal year ended March 31, 2003
Economic and other factors affecting operations(1) Extremely difficult conditions in the Japanese economy•

Languishing consumer spending

21

MARS

ENGINEERING

CORP ORATI ON•

Decline of stock prices to a post-bubble low•

Concerns about the viability of the financial system fostered by banks’
accelerated write-offs of non-performing loans•

More pronounced deflation(2) Harsher competition in the industry, fueled by•

Declining customer traffic at pachinko parlors•

More pachinko parlor bankruptcies•

Shorter game machine cycles, requiring investments that weigh on the
profitability of pachinko parlors(3) Other industry trends•

Strong replacement demand for equipment in prepaid card market•

Industry-wide increase in game-machine installations, reflecting growing
popularity of “pachinko slot” machines•

Year-on-year decline in sales and installations of pachinko machines•

Transition to large-scale pachinko parlors whose operating efficiency enables
operators to develop chains

Marketing strategies and results(1) Existing products and new product launches•

Continued aggressive push to market Cycle Card prepaid card systems•

Development and launch of new products (payment devices that enable players
to charge {replenish the value of} their IC cards while seated at game consoles;
IC-card adapted devices for issuing pachinko slot tokens)(2) Results•

Despite undershooting sales targets for IC card systems (partly because ofdelays in bringing new products to the market), more system installations eachmonth than any other company in the industry•

Addition of 364 new customers to IC systems business, raising cumulative total
to 928 parlors; year-on-year increase in sales of such systems registered

22

MARS

ENGINEERING

CORP ORATI ON

Financial analysis (year-on-year percentage change)(1) Land and buildings sold to a subsidiary to strengthen financial position andincrease efficiency of asset use, resulting in valuation loss of 5,779 million yen(recognized as extraordinary loss) and net deficit for the term.
(2) 16.6% increase in sales(3) 4.8% increase in operating income(4) 7.3% decline in ordinary profit
Segment breakdown
Pachinko business: By increasing customer satisfaction through effective productdevelopment and responsive follow-up services, the business created new customer
demand while reducing total costs, with a resulting 17.1% increase in sales to 24,438
million yen.
•

Despite relatively late entry into the market, growth in market share of IC-card
systems to more than 7% as of the end of March 2003.

•

Success achieved in IC-card market from the Company’s lead in using
contact-free IC-card technology to integrate various technologies developed
over the years—prize control systems, parlor computer systems, and prepaid
card systems.

Other business: The effects of the September 11 terrorist attacks continued to be felt in
the Company’s hotel operations. Although occupancy rates improved year-on-year (tothe number-one position in the Hakata market), average room charges declined. The
business consequently reported a 1.8% decline in sales to 521 million yen.

Issues requiring action(1) See “Economic and other factors affecting operations” for a discussion of theoperating environment.
(2) Required actions—product development•

Lowering cost of sales and increasing gross margins to ensure profitability in anenvironment of extremely intense competition•

Recognizing changes in the market and responding rapidly with new productsthat meet customers’ needs•

Differentiating the Company’s products from those of other companies bydeveloping maintenance-free products

23

MARS

ENGINEERING

CORP ORATI ON(3) Required actions—sales•

Expanding sales and profits through emphasis on proposal-based sales•

Strengthening brand image and increasing brand recognition•

Making the Company the industry’s No. 3 producer of prepaid card systems

Production and sales
Production
2004
AmountYear-on-yearcomparison (%)

19,818,675

116.1

-

-

19,818,675

116.1

Thousands of yen

Pachinko business
Other business

Procurement
2004
Thousands of yen

AmountYear-on-yearcomparison (%)

Pachinko business

1,243,161

139.4

99,735106.0

1,342,897

136.2

Other business

Sales by product2004
AmountYear-on-yearcomparison (%)

30,192,442

123.5

531,367101.9

30,723,810

123.1

Thousands of yen

Pachinko business
Other business

24

MARS

ENGINEERING

CORP ORATI ON

LeasesUnder generally accepted accounting principles in Japan, finance leases that do nottransfer ownership are accounted for in the same manner as operating leases when “asif capitalized” information is disclosed.
The Company’s main finance lease contracts are as follows:
Thousands of yen
ParentRent orlease

Number of
employees(Square meters)

Current
payments

78-

225,411Land

Head office
OfficeRent

OA equipment

Lease

-

14,288

Vehicles and delivery equipment

Lease

-

5,278

-

18,931-45-

73,473-

208-

39,033

-

158

-

495

-

445

Fuchu Technical Center
OfficeRent

OA equipment

Lease

22

Susono Technical Center
OfficeRent

OA equipment

Lease

42

Mishima Technical Center
OfficeRent

OA equipment

Lease

5

Gotemba Technology and Distribution Center
Parking lot

Rent

Vehicles and delivery equipment

Lease

31

Gotemba Warehouse
Vehicles and delivery equipment

Lease

6

-

1,382

Office

Rent

210

-

168,115

OA equipment

Lease

-

4,094

Vehicles and delivery equipment

Lease

-

82,829

Tokyo Branch, etc.

Mars Corporation

Peripheral equipment

Lease

2

-

1,404,229

Office

Rent

9

-

6,250

OA equipment

Lease

-

946

Vehicles and delivery equipment

Lease

-

528

-

51,255

Mars Line-Tech Corporation

Mars Techno-Science Corporation

OfficeRent

49

Peripheral equipment

Lease

-

1,287,897

OA equipment

Lease

-

1,256

Vehicles and delivery equipment

Lease

-

462

25

MARS

ENGINEERING

Thousands of yen

Rent orlease

CORP ORATI ON

Number of
employees(Square meters)

Current
payments

21

-

2,804

Land

WINTEC Co., Ltd.

OfficeRent

OA equipment

Lease

-

105

Equipment and machinery

Lease

-

38

Vehicles and delivery equipment

Lease

-

1,234

644

145,977

Hotel Sunroute Hakata, Inc.

Buildings and structures

Rent

13

Equipment and machinery

Lease

-

1,258

OA equipment

Lease

-

246

Pro forma information on leased property is as follows:
LesseeThousands of yen
Tools, appliances and fixtures

2003

2004

1,893,363

2,276,714

797,082

1,336,272

1,096,281

940,442

Due within one year

1,536,282

1,829,531

Due after one year

2,999,465

2,664,180

4,535,747

4,493,712

1,497,907

2,020,757

388,176

538,946

208,328

384,482

Due within one year

1,003

1,003

Due after one year

3,343

2,340

4,346

3,343

2003

2004

Acquisition cost

488,553

485,598

Accumulated depreciation

353,312419,357

Net leased property

135,241

66,241

Due within one year

1,257,370

1,409,804

Due after one year

2,796,341

2,466,969

4,053,711

3,876,774

1,423,611

1,728,497

Acquisition cost
Accumulated depreciation
Net leased property
Future minimum lease payments,
including interest portion

Lease payments
Pro forma depreciation expenses (assuming
declining-balance method)
Pro forma interest expenses
Operating leases - future minimum lease
payments

LessorThousands of yen
Tools, appliances and fixtures

Future minimum lease payments,
including interest portion

Lease payments received
Depreciation expenses

96,03367,768

Revenues from interest

299,745

281,99026

MARS

ENGINEERING

CORP ORATI ON

Capital Structure
Consolidated balance sheet
AssetsMarch 31; Thousands of yen

2002

2003

2004

Current assets
Cash and deposits

3,419,786

7,286,078

10,633,446

Notes and accounts receivable

9,531,276

10,313,582

10,518,982

Marketable securities

4,626,631

3,425,487

7,134,206

Inventories

3,194,132

3,519,687

3,184,929

364,674

865,704

499,330-

933,050-

Others106,859

190,165

239,754

Allowance for doubtful accounts(9,065)(22,999)(36,021)

21,234,295

26,510,757

32,174,627

7,906,200

5,723,107

6,147,187

2,612,887

1,657,960

1,913,295

5,293,312

4,065,146

4,233,891

178,832

198,411

246,231

84,549108,715

127,053

94,28389,696

119,177

Tools, appliances and fixtures

2,259,585

2,348,959

2,357,083

Accumulated depreciation

1,673,568

1,866,976

1,981,340

586,016

481,983

375,742

10,242,712

5,699,374

5,782,399

7,180

21,000-16,223,506

10,357,201

10,511,211

Consolidation translation adjustments

25,95916,4306,901

Others96,362

121,882

84,565

122,321

138,31391,466

Investment securities

1,169,365706,010

1,575,342

Deferred tax assets

681,628

569,362

587,287

Deferred tax assets
Income tax refunds receivable

Fixed assets
Tangible fixed assets
Buildings and structures
Accumulated depreciation

Machinery and transportation equipment
Accumulated depreciation

Land
Construction in progress

Intangible fixed assets

Investments and other assets

Others611,431563,551

608,629

Allowance for doubtful accounts(162,785)(146,077)(268,206)

2,299,638

1,692,847

2,503,053

Total fixed assets

18,645,466

12,188,361

13,105,732

Total assets

39,879,762

38,699,119

45,280,360

27

MARS

ENGINEERING

CORP ORATI ON

Liabilities and shareholders’ equity
March 31; Thousands of yen

2002

2003

2004

4,289,542

3,417,140

3,392,821

86,632

1,000,000

1,000,000-

300,000

300,000

Income taxes payable

1,805,334

272,670

2,836,977

Allowance for bonuses

266,839

254,359

285,551

3,762,361

4,177,561

4,008,890

634,963749,509742,424

10,845,673

10,171,241

12,566,665-

700,000

400,000

4,137

-

-

-

-

503,9542,438,739

2,584,459

2,458,826

2,442,877

3,284,459

3,362,781

13,288,551

13,455,701

15,929,447

144,427

212,837

362,992

Common stock

7,934,100--

Additional paid-in capital

8,371,830--

Retained earnings

10,193,486--(52,340)

-

-

(292)

-

-

26,446,783--

Common stock-

7,934,100

7,934,100

Capital reserves-

8,371,830

8,371,830

Retained earnings-

8,865,052

12,475,532

Unrealized gains or losses on other securities-(140,110)

206,751

Treasury stock

-

(292)

(292)

Total shareholders' equity-

25,030,579

28,987,920

39,879,762

38,699,119

45,280,360

Current liabilities
Notes and accounts payable
Short-term borrowings
Long-term debt due within 1 year

Advances received
OthersLong-term liabilities
Long-term debt
Employees' retirement benefits
Reserve for directors' retirement allowances
OthersTotal liabilities

Minority interests
Shareholders' equity

Unrealized gains or losses on other securities
Treasury stock
Total shareholders' equity

Total liabilities, minority interests and shareholders' equity

28

MARS

ENGINEERING

CORP ORATI ON

Market value of securities
Other quoted securities
Cost ofacquisition

Book value

Unrealized
gain (loss)

Cost ofacquisition

Book value

Unrealized
gain (loss)

95,745

108,709

12,964

170,949

452,142

281,192

JGB, local government bonds, etc.

-

-

-

-

-

-

Corporate bonds

-

-

-

-

-

-

Others

-

-

-

-

-

-

1,530,000

1,531,825

1,825

1,257,543

1,336,935

79,392

1,625,745

1,640,534

14,7891,428,492

1,789,078

360,585

75,20460,236(14,967)---

JGB, local government bonds, etc.

-

-

-

-

-

-

Corporate bonds

-

-

-

-

-

-

Others

-

-

-

-

-

-

667,652

426,064(241,587)

983,176

971,193(11,983)

742,856

486,301(256,555)

983,176

971,193(11,983)

2,368,601

2,126,835(241,766)

2,411,669

2,760,271

348,602

Thousands of yen

Securities valued on the consolidatedbalance sheet at amounts greater thanpurchase cost
Shares
Bonds

OthersSecurities for which valuations on the
consolidated balance sheet do not exceed
purchase cost
Shares
Bonds

OthersDuring fiscal year 2003, a valuation write-off of 59,539,000 yen was recorded with regard to other securities held. When the market valueof a security at fiscal year-end has fallen to less than 50% of the acquisition price, a valuation write-off is made for the full amount of thedifferential. When the market price has fallen by 30%-50% of the acquisition price, an amount deemed necessary is written off, taking
into consideration the actual amount in question and the possibility of recovery.

Other marketable securities sold during the years ended March 31, 2003
and 2004
Thousands of yen

2003

2004

48,649172,483

Total gains on sales

-

6,962

Total losses on sales

52,18991,956

Amount sold

Major investment securities without market prices
Thousands of yen

2003

2004

Corporate bonds

221,146

61,000Commercial paper

299,566

4,018,802

90,00090,0001,283,815

1,169,328

110,134

110,147-

500,000

Bonds being held to maturity

Other securities
Unlisted stocks (excluding OTC stocks)
Money management funds
Medium-term government bond funds
Bonds

29

MARS

ENGINEERING

CORP ORATI ON

Scheduled redemptions of bonds with maturity dates and bonds being
held to maturity (among holdings in the “other securities” account)
Up to 1 year

Longer than 1 andup to 5 years

Longer than 5 andup to 10 years

Longer than
10 years

-

-

-

-

9,000

52,000--4,018,802

-

-

-

-

389,094--

4,027,802

441,094

-

-

-

-

-

-

Corporate bonds

200,146

21,000--

Others299,566---

145,228

83,883

142,804-

644,940

104,883

142,804-

Thousands of yen
2004

Bonds
JGB, local government bonds, etc.
Corporate bonds
OthersOthers2003

Bonds
JGB, local government bonds, etc.

OthersDerivatives
Thousands of yen
Total

2003
Over oneyear Market value

2004
Over oneyear Market value

Unrealized
gain (loss)

Total

Unrealized
gain (loss)

-

-

-

-

-

Interest rate swap

Pay floating and receive fixed

-

-

-

Pay fixed and receive floating

10,000,000 10,000,000(511,266)(511,266) 10,000,000-(257,379)(257,379)

10,000,000 10,000,000(511,266)(511,266) 10,000,000-(257,379)(257,379)

30

MARS

ENGINEERING

CORP ORATI ON

Facilities
Thousands of yen

Buildings
andstructures

Tools,
appliancesandfixtures

Land
Book value

Squaremeters

Other

Total bookvalue

Number of
employees

ParentHigashi Fuji Plant
Manufacturing equipment
Gotemba Technology and Distribution
CenterManufacturing and distribution facilities
Head Office533,080

156,514597,253

11,447

1,792

1,288,640

32

638,2028,263

535,660

2,692

98,294

1,280,420

31-

27,870

-

-

2,039

29,909

78

-

761

-

-

-

761

22

-

25,982

-

-

1,079

27,06242

275,411

2,497

172,813

7,654

4,382

455,1046

305,762

721

-

-

-

306,484

-

-

2,428

-

-

-

2,428

5

Employee recreation and welfare
facilities
Tokyo Branch, etc.

183,728444

550,024

1,202

2,979

737,176-

Sales, installation, and maintenancefacilities
Others

3,476

1,739

-

-

-

5,216

210

-

-

1,641,013

16,278-

1,641,013

2

Facilities for corporate administration
Fuchu Technical Center
Facilities for corporate administration
Susono Technical Center
R&D facilities
Gotemba Warehouse
Warehousing facilities
Fuji Training Center
Training facilities
Mishima Technical Center
Inactive
Dormitories

Unused landMars Corporation

Buildings and structures

1,490,790-

2,214,745

5,398

-

3,705,535

Equipment and machinery

393,241

8,196

-

-

-

401,438

OA equipment

-

1,603

-

-

-

1,603

Peripheral equipment

-

-

-

-

193,256

193,256

Buildings and structures

19,115

-

3,610

23

-

22,725Equipment and machinery

4,024

680

-

-

-

4,705

-

507

-

-

-

507

Dies

-

2,046

-

-

-

2,046

Vehicles and delivery equipment

-

-

-

-

50

50

1,036

11,698---12,735

OA equipment

-

8,813

-

-

-

8,813

Peripheral equipment

-

2,172

-

-

-

2,172

Mars Line-Tech Corporation

OA equipment

9

Mars Techno-Science Corporation

Equipment and machinery

31

49

MARS

ENGINEERING

CORP ORATI ON

Buildings
andstructures

Tools,
appliancesandfixtures

Buildings and structures

253,907-

Equipment and machinery

131,107

7,256

-

1,285

Dies

-

2,323

-

Vehicles and delivery equipment

-

-

-

1,006

3,829

-

-

334

-

Thousands of yen
WINTEC Co., Ltd.

OA equipment

Other

Total bookvalue

Number of
employees

2,519

-

321,187

21

-

-

7,586

145,950

-

-

-

1,285

-

-

2,323

-

971

971

-

-

4,835

-

-

334

Land

67,280Hotel Sunroute Hakata, Inc.

Equipment and machinery
OA equipment

13

Borrowings
Thousands of yen

Previous term

Outstanding

Average rate

Maturity

1,000,000

1,000,000

0.31555%-

Current portion of long-term debt

300,000

300,000

0.44%-

Long-term debt (excluding current
portion of long-term debt)
Other interest-bearing liabilities

700,000

400,000

0.44%

2005 - 2006

-

-

-

-

2,000,000

1,700,000--

Short-term borrowings

Long-term debt repayable within 5 years of the end of the fiscal year to March 2004
(excluding the amount payable within one year) is as follows:
Thousands of yen

Long-term debt

Longer than 1
and up to 2 years

Longer than 2
and up to 3 years

Longer than 3
and up to 4 years

300,000

100,000

-

32

MARS

ENGINEERING

CORP ORATI ON

Retirement benefits
Outline of retirement benefit system

The Company has established a qualified defined-benefit pension plan. It has alsojoined a corporate pension plan formed by multiple employers (the National
Employers Welfare Pension Fund for the Information Service Industry).
Upon the retirement of an employee, the Company may make extra retirement
payments to the employee. These are unrelated to liabilities calculated on the basis ofactuarial assumptions, which the Company recognizes in accordance withretirement-benefit accounting guidelines.
Items related to retirement benefit liabilities
Thousands of yen

2003

2004

Retirement benefit liabilities(832,861)(943,283)

Pension assets

683,299785,689

Unaccrued pension benefit liabilities(149,561)(157,593)

Unrecognized actuarial gains or losses

304,266

288,956

Net amount shown on consolidated balance sheet

154,705

131,363

Prepaid pension expenses

154,705

131,363--

Allowance for retirement benefits

Items related to retirement benefit expenses
Thousands of yen

2003

2004

Current service costs

70,55577,555Pension premiums paid under multi-party employers'
welfare pension fundInterest expense

85,23096,987

12,45814,350

Expected earnings on pension fund assets(2,162)0

Expensing of actuarial differences

26,776

33,621Retirement benefit expenses

192,856

222,51433

MARS

ENGINEERING

CORP ORATI ON

Assumptions underlying the calculation of retirement benefit liabilities
Thousands of yen

2003

2004

Discount rate

1.7%

1.7%

Expected rate of return

0.3%

0.0%

Equal payments basis

Equal payments basis

Method of allocating prospective retirement benefits toeach period
Amortization period for actuarial gains or losses

10 years

10 years(Expensed beginning in the
consolidated fiscal year following
the year in which the expenses
arise, using straight-line
amortization over a prescribed
number of years that is equal toor less than the averageremaining period of service of
employees.)(Expensed beginning in the
consolidated fiscal year following
the year in which the expenses
arise, using straight-line
amortization over a prescribed
number of years that is equal toor less than the averageremaining period of service of
employees.)

Company’s share of pension assets based on percentage of premiums
contributed to multi-party employers’ pension system
Thousands of yen

2003

2004

676,766

980,330

Deferred taxes
Thousands of yen

2003

2004

Deferred tax assets (current)

865,989

499,650

Deferred tax liabilities (current)

(284)

(319)

Deferred tax assets - net

865,704

499,330

Deferred tax assets (fixed)

634,384786,692

Deferred tax liabilities (long-term)(65,022)(199,404)

Deferred tax assets - net

569,362

587,287

Legal effective tax rate

42.05

Expenses not deductible for tax purposes(such as entertainment expenses)
Per-capita rate of inhabitants tax(2.23)(6.47)

Non-recognition of tax effects related to unrealized profits(50.66)

Impact of change in effective tax rate

(3.87)

Others0.46

The difference
between the effective
tax rate as stipulated
by law and thecorporate tax rate
after application ofinter-period tax
allocation is less than
5 percent, and thefigure is therefore notreported in thissection.

Percentage

Income tax and others accompanying adoption of tax effectaccounting(20.72)%

34

MARS

ENGINEERING

CORP ORATI ON

Nonconsolidated Financial Statements
Nonconsolidated statement of income
Years ended March 31; Thousands of yen

2002

2003

2004

Net sales - finished goods

17,398,992

20,167,621

25,900,391

Net sales - merchandise

421,575

413,258

212,688

17,820,567

20,580,880

26,113,079

Net sales

Cost of goods soldCost of finished goods sold
Finished goods inventory, beginning of term

1,471,750

993,386

1,562,263

Production costs for the term

8,291,917

11,653,380

14,650,062

9,763,668

12,646,766

16,212,326

Transfers to other accounts

50,881

128,937

90,512Finished goods inventory, end of term

993,386

1,562,263

1,547,961

8,719,400

10,955,565

14,573,851

Cost of merchandise sold
Merchandise inventory, beginning of term
Merchandise purchased during term
Merchandise inventory, end of term

4,369

4,017

4,207

270,366

213,602107,303274,735

217,620

111,511

4,017

4,207

5,384

270,717

213,412106,127

8,990,118

11,168,978

14,679,979

8,830,449

9,411,902

11,433,100

After-sales service expenses

304,763356,981410,120

Directors' salaries

117,420

129,420

125,130

Employees' salaries

1,326,536

1,445,079

1,581,695

281,741

272,611445,467

Gross profit on sales
Selling, general and administrative expenses

Bonuses
Provision for bonuses

192,606

181,378

210,956

Legal welfare expenses

224,230

245,466

299,583

Rent

163,254

171,551

525,460

Depreciation expenses

207,671

190,61483,811

Provision for directors' retirement allowances--

36,614

1,385,734

1,558,302

1,626,330

4,203,960

4,551,406

5,345,169

4,626,488

4,860,496

6,087,931

Interest income

31,385

16,242

14,609Interest income from securities

9,995

38,12365,975

Dividend income

7,954

18,604

19,378Foreign exchange gain

1,345

-

-

OthersOperating income
Nonoperating income

Profits from anonymous association

811,993--

Income from contracted operations-

10,6009,600

65,412

17,546

21,733928,085

101,117

131,296

Miscellaneous income

35

MARS

ENGINEERING

Years ended March 31; Thousands of yen

CORP ORATI ON

2002

2003

2004

153,195

45,956

6,143

Nonoperating expenses
Interest expenses
Loss on sale of securities

4,258

-

-

Miscellaneous losses

9,332

2,208

54

166,786

48,164

6,197

5,387,787

4,913,449

6,213,030

Ordinary profit
Extraordinary income
Gain on sale of investment securities
Reversal of allowance for doubtful accounts

-

-

6,962

16,950-2,200

16,950-9,162

Extraordinary losses
Loss on sale of fixed assets
Loss on removal of fixed assets
Provision for directors' retirement allowances for prior years-

5,779,387-

13,311

13,264

8,979

-

-

487,669

Loss on liquidation of subsidiaries

374,600--

Loss on disposal of inventories

23,590139,023

158,081

Loss on sale of investment securities

24,95352,18991,956

Valuation loss on investment securities

662,781

59,539-Valuation loss on memberships

500

-

-

Provision for doubtful accounts

9,500

-

-

1,109,236

6,043,404

746,687

Income (loss) before taxes and other adjustments

4,295,501(1,129,954)

5,475,505

Corporate, inhabitants and enterprise taxes

1,926,805

42,113

2,161,037(63,585)(479,734)

171,440

1,863,220(437,620)

2,332,478

Adjustment for income and other taxes
Net income (loss) for the term

2,432,281(692,333)

3,143,026

Retained earnings brought forward from previous term

3,521,578

5,345,863

4,031,533

227,198

227,198

227,198

5,726,661

4,426,331

6,947,362

Interim dividends
Unappropriated retained earnings, fiscal year-end

36

MARS

ENGINEERING

CORP ORATI ON

Nonconsolidated appropriation of retained earnings
Thousands of yen

June 27, 2002

June 27, 2003

June 29, 2004

5,726,661

4,426,331

6,947,362

Dividends

340,797

340,797454,396

Directors' bonuses

40,00054,00083,000[Statutory auditors' bonuses][ 2,000 ][ 2,000 ][ 6,000 ]380,797394,797

537,396

5,345,863

4,031,533

6,409,965

Unappropriated profit, end of term
Appropriation of retained earnings

Retained earnings carried forward to next term

Cost of goods soldYears ended March 31; Thousands of yen

2002

%

2003

%

2004

%

7,175,664

84.8

10,186,258

86.6

13,092,715

88.1

Subcontracted processing expenses

531,460

6.3

823,935

7.0

1,112,824

7.5

Labor costs

333,7623.9

307,987

2.6

335,221

2.3

Manufacturing overhead

425,061

5.0

441,7373.8

314,684

2.1

8,465,949

100.0

11,759,919

100.0

14,855,444

100.0

Cost of materials

Total manufacturing costs for the term
Work-in-process inventory, beginning of term

131,047

185,964

34,447

8,596,997

11,945,883

14,889,893

Work-in-process inventory, end of term

185,964

34,447

66,296

Transfers to other accounts

119,115

258,055

173,534

Production costs for the term

8,291,917

11,653,380

14,650,062

27,62526,242

26,271

264,011

278,393

200,062

115,741

223,288

107,689-

31,496

65,844

1,254

216

-

-

3,053

-

2,120

-

-

119,115

258,055

173,534

Primary items and amounts included under Labor costs and Manufacturing overhead.

Labor costs
Provision for bonuses
Manufacturing overhead
Depreciation expenses
Transfers to other accounts
Selling, general and administrative expenses
Loss on disposal of inventories
Manufacturing expenses
Tools, appliances and fixtures
Construction in progress

37

MARS

ENGINEERING

CORP ORATI ON

Nonconsolidated balance sheet
AssetsMarch 31; Thousands of yen

2002

2003

2004

Cash and deposits

2,537,075

5,755,222

8,217,074

Notes receivable

1,059,480

1,184,473

1,801,918

Current assets

Accounts receivable - trade3,952,161

4,205,551

3,988,099

Marketable securities

4,265,079

3,165,074

6,873,957

Merchandise

4,017

4,207

5,384

Finished goods

993,386

1,562,263

1,547,961

Materials

987,083

807,245463,288

Work in process

185,964

34,447

66,296

Supplies

491,194

509,058

420,965

Advances paid

6,557

4,454

-

Prepaid expenses

29,32856,11854,946

Short-term loans

518,000

456,000

283,000

Deferred tax assets

269,880

724,580

344,647-

933,050-

12,106

13,035

14,591

Income tax refunds receivable
OthersAllowance for doubtful accounts(5,418)(5,856)(10,341)

15,305,896

19,408,927

24,071,791

7,513,760

3,506,666

3,507,299

2,378,694

1,503,591

1,613,388

5,135,065

2,003,075

1,893,910

Fixed assets
Tangible fixed assets
Buildings
Accumulated depreciation
Structures
Accumulated depreciation
Machinery and equipment

348,368

191,175

191,175

218,937

137,047

145,425

129,430

54,12845,750148,055

166,207

216,723

Accumulated depreciation

60,53282,224

109,156

87,52383,983

107,566

Vehicles and delivery equipment

26,17826,17818,304

Accumulated depreciation

20,024

21,81715,302

6,153

4,360

3,002

Tools, appliances and fixtures

1,609,433

1,641,258

1,633,514

Accumulated depreciation

1,251,179

1,360,217

1,406,291

358,253

281,041

227,223

10,239,102

3,496,763

3,496,763

LandConstruction in progress

38

2,770

-

-

15,958,299

5,923,352

5,774,217

MARS

ENGINEERING

March 31; Thousands of yen

CORP ORATI ON

2002

2003

2004

Patents

13,217

15,785

17,461

Telephone subscription rights

15,214

15,214

15,214

Software49,36736,763

23,81977,79967,76456,495

1,169,365706,010

1,575,342

Capital stock of affiliated companies

466,860

2,476,860

2,476,860

Investments other than securities

1,610

1,610

454

Intangible fixed assets

Investments and other assets
Investment securities

Long-term loans to affiliates

239,000

103,000

410,000

Rental and guarantee deposits

162,165

392,450

365,400

Claims in bankruptcy and substantial bankruptcy

76,393

52,79193,309Long-term prepaid expenses

39,791

18,686

9,694

Deferred tax assets

97,939186,296

151,271

Prepaid pension expenses

167,613

154,705

131,363

Others

66,10066,10066,100Allowance for doubtful accounts(130,962)(109,635)(141,895)

2,355,877

4,048,876

5,137,902

Total fixed assets

18,391,976

10,039,993

10,968,615

Total assets

33,697,873

29,448,920

35,040,407

39

MARS

ENGINEERING

CORP ORATI ON

Liabilities and shareholders’ equity
March 31; Thousands of yen

2002

2003

2004

Notes payable

1,422,773

15,8304,160

Accounts payable - trade

2,286,744

2,656,365

2,939,070

Accounts payable - other

183,543

104,911

158,023

Income taxes payable

1,553,467

17,4072,165,011

Consumption taxes payable

143,023

177,359

138,358

Accrued expenses

84,25685,15090,518Current liabilities

Advances from customers

8,400

31,91339,465

Deposits received

13,373

14,64625,546

Deferred income

28,077

15,241

3,534

Allowance for bonuses

220,232

207,621237,228-

12,772-

5,943,893

3,339,219

5,800,916

730,436

511,266

257,379--

503,954

OthersLong-term liabilities
Interest rate swap liability
Reserve for directors' retirement allowances
Others72,011

34,50046,320802,447

545,766

807,655

6,746,340

3,884,986

6,608,571

Common stock

7,934,100--

Additional paid-in capital

8,371,830--

Legal income reserves

372,109--4,600,000--

Total liabilities

Shareholders' equity

Retained earnings
Voluntary reserves - total
Special reserve
Unappropriated retained earnings, fiscal year-end
Unrealized gains or losses on other securities
Treasury stock
Total shareholders' equity

40

4,600,000--

5,726,661--

10,326,661--(52,875)

-

-

(292)

-

-

26,951,532

-

-

MARS

ENGINEERING

CORP ORATI ON

March 31; Thousands of yen

Common stock

2002

2003

2004

-

7,934,100

7,934,100-

8,371,830

8,371,830-

8,371,830

8,371,830-

372,109372,109-4,600,000

4,600,000-

4,426,331

6,947,362

Capital reserves
Additional paid-in capital
Retained earnings
Legal income reserves
Voluntary reserves - total
Special reserve
Unappropriated retained earnings, fiscal year-end-

9,398,441

11,919,471

Unrealized gains or losses on other securities-(140,144)

206,726

Treasury stock

-

(292)

(292)

-

25,563,934

28,431,835

33,697,873

29,448,920

35,040,407

Total shareholders' equity
Total liabilities and shareholders' equity

Trade credits
Notes receivableThousands of yen

2004

GAIA

260,525

Hikari Shinsei

144,600

Heart Brain

94,105

MEISEI-KOGYO CO., LTD.

82,775Meiwa

72,000

Others

1,147,912
1,801,918

Accounts receivable — trade
Thousands of yen

2004

Fuyo General Lease

224,684

Hikari Shinsei

201,174

ORIX Corporation

176,936TATSUMI Corporation

140,908

Mars Techno-Science Corporation

132,111

Others3,112,284
3,988,099

41

MARS

ENGINEERING

CORP ORATI ON

Turnover of accounts receivableThousands of yen

2004

Beginning balance

4,205,551

Increase

27,496,360

Collected

27,713,811

Ending balance

3,988,099

Turnover87.4%

Average days for collection

54.3

Securities
Marketable and investment securities
Thousands of yen

StocksNumber ofsharesBook value

Investment securities
Other securities
Japan Cash Machine (6418)

80,525281,837

Resona Holdings, Inc. (8038)

465,150

80,936

Atom Corp. (7412)

1,000

50,000Tokyo Tomin Bank (8339)

21,242

47,688P ARK

20,00040,00050

33,100

Nippon Signal (6741)

5,000

3,485

NAGANO KEIKI (7715)

1,464

2,122

Nissei Plastic Industrial (6293)

1,400

1,176

Daiwabo Information System (9912)

1,100

1,144

Taisei Oncho (1904)

1,500

662

TOKYO MAGTEK Inc.

30

-

2,048

-

600,509542,142

Total face value

Book value

4,029,000

4,027,802

52,00052,0004,081,000

4,079,802

1,292,276

2,846,155

576,495

981,200

1,868,771

3,827,355

UFJ Holdings, Inc. (8307)

IRLAN

Bonds
Marketable securities
Bonds being held to maturity
Investment securities
Bonds being held to maturity

OthersMarketable securities
Other securities
Investment securities
Other securities

42

MARS

ENGINEERING

CORP ORATI ON

Tangible fixed assets
Beginningof term

Increase

Decrease

End of term

Buildings

3,506,666

3,881

3,249

3,507,299

1,613,388

112,360

1,893,910

Structures

191,175--

191,175

145,425

8,377

45,750Machinery and equipment

166,207

50,515-

216,723

109,156

26,932

107,566

Vehicles and delivery equipment

26,178480

8,354

18,30415,302

1,420

3,002

Tools, appliances and fixtures

1,641,258

87,911

95,655

1,633,514

1,406,291

134,782

227,223

Land

3,496,763--

3,496,763--

3,496,763

9,028,251

142,789

107,258

9,063,782

3,289,564

283,8735,774,217

Patents---

25,423

7,962

3,086

17,461

Telephone subscription rights

-

-

-

15,214--

15,214

Software---70,17846,35813,99923,819---110,816

54,32017,08556,495

65,137

6,374

1,524

69,98860,293

14,436

9,694

Thousands of yen

Depreciation
Accumulated
Current

End of term,net

Tangible fixed assets

Intangible fixed assets

Long-term prepaid expenses

Reserves
Beginning ofterm

Increase

Decrease

End of term

Allowance for doubtful accounts

115,491

45,0958,350

152,236

Reserve for bonuses

207,621237,228

207,621237,228-

519,959

16,005503,954

Thousands of yen

Reserve for directors' retirement allowances

43

MARS

ENGINEERING

CORP ORATI ON

Accounting Policies
Summary of accounting policies: consolidated
Basis of presentation

Japanese GAAP

Marketable securities andinvestments in securities

Bonds held to maturity: cost amortization method (straight-line)
Other securities:
Quoted securities: The market value method is applied, based on the market value
as of the fiscal year-end. The entire positive or negative valuation difference withthe purchase price is booked directly as shareholders’ equity, and the cost of
securities sold is calculated using the moving-average method.
Unquoted securities: valued at cost using the moving-average method

Derivatives

Market price method

Inventories

Valued at cost using the moving-average method

Depreciation

Tangible fixed assets: declining-balance method
Provided, however, that buildings acquired after April 1, 1998 (excluding
appurtenances) and assets used in hotel operations are depreciated on astraight-line basis.
Intangible fixed assets:
Software for sale: amortized over a period of three years from the commencementof sales, based on a projected number of sales. However, if the amount calculatedon this basis is less than straight-line amortization over the estimated economic lifeof the software, then the latter is recognized as a minimum amount of amortization.
Other: straight-line method
Amortization of software for internal use is based on the period of potential use (5years); patent rights are amortized over 5 years.
Long-term prepaid expenses: amortized in equal installments over the period
coveredAllowance for doubtful accounts

To provide for potential losses from doubtful accounts, the Company recognizes
an amount calculated on the basis of a statutory deduction ratio for generalaccounts receivable, plus an amount for specific accounts for which collection
appears doubtful.
Recognition of expense for current term, based on estimated bonus expense forthe bonus period

Reserve for bonuses
Retirement benefit accounting

Opinion of independent auditors

To provide for employees’ retirement benefits, the Company recognizes an amountbased on retirement benefit liabilities and estimated pension assets as of the endof the consolidated fiscal year to March 2004.
Auditors: Tohmatsu & Co.
Opinion: unqualified

44

MARS

ENGINEERING

CORP ORATI ON

Summary of accounting policies: nonconsolidated
Basis of presentation
Marketable securities andinvestments in securities

Japanese GAAP
Bonds held to maturity: cost amortization method (straight-line)
Shares in subsidiaries and affiliated companies: valued at cost using themoving-average method
Other securities:
Quoted securities: The market value method is applied, based on the market value
as of the fiscal year-end. The entire positive or negative valuation difference withthe purchase price is booked directly as shareholders’ equity, and the cost of
securities sold is calculated using the moving-average method.
Unquoted securities: valued at cost using the moving-average method

Derivatives

Market price method

Inventories

Merchandise, finished goods, work in process, raw materials and supplies: valued
at cost using the moving-average method
Tangible fixed assets: declining-balance method
Provided, however, that buildings acquired after April 1, 1998 (excluding
appurtenances) are depreciated on a straight-line basis.

Depreciation

Intangible fixed assets: straight-line method
Amortization of software for internal use is based on the period of potential use (5years); patent rights are amortized over 5 years.

Allowance for doubtful accounts

Reserve for bonuses

Long-term prepaid expenses: amortized in equal installments over the period
coveredTo provide for potential losses from doubtful accounts, the Company recognizes
an amount calculated on the basis of a statutory deduction ratio for generalaccounts receivable, plus an amount for specific accounts for which collection
appears doubtful.
Recognition of expense for current term, based on estimated bonus expense forthe bonus period

Reserve for directors' retirement
allowances

Recognition of full amount of liability at term-end based on employment regulations

Retirement benefit accounting

To provide for employees’ retirement benefits, the Company recognizes an amountbased on retirement benefit liabilities and estimated pension assets as of the endof the consolidated fiscal year to March 2004.
Auditors: Tohmatsu & Co.
Opinion: unqualified

Opinion of independent auditors

45

MARS

ENGINEERING

CORP ORATI ON

Share-related Information
Shares in issue
Class of shares

CommonNumber of shares authorized

33,810,000

IssuedAs of March 31, 2004

11,360,000

As of June 30, 2004

11,360,000

Stock exchange listings or registration

Tokyo Stock Exchange, First Section

Comments-

Changes in common stock and number of shares outstanding
SharesThousands of yen
Date

December 24, 1999

Shares outstanding
Increase or
decrease
Balance

1,200

11,360Common stock
Increase or
decrease
Balance

Additional paid-in capital
Increase or
decrease
Balance Remarks

2,433,600

2,432,400

7,934,100

8,371,830

Public offering ofsharesShareholders by type of investor
Type of investor;
Hundred shares

Number ofshareholders

Number of units
owned% owned---Financial institutions

45

30,855

27.16

Securities companies

21

262

0.23

Business and other corporations

49

22,351

19.68

Non-residents (business and corporations)69

10,869

9.57

[3]

[7]

[0.01]

3,601

49,262

43.36

3,785

113,599

100.00-100-

National and local government agencies[Non-residents (individuals)]
Individuals and others

Shares less than one unit

46

MARS

ENGINEERING

CORP ORATI ON

Largest shareholders
Thousands ofshares owned

Name

Held in trust
accounts% of shares
outstanding

EM Planning

2,125.0

18.71

Japan Trustee Services Bank, Ltd. (Trust Account)

1,124.2

1,004,000

9.90

The Master Trust Bank of Japan, Ltd. (Trust Account)

728.6

529,100

6.41

Hirokazu Matsunami

702.8

6.19

Kayoko Matsunami

514.0

4.52

Akihiro Matsunami

500.0

4.40

Tokyo Tomin Bank, Ltd.

300.0

2.64

Shigeo Komiya

245.0

2.16

Teruo Gomi

225.0

1.98

Nomura Trust and Banking Co., Ltd. (Investment trust
account)

223.2

223,200

6,687.8

Share information
Fiscal year-end

March 31

Ex-rights date

March 31

Ex-rights date for interim dividend

September 30

Annual general meeting of shareholders

June

Trading unit

100 shares

Types of share certificates

100, 1,000 and 10,000 shares

Transfer agent

The Sumitomo Trust & Banking Co., Ltd.
1-4-4, Marunouchi, Chiyoda-ku, Tokyo

Publication of record

Nihon Keizai Shimbun

47

1.96
58.87

MARS

ENGINEERING

Contact
Toshiaki Sato
Executive Officer
Accounting Department
Mars Engineering Corporation
1-10-7, Shinjuku, Shinjuku-ku
Tokyo, Japan
Telephone: 81-3-3352-8555
Facsimile: 81-3-3351-7368

48

CORP ORATI ON

MARS ENGINEERING CORPORATION
1-10-7, Shinjuku, Shinjuku-ku, Tokyo 160-0022
Phone : 81-3-3352-8555
Facsimile : 81-3-3351-7368
URL : http://www.mars-eng.co.jp

Printed in Japan