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Annual Report 2007

About Us

夢With dreams

人

for everyone

for a comfortable house and living

住The vision of “homes for people”
is expanding our horizons
The Japanese word sumau, meaning to dwell continuously, expresses the attachment
many Japanese have to the notion of someday owning a house they can call home. Thus,
with renting traditionally considered no more than a temporary expedient until the time
a home can be purchased, Japanese rental housing has been unremarkable in terms offunction and design.
It is under such conditions that Leopalace21 has defied convention by offering rental
housing that is both comfortable and modern. We have thereby given a generation ofyoung people not yet in a position to buy their own homes a chance to live in more
opulent and pleasant surroundings. By following our dream of creating homes for people,
we have been able to stay firmly on top of Japan’s rental apartment business.
Now the time has come for us to move to a new level. People’s lifestyles and values are
rapidly diversifying. Thus, our next challenge will be to offer new housing options andservices that, transcending the boundaries of
conventional apartment business, enable us
to offer people a wider range of support at
home and in their lives. Leopalace21 continues
to evolve steadily as we seek new ways ofproviding homes for people.

1

Business Operations

夢

Value-added housing and services

Supporting people from every generation

Our Apartment Construction Subcontracting Business helps landowners create new assets
by providing total, long-term apartment management.
Our Leasing Business provides easy-to-rent, one-room studio apartments to meet theneeds of both young people who want to live alone yet in comfort,
and company employees on extended business or training trips.
These two core businesses create powerful synergies and,thanks to our unique business model,
Leopalace21 has achieved steady growth in both sales and earnings.
We are also maximizing the benefits of our core business infrastructure
by means of our three strategic businesses:
The Residential Business, to meet the needs of today’s new families with their changing lifestyles.
The Silver Business, which supports seniors during their “second life”
with nursing care facilities and services.
The Broadband Business, which is a convenient source of entertainment for our renters.
In addition, we have an affiliated domestic hotel business,
as well as an overseas hotel and resort business.
Leopalace21’s housing and residential services meet the needs of each generation.

人

We aim to be a provider of all life-related services across the generations.
Our integrated, multi-business approach is designed to maximize corporate value.

2

Apartment Construction
Subcontracting Business

住Contents
Leasing BusinessResidential Business

Silver BusinessMessage to Our Shareholders

4

Feature Story: What Strengths Set
Leopalace21 Apart from the Competition?

10

Overview of Operations

16

Corporate Governance22

Corporate Social Responsibility (CSR)

25

Financial Section

26

Corporate Information

52

Corporate Slogan

54

Broadband BusinessCautionary Statements with Respect to Forward-Looking Statements
The business forecasts and other forward-looking statements contained in this annual report are basedon information currently available to the Company and on certain assumptions that the Company has
judged to be reasonable. Readers should be aware that a variety of factors might cause actual results todiffer significantly from these forecasts.

3

Message to Our Shareholders

Taking Our Businessto a New Level

President and CEO Yoshiteru Kitagawa
4Leopalace21 Corporation has developed
a Medium-Term Management Plan:“United Spirit.”
It outlines our vision for the future of the Company,
describing the challenges that we must meet.
Review of the Fiscal Year Ended March 2007

dates for some of these projects had to be pushed into the fiscal year
ended March 2007, thus generating an unusually large increase inboth revenues and profits. However, even after adjusting for theeffects of the construction delays, the overall trend toward higher net
sales and higher profits remains unchanged, and there is no doubtthat the Company is firmly on track to achieving sustainable growth.

It is my pleasure to share with you the news that Leopalace21
Corporation (hereinafter referred to as Leopalace21), by expanding
the operations of its core Apartment Construction Subcontracting
and Leasing businesses, set new company records for net sales
and profits during the fiscal year ended March 2007. We lookforward to making every effort in the future to ensure that we
continue to meet the expectations of our shareholders.

In view of the Company’s solid performance for the year underreview, it was decided to raise the annual cash dividend to ¥50 per
share, a year-on-year increase of ¥35. The dividend payout ratio was
21.3%. Leopalace21 has made providing returns to shareholders a
top management priority. Earnings during the fiscal year under review
were skewed somewhat because of projects carried forward from theprevious fiscal year, but once these effects have disappeared andoperations return to normal, we intend to raise the dividend payout
ratio to 30%. Moreover, the Company’s policy is to use effectively
the retained earnings in ways that will increase corporate value.

During the fiscal year ended March 2007, Leopalace21 recorded net
sales of ¥631,608 million, a gain of 35.7% over the previous year.
The Company posted operating profit of ¥76,007 million (up 86.4%)
and net income of ¥37,358 million, marking a return to profitability
after having recorded a net loss in the previous fiscal year. Becauseof the large concentration of new construction projects scheduled forcompletion toward the end of the previous fiscal year, the completion

Financial Highlights
Leopalace21 Corporation and consolidated subsidiaries
Years ended March 31

Thousands of U.S. Dollars,
Except Where Noted

Millions of Yen, Except Where Noted

Net sales

2007

2006

2005

2007

¥631,608¥465,387¥476,267$5,350,348

Operating profit

76,007

40,77554,682643,857

Net income (loss)

37,358(16,582)

33,262

316,459¥454,820¥412,804¥453,434$3,852,771

185,785

133,622

149,798

1,573,779

Total net assets per share (¥ and US$)

¥1,054.99¥839.44¥941.06$8.94

Net income (loss) per share (¥ and US$)234.68(104.17)220.79

1.99

Cash dividends per share (¥ and US$)

50.00

15.00

15.00

0.42

Equity ratio (%)

37.0

32.4

33.0

Return on equity (ROE) (%)

24.8(11.7)

28.8

Return on assets (ROA) (%)

8.6

(3.8)

7.6

Total assets
Total net assets

Notes: 1. U.S. dollar amounts are translated from yen at the rate of ¥118.05 = US$1, the approximate rate prevailing at March 31, 2007.
2. The amounts of total net assets for the years ended March 2005 and 2006 represent the value of total shareholders’ equity and do not include
minority interests.

5Message to Our Shareholders
Epoch-Making Leasing System Fuels Demand Growth

realtor fees (although in some cases we do collect the equivalent of
one month’s rent as a systems fee), it greatly reduces the burden on
renters. Further, the “Monthly Leopalace” system provides fully
furnished and equipped apartments for short-term rental on a weekly
or monthly basis. We have also developed a “Corporate User System”
to supply the needs of corporate clients for company housing, and toprovide accommodations for businessmen on extended business trips.
By defying convention and developing a rental system focused
primarily on the renter’s needs, Leopalace21 has succeeded in achieving
annual occupancy rates of over 90%.

The first Leopalace21 rental apartment building was completed in
1985, a time when the rental apartments available to young people
were quantitatively and qualitatively inadequate to meet market needs.
Further, in order to move into an apartment, renters had to pay adeposit, key money and realtor fees, causing young people to shoulder
a very heavy financial burden whenever they moved. This Japanesebusiness practice remains largely unchanged.
The Leopalace21 Apartment Business is designed to serve society in
two ways: by promoting the effective use of real estate assets and bycreating a supply of high-quality residential housing for the renting
public. Our business model involves contracting with landowners tobuild apartment buildings, which the Company then agrees to leaseback and manage. Our two main core businesses are apartment
construction and leasing, both of which now operate nationwide. The“Leopalace21 leasing system” that we have pioneered is revolutionary
in Japan because, by eliminating security deposits, key money and

The Company’s basic philosophy is that “successful leasing operations
are our top priority” and we therefore view our apartment construction
and our leasing businesses as integral parts of a whole. We now havea network of 280 Leopalace Center offices, including four overseas
offices that daily serve the diverse needs of renters. In addition,
information about apartments in all parts of Japan is available 24
hours a day via our Internet and mobile phone Websites. We also

Medium-Term Management Plan
Expand business domains, reinforce growth and earnings potential of core businesses

April 2006

March 2009

Phase I Medium-Term Management Plan

Phase II Medium-Term Management Plan

(April 2006-March 2009)(April 2009-March 2011)

Establish solid business foundation

Take advantage of expanding synergies

Specific
Strategies
Core
Businesses

Other
Businesses

Qualitative improvement

Quantitative expansion

Quantitative expansion

Expand Leasing Business into a
network comprising 400 offices
and a marketing staff of 2,400

New apartment products
Introduce new services
Improve labor productivity

Complete development of ALM
leasing system (phase I)
Begin full implementation (phase II)
Pursue strategic M&A activities

Early operation of threestrategic businesses

Apartment total support business

LEO-REIT businessSet up in three metropolitan markets(phase I)

Market company housing services,in addition to life and non-life insurance

Establish a LEO-REIT businesswith ¥100 billion in strategic realestate assets

Target Indicators(FY2011/3)

6

Consolidated Net Sales

Consolidated Operating Profit

Equity Ratio

ROE¥1 trillion¥100 billion

50%

15%

at the same time being careful to maintain our focus on expanding
our core businesses. phase II of the plan runs from April 2009 throughMarch 2011, and is identified as a period of expansion throughsynergy. During this period, we intend to maximize the effect of thesynergies that will be generated between our various business
operations. The numerical targets we have established for the fiscal
year ending March 2011, the final year of the plan, call for us toachieve net sales of ¥1 trillion, operating profit of ¥100 billion, an
equity ratio of 50%, return on equity (ROE) of 15%, and a dividend
payout ratio of 30%.

publish our own magazine of apartment listings, and make every effort
keep track of market needs by providing information to major realestate brokers. The market information that we collect in this way isused to effectively promote our apartment construction business. Byboth continuously monitoring market demand and paying carefulattention to the wants and needs of today’s renters, we are able todevelop new supply plans to match market demand. This gives us ahead start on our competitors, in terms of meeting the rapidly
diversifying needs of renters, by enabling us to create such new
products as apartments that accept pets and that are equipped withespecially robust security systems.

To achieve these goals, it is essential that we further develop our twocore businesses, which are the two wheels that are driving ourcorporate growth. As of the fiscal year ended March 2007, we had
388,500 apartment units under management, and our occupancy rate
for the year was 92.8%. By the end of the plan in March 2011, however,
we expect to have 592,000 apartment units under management, andto achieve an occupancy rate of 94.5%. To meet these targets, we
intend to expand our network of Leopalace Center offices to 400

Medium-Term Management Plan: “United Spirit”

Leopalace21 is now moving at full speed to accomplish the goals set
out in our Medium-Term Management Plan. During phase I of thisplan, which runs from April 2006 through March 2009, our goal isto lay a solid foundation for future growth by promoting the progressof our three strategic businesses, which I will discuss below, while

March 2011
Forecasts for Sales
Billions of yen
1,200

Three strategic businesses andother businesses increase theirratio of net sales composition.

Three strategic businesses and other businesses
Leasing Business
Apartment Construction Subcontracting Business

1,000.0

1,000

870.0

Change into a residential
property asset
management company

766.7

800

96.9

316.2

349.8

384.3

424.7

277.2

316.1

336.4

320.0

320.0

320.0

2007/3

2008/3 (E)2009/3 (E)2010/3 (E)2011/3 (E)631.6

Become atotal support provider

20.5

165.7

706.7
54.1

600

465.4

255.3

38.3

400

249.7
200

195.2
0

Dividend Payout Ratio

30%

2006/3

Note: The segment results shown for our Hotel Resort Business and Other Business are included within three strategic
businesses and other businesses.

7Message to Our Shareholders
locations while aggressively developing and introducing new products
and services.
Apartment leasing is a business that depends on inventory, and thequantitative expansion in apartment stocks described above is intended
to increase our leverage in the market. At the same time, however, we
recognize the need to establish a profit structure that is commensuratewith the scale of our business. We are addressing this issue by taking
steps to construct a basic management system for our core businesses
ーa so-called “ALM leasing system”ーthat is based on the concept
of asset liability management (ALM, the comprehensive managementof all assets and liabilities). Under this system, our apartment buildings
will be considered assets on deposit from the apartment owners, andthe aim of the system will be to organically fuse the vast amount ofmanagement and market data that we have accumulated over morethan 20 years and utilize it to optimize returns from what will be asteadily expanding amount of deposit assets. From the beginning, ourcore business has been, at least in part, a financial service businessproviding asset management services for landowners. During phase
I of the present plan, we intend to complete development of a highlysophisticated ALM leasing system that will be on a par with thesystems used by megabanks. In phase II, the new system will become
fully operational. The quantitative and qualitative strategies describedabove will place Leopalace21 firmly on track to significantly enhance
the growth and earnings potential of its core businesses.

Promoting Our Three Strategic Businesses
Our Medium-Term Management Plan presents two visions for thedevelopment of the Company. The first involves our becoming a“Total Support Provider in the Housing Sector.” During the fiscal year

under review, 93.9% of our consolidated net sales were generated byour two core businesses. In the future, however, to realize the above
vision we will need to maintain the present level of growth andearnings expansion in our core businesses while, at the same time,increasing the percentage contribution to net sales of our otherbusinesses. This will require that we move the three strategic
businesses that we have already established, namely, our Residential
Business, Silver Business and Broadband Business, into full operation
as soon as possible. The expansion of our core businesses will leaddirectly to an expansion in the market for our broadband services.
As the number of apartment units we have under management
approaches the 400,000 mark, the increase in the number of units
with broadband connections, and a significant improvement in system
functions, is rapidly driving up the media value of our service. Asof the end of the fiscal year under review, some 302,000 people hadsigned up for our broadband services (an increase of 50% over theprevious year). Net sales totaled ¥11,100 million (up 50% year onyear), and the gross profit reached ¥850 million (a twofold year-onyear increase). This sharp rate of growth demonstrates that broadband,
which began as a service department, is well on its way to becoming
an important profit center. The Residential and Silver businesses,
which are involved in the construction of residential housing andnursing care facilities for sale or direct management, are extensionsof our core business model. They use our existing network ofApartment Construction Subcontracting and Leasing Business offices
as well as the apartment units we have under management, and haveeasy access to building sites owned by our client apartment owners.
This gives the Residential and Silver businesses a definite strategic
advantage that in time can be exploited further. Indeed, both of thesebusinesses have registered rapid growth despite only having started
operating in January 2005. In the fiscal year ended March 2007, net
sales of the Residential Business climbed to ¥14,150 million, thoseof the Silver Business’s facility operations totaled ¥880 million, andthose of its facility construction sector amounted to ¥4,460 million.
In the future, the continued expansion of our core business operations
is expected to spur a corresponding growth in our three strategic
businesses. One might say that the “Construction and Leasing
Synergy Business Model” that originally guided the development ofour core businesses is now evolving into a “Core Business and Strategic
Business Synergy Model.” We believe that this model will pave theway to the realization of the first vision outlined in our Medium-Term
Management Plan, and enable us to become a “Total Support Provider
in the Housing Sector.”8

Evolution into a Residential Property
Asset Management Company
The second key vision described in the present Medium-Term
Management Plan involves the transformation of Leopalace21 intoa full-fledged residential property asset management company. By
the end of the plan, we will have 600,000 apartment units undermanagement. To effectively manage these apartments, which represent
a huge amount of property assets, it is essential that we institutethe ALM leasing system mentioned earlier. Further, as illustrated
by the growth of real estate investment trusts (REITs) in this country,
financial investors are becoming an increasingly important presencein the real estate market. This trend will force us to expand ourbusiness model from one that focuses on individual property andapartment owners to one that also targets the financial assets ofinstitutional investors. During phase II of the plan, we will establish
a LEO-REIT specializing in residential and commercial property
asset management to serve the needs of these types of institutional
investors. This will move us a step closer to becoming a financeoriented business, and should greatly expand the synergies generated
between our two core businesses as well as our core and strategic
businesses, paving the way for the “Expansion through Synergy”
stage envisioned for phase II of our Medium-Term Management Plan.

Corporate Governance and CSR
Leopalace21 recognizes that increasing corporate value is an importantmanagement goal for all its stakeholders, and to this end the Company
is working to establish and reinforce its system of corporate governance.
Moreover, we believe that it is important for us to take steps now toestablish the management structures and systems we will need forgovernance of a business of the expanded scale we expect to achievein the coming years. In June 2006, we reformed our management
structure, adding a new Administrative Headquarters and a Management
Planning Headquarters to our original Sales and Marketing General
Headquarters. Under this new three-headquarters system, the Sales
and Marketing General Headquarters oversees all marketing activities
and helps promote corporate vitality. Meanwhile, the Administrative
Headquarters has primary responsibility for all compliance-related
issues, and the Management Planning Headquarters oversees risk
control. We believe that this new structure will enable us to maximize
our corporate performance within the framework of a compliance-based
management system. In terms of corporate social responsibility (CSR),
we believe that our business activities have a high public service
component, since our business model allows landowners to makemore effective use of their real estate assets, and serves society bymaking available to the renting public a new supply of high-quality
housing. Our business is to make sure that the rental apartments weconstruct suit the needs and characteristics of the area in which they
are built and, by securing high occupancy rates, we hope to contributeto the vitality of the local community. We do not build and thendisappear; we conduct our business in such a way as to provide
comprehensive support to people’s lives. This is the most important
way in which we aim to fulfill our CSR.

Corporate Slogan
In formulating our Medium-Term Management Plan, we came up
with a corporate slogan that we believe expresses very well how wefeel about the work ahead of us: “United Spirit: A Single Dream fora United Purpose.” It reminds us that in our interactionsーwith ourcustomers, shareholders, companies with which we do business,
local communities we serve, people who work for us, and all otherstakeholdersーwe must show a united spirit and demonstrate a shareddetermination to work together to create a corporate culture of
excellence. We hope to make a “United Spirit” the foundation of ourcorporate culture, and we are confident that this spirit will help us topromote our businesses, take maximum advantage of their respectivesynergies, and enable the Company to evolve and create new corporate
value. I look forward to the continued support and cooperation of ourshareholders as we press forward toward our goals.
August 2007

Yoshiteru Kitagawa
President and CEO

9Feature Story

What Strengths Set Leopalace21 Apartfrom the Competition?
In 1973, when the Japanese economy was reeling from theeffects of the first oil shock, we set up Leopalace21 Corporation as areal estate brokerage with a staff of six and an office measuring only 23 square meters.
Now, just over 30 years later, we have grown into a large company withannual net sales of ¥600 billion, and we expect to become afull-fledged major corporation with net sales of ¥1 trillion by thefiscal year ending March 2011.
Despite the difficult economic conditions, why have we been able tooutperform our competitors and establish ourselves firmly at the
top of the one-room studio apartment business in Japan?
In the following pages, we will answer this question as
we describe our rapid early expansion,
the adoption of a new business model that led to the start of
our Apartment Construction Subcontracting Business, andour vision for the next stage in our corporate evolution.
By the time you have read the last page,
we hope you will understand what sets Leopalace21 apart from its competitors.

10Chapter 1 : Establishment and Early Growth

Achieving Growth by
Defying Industry Conventions■Japan’s Housing Market

Leopalace21 offers sophisticated rental apartments asneglected rental housing reflects consumer preferenceor home ownership
Unlike the United States and the countries of Europe that have large
stocks of high-quality used housing with long lifecycles, Japan has
no tradition of people living in different houses at various stages of
their lives. The Japanese believe in “owning one house for life,” even
if it means taking out a mortgage loan for an amount many times
higher than their annual income and spending their entire working
lives paying it back. The attachment to the notion of home ownership
became even stronger during the period of rapid economic growththat Japan experienced from the 1950s through the mid-1970s. Rental
housing was considered no more than a temporary expedient until it
became possible to purchase a home, and as a result, very little attention
was paid to improving the amenities and design of rental housing.
Severe housing shortages developed after World War II, as people
increasingly moved to the cities. To remedy the shortages, policies
were implemented emphasizing quantity over quality. As a result,a large supply of rather shabby rental housing was developed thatproudly featured “one four-and-a-half tatami-mat room (about 7.5
square meters), shared toilet and kitchen.” When Leopalace21 wasestablished, these postwar apartments were already out of date.
According to Yoshiteru Kitagawa, President and CEO of Leopalace21,“Single young people by that time had already become used to more
comfortable material surroundings. There was a huge gap between
the needs of these people and what was on
the market.”President Kitagawa joined Leopalace21 in
1974, just one year after it had been founded,
when he was still in his 20s. Devoting himself
to his work as a real estate broker, he and otheryoung staff members of the new company
became keenly aware of the gap between supply
and market needs. In an effort to meet thoseYoshiteru Kitagawa

President, CEO and head of the Marketing and Sales Division, he cameto Leopalace21 in 1974.

needs, the Company in 1985 introduced its new Leopalace21 urbanstyle, one-room rental apartment buildings that immediately becamea huge hit. The buildings were sold as investment vehicles to cashrich investors, and then leased back and managed by the Company.
These rental apartments, with their attractive modern exteriors, andfloor plans that included innovative loft spaces, proved wildly
popular among single young people.
■Revolutionary New Rental System“Cube System” demolishes real estate industry
conventions
During this period, however, Japan’s bubble economy was beginningto heat up, and competition within the real estate industry was
intensifying. The founding members of Leopalace21 realized thatthey were not satisfied with the success they had achieved so far.
They were looking ahead to new and bigger challenges. Young

A typical post-war
Japanese apartment

The Leopalace21 urban-style studio apartment buildingthat debuted on the market in 1985.

11

Feature Story

Chapter 2 : Transition to a New Businessmembers of the sales and marketing staff working on the front lines
all over the country were asked to share and discuss a variety of
new ideas and suggestions, and in the end they came up with therevolutionary idea of setting up a membership system for Leopalace21
renters. This Cube System (CS), was launched in 1987. Ordinarily,
renting an apartment in Japan requires payment of a security deposit,
key money, and realtor fees, so renters are forced to shoulder a large
financial burden whenever they have to move. The CS eliminatedthis outdated system and made it possible for any member to moveeasily to or from Leopalace21 rental apartments anywhere in the country.
President and CEO Kitagawa, looking back at that period, recalls,“As you may imagine, we encountered fierce industry opposition.
At that time, construction, real estate brokerages, and building
management were nearly always handled by separate companies.
Under that system, if the customary deposits and fees were eliminated,
it was thought that real estate brokers would go out of business.
However, we were able to handle all three functions in-house, andwe used the proceeds from construction sales contracts to cover realtor
fees. This enabled us to reduce the initial financial burden on tenants,
and it also helped us to grab a larger share of the market.”This CS was a major challenge to Japan’s conventional, horizontally
structured real estate practice that was not designed to be renter friendly.
During this period, the Company became increasingly devoted to theidea of enriching people’s lives by eliminating obsolete customs in theresidential housing sector. We faced a great deal of opposition, withtrade magazines even refusing to accept our advertisements. But,
through our own public relations efforts and by utilizing television
advertising, we achieved an occupancy rate of 98%.
Comparison with Conventional Apartments
Conventional Leopalace21
apartments

Deposit
Key money
Realtor fee
Furniture/appliances
Broadband
Short-term rental (from two weeks)Tadahiro Miyama

Director and Head of the Construction Contracting
Business Headquarters. Came to Leopalace21 in 1985.

12

A Model with Leasing and Const■Area Marketing

Emphasis on well-planned supply ensures new construction
matches rental real estate market demand
The high occupancy rates achieved by Leopalace21 were due not only
to our revolutionary new rental system, but also largely to extremely
careful analysis of supply and demand. The Company performed
regular, nationwide market surveys of rental demand and renter
preferences, and planned new apartment construction accordingly.
Tadahiro Miyama, a Leopalace21 director who is also in charge of
the Apartment Construction Subcontracting Business, describes thismethod as “a supply system with brains.” He explains further, “We
have divided the country into more than 1,000 sections, and use thedata collected by our Leasing Business offices in each area, as wellas information gleaned from our proprietary Websites, to determine
where we should construct new apartments and how many units are
required to satisfy market demand. Although our business fundamentally
revolves around leasing, this unique supply planning system supports
our powerful business model by allowing us to maintain an optimalbalance between new supply and market demand.”
Leopalace21 has been developing its business model since 1993, when
we began the transition from a company that constructed and soldapartment buildings to one that constructed apartments on behalf oflandowners. This was a period when the government placed restrictions
on loans for investment in real estate. As a result, it took a very longtime to purchase new property, and made it difficult to create a new
supply of rental apartments in those areas where demand was strongest.
President and CEO Kitagawa,
looking back on that time,says,“We all sat up night afternight considering how tocope with this situation.What
we came up with was a ’stockbusiness model’ in which
we would seek to expand
our stock of apartments
using apartment buildings
as deposit assets. All of ouryoung staff members andI united around this conceptModel (Part I)

ruction as Core Businesses

and were able to come up with concrete strategies for implementationof this new business model. One of these strategies was the ’area marketing’concept, which we still use today.”product marketability. Each apartment owner contributes a fixedsum each month to the Mutual Insurance Association, and these funds
are to be used in the future to cover maintenance expenses. This measureenhances the stability of the apartment management business. We also
handle maintenance operations and provide owners with a variety of■Owner Support System

A total support system for apartment management
Another strategy we developed at that time was the introduction of arobust owner support system to supplement our careful market analysis,
to ensure that new supply would match existing demand. According to
Director Miyama, “It was because of our confidence in our ability to
attract renters that we were able to develop our ’Build and Leaseback
System,’ which guarantees the apartment owner a rental income stream
for as long as 30 years. Because we provide this guarantee, our projectreview process is quite severe, and if conditions are not satisfactory
we will sometimes have to reject a project. Also, because we are theones who will manage the property after construction, we havebecome known for our ’Tell No Lies’ marketing approach.”
Meeting of the Leopalace21 Owners Mutual
Insurance Association

Leopalace21 building maintenanceapartment management support.

■Product Marketability

Quick response with new products to match renter
preferences
We base our marketing approach to landowners on the superiormarketability of our apartments that is due to their functionality anddesign, and the long product lifecycle that we can achieve throughour integrated business approach. In recent years, we have gone
further and have led the market in introducing new styles of apartments
to meet specific renter demand. These apartments include ones that
accept pets, 1LDK (one room plus a living room/dining room/kitchen)units targeting the DINKS (double income, no kids) market, andapartments with tighter security systems. These new products
have, in turn, created new demand and are revitalizing apartment
management for owners. Without rental demand, our Apartment
Construction Subcontracting Business cannot succeed. This fact
is central to our business model and is reflected in the motto,“Successful Leasing Operations Are Our Top Priority in the
Apartment Business.”Today the sales staff we send out to market our system to landowners
consists mostly of an eager group of young people in their early 20s.
However, we do not rely on individual sales ability alone. We provide
our staff with a common set of marketing tools to ensure that
landowners fully understand how our business works. In addition, tomake certain that all agreements are firmly grounded in mutual trust
and understanding, the final stage of all negotiations is conducted by
the executive staff member with responsibility for that particularregion. As a result, our contract cancellation rate is one of the lowest
in the industry.
One more unique strategy that we implemented at the same time as our
Build and Leaseback System was the establishment of the Leopalace21
Owners Mutual Insurance Association to help maintain long-term

13

Feature Story
A more convenient rental system and support services｜

Our Leasing Business also implemented a number of new strategies,
including the introduction, in 1999, of “Monthly Leopalace” apartments
designed to offer short-term accommodations. These are fully furnishedapartments, complete with electric appliances something then practicallyunheard of in the Japanese market. These short-term rentals quickly
attracted users among traveling businessmen and company employees
who had been transferred to locations at a distance from home.
We have also begun to introduce a variety of renter support services,
including a living support system to enhance the comfort and securityof people living alone, and a magazine exclusively for our members.
Senior Managing Director Eisei Miyama, head of the Leasing
Business Headquarters, describes his business as follows. “First we
ascertain the needs of the market, then we develop products to meetthose needs. It is our ability to do this, and to do so quickly, that has
distinguished Leopalace21 from the very beginning. In 2001, we
introduced an Internet Website that allowed renters to search forapartments, fill out applications, and conclude contracts entirely
online, and in 2002 we began to offer renters a broadband service.
Both of these strategic ideas were born out of a desire to meet theneeds of our renters and offer them greater convenience. By creating
new products and services, we continue to enhance our marketability.”

Website that allows users to search for
Leopalace apartments
Note: Leopalace21 has the only Website
in the industry that allows users to
conduct apartment searches in realtime from mobile phones.

Senior Managing Director, Head of Marketing for the
Leasing Business Headquarters, Eastern Japan District, andHead of the Broadband Business Headquarters■Corporate Contracts

Contracts with listed corporations ensure secure,stable, volume sales
One new area that we have developed successfully is the corporate
market. When we first entered this market in 1996, most companies
in the real estate industry were content to wait passively for corporate
business to come to them. “Given these circumstances, we werecertain that our rental system and our nationwide stock of apartments
would give us an overwhelming advantage were we to target thecorporate market,” explains Senior Managing Director Miyama.
Our system offered significant merit for corporations. It not only
enabled them to cut costs by eliminating the need to pay conventional
deposits, key money and realtor fees when renting apartments fortransferred employees, but it also boosted their administrative
efficiency by allowing them to pay all contract fees by means of asingle bank deposit. As soon as we began marketing our services,
one corporation after another signed contracts with Leopalace21.
Since the introduction of ready-to-occupy, fully furnished Monthly
Leopalace apartments, and the creation of an Internet Website whererenters can search for apartments and conclude rental agreements
online, the marketability of our products has steadily increased, andthe number of contracting client companies has grown. Today,
corporate contracts account for more than 40% of Leopalace21’s
tenants.

Leopalace21 members’ magazine

14

Eisei Miyama

Senior Managing Director Miyama points out that all the ideas
behind the new marketing strategies and services came from thebottom up. “Our young executives are very active participants in ourmonthly nationwide meetings of leasing business representatives.
Ideas that have proved successful in one region are often implemented
nationwide. This demonstrates the importance we attach to our
tradition of listening to the people on the front lines.”

Chapter 3 : The Next Stage in Our Evolution

Exploiting the Strengths of Our Business Modelto Create New Markets and New Businesses■Future Potential of the Leasing Market■A Vision of the Next Stage of Our Evolution

Aggressive use of apartment stocks taps
undeveloped markets

A residential property asset management company
maximizing its capital asset returns

President and CEO Kitagawa describes the Company’s vision for the
future as follows. “Leasing drives growth, construction drives profits.
We must solidly establish these as our twin core businesses.” With
the recovery of the Japanese economy, business travel is increasing,and corporate demand is expected to expand significantly. This iscreating the opportunity to open up new markets. Looking ahead,
President Kitagawa predicts, “In the future, more and more baby boomers(see note) are expected to travel regularly back and forth between
cities and regional areas. This will present us with some interesting
business opportunities. For example, we might be able to exploit our
nationwide stock of apartments by introducing a system that allows
baby boomers to stay at a series of different apartments as they travel.”
He is also bullish about demand from foreign visitors. Radiating
enthusiasm he explained, “There is still a lot of resistance in Japanto renting to foreigners. This is a shame. We want to break down thisbarrier and create an environment where everyone is free to choose
where they want to live. There is definitely business potential here.”

What is the future of our Apartment Construction Subcontracting
Business? By the end of the present Medium-Term Management
Plan in March 2011, we will have expanded the number of rental
units we have under management to 600,000. However, we recognizethat financial investors are starting to play a much more importantrole in the Japanese real estate market, as is demonstrated by the
success of investment vehicles such as REITs. This new developmentin the market presents us with an excellent opportunity to takeadvantage of our experience managing apartment stocks held on
deposit from landowners to create a new business model. Whereas
our approach in the past has targeted individual landowners, we now
have the opportunity to use the same methods to collect funds frominstitutional and other investors, to develop new properties with those
funds, and increase our revenues from management fees. Our ultimate
aim is to become a finance-related business.

Note: A large number of post-war baby boomers are expected to reach retirement
age in 2007. The consumption habits of these retirees are a matter of much
speculation.

Trend in Apartment Units
under Management and Occupancy Rate
Thousands of units%
Apartment units under management
Occupancy rate

600

93.9
92.4

94.5
94.0
93.5

95

592

543

92.8
494
449
389

400

344

To do this, we will need to further improve the returns generated by
our apartment stocks. We will take an initial step in this direction in
2009, by developing a support infrastructure for property management,
and by starting to train young staff members across the country as
property asset fund managers. In addition to these steps designed tostrengthen our core businesses, we are moving aggressively to get
our three strategic businesses−Residential, Silver, and Broadband
businesses−into full operation as quickly as possible. Each of thesebusinesses is designed to take advantage of synergies with our corebusinesses. As President and CEO Kitagawa explains, “A variety
of symmetries will allow us to develop a self-propagating businessmodel that will serve as the foundation for yet another stage in our
evolution in the next 10 to 20 years.” We at Leopalace21 invite you
to keep track of our progress.

90

200

0

2006/3

2007/3

2008/3 (E)2009/3 (E)2010/3 (E)2011/3 (E)8515Overview of Operations

Core Business

Apartment Construction Subcontracting

Overall earnings growth linked to leasing
The core Apartment Construction Subcontracting Business is the foundation of Leopalace21’s operations.
Properties for lease are constructed on an owner’s land, which Leopalace21 then manages andoperates on the owner’s behalf. We focus on the development and supply of units with a strong all-aroundappeal in terms of livability, design and amenities, offering a unique total support system for owners’
leased-residence plans.
Leopalace21 has contracts with over 20,000 property owners and approximately 388,500 apartment units
under management. An increase in contracts with owners generates an increase in leased units, driving
expansion in our second core enterprise, the Leasing Business.

Marketing Power and Product Appeal Underpin Contract Growth
Sales in the Apartment Construction Subcontracting Business for the fiscal year ended March 2007 amounted to ¥316,117
million, a year-on-year increase of more than 60% adjusted for the fiscal-year lag between contracts and sales. The segment
accounted for 50% of net sales, and together with the Leasing Business, for 94% of net sales (as of the end of the fiscal year underreview). The segment is the driver behind our strong growth and profitability.
Leopalace21 is currently restructuring and strengthening the locations for its Apartment Construction Subcontracting Business. By
the end of the fiscal year to March 2008, we plan to have a nationwide network of 127 locations that will further strengthen our
region-based sales strategies. We will increase the number of sales staff skilled in asset management consulting, placing themthroughout our network to enhance our consultation ability. We will also focus on introducing such new types of dwellings as 1LDK*
units and high-security residences. Our steadily increasing contracts reflect Leopalace21’s strategic marketing and attractive productdevelopment.
*One room plus a living room/dining room/kitchen.

Utilizing Area Marketing
Leopalace21’s sales efforts and new product development are guided by its in-depth area marketing. We have divided the country
into 1,140 segments, where we conduct marketability and development surveys that take into account trends in population and leasing
markets, as well as lifestyle-related facilities. This information is used to conduct sales activities based on whether an apartment issuitable for a particular site. We also survey and analyze the needs of prospective tenants, and quickly incorporate these into our
product development. Through such area marketing-based strategies, our Leasing Business is able to maintain a high occupancy
rate. The ability to offer owners long-term, stable income is one of our strengths, generating substantial synergies in the form ofbusiness expansion for our Apartment Construction Subcontracting Business, and securing revenue for the Leasing Business. This,in turn, raises the profitability of the entire company.

16Market Trends

Sales(Year ended March 31, 2007)

There has recently been an increase in the number of people seeking a new
type of urban lifestyle, particularly young people in single households. There
has also been growth in new demand from corporations for outsourcing of
dormitories and company-owned housing. As a result, over the last few years
there has been a notable rise in demand for leased units of less than 30 m2,
which is Leopalace21’s mainstay product. Such units account for around aquarter of all lease residence housing starts. Leopalace21 accounts for an
overwhelming market share representing more than 40% of all leaseresidence housing starts involving units of 30 m2 or less.
New Residential Leaseholds under 30 m2 and Our Market ShareThousands households
Under 30 m2

160

120

127.6

122.8

113.5

108.1

Our units
Our market share

104.2
80

50%

39.6%

39.6%

42.8

44.9

2004/3

2005/3

40.4%

43.8%

33.6%
40

¥316.1 billion

49.7

55.9

35.0
0

2003/3

2006/3

2007/3

Source: Based on housing start statistics for the FY March 2007, Ministry of Land,
Infrastructure & Transport and company report.

Topics
Forecasts for Sales

Innovative products expand opportunities
for land development

Billions of yen
400

336.4
316.1

320.0

320.0

320.0

300

200

On September 1, 2006 Leopalace21 introduced three new apartment products designed
to meet the changing needs of urban renters. These new apartments offer living
spaces that allow us to satisfy a more diverse range of renter needs than ever before, andare helping us to maintain high occupancy rates as we expand our rental customer base.

195.2

100

Leopalace21 Leo-with-style0
2006/3

2007/3

2008/3 (E) 2009/3 (E) 2010/3 (E) 2011/3 (E)This is Leopalace21’s first“pet-friendly urban apartment.”
It incorporates a variety of features
to enhance the experience of livingwith a pet in the urban environment.

Leopalace21 Villa Scelte

This is a superior urban-styleapartment that ranks one step above
our other products in terms ofspace and quality. The 1LDK design
allows us to serve the needs ofa wider range of the renting population.

Leopalace21 New Leovarious

This “New Standard Apartment”
features two types of rooms,
and serves a wide variety of lifestyles
among both singles and DINKS.

17

Overview of Operations

Core BusinessLeasing

Quantitative growth and improved quality
The Leasing Business leases and manages properties, developed and supplied by the Apartment
Construction Subcontracting Business, that are either leased buildings or properties developed on landpurchased by Leopalace21. As one of Leopalace21’s two core businesses, it seeks to maximize operating
revenue by utilizing apartment buildings held on consignment from owners.
Leopalace21 has a nationwide network of properties with a new leasing system that requires no deposit or key money.
It has allowed us to respond to the broad needs of prospective tenants, and to maintain an extremely highoccupancy rate that provides a powerful incentive to landowners and helps expand the Apartment Construction
Subcontracting Business.

Maintaining a High Occupancy Rate
Sales in the Leasing Business for the fiscal year ended March 2007 amounted to ¥277,163 million (44% of net sales), a year-onyear increase of more than 10%. One of the main factors behind this is a high occupancy rate of 92.8% (average over the fiscal
year under review). We have established a multifaceted sales network that includes 280 Leopalace Center locations (four of which
are overseas), and an online service to search the Company’s entire network. We have maintained our high occupancy rate byoffering a structure able both to instantly respond to a wide range of tenant needs and acquire tenants.
Based on the concept that apartment management exists where there is leasing, we are seeking new sources of demandfocused on corporate sales ahead of the rising business demand expected as a result of the economic recovery. Amid steady growthin the Monthly Leopalace Flat plan, which allows for short-term stays for those on business trips or undergoing training, we aremaking efforts to develop a Corporate User System and increase the number of corporate sales locations. The number of corporations
conducting business with Leopalace21 increased 15% year on year. We are also working with distance learning and credit cardcompanies to develop sales promotion schemes for students, and to pioneer new markets. Through such measures, we will be able
to maintain our high occupancy rate, and increase the number of apartment units under management.

Strengthening Asset Management
The number of leased properties (units under management) at the end of the fiscal year ended March 2007, had increased by some
40,000 units year on year, for a nationwide total of around 388,500 units. This is a substantial asset for Leopalace21. We plan toincrease this number to 600,000 units by the end of the fiscal year ending March 2011, as we push ahead with our quantitative
expansion measures to develop such new markets as student and corporate demand.
At the same time, we are also taking steps to improve quality by strengthening asset management. The central element of this effort
is the creation of the ALM leasing system for the comprehensive management of assets and liabilities. We plan to invest ¥10 billion
over three years to build a system that will organically merge the wealth of administrative data, accumulated during more than
two decades of apartment operations, with external data, thus ensuring the optimal management of our custodial assets. We aim tobecome Japan’s largest property asset management company, efficiently managing our extensive apartment stock at a standard on apar with that of a finance company.

18Market Trends
Looking at types of households in light of Japan’s declining birthrate and aging
population, by 2010 we expect the proportion of singles living alone to top
15.16 million, or 30.3% of all households. By 2025, the figure is expected to reach
17.15 million, or 34.6% of all households, as singles living alone quickly
become a larger component of Japan’s household structure. We anticipate
long-term growth in the market demand for Leopalace21’s one-room units.
Number of Households by Type
Thousands households

Sales(Year ended March 31, 2007)

50,00040,00030,00049,06350,13950,476

Singles

50,27046,782
12,911

Single parents
with children

14,457

15,16915,984

16,663

3,578

4,112

4,400

4,625

4,750

8,835

9,637

10,421

10,58910,507

14,91914,646

10,000¥277.2 billion

017,159Married couples

20,00044%

49,643

14,16913,517

12,776

4,794
10,291Married couples
with children
Others11,998

6,539

6,212

5,981

5,761

5,574

5,401

2000/10

2005/102010 (E)2015 (E)2020 (E)2025 (E)

Source: Based on the 2005 Census and 2003 Number of Households and Future Estimates,
National Institute of Population.

TopicsNew overseas offices, an increasein the number of foreign tenants

Forecasts for Sales
Billions of yen
450

424.7
384.3

400

349.8

350

316.2

300
250

277.2
249.7

200

Our unique rental service, which eliminates the need for a guarantor, security deposits
and key money, is also proving to be very convenient among foreign residents of Japan.
An increasing number of exchange students are making use of our services. In orderto provide better support for South Korean and Chinese exchange students, whose
numbers have been growing rapidly in recent years, Leopalace21 opened its firstoverseas office in Seoul in 2002, followed by offices in Shanghai in 2004, and Taipei
and Pusan in 2006. In April 2007, we opened a second office in Seoul, in the Chonro
district. As a result, the number of foreign tenants is expanding steadily.

150
100
50
0
2006/3

2007/3

2008/3 (E) 2009/3 (E) 2010/3 (E) 2011/3 (E)In 2006, a Leopold
Center opened on
the second floor of
an office block in
Pusan, following theestablishment of ourSeoul office.

Our first Leopold Center
opened on the sixth floorof this Taipei building in
2006.

19

Overview of Operations

Strategic Businesses

Residential, Silver and Broadband

Generating earnings through synergies with
The Residential, Silver and Broadband businesses are an extension of the two core businesses: Apartment
Construction Subcontracting and Leasing. They utilize the existing infrastructure, including the apartment
construction subcontracting and the leasing sales locations, leased properties and landowners torealize quick and efficient growth.
In 2006, Leopalace21 designated these businesses as strategic fields that will drive growth and generate new earnings,
and began full-scale development. We plan to develop the Residential and Silver businesses nationwide to create
revenue-generating divisions, and to achieve profitability from value-added services in the Broadband Business.

Residential Business: Targeting Second-Generation Baby Boomers
In its Residential Business, Leopalace21 develops and sells houses and condominiums as permanent residences utilizing thefoundations and expertise of its core businesses to provide safe, versatile housing. Sales jumped from ¥1,743 million in the fiscal year
ended March 2006 to ¥14,150 million in the fiscal year ended March 2007, and we expect growth to continue for a third
consecutive year, forecasting ¥23,500 million for the fiscal year ending March 2008. Our main targets in this business are thesecond-generation baby boomers (born between 1971 and 1975). This group was estimated in 2005 to comprise approximately 6.3
million people, 64% of whom are concentrated in the Tokyo, Chubu and Kinki regions. We are, therefore, making a major push
into the three major urban areas of Tokyo, Nagoya and Osaka in pursuit of efficient business growth. We are currently developing
a LEO-REIT and other real estate securitization businesses.

Silver Business: Expansion in Major Urban Areas
In the Silver Business, Leopalace21 offers a variety of nursing care facilities and services to meet the needs of Japan’s rapidly aging
society, including the planning, development, management and operation of community-based elderly group homes, day-care services,nursing homes, and short-stay care facilities. Since many of the landowners targeted by the Apartment Construction Subcontracting
Business, the source of contracts for care facilities for the elderly, as well as prospective tenants are elderly individuals, our sales efforts
are tailored to focus on both demand and supply. We currently have 16 facilities in the Tokyo area, which generated sales of ¥2,434
million in the fiscal year ended March 2006, and ¥5,344 million in the fiscal year ended March 2007. We anticipate a third consecutive
year of growth, forecasting sales of ¥10,000 million in the fiscal year ending March 2008. We will focus on the three major
cities of Tokyo, Nagoya and Osaka, considering such options as business alliances and M&As to establish facilities as quickly as possible.

Broadband Business: A Substantial Market
In the Broadband Business, Leopalace21 offers a range of broadband services to the tenants of the lease properties it manages,
including digital rental televisions, as well as satellite broadcast and Internet services. The set-top box (LEO-NET terminal) installedin each unit offers such convenient bidirectional communications as shopping, games, and research. This service had approximately
300,000 subscribers at the end of the fiscal year ended March 2007, with sales of ¥11.1 billion. Terminals had been installed in
83% of units under management, and as we have acquired more viewers with the annual increase in the number of units undermanagement, the service is developing into a substantial market. By the end of the fiscal year ending March 2008, we anticipate
there will be 350,000 subscribers, with sales rising to ¥14.5 billion. By 2011, we expect to have an extensive broadband stock
linked to 600,000 units under management. We intend to use this to expand such business opportunities as corporate services utilizing
advertising mediums and monitoring functions, and to pursue sales to hotels, hospitals and other external corporations.

20

core businesses

Market Trends
The graph on page 19 gives a breakdown of households by type. Those 65
years of age or older (the silver generation) are projected to exceed 30% of the
population by 2010, and 37% by 2025. One in three households will be an elderly
household, creating a huge market. Along with an increase in the number ofcustomers for Leopalace21’s Silver Business, we anticipate that our core Leasing
Business will see more elderly tenants increasingly utilize leased properties forhobbies or nursing care.
Number of Households by Age

Sales(Year ended March 31, 2007)

Thousands households

50,00040,00049,06350,13950,47650,27015,406

17,616

18,47149,643

Aged 65
and over

46,782
11,136

13,546

Aged 35 to 64

18,426
Aged under 35

30,00026,1386%

20,000¥38.3 billion

26,371

26,81825,88825,43525,132

10,000

0

9,509

9,146

7,915

6,971

6,363

6,085

2000/10

2005/102010 (E)2015 (E)2020 (E)2025 (E)

Source: Based on the 2005 Census and 2003 Number of Households and Future Estimates,
National Institute of Population.

Note: The above sales figure includes segment results from our Hotel
Resort Business and Other Business.

TopicsOur hotel business is also expanding

Forecasts for Sales
Billions of yen
300

255.3

200

165.7

In addition to our Housing, Silver and Broadband businesses, Leopalace21 is pursuing
a number of other businesses that take advantage of its core business know-how,particularly hotel and foreign resort management. Since 2001, when we opened
the Hotel Leopalace Sapporo and the Hotel Leopalace Nagoya, we have been expanding
our domestic hotel network. In April 2007, we opened our eighth facility in Japan, theHotel Leopalace Hakata. Its quality, original design as well as broadband Internet andother facilities are helping it achieve a high occupancy rate.

96.9

100

20.5

38.3

54.1

0
2006/3

2007/3

2008/3 (E) 2009/3 (E) 2010/3 (E) 2011/3 (E)Note: The above sales figure includes segment results from our Hotel
Resort Business and Other Business.
Hotel Leopalace Nagoya,a stately urban resort,
opened in 2001.

Hotel Leopalace Hakata,with its innovative glass
wall facade21

Corporate Governance

Toward an Efficient,
Fair and Transparent Management System

22Basic Governance Policy
Establishment of a Three-Headquarters System
To ensure that we are able to continue to increase corporate value while at thesame time meeting the expectations and advancing the mutual interests of all
our stakeholders, the Company is taking steps to enhance corporate social
responsibility (CSR) by reforming its system of corporate governance, and bytraining the human resources it needs to implement this system. In June 2006
we restructured our management by creating an Administrative Headquarters
and a Management Planning Headquarters. These, together with the Sales andMarketing General Headquarters, form our three-headquarters system. Under
this system, the Sales and Marketing General Headquarters is responsible forenhancing our corporate vitality, the Administrative Headquarters oversees
corporate governance, and the Management Planning Headquarters handles allrisk control issues as regards corporate governance and business operations.
At the same time, we also drew up a “Corporate Code of Ethics” and took steps
to familiarize our corporate executives and all the employees of our Group
companies with its contents. In this way, we are doing our part to ensure thatour business practices are ethically sound and in full compliance with all
relevant legal standards.

President and CEO

Senior Managing Director

Senior Managing Director

Executive Director of Management

Director

Yoshiteru Kitagawa

Eisei Miyama

Akihiko Umeda

Hitoshi Yamaguchi

Tadahiro Miyama

Establishment of Director and Auditor Systems
Leopalace21 has adopted director and auditor systems designed to help us
significantly raise the level of our business performance by speeding up ourdecision-making process and enhancing our capacity to respond appropriately
and rapidly to changes in our business or management environment. The
Company’s Board of Directors presently consists of 17 members (currently wehave no external board members). In addition to its regularly scheduled monthly
meetings, the Board holds special meetings whenever necessary to decide on
matters of importance to the Company’s management, and to ascertain the stateof the Company’s business operations. Further, an established Management
Committee meets monthly to discuss and evaluate issues related to theimplementation of business plans and policies. A Board of Auditors has been
established that consists of four members, two of whom are appointed fromoutside the Company. The ability of the auditors to perform their functions has
been strengthened by empowering them to attend meetings of the Board of
Directors and to independently conduct investigations of business operations.
23

Corporate Governance

Strengthening of the Compliance Committee,
and Creation of a Legal Department

Organization Chart(As of June 1, 2007)

General Meetingof Shareholders
Board of Auditors
Board of Directors
Compliance
Committee
Risk Management
Committee＊

President and CEO＊

Management
Committee
Sales and Marketing
General Headquarters＊

Administrative
Headquarters＊

Management Planning
Headquarters＊＊New bodies

Compliance System and Risk Management(As of June 1, 2007)

Board of Directors
Consultations oncompliance system

Legality
checksSubmission of
specific opinions

Risk Management
Committee

Compliance
Committee
Determination of policies
Formulation ofannual activity plans

Internal
Auditing Office

Auditreports
Auditing
requests

Administrative
Headquarters
Individualcompetent Legal Dept.
corporateorganizations

Formulation ofcompliance manuals
Guidance for annual
activity plans
AdviceStatus investigations
Guidance for
improvement
Implementation oftraining sessions[Secretariat ofCompliance
Committee]
Reports on
violations(Divisional Director)

Implementation of audits

Reports on
legal risks
and others

Reports on
individual
business
proposals

Person in chargeof complianceIndividual businessdivision headquarters(Communication Contact)

Compliance
HotlineReports on
business
proposals(Corporate External)(protectionof those
who report)

Compliance
Hotline(Corporate Internal)

Legality
checksReports
on results

Corporateinternal
communication
Consultation
Queries

Persons communicatingfrom public domain
Usual consultant

Maintenance of organizational systems
Formulation of organizational rules
Voluntary inspections

24

The Company has taken steps to improve its compliance system by revising
its compliance manuals, reforming its organization, and establishing bothinternal and external compliance hotlines. The Compliance Committee was
updated by appointing the President and CEO of the Company as Committee
Chairman and by recruiting several outside members. It now serves as anadvisory body to the Board of Directors. The Administrative Headquarters is
now the executive agency with primary responsibility for devising, constructing
and maintaining a compliance-based management system. In order to effectively
promote implementation of our compliance policies throughout all of ourdifferent business operations, a person responsible for compliance has been
appointed at each of our three main headquarters, and a person in charge ofcompliance has been appointed at each of our business locations. Further, wehave created a Legal Department within the Administrative Headquarters to
improve internal supervision.

A More Robust Risk Management System
A Risk Management Committee, headed by the Board Member in chargeof the Management Planning Headquarters, was created in June 2006 tocomprehensively monitor and manage risk on a company-wide basis. This
committee is responsible for establishing risk management guidelines, andmonitoring their implementation. It also organizes and conducts training
sessions for employees, and submits reports on risk to the Board of Directors
on a quarterly basis. Further, an Internal Auditing Office has been createdthat reports directly to the President and works with corporate auditors tomonitor the status of risk management at each of our divisions, and reports
its findings to the Board of Directors and to the Compliance Committee. It
also provides feedback to the Administrative Headquarters and helps findways to correct or to develop strategies for dealing with risk issues. If any
legal violation or other activity is discovered, these are now reported
immediately to the Risk Management Committee and to the relevant businessdepartment. The system also mandates various activities to promote
understanding of risk management issues at all Group companies, as well as
training programs for employees to help them better recognize and understandthe problem of risk.

Corporate Social Responsibility (CSR)

Socially Responsible Business Activities andCorporate Attitudes
Pursuing CSR While Striving
to Increase Corporate ValueOur corporate philosophy calls for us to “Create New Value,” and the businessmodel we have created and are promoting is one in which our businessactivities, by their very nature, enhance our CSR. Our two core businessesof Apartment Construction Subcontracting and Leasing provide a two-fold
service to society by promoting a more efficient use of land resources on the
one hand, and by creating a supply of high-quality rental housing on the other.
Further, our strategic Residential, Silver, and Broadband businesses present
even further land-use options to landowners, while contributing to theimprovement of our social infrastructure. These strategic businesses target
not only young single people in their 20s, but also provide a variety oflifestyle support services to a wide range of other age groups, ranging frombusinessmen and students to senior citizens requiring nursing care.

Business Activities “Friendly
to Both People and the Environment”

Video intercom systems

Leopalace21 places great emphasis on making sure that its business activities
help people and are friendly to the environment. For example, we have taken aseries of steps to improve the security and convenience of our rental facilities byintroducing card keys (September 2000), video intercom systems (April 2004),
security glass (April 2006), and automatic lock gates (October 2006). We havealso introduced several other support services designed to increase the peace ofmind of our renters, such as a “Residential Emergency Service” for plumbing
and other problems, and a “24-Hour Medical Consultation Service” to provide
health-related advice on an around-the-clock basis. We also take great care in
the selection of the wall coverings and furniture used in our apartments to avoid
the use of formaldehyde and other substances associated with sick-house syndrome.

Helping Athletes Achieve Their Dreams
through Sports Promotions
Through its various businesses, Leopalace21 has followed its dream of finding new
ways of providing “Homes for People.” We are also helping a group of athletes
to achieve their dreams by sponsoring a women’s softball club. This club wasorganized in November 2001 and currently competes in the First Women’s Leagueof Japan Softball Association. The team has quickly developed into a perennial
candidate for league champion, and some of its members have even participatedin the Olympic Games as members of the Japanese national team. We also help
to sponsor a swimming association, as well as beach volleyball competitions.

25

Financial
SectionConsolidated
Six-Year Summary
Leopalace21 Corporation and consolidated subsidiaries
Years ended March 31

Thousands of U.S.
Dollars, Except
Where Noted

Millions of Yen, Except Where Noted

For the year:
Net sales

2007

2006

2005

2004

2003

2002

2007

¥631,608¥465,387¥476,267¥422,224¥360,369¥297,584$5,350,348

Apartment Construction Subcontracting

316,117

195,202

248,033

225,011

190,217150,843

2,677,824

Leasing

277,163249,696

216,591

188,864

162,766

136,924

2,347,845

Hotel Resort

7,141

8,340

7,282

5,759

5,928

7,043

60,491

Other

31,187

12,149

4,361

2,590

1,458

2,774

264,188

Cost of sales

474,713353,928

357,546

313,085

268,857

220,807

4,021,291

Selling, general and administrative expenses

80,88870,68464,03957,46846,98642,202685,200

Operating profit

76,007

40,77554,682

51,671

44,526

34,575643,857

Net income (loss)

37,358(16,582)

33,262

20,96020,464

19,902

316,459¥454,820¥412,804¥453,434¥421,164¥410,340¥374,397$3,852,771

185,785

133,622

149,798

81,42068,30946,078

1,573,779

Total net assets¥1,054.99¥839.44¥941.06¥585.82¥492.06¥373.69$8.94

Net income (loss)

234.68(104.17)220.79150.91160.56164.53

1.99

Cash dividends

50.00

15.00

15.00

15.00

15.00

0.00

0.42

Equity ratio (%)

37.0

32.4

33.0

19.3

16.6

12.3

Return on equity (ROE) (%)

24.8(11.7)

28.8

28.0

35.8

62.5

Return on assets (ROA) (%)

8.6

(3.8)

7.6

5.0

5.2

5.5

Number of employees

7,409

6,868

6,457

5,702

4,385

4,228

At year-end:
Total assets
Total net assets

Amounts per share:

Ratios:

Notes: 1. U.S. dollar amounts are translated from yen at the rate of ¥118.05 = US$1, the approximate rate prevailing at March 31, 2007.
2.The amounts of total net assets for the years ended March 2002, 2003, 2004, 2005 and 2006 represent the value of total shareholders' equity and do not include minority interests.
3. Net loss for the year ended March 31, 2006 is the result of impairment losses posted after adoption of new accounting standards for impairment of fixed assets.

26

Management Discussion and Analysis

Net Sales

The Leopalace21 Group (hereinafter referred to as the Group) consists of
Leopalace21 Corporation, eight consolidated subsidiaries and two equitymethod affiliates. Its two core businesses are Apartment Construction
Subcontracting and Leasing. Consolidated net sales for the fiscal year
ended March 31, 2007 (the fiscal year under review) rose 35.7% year on
year to ¥631,608 million. By segment, sales of the Apartment Construction
Subcontracting Business rose 61.9% year on year to ¥316,117 million, andof the Leasing Business increased 11.0% to ¥277,163 million. Sales of theHotel Resort segment were down 14.4% from a year earlier to ¥7,141
million, while sales of the Other segment saw a 156.7% increase to ¥31,187
million.
As a proportion of sales, the Apartment Construction Subcontracting
Business accounted for 50.0% (up 8.1 percentage points year on year),the Leasing Business for 43.9% (down 9.8 percentage points), the Hotel
Resort segment 1.1% (down 0.7 percentage point), and the Other segment
4.9% (up 2.3 percentage points). The Apartment Construction Subcontracting
Business accounted for a particularly high proportion of sales growth
because construction of several properties had been completed at the end of
the previous fiscal year, generating a significant lag between the conclusionof contracts and the recording of sales. This pushed up figures for total sales
and year-on-year growth, but even adjusting for the time lag, the Group
achieved revenue increases.

Earnings

The cost of sales, following the rise in net sales, increased 34.1% year on
year to ¥474,713 million. By segment, the cost of sales for the Apartment
Construction Subcontracting Business rose 61.8% to ¥209,395 million,
and for the Leasing Business increased 12.0% to ¥228,119 million. The
combined cost of sales for the Hotel Resort and Other segments rose 78.3%
year on year to ¥37,197 million. As a proportion of the cost of sales, theApartment Construction Subcontracting Business accounted for 44.1%(up 7.5 percentage points year on year), the Leasing Business 48.1% (down
9.4 percentage points), and the Hotel Resort and Other segments for a
combined 7.8% (up 1.9 percentage points). Because the year-on-year growthin the cost of sales was less than that in net sales, the gross profit marginrose 0.9 percentage point from the previous fiscal year to 24.8%.
Selling, general and administrative (SG&A) expenses rose 14.4% year on
year to ¥80,888 million. Because this was less than the year-on-year growthin net sales, SG&A expenses as a proportion of net sales decreased 2.4
percentage points from the previous fiscal year to 12.8%. As a result, theoperating profit rose 86.4% year on year to ¥76,007 million, with theoperating profit margin up 3.2 percentage points year on year to 12.0%.
The balance of other income (expenses) was net other expenses of ¥6,677
million for the fiscal year to March 2007, compared with net other expensesof ¥63,518 million for the previous fiscal year. The main factor underlying

Net Sales

Operating Profit and Operating Profit Margin

Millions of yen

Millions of yen

800,000

80,00076,007

Operating Profit
Operating Profit Margin631,608
600,000

60,000

11.6

12.4

12.2
51,671

476,267

465,387
40,000360,369

12.0

12.0

40,77544,526422,224400,000

54,682
11.5

%
16.0

8.8
8.0

34,575297,584

200,000

0

20,0002002/3

2003/3

2004/3

2005/3

2006/3

2007/30

4.0

2002/3

2003/3

2004/3

2005/3

2006/3

2007/30Note: Decline in operating profit and operating profit margin for the year ended March 31, 2006
is the result of the postponement of scheduled construction contract.

27

Management Discussion and Analysis

the relative improvement was the decline in impairment loss, which fell
from ¥65,481 million in the previous fiscal year to ¥3,009 million for the
fiscal year to March 2007. This relative improvement more than offset a
decline in foreign exchange gain from ¥4,780 million a year earlier to ¥501
million, and a deterioration in equity in earnings of affiliated companies,
which worsened from a gain of ¥513 million in the previous fiscal year toa loss of ¥2,321 million. As a result, income before income taxes andminority interests for the fiscal year under review amounted to ¥69,330
million (compared to a net loss of ¥22,743 million in the previous fiscal
year). Net income totaled ¥37,358 million (compared to a net loss of¥16,582 million in the previous fiscal year).
Return on assets (ROA) was 8.6% (compared to -3.8% in the previous
fiscal year), and ROE 24.8% (compared to -11.7% a year earlier). Dividends
paid for the fiscal year ended March 2007 totaled ¥ 50.00 per share(an interim dividend of ¥ 15.00 and a year-end dividend of ¥ 35.00),
an increase of ¥35.00 per share from the previous fiscal year. The payout
ratio was 21.3%, but could not be calculated for the previous fiscal year
because of the net loss.

ROE
%
70

50
40

35.8
28.0

30

28.8
24.8

20
10
0
-10
-20

Net Income and Net Income Margin

62.5

60

(11.7)
2002/3

2003/3

2004/3

2005/3

2006/3

ROA

Millions of yen%
8.0

60,000

%
10

7.0
6.7

8.6

5.7

5.9
5.0

40,00020,000Net Income
Net Income Margin

19,902

20,464

2007/3

7.6
5.5

37,358 4.0
33,262

5.2

5

5.0

20,960

0.0

0

(3.6)

0
2002/3-20,000

2003/3

2004/3

2005/3-4.0
2007/3(16,582)
2006/3

(3.8)
-8.0

-5

2002/3

2003/3

2004/3

2005/3

2006/3

2007/3

Note: Net loss, negative ROE and ROA for the year ended March 31, 2006 are the result of impairment losses posted after adoption of new accounting standards for impairment of fixed assets.

28

Segment Information

Other

Apartment Construction Subcontracting

The Other segment consists of residential and other real estate sales−a strategic
division for the Group−together with the Silver, Broadband, and Financebusinesses. Sales in this segment jumped 156.7% over those of theprevious fiscal year to ¥31,187 million, with an operating profit of ¥1,091
million (compared to an operating loss of ¥394 million in the previous
fiscal year). The Group is pursuing full-scale development of the residential
housing business in the Tokyo metropolitan, Kyoto-Osaka-Kobe and Nagoya
metropolitan areas. The Silver Business had 16 care facilities for the elderlyin the Tokyo metropolitan region as of the end of the fiscal year ended March
2007. In the Broadband Business, subscriber numbers are rising steadily.

The operating profit increased 89.1% year on year to ¥74,614 million, withthe operating profit margin up 3.4 percentage points to 23.6%. Cost increases
stemming from rising materials prices and the incorporation of higher-quality
facilities were absorbed by careful attention to cost and process management.

Financial Position

Sales in Apartment Construction Subcontracting, one of the Group’s twocore businesses, rose 61.9% year on year to ¥316,117 million. The Group
restructured and strengthened its sales locations based on its regional
strategies, and continued to steadily conclude contracts by introducing new
products, including 1LDK* apartments, and buildings with enhanced security.
Contract volume rose 10.1% year on year to ¥340,606 million, with thebalance of contracts on hand rising 10.9% to ¥248,685 million. There were
127 sales locations at the end of the fiscal year ended March 2007, up ninefrom the end of the previous fiscal year.

*1LDK refers to one room plus a living room/dining room/kitchen.

Leasing

Sales in the Leasing Business, the Group’s other core business, rose
11.0% year on year to ¥277,163 million. At the end of the fiscal year to
March 2007, there were 388,500 apartment units under management, ayear-on-year increase of 44,000 units. Measures to increase the occupancy
rate saw a 0.4 percentage point hike to 92.8%.
The operating profit decreased 13.0% year on year to ¥7,031 million, withthe operating profit margin down 0.7 percentage point to 2.5%. The main
reason for the profit decrease was anticipatory investments to expand sales
locations and personnel numbers to strengthen corporate sales and cover
the expected future increase in the number of units under management.
Impairment losses declined significantly, from ¥16,971 million in theprevious fiscal year to ¥3,009 million.

Hotel Resort

Sales in the Hotel Resort segment decreased 14.4% year on year to¥7,141 million, and the segment recorded an operating loss of ¥2,628
million (compared to ¥2,667 million in the previous fiscal year). The
Group’s integrated sports resort in Guam, Leopalace Resort Manenggon
Hills Guam, maintained a stable operating status, but room renovations at
the Westin Resort Guam had a negative impact on sales. In October 2006,
the Group sold the Trianon Palace, a Westin Hotel in France. Impairment
losses had been ¥47,132 million in the previous fiscal year, but no losses
were recorded for the fiscal year ended March 2007.

Total current assets increased ¥23,037 million from the end of the previous
fiscal year to ¥186,556 million. Increases consisted mainly of ¥30,554
million in cash and cash equivalents, ¥20,242 million in real estate forsale/property inventories, and ¥21,819 million in prepaid expenses, while
decreases consisted mainly of ¥1,924 million in operating loans, ¥26,347
million in inventories, and ¥5,751 million in deferred tax assets. Total fixed
assets plus total investments and other assets rose ¥18,979 million from theend of the previous fiscal year to ¥268,264 million. Increases consisted
mainly of ¥11,039 million in land and ¥9,692 million in long-term prepaid
expenses, while decreases consisted mainly of ¥3,040 million in net buildings
and structures, and ¥3,113 million in investment securities. As a result, total
assets at the end of the fiscal year ended March 2007 were up ¥42,016 million
from the end of the previous fiscal year to ¥454,820 million.
Equity Ratio
%
60.0

50.0

40.0

37.0

33.0
32.4

30.0

20.0

16.6
12.3

19.3

10.0

0
2002/3

2003/3

2004/3

2005/3

2006/3

2007/329

Management Discussion and Analysis

Total current liabilities increased ¥11,239 million from the end of the previous
fiscal year to ¥216,914 million. Increases consisted mainly of ¥9,117
million in advances received and ¥22,598 million in accrued income taxes,
while decreases consisted mainly of ¥4,138 million in short-term borrowingsand ¥18,531 million in customer advances for projects in progress. Total longterm liabilities decreased ¥3,734 million from the end of the previous fiscal
year to ¥52,121 million. Increases consisted mainly of ¥2,986 million inretirement benefit reserves for directors, while decreases consisted mainlyof ¥7,215 million in long-term borrowings. As a result, total liabilities forthe fiscal year ended March 2007 were up ¥7,505 million from the end of
the previous fiscal year to ¥269,035 million.
Total net assets amounted to ¥185,785 million at the end of the fiscal year
under review, an increase of ¥52,163 million from total shareholders’ equityof ¥133,622 million at the end of the previous fiscal year. By the same
comparison, with minority interests from the previous fiscal year added toshareholders’ equity, the year-on-year increase in net assets was ¥34,511
million. The equity ratio for the fiscal year ended March 2007 was 40.8%,
up 8.4 percentage points from the previous fiscal year. With minority
interests subtracted from net assets, the equity ratio was 37.0%.

Cash FlowsNet cash provided by operating activities amounted to ¥63,308 million, a
net increase of ¥6,336 million over the previous fiscal year. Net inflows
included ¥69,330 million from income before income taxes and minority
interests (up ¥92,073 million year on year) and ¥26,431 million from adecrease in work in process (up ¥26,431 million), against net outflows that
included ¥18,554 million from an increase in real estate for sale (up ¥18,554
million), and ¥12,367 million from an increase in long-term prepaid expenses(up ¥5,021 million).
Net cash used in investing activities amounted to ¥15,930 million, a netincrease of ¥4,664 million from the previous fiscal year. Cash payments
mainly comprised ¥21,830 million for purchases of tangible fixed assets(up ¥8,637 million year on year), and ¥1,100 million for the purchase ofaffiliates’ stock (up ¥1,100 million).
Net cash used in financing activities amounted to ¥17,019 million, a net
decrease of ¥30,928 million compared to the previous fiscal year. Some
¥32,454 million was used to repay short-term debt (up ¥3,889 million year
on year), and ¥22,656 million to repay long-term debt (down ¥20,048
million).
Consequently, with the addition of ¥195 million resulting from exchange
rate fluctuations, cash and cash equivalents at the end of the fiscal year
ended March 2007 stood at ¥75,167 million, an increase of ¥30,554 million
over the previous fiscal year.

Free Cash Flows
Millions of yen
50,00045,70547,37840,00031,37030,00020,00021,66917,933

10,0005,464
02002/330

2003/3

2004/3

2005/3

2006/3

2007/3

Business and Other Risks

Listed below are the principal risks that we believe could affect the
Leopalace21 Group’s business performance and financial position. However,this list is not all-inclusive and does not cover all the risks that could affectGroup businesses. All forward-looking statements included herein reflect
the judgment of the Leopalace21 Group management as of the end of theconsolidated fiscal term under review.
Foreign Exchange Risk

The Leopalace21 Group includes overseas subsidiaries involved in the hotel
and resort business, and as a result our business results may be affected byexchange rate fluctuations. Our consolidated subsidiary MDI Guam
Corporation has borrowed funds in the form of yen-denominated loans from
Leopalace21 for the purpose of acquiring facilities and equipment. Because
the value of this debt is calculated each year as of the date of accountsettlement, the Company is subject to foreign exchange gain or loss. Therefore
it is possible that future fluctuations in exchange rates could affect theGroup’s business performance and financial position.
Leasehold Deposits and Guarantee Deposits

The majority of Group leasehold and guarantee deposits held by the Company
are Leopalace Resort membership deposits related to our Guam resort
business, most of which date back to the time when the resort complex
opened in July 1993. The Group is working to increase member usage byimproving our facilities and members’ services; however, our financial
position could be affected if we should receive an unexpected amount ofclaims requesting the return of these deposits.
Tangible Fixed Assets

Because the Leopalace21 Group owns rental real estate and resort-related
properties, tangible fixed assets account for a relatively high proportion(45.6%) of our total assets. We make every effort to sell idle assets or underperforming properties; however, in future fiscal terms we have plans toacquire or build new rental properties, and to replace or maintain facilities
associated with our hotel and resort business, so we will need to make capital
investments and replace facilities on an ongoing basis. As a result, the Group’sbusiness results could be affected if we post a loss on the sale or disposalof fixed assets, or impairment losses, as a result of changes in real estate
prices, or if depreciation costs should rise significantly as a result of facility
renewal.
Loan Losses, and Provision for Bad Debt

The Company conducts financing activities, and carries on its books abalance for apartment construction loans and other types of operating loans

receivable. However, since the fiscal term ended March 31, 1992, theCompany has primarily focused on collection of existing loans and credit
management operations. The Company also may guarantee the housing loans
and membership fee loans offered to its customers by financial institutions.
Apartment and other loans where repayment has become doubtful areaccounted for separately as doubtful receivables (tangible), and a provision
is made for bad debt in each such case; however, our business results could
be affected if amounts of uncollectible debt should increase, or if we should
be obliged to honor claims pertaining to these loan guarantees.
Seasonal Risk

The structure of Group businesses is such that net sales tend to be higher inthe second half of the fiscal year than in the first, both in our Apartment
Construction Subcontracting and in our Leasing businesses. In our Apartment
Construction Subcontracting business, a large majority of contracts call forcompletion by March, when leasing demand is at a peak. Leasing income
is also higher in the second half of the year than in the first, because thenumber of apartments under management rises steadily throughout the year
as new apartments are completed. For this reason, we expect our businessresults in terms of both net sales and profits to be higher in the second halfof the fiscal year.
Information Leaks

The Leopalace21 Group holds a great deal of information, including personal
information obtained through the consent of, or as a result of non-disclosureagreements with, client companies. To control information security, theCompany has drawn up the required information security guidelines, andset up a Compliance Committee to thoroughly educate our executive officers
and employees about information security issues. Nevertheless, in theunlikely event that a leak of information of some type should occur, there
is a possibility that the Group’s reputation could be damaged, and thatbusiness performance might be affected.
Other Risks

The Group is aware that it incurs a variety of risks in the course of promoting
its businesses, and it attempts to prevent, distribute or avoid risk wheneverpossible.
Nevertheless, the Group’s business performance and financial position may
be affected by changes in economic conditions, the real estate market, thefinancial and stock markets, legal regulations, natural disasters, and a variety
of other factors.

31Consolidated Balance Sheets
Leopalace21 Corporation and consolidated subsidiaries
March 31, 2007 and 2006

Millions of yen
2007

2006

2007

¥ 75,167)
9,594)
8,502)
27,766)
9,541)
21,819)5,077)
22,075)8,305)(1,290)¥ 44,613)
8,114)
10,426)
7,524)
35,888)
─)
10,828)22,565)25,049)(1,488)$ 636,738)
81,273)72,020)235,204)
80,823)
184,829)
43,007)
187,000)
70,340)(10,927)

Total current assets

186,556)

163,519)

1,580,307)

Fixed assets (Note 9, 10, 13)Land
Buildings and structures
Construction in progress
Other
Accumulated depreciation

118,255)
124,648)
4,398)
12,129)(52,318)

107,216)
129,255)
1,964)
13,207)(55,129)

1,001,739)
1,055,891)
37,252)
102,745)(443,183)

Total fixed assets

207,112)

196,513)

1,754,444)

Investments and other assets (Note 13)
Intangible assets
Investment securities (Note 7)Long-term loans
Deferred tax assets (Note 12)Long-term accounts receivables (Note 11)Long-term prepaid expenses
Other
Allowance for doubtful accounts

569)
7,934)
2,281)
3,074)
2,125)
42,728)5,016)(2,575)580)
11,047)2,931)
1,902)
2,835)
33,036)
3,505)(3,064)

4,824)
67,212)
19,324)
26,040)18,002)361,944)
42,489)(21,815)

Total investments and other assets

61,152)

52,772)

518,020)¥454,820)¥412,804)$3,852,771)

ASSETS
Current assets
Cash and cash equivalents (Note 6)
Trade receivables and accounts receivable for completed projects
Operating loans
Real estate for sale/property inventories
Inventories
Prepaid expenses
Deferred tax assets (Note 12)
Other accounts receivable
Other
Allowance for doubtful accounts

Total assets
The accompanying notes are an integral part of these statements.

32

Thousands of
U.S. dollars (Note 1)

Thousands of
U.S. dollars (Note 1)

Millions of yen
LIABILITIES AND NET ASSETS
Current liabilities
Account payable including payables for completed projects
Short-term borrowings (Note 13)
Accrued income taxes
Advances received
Customer advances for projects in progress
Allowance for employees’ bonuses
Other
Total current liabilities
Long-term liabilities
Long-term debt (Note 13)
Retirement benefit reserves (Note 14)
Retirement benefit reserves for directors
Reserve for rents due on leaseback agreements
Lease/guarantee deposits received
Other

2007

2006

2007

¥ 77,392)
17,645)27,021)
46,744)23,530)2,799)
21,783)¥ 81,231)
21,783)
4,423)
37,627)42,061)
2,487)
16,063)$ 655,588)
149,471)
228,896)395,969)
199,319)
23,709)184,525)

216,914)205,675)

1,837,477)

35,515)
4,111)
2,986)
534)
8,975)
ー)

42,730)3,246)
─)─)9,802)
77)

300,845)
34,825)25,298)4,523)
76,026)(2)

Total long-term liabilities

52,121)55,855)441,515)

Total liabilities

269,035)

261,530)

2,278,992)

55,641)

─)

471,331)

34,105)85,700)
(97)

─)
─)
─)

288,902)725,964)
(818)

532)
(7,737)
17,641)─)─)─)4,507)(65,547)
149,440)

Total net assets

185,785)

─)1,573,779)

Total liabilities and net assets¥454,820)

─)$3,852,771)

ー)

17,652)ー)ー)

55,641)

ー)

ー)
ー)
ー)
ー)
ー)

33,760)53,123)715)(9,419)
(198)

ー)
ー)
ー)
ー)
ー)

Total shareholders’ equity

ー)

133,622)ー)

Total liabilities, minority interests and shareholders’ equity

ー)¥412,804)ー)

Net assets
Shareholders’ equity
Share capital
Authorized: 250,000,000 shares
Issued: 159,543,915 shares
Capital surplus
Retained earnings
Treasury stockー164,521 shares
Valuation and translation adjustments
Net unrealized gains on “other securities”
Translation adjustments
Minority interests

Minority interests
Contingent liabilities (Note 22)
Shareholders’ equity
Share capital
Authorized: 250,000,000 shares
Issued: 159,543,915 shares
Capital surplus
Retained earnings
Net unrealized gains on “other securities”
Translation adjustments
Treasury stockー383,850 shares33

Consolidated Statements of Operations
Leopalace21 Corporation and consolidated subsidiaries
For the years ended March 31, 2007 and 2006

Thousands of
U.S. dollars (Note 1)

Millions of yen
2007

2006

2007

Net sales
Cost of sales¥631,608)
474,713)¥465,387)
353,928)$5,350,348)
4,021,291)

Gross profit
Selling, general and administrative expenses

156,895)
80,888)111,459)
70,684)

1,329,057)
685,200)

76,007)

40,775)643,857)50)
166)(2,321)123)
501)
2,515)
1,119)(1,333)
(606)
7)
(17)
(216)
(3,009)(210)(710)(2,790)
(446)
500)

54)
126)
513)
233)
4,780)
32)
─)(2,301)
─)
13)
(11)
(453)
(65,481)
─)
(831)
─)
─)
(192)

427)
1,409)(19,659)
1,039)
4,247)
21,304)
9,482)(11,290)(5,134)61)(140)(1,827)(25,489)(1,782)(6,018)(23,631)(3,779)4,214)

69,330)(22,743)587,291)

26,438)4,662)
872)

992)(8,024)871)

223,956)
39,494)
7,382)¥ 37,358)¥ (16,582)$ 316,459)

Operating profit
Other income (expenses)
Interest income
Gain on sales of investment securities
Equity in earnings of affiliated companies
Valuation gain on interest-rate swap
Foreign exchange gain
Gain on sales of affiliates’ stock
Gain on sales of affiliates’ bonds
Interest expenses
Other financial expenses
Gain on sales of property, plant and equipment (Note 15)
Loss on sales of property, plant and equipment (Note 16)
Loss on disposal of property, plant and equipment (Note 17)
Impairment loss (Note 9)
Loss on devaluation of investment securities
Transfer to allowance for bad debt
Provision for accrued retirement benefits for directors
Provision for accrued rents on leaseback properties
Other, net
Income (loss) before income taxes and minority interests
Income taxes
Income taxーcurrent
Income taxesーdeferred
Minority interests
Net income (loss)
The accompanying notes are an integral part of these statements.

34

Consolidated Statements of Shareholders’ Equity
Leopalace21 Corporation and consolidated subsidiaries
For the year ended March 31, 2007

Millions of yen
Shareholders’ equity

Balance as ofMarch 31, 2006
Cash dividend by
appropriation ofretained earnings
Cash dividend
Net income
Purchases of treasury
stock
Sales of treasury stock
Net change of items
other thanshareholders’ equity
Total change during
periodBalance as ofMarch 31, 2007

Share
capitalCapitalsurplusRetainedearnings¥55,641¥33,760¥53,123)

Valuation and translation adjustments
Net
Total
Foreign
Minority
Total
unrealized
valuation
Treasurycurrencyinterests
shareholders’ gains on
and
stock
translation
equity“othertranslation
adjustments
securities”
adjustments

Total net
assets¥(198)¥151,274)(2,391)(2,390)37,358)
(3)
104)

345

¥142,326)¥715)¥(9,419)¥(8,704)¥17,652)(2,391)(2,390)37,358)(2,391)(2,390)37,358)

(3)
449)

(3)
449)
(183)

1,682)

1,499

(11)

1,488)

─

345

32,577)

101)

33,023)(183)

1,682)

1,499

(11)

34,511)¥55,641¥34,105¥85,700)¥ (97)¥175,349)¥532)¥(7,737)¥(7,205)¥17,641)¥185,785)

Thousands of
U.S. dollars (Note 1)
Shareholders’ equity
Share
capitalBalance as ofMarch 31, 2006
$471,331
Cash dividend by
appropriation ofretained earnings
Cash dividend
Net income
Purchases of treasury
stock
Sales of treasury stock
Net change of items
other thanshareholders’ equity
Total change during─
periodBalance as of$471,331
March 31, 2007

CapitalsurplusRetainedearnings$285,978$450,007)Valuation and translation adjustments
Net
Total
Foreign
Minority
Total
unrealized
valuation
Treasurycurrencyinterests
shareholders’ gains on
and
stock
translation
equity“othertranslation
adjustments
securities”
adjustments$(1,676)(20,251)(20,251)
316,459)
(23)
881)

2,924

$1,205,640)$6,053)$(79,783)$(73,730)

Total net
assets$149,525) $1,281,435)(20,251)(20,251)
316,459)(20,251)(20,251)
316,459)(23)
3,805)(23)
3,805)(1,546)

14,236)

12,690)(85)

12,605)(85)292,344)

2,924

275,957)858)

279,739)(1,546)

14,236)

12,690)$288,902$725,964)$ (818)$1,485,379)$4,507)$(65,547)$(61,040)$149,440) $1,573,779)

The accompanying notes are an integral part of these statements.

Millions of yen
2006
Capital surplus:
Balance at beginning of year
Balance at end of year
Retained earnings:
Balance at beginning of year
Cash dividends
Net loss
Balance at end of year

¥33,760)¥33,760)¥72,097)(2,391)(16,583)¥53,123)

The accompanying notes are an integral part of these statements.

35

Consolidated Statements of Cash Flows
Leopalace21 Corporation and consolidated subsidiaries
For the years ended March 31, 2007 and 2006

Millions of yen
2007
2006
Cash flows from operating activities
Income (loss) before income taxes and minority interests
Depreciation expenses
Increase (decrease) in allowance for doubtful accounts
Increase (decrease) in retirement benefit reserves for directors
Interest and dividend income
Interest expense
Foreign exchange gain
Equity in earnings of affiliated companies
Loss on sale of tangible fixed assets
Write-offs of tangible fixed assets
Impairment loss
Gain on sales of affiliates’ stock
Gain on sales of affiliates’ bonds
Gain on sales of investment securities
Loss on devaluation of investment securities
Decrease (increase) in accounts receivable
Decrease (increase) in inventories
Decrease (increase) in real estate for sale
Decrease (increase) in work in process
Decrease (increase) in long-term prepaid expenses
Increase (decrease) in accounts payable
Increase (decrease) in customer advances for projects in progress
Increase (decrease) in advances received
Increase (decrease) in guarantee deposits received
Increase (decrease) in accrued consumption taxes
Other
Sub-totalInterest and dividends received
Interest paid
Income taxes paid
Net cash provided by operating activities
Cash flows from investing activities
Payment for purchase of tangible fixed assets
Proceeds from sales of tangible fixed assets
Fees paid related to sale and disposal of tangible fixed assets
Payment for purchase of affiliates’ stock
Proceeds from sales of affiliates’ stock (Note 16)
Proceeds from sales of affiliates’ bonds
Payment for purchase of investment securities
Proceeds from sales of investment securities
Payment for loans madeProceeds from collection of loans
Other
Net cash used in investing activities
Cash flows from financing activities
Proceeds from short-term debt
Repayments for short-term debt
Proceeds from long-term debt
Repayments for long-term debt
Proceeds from issuance of privately placed bonds
Payments for purchase depreciation on privately placed bonds
Payments for redemptions of privately placed bonds
Dividends paid for minority shareholders
Payment for purchases of treasury stock
Dividends paid for shareholders
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year (Note 6)
The accompanying notes are an integral part of these statements.

36

Thousands of
U.S. dollars (Note 1)
2007¥69,330)
4,560)
160)
2,986)(136)
1,333)(501)
2,321)
17)216)
3,009)(2,515)(1,119)
(166)
210)
914)
ー)
(18,554)
26,431)(12,367)(2,571)(18,532)
9,093)(780)
2,923)
2,766)
69,028)130)(1,290)(4,560)63,308)¥(22,743)
4,565)
1,737)
─)(256)
2,518)(4,780)
(513)
11)
453)
65,481)
(32)
─)
(126)
─)
42,238)(39,213)─)─)(7,346)(10,209)33,329)9,295)(1,761)(1,166)699)
72,181)229)(2,356)(13,082)
56,972)$587,291)
38,624)
1,351)
25,298)(1,155)
11,290)(4,247)
19,659)140)
1,827)
25,489)(21,304)(9,482)(1,409)1,782)
7,743)ー)(157,174)
223,893)(104,757)(21,783)(156,981)
77,030)(6,609)24,761)
23,461)
584,738)
1,099)(10,931)(38,624)536,282)(21,830)9)(119)(1,100)4,110)
2,881)(792)
1,001)(1,379)3,647)(2,358)(15,930)(13,193)
914)
(35)
─)
─)
─)
(2,828)2,836)(1,381)
2,843)(422)(11,266)(184,922)75)(1,010)(9,318)34,812)
24,401)(6,712)8,477)(11,680)
30,891)(19,957)(134,943)

34,190)(32,454)
13,000)(22,656)
ー)(2,007)(1,435)(873)(3)(4,781)(17,019)
195)
30,554)44,613)¥75,167)

17,750)(28,565)
10,681)(42,704)
13,260)(13,667)(1,435)(874)(2)(2,391)(47,947)
1)(2,240)46,853)¥ 44,613)

289,623)(274,918)
110,123)(191,915)ー)(17,000)(12,156)(7,399)(23)(40,503)(144,168)
1,654)
258,825)
377,913)$636,738)

Notes to Consolidated Financial Statements
Leopalace21 Corporation and consolidated subsidiaries
For the years ended March 31, 2007 and 2006

1. United States Dollar Amounts
The U.S. dollar amounts are included solely for convenience and havebeen translated only as a matter of arithmetical computation at the rateof ¥118.05 = US$1.00, the current rate on March 31, 2007.
This translation should not be construed as a representation thatthe yen amounts actually represent, or could be converted into,
U.S. dollars.

2. Basis of Presenting Consolidated Financial Statements
Leopalace21 Corporation (the “Company”) and its subsidiaries (the“Companies”) maintain their record and prepare their financial statements in accordance with accounting principles generally accepted inJapan. The accompanying consolidated financial statements incorporate certain modifications in format to the statutory financial statements
and include certain additional notes that were not contained in the statutory financial statements, so as to make the financial statements moremeaningful to readers outside Japan. Certain amounts in the prioryear’s financial statements have been reclassified to conform to thecurrent year’s presentation.

3. Summary of Significant Accounting Policies(1) Consolidation
The accompanying consolidated financial statements as of March 31,
2007 include the accounts of the Company and its 8 (9 as of March
31, 2006) significant subsidiaries. Affiliated companies over which theCompany exercises significant influence in terms of their operating andfinancial policies have been included in the consolidated financial statements on an equity basis. Investments in 2 affiliates have been included as of March 31, 2007 and 2006. All significant intercompany balances and transactions have been eliminated in consolidation.
Investments in subsidiaries and affiliates that are not consolidated or
accounted for by the equity method are carried at cost or less. Where
there has been a permanent decline in the value of such investments,
the Company has written down the investments.
The difference at the dates of acquisition between the cost and the underlying net equity of investments in consolidated subsidiaries and affiliated companies accounted for by the equity method is being amortized by the straight-line method over a period of ten years.
Since the fiscal year end for certain consolidated subsidiaries is December 31, their financial statements as of that date are used in the
preparation of the Company’s consolidated financial statement. Whensignificant transactions occur at those subsidiaries between their fiscal
year end and the Company’s fiscal year end, these transactions are included in consolidation as necessary.
(2) Cash and cash equivalents
For the purpose of the statements of cash flows, the Company considers all highly liquid investments with insignificant risk of change in valuethat have maturities of generally three months or less when purchased
to be cash equivalents.
(3) Inventories
Real estate for sale is stated at cost determined by the specific identified cost method. Raw materials are stated at cost determined by theperiodic average method. Stored goods are stated at cost determined
mainly by the last-purchase-price method.
(4) Marketable and investment securities
Held-to-maturity securities are stated at amortized cost (straight line
method). “Other securities” with available fair market values are stated

at fair market value. Unrealized gains or losses on these securities arereported, net of applicable income taxes, as a separate component of
net assets. Realized gains or losses on sale of such securities are computed using moving-average cost.
(5) Derivatives
1) Content of transactions
Derivative transactions used by the Company are limited to interest rate
swaps.
2) Policy regarding derivative transactions
All of the derivative transactions engaged in by the Company are used
exclusively for hedging against interest or foreign exchange risk. The
Company does not conduct derivative transactions for investment purposes.
3) Purpose of the transactions
With regard to variable loans, the Company carries out interest rate
cap and interest rate swap transactions to reduce the risks associatedwith the possibility of future increases in market interest rates.
Derivative transactions are accounted for using hedge accounting.
1. Hedge accounting method
The Company uses the deferral hedge accounting method.
The interest rate swaps that meet specific matching criteria arerecognized and included in interest expense or income.
2. Hedging method and hedge targets
Hedging method
Hedge targets
Interest rate swap
Debt
3. Hedge method
Interest rate swaps are utilized as a hedge against possible futureinterest rate increases, in amounts that fall within the range of theparticular liability being hedged.
4. Method used to evaluate the effectiveness of the hedge
Cumulative interest rate fluctuations and changes in cash flows
are compared to evaluate the effectiveness of hedge targets andhedge methods. However, evaluation as of the date of settlementof the effectiveness of interest rate swaps that meet specificmatching criteria is omitted.
4) Risks associated with derivative transactions
The interest rate swap transactions used by the Company are associated with interest rate risk.
The contracting parties used by the Company are all highly reliable
Japanese financial institutions, and the risk of their failure to honor acontract is considered to be negligible.
5) Risk control system
The Company’s basic policy on derivative transactions is determinedby the Board of Directors, and the Accounting Department is then responsible for executing and monitoring this policy in accordance withthe regulations set out in the Company’s “Rules for Managing Derivative Transactions.”
The status of derivative transactions is reported to the Board of Directors on a regular basis to further reinforce our risk management.
6) Additional explanations about “Items pertaining to the market valueof transactions”
As regards the market value of transactions, contracted values represent the calculated value of the notational principal of the transaction;these values do not reflect the size of the risk associated with thetransaction.

37

(6) Tangible assets
Rental buildings of the Company and domestic consolidated subsidiaries are stated at cost. Depreciation is computed generally on thestraight-line basis. The principal estimated useful lives used for computing rental buildings’ depreciation are from 22 to 47 years.
Tangible assets other than rental buildings of the Company and domestic consolidated subsidiaries are stated at cost. Depreciation iscomputed generally on the declining-balance method. However, buildings obtained after April 1, 1998 are depreciated on the straight-line
method. The principal estimated useful lives used for computing buildings’ and structures’ depreciation are from 40 to 50 years and machinery and equipment are 5 years.
Property, plan and equipment of the overseas consolidated subsidiaries are amortized using the straight-line method based on GAAP ofthe country. The principal estimated useful lives used for computing
buildings’ and structures’ depreciation are from 30 to 40 years andmachinery and equipment are 5 years.
(7) Long-lived assets
On August 9, 2002 the Business Accounting Council issued a Statement of Opinion, “Accounting for impairment of Fixed Assets,” and on
October 31, 2003 the Accounting Standards Board of Japan (“ASB”)
issued ASB Guidance No. 6 “Guidance for Accounting Standard for
Impairment of Fixed Assets.” These new pronouncements are effective
for fiscal years beginning on or after April 1, 2005 with early adoption
permitted for fiscal years ending on or after March 31, 2004.
The Company and its subsidiaries review long-lives assets for impairment whenever events or changes in circumstance indicate the carrying amount of an asset or asset group may not be recoverable. An
impairment loss would be recognized if the carrying amount of an asset
or asset group exceeded the sum of the undiscounted future cash
flows expected to result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the assets exceeds their recoverable amount, which is the higher of the discounted
cash flows from the continued use and eventual disposition of the assets, or the net selling price at disposition.
(8) Deferred charges
All costs incurred in connection with the issuance of corporate bonds
are amortized over three years using the straight-line method.
(9) Long-term prepaid expenses
Long-term prepaid expenses are amortized using the straight-line
method mainly over three years.
(10) Allowance for doubtful accounts
The Companies provide the allowance for doubtful accounts by themethod that uses the percentage of its own actual experience of bad
debt loss written off against the balance of total receivables plus theamount deemed necessary to cover individual accounts estimated to
be uncollectible.
(11) Allowance for employees’ bonuses
Allowance for employees’ bonuses is provided for the payment of
employees’ bonuses based on estimated amounts of future payments
attributed to the current fiscal year.
(12) Retirement benefit reserves
Retirement benefit reserves for employees are provided mainly at an
amount calculated based on the retirement benefit obligation as of thebalance sheet date. The retirement benefit obligation is attributed toeach period by the straight-line method over the estimated years ofservice of the eligible employees. Actuarial gain and loss of the
38

Companies are amortized in the year following the year in which thegain or loss is recognized by the straight-line method over a period (5years) which is shorter than the average remaining years of service ofthe employees.
Some domestic consolidated subsidiaries calculate retirement benefit
reserves based on compendium method.
(13) Retirement benefit reserves for directors
The Company recognizes liabilities for retirement benefits for directors
at an amount in accordance with the internal regulations had all directors been terminated as of the balance sheet date.
(Additional information)
Previously, the Company recognized the expenses of retirement benefits for directors when those benefits were paid. As the internal regulations for directors were set in the year ended March 31, 2007, theCompany changed its accounting policy to recognize retirement benefit
reserves for directors based on the Company’s internal regulations regarding the payment of retirement benefits to directors.
As a result, expenses in the current fiscal year of ¥196 million(US$1,667 thousand) were recognized as selling, general and administrative expenses and expenses in the past fiscal year of ¥2,789 million(US$23,630 thousand) were recognized as other expenses. Operating
profit decreased ¥196 million (US$1,667 thousand) and income before
income taxes and minority interests decreased ¥2,986 million(US$25,297 thousand), in comparison with the result under the previous method of accounting. The influence to the segment information is
described in Note 18.
(14) Reserve for rents due on leaseback agreements
In the leasing business the Company recognizes the reserve for rents
due on leaseback agreements to prepare for the losses from the rental
agreements in bulk. This is calculated based on the estimation of theexcess amount of rental expense to lessor than rental income from lessee in the term of agreements.
(Change in accounting policy)
In the leasing business, the excess amount of the rental expense tolessor than rental income from lessee had been the period cost sincesuch properties had been less compared to the all properties. But as itis estimated that these properties will be more significant, the Company
changed to recognize the reserve for rents due on leaseback agreements based on the reasonable estimation of excess amount of rental
expense to lessor than rental income from lessee in the term of agreements.
As a result, expenses in the current fiscal year of ¥87 million (US$743
thousand) were recognized as cost of sales and expenses in the pastfiscal year of ¥446 million (US$3,779 thousand) were recognized asother expenses. Operating profit decreased ¥87 million (US$743 thousand) and income before income taxes and minority interests decreased ¥533 million (US$4,522 thousand). The influence to the segment information is described in Note 18.
(15) Income taxes
Income taxes comprise corporate, inhabitant and enterprise taxes.
The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes.
(16) Lease transactions
Non-cancelable lease transactions are primarily accounted for as operatingleases except that lease agreements which stipulate the transfer of ownership of the leased assets to the lessee are accounted as finance leases.

(17) Foreign currency transactions
All monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the current exchange rates asof each balance sheet date. The foreign exchange gains and losses
from translation are recognized in the consolidated statements of income.
The assets and liabilities of consolidated overseas subsidiaries aretranslated into Japanese yen at the current exchange rates as of eachbalance sheet date and revenues and expenses are translated at the
average exchange rates of the fiscal year. Exchange difference is included in foreign currency translation adjustments.
(18) Interest capitalization
MDI Guam Corporation, a consolidated subsidiary, capitalized interest
paid for real estate development business for the development period
into tangible fixed assets.
Capitalized interests in tangible fixed assets were ¥2,763 million(US$23,412 thousand) as of March 31, 2007.
(19) Consumption taxes
National and local consumption taxes are excluded from transaction
amounts. Non-deductible portions of consumption taxes on the purchases of tangible fixed assets are capitalized as long-term expenses
and depreciated using straight-line method for five years.
(20) Net income per share
Basic net income per share of common stock is computed by net income available to common shareholders divided by the weightedaverage number of common shares outstanding for the period.

4. Changes in Significant Accounting Policies
Accounting standard for presentation of net assets in balance
sheet
The Companies have adopted “Accounting Standard for Presentationof Net Assets in the Balance Sheet” (“Business Accounting Standard
No. 5, December 9, 2005”) and “Guidance for Accounting Standard
for Presentation of Net Assets in the Balance Sheet” (“Guidancefor Business Accounting Standard No. 8, December 9, 2005”). If“Shareholders’ equity” were calculated using the conventional method,“Shareholders’ equity” on the consolidated balance sheet for the year
ended March 31, 2007 would be ¥168,143 million (US$1,424,339
thousand).

5. Changes in Presentation
Consolidated balance sheet
An amount posted under “Prepaid expenses” was included in “Others”
in “Current assets” up to the previous term. Due to its increased significance, however, the amount is reported separately for the reporting term.
“Prepaid expenses” would have amounted to ¥18,824 million(US$159,461 thousand) for the previous term under the current classification.
Consolidated statements of operations
An amount posted under “Other financial costs” was included in“Other, net” in “Other income (expenses)” up to the previous term. Dueto its increased significance, however, the amount is reported separately for the reporting term.
“Other financial costs” would have amounted to ¥271 million(US$2,299 thousand) for the previous term under the current classification.
Consolidated statements of cash flows
Amounts posted under “Decrease (increase) in real estate for sale” and“Decrease (increase) in cost for contract work in progress” were included in “Decrease (increase) in inventories” up to the previous term. Dueto its increased significance, however, the amount reported separately
for the reporting term.
“Decrease (increase) in real estate for sale” and “Decrease (increase) inamount received for uncompleted works” would have amounted
to -¥7,046 million (-US$59,694 thousand) and -¥32,001 million(-US$271,080 thousand) for the previous term under the current
classification.

6. Cash and Cash Equivalents
There is no difference between “Cash and cash equivalents” in the
consolidated balance sheet and “Cash and cash equivalents” in the
consolidated statements of cash flow.

7. Securities and Investment Securities(a) At March 31, 2007 and 2006, information with respect to held-tomaturity securities for which market prices were available was summarized as follows:
Millions of yen
March 31, 2007
Unrecognized gain items:
Government and municipal bonds, etc.
Corporate bonds
Other

Balance sheet
UnrecognizedamountMarket value gain (loss)¥

Subtotal
Unrecognized loss items:
Government and municipal bonds, etc.
Corporate bonds
Other
Subtotal
Total

─
─
500

¥ ─
─
500

¥─)
─)
0)

500

500

0)

─
─
501

─
─
496

─)
─)
(5)

501

496

(5)

¥1,001

¥996

¥ (5)

Millions of yen
March 31, 2006

Balance sheet
UnrecognizedamountMarket value gain (loss)

Unrecognized gain items:
Government and municipal bonds, etc.
Corporate bonds
Other
Subtotal
Unrecognized loss items:
Government and municipal bonds, etc.
Corporate bonds
Other

¥ ─
─
─

¥ ─
─
─

¥─)
─)
─)

─

─

─)

─
─
501

─
─
496

─)
─)
(5)

Subtotal

501

496

(5)

Total

¥501

¥496

¥ (5)

Thousands of U.S. dollars
March 31, 2007
Unrecognized gain items:
Government and municipal bonds, etc.
Corporate bonds
Other
Subtotal
Unrecognized loss items:
Government and municipal bonds, etc.
Corporate bonds
Other

Balance sheet
UnrecognizedamountMarket value gain (loss)

$

─
─
4,236

$ ─)
─)
1)

4,235

4,236

1)

─
─
4,244

─
─
4,199

─)
─)
(45)

─
─
4,235

$

Subtotal

4,244

4,199

(45)

Total

$8,479$8,435$(44)

39

(b) Marketable securities classified as “other securities” as of March 31,
2007 and 2006 were as follows:
Millions of yen
March 31, 2007

Acquisition
cost

Carrying
value

Unrealized
gain (loss)¥1,369

¥863)

─
─
─
105

─)
)─)
─)
2)

609

1,474

865)

─
─
208
─
─
501

─
─
207
─
─
498

─)
─)
(1)
─)
─)
(3)

Securities whose carrying value
exceeds their acquisition cost:
Stock¥1,506
Bonds:
Government and municipal bonds, etc.
─Corporate bonds
─
Other
─
Other
103
Subtotal
Securities whose acquisition costexceeds their carrying value:
Stock
Bonds:
Government and municipal bonds, etc.
Corporate bonds
Other
Other
Subtotal

709

705

(4)

Total

¥1,318¥2,179¥861)

March 31, 2006

Acquisition
cost

Millions of yen

Securities whose carrying value
exceeds their acquisition cost:Stock¥1,563
Bonds:
Government and municipal bonds, etc.
13
Corporate bonds
─
Other
─
Other
204
Subtotal
Securities whose acquisition costexceeds their carrying value:
Stock
Bonds:
Government and municipal bonds, etc.
Corporate bonds
Other
Other
Subtotal
Total

Carrying
value

Unrealized
gain (loss)¥1,710¥1,147)

13
─
─
239

0)
)─)
)─)
35)

780

1,962

1,182)

─
─
183
─
─
610

─
─
180
─
─
536

─)
─)
(3)
─)
─)
(74)

793

716

(77)

¥1,573¥2,678¥1,105)

Thousands of U.S. dollars
March 31, 2007

Carrying
value

Unrealized
gain (loss)$11,600$7,316)

─
─
─
887

─)
─)
─)
18)

5,153

12,487

7,334)

─

─

─)

1,761
─
─
4,240

1,750
─
─
4,215

(11)
─)
─)
(25)

Securities whose carrying value
exceeds their acquisition cost:Stock$14,284
Bonds:
Government and municipal bonds, etc.
─Corporate bonds
─
Other
─
Other
869
Subtotal
Securities whose acquisition costexceeds their carrying value:
Stock
Bonds:
Government and municipal bonds, etc.
Corporate bonds
Other
Other
Subtotal
Total

6,001

5,965

(36)

$11,154$18,452$7,298)The companies recognized ¥210 million (US$1,782 thousand) of loss
on devaluation of investment securities in mutual funds in the year
ended March 31, 2007. Other securities are considered as impaired
when market value is 30% or more lower than acquisition cost.
(c) Proceeds from sales of ”other securities” for the years ended March
31, 2007 and 2006 were ¥3,868 million (US$32,770 thousand) and¥743 million, respectively. Gross realized gains on these sales were¥1,234 million (US$10,451 thousand) for the year ended March 31,
2007, and gains and losses were ¥126 million and ¥1 million, respectively, for the year ended March 31, 2006.
(d) Securities without market value as of March 31, 2007 and 2006
were as follows:
Millions of yen
2007
Available for “other securities”:
Unlisted securities¥2,718Unlisted bonds
Bonds with warrantsーSubordinated bonds
824
Foreign bondsーOthersSubordinated trust beneficiary right inloans receivable and money claims
508
Investments for limited partnership ininvestment business
536
Other
ー
Total

40

Acquisition
cost¥2,586

Thousands of
U.S. dollars

2006

2007

¥2,706$06,080

1,200
824
500

ー
6,982
ー

496

4,302

500
143

4,537
ー

¥4,369$21,901(e) The redemption schedule for securities with maturity dates classified
as available for sale securities is summarized as follows:
Millions of yen
March 31, 2007
Bonds:
Government andmunicipal bonds, etc.
Corporate bonds
Other
Other

Due inone yearor less

Due after one Due after five
year through years throughfive years
ten years

¥30
─
─
─

¥177
─
─
96

¥

Total

¥30

¥273

¥1,239March 31, 2006

Due inone yearor less

─
─
301
938

Due after
ten years

¥

─
824
695
507

¥2,026

Millions of yen

Bonds:
Government andmunicipal bonds, etc.
Corporate bonds
Other
Other

Due after one Due after five
year through years throughfive years
ten years

¥ ─
─
301
695

¥

Total

¥13

¥657

¥996

¥3,215

March 31, 2007

Due inone yearor less

─
2,024
195
996

Thousands of U.S. dollars
Due after one Due after five
year through years throughfive years
ten years

$254
─
─
─

$1,496
─
─
810

$

$254

$2,306$10,489

─
─
2,547
7,942

Due after
ten years

$

─
6,982
5,887
4,298

$17,167(f) Investments in securities include investments in unconsolidated
subsidiaries and affiliates ¥2,220 million (US$18,810 thousand).

8. Derivative Transactions
Derivative transactions for the years ended March 31, 2007 and 2006
were as follows:
Millions of yen
March 31, 2007

Marketvalue

Unrealized
gain (loss)

Transactions Interest-rate
outsideswaps
marketReceivefloating rate
and pay
fixed rate

$84,710$(168)$(168)$─(Notes) 1. Method of calculating market valueMarket value is calculated based on the value provided by the financial
institution that is party to transaction.
2. Excludes derivative transactions subject to hedging accounting.

(a) The Companies recognized impairment loss of the following asset
group during the year ended March 31, 2007.
Impairment loss

¥180
─
─
477

Total

March 31, 2007

9. Long-Lived Assets
Due after
ten years

¥13
─
─
─

Bonds:
Government andmunicipal bonds, etc.
Corporate bonds
Other
Other

Thousands of U.S. dollars
Contract Portion maturing
amountover one year

Contract Portion maturing
amountover one year

Marketvalue

Unrealized
gain (loss)

Transactions Interest-rate
outsideswaps
marketReceivefloating rate
and pay
fixed rate

¥10,000

March 31, 2006

Contract Portion maturing
amountover one year

Marketvalue

Unrealized
gain (loss)

Transactions Interest-rate
outsideswaps
marketReceivefloating rate
and pay
fixed rate

¥20,000¥(143)¥(143)¥─¥(20)

PurposeCategory

Rental assets(94 blocks ofapartments)

Buildings andstructures

Meguro ward,Tokyo¥2,624$05,284

2,385

20,205The Companies reduced book value of the rental assets, idle assets
and business assets whose profitability decreased seriously due to a
decline in current rental rates and continuous decline in land prices, torecoverable amounts and recognized the reduced values as impairment losses of ¥3,009 million (US$25,489 thousand).
Recoverable amounts of rental assets were measured by values in current use, which were calculated based on the present values of future
cash flows, using a discount rate of 4.6%.
(b) The Companies recognized impairment loss of the following asset
group during the year ended March 31, 2006.
PurposeRental assets(268 blocks ofapartments)
Idle assets(3 land)Category
Buildings andstructures
Land
Land

Location
Bunkyo ward,
Tokyo
Higashi Kagawa
City, Kagawa
Prefecture

Buildings andstructures
Business assets(Resort facilities)¥10,000(Millions of yen) (Thousands of
U.S. dollars)

The Companies recognized each property in domestic rental assets asa unit and grouped overseas assets by administration accounting classification.

¥(20)

Millions of yen

Land

Location

Construction inprogress
Long-term prepaid
expenses

Impairment loss
(Millions of yen)
¥02,513
14,458
1,378
34,815

Trust territory of
U.S.A. Guam

7,514
4,803

The Companies recognized each property in domestic rental assets
and idle assets as a unit and grouped overseas assets by administration accounting classification.
The Companies reduced book value of the rental assets, idle assets
and business assets whose profitability decreased seriously due to a
decline in current rental rates, continuous decline in land prices, anddownturn in profitability in resort business, to recoverable amounts andrecognized the reduced values as impairment losses of ¥65,481 million.

41

Recoverable amounts of rental assets and buildings and structures inbusiness assets were measured by values in current use, which were
calculated based on the present values of future cash flows, using a
discount rate of 4%.

(b) Reconciliation of the differences between the statutory tax rate andthe effective income tax rate for the year ended March 31, 2007
was as follows:

Recoverable amounts of assets other than the above were measured
by net sale values, which were calculated based on real-estate appraisal value and market data value.

Statutory tax rate
Non-deductible expenses including entertainment expenses
Valuation allowances
Equity in earnings of affiliates
Inhabitant tax
Dividends excluded from taxable income
Gain on sales of affiliates’ bonds
Others40.69%
2.37%
1.97%
1.36%
0.29%
-0.73%-1.15%
0.06%

Effective income tax rate

44.86%

10. Change from Fixed Assets to Real Estate for Sale
¥1,687 million (US$14,293 thousand) land which had been categorized
as fixed assets was changed to real estate for sale due to possession
purpose changed since the year ended March 31, 2007.

11. Long-Term Accounts Receivable
Long-term accounts receivable at March 31, 2007 and 2006 consistedof the following:
Millions of yen
Claim in bankruptcy
Claim in the process of bankruptcy
Long-term accounts receivable
Others
Total

Thousands of
U.S. dollars

2007

2006

2007

¥2,1504
1,224
847¥2,85975
2,701
─

$18,424
32
10,3707,176¥2,125¥2,835$18,002(a) Significant components of deferred tax assets and liabilities as ofMarch 31, 2007 and 2006 were as follows:
Millions of yen

Sub-total
Less: valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Net unrealized gain on “other securities”
Other
Total deferred tax liabilities
Net deferred tax assets

42

Thousands of
U.S. dollars

2006

2007

¥23,444)
24,821)453)
1,314)
1,630)
─)
1,012)
772)
270)
273)
1,118)
207)
255)
─)

$205,055)
116,553)
17,448)14,170)13,805)
10,294)
9,647)
7,224)
4,159)
3,733)
3,626)
2,906)
2,163)
1,933)

─)
187)
60)
104)
181)

1,840)
1,221)
511)
477)
1,770)

49,408)(40,819)

56,101)(42,922)418,535)(345,779)

8,589)

13,179)72,756)

(365)
(73)

(449)
─)

(616)
(3,093)

Deferred tax assets:
Impairment loss
¥24,207)
Loss carried forward for tax purposes
13,759)Accrued business tax
2,060)
Retirement benefit reserves
1,673)
Devaluation loss on fixed assets
1,630)
Retirement benefit reserves for directors
1,215)
Allowance for employees’ bonuses
1,139)
Advances from customers for rent income
853)
Deposits received
491)
Accounts payable441)
Allowance for doubtful accounts
428)
Excess depreciation
343)
Evaluation loss on real estate for sale255)
Elimination of unrealized loss
228)
Reserves for rents due on leaseback
agreements
217)
Excess depreciation on software
144)
Devaluation loss on securities
60)
Bad debt loss
56)
Other
209)

Reconciliation of the differences between the statutory tax rate and theeffective income tax rate for the year ended March 2006 is not shown
due to loss before income taxes and minority interests.

13. Short-Term Borrowings and Long-Term Debt(a) Short-term borrowings and long-term debt at March 31, 2007 and2006 consisted of the following:

(438)

(449)

(3,709)¥08,151)¥12,730)$069,047)

Thousands of
U.S. dollars

Millions of yen
Short-term borrowings
Current portion of long-term debt
Long-term debt
Total

12. Deferred Tax Assets and Liabilities

2007

2007

2007

2006

2007

¥03,778
13,86735,515¥02,042
19,74142,730$032,007
117,464
300,845¥53,160¥64,513$450,316(b) Assets pledged as collateral for short-term borrowings and longterm debt at March 31, 2007 and 2006 were as follows:
Thousands of
U.S. dollars

Millions of yen
Buildings and structures
Land
Investment securities
Others in Investments and other assets(Membership right)
Total

2007

2006

2007

¥15,164
46,66792¥22,991
61,15091$128,458
395,312
783

420

420

3,558

¥62,343¥84,652$528,111(c) The aggregate annual maturities of long-term debt subsequent toMarch 31, 2007 are summarized as follows:
For the year ending March 31
2009
2010
2011
2012 and thereafter

Millions of yen

Thousands of
U.S. dollars¥20,440
7,368
4,688
3,019

$173,145
62,41439,712
25,574

14. Retirement Benefit Plans

16. Loss on Sales of Property, Plant and Equipment(a) The following table sets forth the funded and accrued status of theplans, and the amounts recognized in the consolidated balance
sheets as of March 31, 2007 and 2006 for the Companies’ defined
benefit plans:

Loss on sales of property, plant and equipment for the year ended
March 31, 2007 and 2006 consisted as follows:

Millions of yen

Thousands of
U.S. dollars

Millions of yen

2007

2006

2007

Land
Others

Projected benefit obligation
Unrecognized actuarial gain or loss¥(4,645)534)¥(3,812)566)$(39,350)
4,525)

Total

Retirement benefit reserves¥(4,111)¥(3,246)$(34,825)

The Company joins to a welfare pension fund. In the welfare pension
fund, they can not reasonably calculate the portion of the pension assets that attributes to the Company.
The pension assets that attribute to the Company based on the contribution ratio was ¥17,367 million (US$47,115 thousand) and ¥15,050
million (US$127,486 thousand) as of March 31, 2007 and 2006.
(b) The components of retirement benefit expenses for the years ended
March 31, 2007 and 2006 were outlined as follows:
Millions of yen
Service cost
Interest cost
Amortization of actuarial gain or loss
Total

Thousands of
U.S. dollars

2007

2006

2007

¥ー
17

¥11
0

$ー
140

¥ 17

¥11

$140

17. Loss on Disposal of Property, Plant and Equipment
Loss on disposal of property, plant and equipment for the year ended
March 31, 2007 consisted as follows:
Thousands of
U.S. dollars

Millions of yen
Buildings and structures
OthersConstruction in progress
Total

2007

2006

2007

¥ 56
44
116

¥438
15
─

$ 475
365
987

¥216

¥453

$1,827

Thousands of
U.S. dollars

2007

2006

2007

¥2,27084
164¥2,00668
141$19,226707
1,393¥2,518¥2,215$21,326(Note)1. Contribution to welfare pension fund was ¥1,518 million (US$12,859
thousand) and ¥1,353 million (US$11,466 thousand) in the year ended
March 31, 2007 and 2006.
2. All the retirement benefit expenses of the domestic consolidated
subsidiaries that adopt compendium method were recoded in service
cost.

18. Main Components of Assets and Liabilities Excluded
from Consolidated Financial Statements
Main components of assets and liabilities of a subsidiary, Trianon Palace that was excluded from consolidation due to sales of shares, salevalue and net cash in-flow by the sales in the year ended March 31,
2007 were as follows:
Millions of yen

Thousands of
U.S. dollars(c) The assumptions used in accounting for the above plans are as
follows:

Current assets
Fixed assets
Current liabilities
Long-term liabilities
Translation adjustment
Gain on sales of investment in Trianon Palace¥ 778)
2,670)(144)(2,612)
1,176)
2,515)$ 6,589)
22,621)(1,223)(22,131)
9,965)
21,304)

Assumptions used in accounting for
retirement benefits

Sale value of investment in Trianon Palace
Cash and cash equivalent held by Trianon Palace

4,383)(273)

37,125)(2,313)

Net cash in-flow by sales of Trianon Palace shares¥4,110)$34,812)Periodical allocation of estimatedretirement benefit
Discount rate
Amortization period of actuarial gain or loss

2007

2006

Benefits-years-ofservice approach
2.2%
5 years

Benefits-years-ofservice approach
2.2%
5 years

15. Gain on Sales of Property, Plant and Equipment
Gain on sales of property, plant and equipment for the year ended
March 31, 2007 and 2006 consisted as follows:
Millions of yen
Buildings and structures
Others
Total

Thousands of
U.S. dollars

2007

2006

2007

¥ー
7

¥ 8
5

$ー
61

¥ 7

¥13

$ 61

March 31, 2007

19. Shares Outstanding and Treasury Stocks
Shares outstanding and treasury stocks for the year ended March 31,
2007 were as follows:
Type of shares
Shares outstanding
Common stock
Total
Treasury stock
Common stock
Total

March 31, 2006 Increase

Decrease March 31, 2007

159,543,915

──

159,543,915

159,543,915

──

159,543,915

363,850671

200,000

164,521363,850671

200,000

164,521(Notes)1. 671 shares increase was due to purchases of fractional shares.
2. 200,000 shares decrease was due to sales by affiliates applied equity
method.

43

20. Cash Dividends(a) Cash dividends for the year ended March 31, 2007 were as follows:
Resolution
General shareholders’meeting on
June 29, 2006
Board of Directors’
meeting on
November 16, 2006

Type of shares

Gross amount(Millions of yen)

Gross amount(Thousands of
U.S. dollars)

Per share(Yen)

Per share(U.S. dollars)Common stock¥2,391$20,252

¥15

$0.13

March 31, 2006

June 29, 2006

Common stock

2,391

20,25215

0.13

September 30, 2006

December 12, 2006

Date in effect ofdividend

Record date(b) Dividends of which record date were in the year ended March 31, 2007 but date in effect would be in the next fiscal year were as follows:
Resolution

Type of shares

Source ofdividends

General shareholders’meeting on
June 28, 2007

Common stock

Retained earnings

Gross amount(Millions of yen)

Gross amount(Thousands of
U.S. dollars)

Per share(Yen)

Per share(U.S. dollars)

Record date

Date in effect ofdividend¥5,578$47,254

¥35

$0.30

March 31, 2007

June 29, 2007

21. Leases(a) The following pro forma amounts represent the acquisition cost, accumulated depreciation and net book value of leased property as ofMarch 31, 2007 and 2006:
Thousands of
U.S. dollars

Millions of yen
2007

2006

2007

¥21,206
21,792¥16,123
16,505$001,748
184,603

Estimated amount of depreciation by
the straight-line method over thelease period
Estimated interest cost

Accumulated depreciation
VehiclesEquipment¥21,072
10,179¥00,062
9,318$00,0606
86,22822. Contingent Liabilities

Net book value
VehiclesEquipment¥21,134
11,613¥00,061
7,187$001,141
98,375

Year ending March 31
20082009 and thereafter
Total

Millions of yen

Thousands of
U.S. dollars¥03,666
8,573$031,052
72,623¥12,239$103,675

Annual lease expenses charged to income were ¥4,503 million(US$38,147 thousand) and ¥4,014 million for the years ended March
31, 2007 and 2006, respectively.

Thousands of
U.S. dollars

Millions of yen

Acquisition cost
VehiclesEquipment(b) Estimated amount of depreciation and finance charges for the years
ended March 31, 2007 and 2006 were as follows:

44(c) Future minimum lease payments (including the interest portion
thereon) subsequent to March 31, 2007 for finance lease transactions accounted for as operating leases were summarized asfollows:

2007

2006

2007

¥3,921655¥3,504498$33,216
5,548

Contingent liabilities for the years ended March 31, 2007 and 2006
were as follows:
Thousands of
U.S. dollars

Millions of yen
Contingent liabilities to financial
institutions for customers who havehome mortgage
Contingent liabilities to financial
institutions for customers who havemembership loan
Subordinated contingent liabilities tofinancial institutions for customers
who have an apartment loan withnonexempt property
Total

2007

2006

2007

¥2,114¥2,190$17,905

30

49

254

10

14

85

¥2,154¥2,253$18,24423. Segment Information(a) Business segments
Segment information by business group for the years ended March 31, 2007 and 2006 was as follows:
Millions of yen
Apartment
Construction
Subcontracting
Division

Leasing
Division

Hotel
ResortDivision

Other
Division

Segment
totals¥316,117─

¥277,1633¥ 7,141)
3,702)¥31,187─¥631,608
3,705

Total
Operating expenses

316,117
241,503

277,166
270,135

10,843)
13,471)

31,18730,096

Operating profit (loss)¥ 74,614¥7,031¥ (2,628)¥ 51,339
388
─242¥207,581
2,000
3,009
5,064

¥55,868)
1,889)
─)
933)

Apartment
Construction
Subcontracting
Division

Leasing
Division

Hotel
ResortDivision¥195,202─

¥249,696
3

Total
Operating expenses

195,202
155,750

Operating profit (loss)¥ 39,452¥¥ 76,486
429
─134Year ended March 31, 2007
(1) Net sales and operating profit (loss)
Sales
Sales to customers
Inter-segment sales and transfers

Elimination orcommon assets

─)(3,705)¥631,608
─635,313555,205(3,705)396)

631,608555,601¥ 1,091¥ 80,108¥ (4,101)¥ 76,007¥40,42577─
228¥355,213
4,354
3,009
6,467

¥99,607)206)
─)15,385)¥454,820
4,560
3,009
21,852

Other
Division

Segment
totalsElimination orcommon assets

Consolidated
totals¥ 8,340)
2,530)¥12,149)─)¥465,387
2,533

249,699
241,619

10,870)13,537)

12,149)12,543)8,080¥ (2,667)¥¥183,931
1,977
16,971
11,232¥59,394)
1,902)
47,132)
1,704)

Apartment
Construction
Subcontracting
Division

Leasing
Division

Hotel
ResortDivision$2,677,824
─

$2,347,845
25

Total
Operating expenses

2,677,824
2,045,765

Operating profit (loss)$ 632,059$$ 434,893
3,284
─
2,045

(2) Assets, depreciation, impairment
losses and capital expenditures
AssetsDepreciation
Impairment losses
Capital expenditures¥

Consolidated
totalsMillions of yen
Year ended March 31, 2006
(1) Net sales and operating profit (loss)
Sales
Sales to customers
Inter-segment sales and transfers(2) Assets, depreciation, impairment
losses and capital expenditures
AssetsDepreciation
Impairment losses
Capital expenditures¥─)(2,533)¥465,387─

467,920
423,449(2,533)
1,163)

465,387424,612(394)¥ 44,471¥ (3,696)¥ 40,775¥20,46270─
21¥340,273
4,378
64,10313,091¥72,531)187)
1,378)
137)¥412,804
4,565
65,481
13,228

Other
Division

Segment
totalsElimination orcommon assets

Consolidated
totals$ 60,491)
31,359)$264,188─

$5,350,348
31,384

2,347,870
2,288,310

91,850)114,115)

264,188
254,942

59,560$ (22,265)$$1,758,416
16,94025,48942,901$473,260)
16,002)
─)7,899)

Thousands of U.S. Dollars
Year ended March 31, 2007
(1) Net sales and operating profit (loss)
Sales
Sales to customers
Inter-segment sales and transfers(2) Assets, depreciation, impairment
losses and capital expenditures
AssetsDepreciation
Impairment losses
Capital expenditures$─)(31,384)$5,350,348
─

5,381,732
4,703,132(31,384)
3,359)

5,350,348
4,706,491

9,246$ 678,600$ (34,743)$ 643,857$342,438
652
─
1,934

$3,009,007
36,87825,48954,779$843,764)
1,746)
─)
130,328)$3,852,771
38,62425,489185,107(Notes)1. The above segments are defined according to our own internal management system.
2. Segments and business content(1) Apartment Construction Subcontracting Division
Contract apartment construction(2) Leasing Division
Apartment leasing, management, related services and repairs(3) Hotel Resort Division
Hotel and resort management, sales of resort club memberships, etc.
(4) Other Division
Financial services (real-estate loans, etc.), residential business, broadband business, silver business
3. Major items and amounts included in “Elimination or common assets” are as follows.

45

Millions of yen
2007

2006

Thousands of
U.S. dollars
Main component

2007

Operating expenses unable to beallocated included in “Elimination orcommon assets”

4,101

3,696

34,743

Amount of corporate assets
included in “Elimination orcommon assets”

99,606

72,531

843,764

Management expenses of the General Affairs Department of the Company submitting
the consolidated financial statements.
Surplus funds under management at submitting company (cash and deposits,marketable securities, etc.), long-term investment funds (investment securities, etc.),
and assets related to management operations.

(Change in accounting policy)
Reserve for rents due on leaseback agreements
Due to a change in accounting policy regarding reserves for rents due on leaseback agreements, operating expenses in leasing division increased¥87 million (US$743 thousand) and operating profit decreased the same amount in the year ended March 31, 2007.
Loss on impairment on long-lived assets
Due to a change in accounting policy regarding loss on impairment on long-lived assets, operating expenses in leasing division and hotel resort division
decreased ¥148 million and ¥1,117 million, respectively, and operating profit increased the same amounts in the year ended March 31, 2006.
(Additional information)
Retirement benefit reserves for directors
Due to a change in accounting policy regarding retirement benefit reserves for directors, operating expenses in “Elimination or common assets”
increased ¥196 million (US$1,667 thousand) and operating profit decreased the same amount in the year ended March 31, 2007(b) Geographical segments
Segment information by geographic area for the years ended March 31, 2007 and 2006 were as follows:
Millions of yen
Japan

Trust territory of
U.S.A. GuamFranceSegment totals¥626,250333¥ 4,107)3,824)¥1,251)18)¥631,608
4,175

Total
Operating expenses

626,583
545,361

7,931)
8,927)

1,269)
1,387)

Operating profit (loss)¥ 81,222¥(996)¥300,846¥54,367)

Japan

Trust territory of
U.S.A. Guam

¥458,557
191

Total
Operating expenses

458,748
413,359

Operating profit (loss)¥ 45,389¥

Year ended March 31, 2007
(1) Net sales and operating profit (loss)
Sales
Sales to customers
Inter-segment sales and transfers

Elimination orcommon assets

Consolidated
totals─)(4,175)¥631,608
─

635,783
555,675(4,175)(74)631,608555,601¥ (118)¥ 80,108¥ (4,101)¥ 76,007─)¥355,213¥99,607)¥454,820

FranceSegment totals

Elimination orcommon assets

Consolidated
totals¥ 4,665)
3,149)¥2,165)34)¥465,387
3,374

7,814)
8,513)

2,199)
2,418)(699)¥282,552¥54,485)

Japan

Trust territory of
U.S.A. GuamFranceSegment totals$5,304,960
2,818$ 34,787)
32,398)$10,601)
152)$5,350,348
35,368

Total
Operating expenses

5,307,778
4,619,748

67,185)75,620)10,753)
11,748)Operating profit (loss)$ 688,030$ (8,435)$$2,548,465$460,542)$(2) Assets
Assets¥Millions of yen
Year ended March 31, 2006
(1) Net sales and operating profit (loss)
Sales
Sales to customers
Inter-segment sales and transfers(2) Assets
Assets─)(3,374)¥465,387─

468,761424,290(3,374)322)

465,387424,612¥ (219)¥ 44,471¥ (3,696)¥ 40,775¥3,236)¥340,273¥72,531)¥412,804

Elimination orcommon assets

Consolidated
totals¥Thousands of U.S. Dollars
Year ended March 31, 2007
(1) Net sales and operating profit (loss)
Sales
Sales to customers
Inter-segment sales and transfers(2) Assets
Assets46─)(35,368)$5,350,348
─

5,385,716
4,707,116(35,368)(625)

5,350,348
4,706,491(995)$ 678,600$ (34,743)$ 643,857

─)$3,009,007$843,764)$3,852,771$

(Notes)1. Geographic area is defined by geographic contiguity.
2. Major items and amounts included in “Elimination or common assets” are same as Note 3 in “Business segment.”(Change in accounting policy)
Reserve for rents due on leaseback agreements
Due to a change in accounting policy regarding reserves for rents due on leaseback agreements, operating expenses in Japan segment increased ¥87
million (US$743 thousand) and operating profit decreased the same amount in the year ended March 31, 2007.
Loss on impairment on long-lived assets
Due to a change in accounting policy regarding loss on impairment on long-lived assets, operating expenses in Japan and Trust territory of U.S.A.
Guam decreased ¥148 million and ¥1,117 million, respectively, and operating profit increased the same amounts in the year ended March 31, 2006.
(Additional information)
Retirement benefit reserves for directors
Due to change in accounting policy regarding retirement benefit reserves for directors, operating expenses in Japan segment increased ¥196 million(US$1,667 thousand) and operating profit decreased the same amount in the year ended March 31, 2007(c) Overseas sales
As overseas sales constituted less than 10% of consolidated net sales for the years ended March 31, 2007 and 2006, overseas sales information has
been omitted.

24. Amounts per Share(a) The following table sets forth the net assets and net income (loss)
per share of common stock for the years ended March 31, 2007
and 2006.
Yen
Net assets
Net income (loss)
Basic

U.S. dollars

2007

2006

2007

¥1,054.99¥839.44)$8.94

234.68(104.17)

1.99(b) Basis of computation of net assets per share at March 31, 2007
was as follows:
Millions of yen
Net assets
Amount not allocated to the common
stock
Net assets allocated to the common
stock
Shares issued outstanding at end of year
(Thousands of shares)

Thousands of
U.S. dollars

2007

2007

¥185,785$1,573,779

17,641

149,440

168,144

1,424,339

159,379

ー(c) Basis of computation of basic net income per share for the years
ended March 31, 2007 and 2006 was as follows:
Thousands of
U.S. dollars

Millions of yen
Net income (loss)
Amount not allocated to thecommon stock
Net income (loss) allocatedto the common stock
Shares issued outstanding at
end of year
(Thousands of shares)

2007

2006

2007

¥ 37,358¥ (16,582)$316,459ー─)ー

37,358(16,582)

316,459

159,186

159,181)ー47

25. Related Party Transaction
The following table sets forth related party transactions for the years ended March 31, 2007 and 2006.
(For the year ended March 31, 2007)(a) Director and individual major shareholder
Capital stock
Attribute

Name

Address

Yoshiteru Kitagawa

─Eisei Miyama

Director andcompany whose
majority of voting
right owned bydirector and close
relatives

──Business or position

Thousands ofMillions of yen
U.S. dollars

─

Relation

Percentage of shareownership of theCompany

Interlocking
directors

Relation inbusiness─President and CEO

0.5%

─

─

─

Senior Managing
Director

0.0%

─

─

0.0%

─

─

Kuniaki Sasahara

─

─

─

Senior Managing
Director

Yoshikazu Miike

─

─

─

Director

0.0%

─

─

Satoshi Abe

─

─

─

Director───Yousuke Kitagawa

─

─

─

Director

0.0%

─

─

Tomio Oba───

Director

0.0%

─

─

─

─

─

─

─

Receiving
serviceMillions of yen

Thousands of
U.S. dollars

Account

Millions ofyen

Thousands of
U.S. dollars

Katsumi Furuhata

BobbyTech Ltd.

─

─

─

Full-time Corporate
AuditorMinato
ward,
Tokyo

¥3

$25

IT solution businessTransaction amountAttribute

Director andcompany whose
majority of voting
right owned bydirector and close
relatives

Name

Transaction

Balance

Yoshiteru Kitagawa

Leasing of land andbuilding

¥11

$ 91

─

─

─

Eisei Miyama

Leasing of land andbuilding

6

54

─

─

─

Kuniaki Sasahara

Subleasing of land andbuilding

0

3

─

─

─

Yoshikazu Miike

Leasing of land andbuilding

5

45

─

─

─

Satoshi Abe

Leasing of land andbuilding

3

28

─

─

─

Yousuke Kitagawa

Leasing of land andbuilding

3

23

─

─

─

Tomio Oba

Leasing of land andbuilding

6

51

─

─

─

Katsumi Furuhata

Leasing of land andbuilding

1

7

─

─

─

BobbyTech Ltd.

Commitment of IT
network related affairs

17

144

Accounts payable

¥8

$64

(Notes)1. BobbyTech Ltd. is a company whose majority of voting right is owned by close relatives of Kuniaki Sasahara, Senior Managing Director of the Company.
2. Conditions of transactions and policy of conditions of transactions decision(a) Conditions of leasing of land and building are same as transactions with third parties.
(b) Conditions of commitment of IT network related affairs are same as transactions with third parties.
(c) Kuniaki Sasahara retired from director on June 29, 2007 and Tomio Oba retired from director on March 18, 2007.
3. Consumption taxes were not included in the transaction amount above.

48

(b) Subsidiaries and others
Capital stock
Attribute

Affiliate

Name

Address

Toyo Miyama
Kogyo Co., Ltd.

Kisarazu
City,
Chiba

Business or position

Thousands ofMillions of yen
U.S. dollars¥100

Production andsales of building
material$847

Percentage of shareownership of theCompany
50.0%

RelationInterlocking
directors

Relation inbusiness

2 interlocking
directors

Purchases ofbuilding
material andothersTransaction amountAttribute
Affiliate

Name

Transaction

Toyo Miyama
Kogyo Co., Ltd.

BalanceMillions of yen

Thousands of
U.S. dollars

Account

Millions ofyen

Thousands of
U.S. dollars¥25,233$213,746

Accounts payable¥9,574$81,098

Percentage of shareownership of theCompany

Interlocking
directors

Relation inbusiness

Purchases of building
material and others(Notes)1. Conditions of transactions and policy of conditions of transactions decision
Conditions of purchases of building material were same as transactions with third parties.
2. Consumption taxes were not included in the transaction amount above but included in balance.

(For the year ended March 31, 2006)(a) Director and individual major shareholder

Attribute

Director

Name

Capital stock

Yusuke Miyama──

President and CEO

14.7%

─

─

Tomio Oba──

Executive Vice President

0.0%

─

─

Yoshiteru Kitagawa

──Senior Managing Director

0.0%

─

─

Eisei Miyama──Senior Managing Director

0.5%

─

─

Kuniaki Sasahara──Senior Managing Director

0.0%

─

─

Yoshikazu Miike──

Director

0.0%

─

─

Satoshi Abe──

Director

0.0%

─

─

Yousuke Kitagawa

──

Director

0.0%

─

─

Katsumi Furuhata──

Full-time Corporate Auditor

─

─

─

Attribute

Director

Name

Business or position

Relation

Address

Transaction

Transaction amount(Millions of yen)Account

Balance(Millions of yen)

Yusuke Miyama

Loan interest

¥23

─

─

Tomio Oba

Leasing of land and building

6

─

─

Yoshiteru Kitagawa

Leasing of land and building

11

─

─

Eisei Miyama

Leasing of land and building

6

─

─

Kuniaki Sasahara

Subleasing of land and building

0

─

─

Yoshikazu Miike

Leasing of land and building

5

─

─

Satoshi Abe

Leasing of land and building

3

─

─

Yousuke Kitagawa

Leasing of land and building

3

─

─

Katsumi Furuhata

Leasing of land and building

1

─

─

(Notes)1. Conditions of transactions and policy of conditions of transactions decision(a) Conditions of subleasing of land and building are decided on nearby actual transactions and internal rule.
(b) Conditions of leasing of land and building are same as transactions with third parties.
(c) Interest rate and other conditions of loan to directors are decided based on transactions with financial institutions.
(d) The Company collected the entire long-term loan to director ¥1,700 million in the year ended March 31, 2006.
(e) Yusuke Miyama retired from director on June 1, 2006.
2. Consumption taxes were not included in the transaction amount above.

49

(b) Subsidiaries and others

Attribute

Affiliate

Attribute
Affiliate

Name

Toyo Miyama
Kogyo Co., Ltd.

Name
Toyo Miyama Kogyo
Co., Ltd.

Address

Capital stock

Kisarazu City,
Chiba

¥100

Transaction
Purchases of building
material and others

Business or position

Production and salesof building material

50.0%Transaction amount(Millions of yen)Account¥19,989(Notes)1. Conditions of transactions and policy of conditions of transactions decision
Conditions of purchases of building material were same as transactions with third parties.
2. Consumption taxes were not included in the transaction amount above but included in balance.

50

Percentage of shareownership of theCompany

Accounts payable

RelationInterlocking
directors

Relation inbusiness

4 interlocking
directors

Purchases ofbuilding
material andothersBalance(Millions of yen)
¥6,448

Report of Independent Auditors

51

Corporate Information

Leopalace21 Corporation(As of March 31, 2007)

Head Office:2-54-11 Honcho, Nakano-ku,
Tokyo 164-8622, Japan
Tel: +81-3-5350-0001
http://www.leopalace21.co.jp

Apartment Construction Subcontracting Division

Toyo Miyama Kogyo Co., Ltd.
(Manufacture and sale of housing materials)

Share Capital:¥55,640.66 million

Number of Employees:
7,409 (consolidated basis);6,489 (non-consolidated basis)

SPC Leopalace REIT (Real estate leasing)

SPC Leopalace REIT II (Real estate leasing) (33.3%)

SPC Leopalace REIT III (Real estate leasing) (25.0%)

MDI Guam Corporation(Hotel/resort operations in Guam)(As of March 31, 2007)

Yoshiteru Kitagawa

Senior Managing Directors

Eisei Miyama
Akihiko Umeda
Kuniaki Sasahara
Jiro Nishida
Yoshinori Uehara
Hitoshi Yamaguchi

Miyama Travel, Ltd.
(Travel agency)

Kou Kimura
Yoshikazu Miike
Tadahiro Miyama
Satoshi Abe
Yousuke Kitagawa
Yasuhide Sakaguchi

Full-time Corporate Auditors

Yoshitaka Kouda
Masaru Katayama
Katsumi Furuhata

Corporate Auditor

Eiichi Dobashi(100%)(100%)

Other Business

DIA KENSETSU Co., LTD.
(Condominium developer/seller)

Domestic consolidated subsidiary
Foreign consolidated subsidiary52(37.5%)

Hotel and Resort-Related Division

President and CEO

Directors(50.0%)

Leasing Division

Operations:
Construction, leasing, and sales of apartments,
condominiums, and residential housing;development and operation of resort facilities;
hotel business; broadband business;silver business, etc.

Executive Directors of Management(As of March 31, 2007)

Leopalace21 Corporation

Date of Establishment:
August 17, 1973

Board of Directors andCorporate Auditors

Leopalace21 Group

Equity-method affiliate
Note 1: Numbers represent equity stakes held by Leopalace21.
Note 2: Apart from the companies listed above, there are three companies(100% owned indirectly by Leopalace21) with operational permits.

(33.3%)

Major Shareholders (Top 10)(As of March 31, 2007)

Name of shareholders

No. of shares held

% of shares held

Yusuke Miyama

21,251,774

13.32

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

10,227,700

6.41

Japan Trustee Services Bank, Ltd. (Trust Account)

6,566,600

4.11

State Street Bank and Trust Company

4,362,449

2.73

State Street Bank and Trust Company 505103

3,400,722

2.13

BBH (Lux) For Fidelity Funds-Japan Fund

3,093,500

1.93

Toyo Kanetsu K.K.

2,745,900

1.72

HSBC-Fund Services, Sparx Asset Management Co., Ltd.

2,691,200

1.68

MDI Corporation

2,350,000

1.47

Mellon Bank, N.A. as Agent for its Client Mellon Omnibus US Pension

2,336,295

1.46

Number of Shares:
Authorized: 250,000,000
Issued and outstanding: 159,543,915
Number of Shareholders:
12,724

Treasury stocks(As of March 31, 2007)

0.10%
Securities companies

0.86%

Foreign corporations

Business corporations
and other legal entities

Stock Exchange Listing:Tokyo Stock Exchange (Ticker: 8848)
Transfer Agent:
Mitsubishi UFJ Trust and Banking Corporation

5.28%

49.88%

Shareholders

Individuals and other
Financial institutions

24.38%

19.49%

Monthly Stock Price Range and Trading Volume
Yen
5,000

Topix average

Leopalace21

4,000
3,000
2,000
1,000
0
Thousands of shares
50,00040,00030,00020,00010,0000

2004/3

2005/3

2006/3

2007/353

Corporate Slogan

A single dream for a united purpose

A United Spirit to meet today’s constant demand for new value and constantA united purpose to fulfill our customers’ dreams

A united purpose for building a comfortable future
A united purpose aiming at a new goal

A united purpose of both employees and customers at the new Leopalace21

Corporate History
Increased capital to¥100 million

Leopalace21 Villa Colonna
wins the 1998
Good Design Award
Number of units undermanagement reached 100,000.

Introduced a unique membership-based
rental system for our tenants
Opened Leopalace
Resort Manenggon Hills,
Guam

1973

1979

Started business as Miyama Inc.,a real estate brokerage

54

1985

1988

Introduced Leopalace21
urban-style, one-room rental
apartment buildings

1989

1993

1997

Listed on JASDAQ
Established the
Leopalace21 Owners’
Mutual Insurance
Association

1998

1999
Launched the Monthly
Leopalace short-term
rental service

changeto realize a rich and comfortable lifestyle

Introduced our Monthly Leopalace Flat service
Started our Broadband Business
Launched Leopalace REIT II and III, a series of securitized real estate products
Opened Leopalace World Nagoya and Leopalace Center Seoul
Number of units under management reached 200,000
Increased capital to ¥30.52 billion
through a third-party allotment of
new shares
Changed company name to
Leopalace21 Corporation

2000

2001

Started Residential and Silver businesses
Number of units under management reached 300,000
Number of units under management
reached 389,000

2002

2004

2005

2006

2007

Opened Leopalace Center Taipei and Leopalace Center Pusan

Launched new Five-Year Medium-Term Management Plan:“United Spirit” in December
Launched Leopalace REIT,
a securitized real estate product

Listed on 1st Section of Tokyo Stock Exchange
Increased capital to ¥55.64 billion by public offering
Opened Leopalace Center Shanghai

55

Leopalace21 Corporation
2-54-11 Honcho, Nakano-ku, Tokyo 164-8622, Japan
TEL: +81-3-5350-0001 Main Line
FAX: +81-3-5350-0058
URL: http://www.leopalace21.co.jp

This annual report was printed in Japan on recycled paper.