(Translation)

Dear Shareholders:Information to be disclosed on the Internet upon Giving
Notice of the 62nd Ordinary General Meeting of Shareholders

June 4, 2014
Funai Electric Co., Ltd.

CONTENT1.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ··················· 1

2.

NOTES TO NONCONSOLIDATED FINANCIAL STATEMENTS ··········· 20

The above-listed matters are deemed to have been provided to the shareholders when posted
on our Internet website (http://www.funai.jp/jp/investors/) in accordance as provided for inlaws and ordinances and Article 14 of the Articles of Incorporation of the Company.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis for Presenting the Consolidated Financial Statements
1.

Scope of consolidation(1)

Number of consolidated subsidiaries:(2)

Names of major consolidated subsidiaries:

21

FUNAI CORPORATION, INC., Funai Electric (HK) Ltd., and DX ANTENNA Co.,
Ltd.
Funai Electric Philippines Inc. and Funai Lexington Technology Corporation, which
are subsidiaries incorporated during the fiscal year ended March 31, 2014, areincluded in the scope of consolidation. In addition, Funai Electric Co., Ltd. (the“Company”), has acquired from Lexmark International, Inc., all shares of its
manufacturing subsidiary Funai Electric Cebu, Inc., which manufactures inkjet
printer-related products in the Philippines. It is also included in the scope of
consolidation.
(3)

Name of major nonconsolidated subsidiary:
FGS Co., Ltd.
(Reason for exclusion from consolidation)
All nonconsolidated subsidiaries are small, and aggregate total assets, net sales, net
income (loss) (based on the Company’s equity interest), and retained earnings (basedon the Company’s equity interest) of the nonconsolidated subsidiaries are not material
to the consolidated financial statements.

2.

Application of the equity method(1)

Number of nonconsolidated subsidiaries to which
the equity method is applied:(2)

1

Name of the nonconsolidated subsidiary to which the equity method is applied:
Highsonic Industrial Ltd.

(3)

Number of associated companies to which
the equity method is applied:(4)

1

Name of the associated company to which the equity method is applied:
CMET FUNAI Optical Electric Co., Ltd.

-1-

(5)

Name of the major nonconsolidated subsidiary and associated company to which theequity method is not applicable:
Nonconsolidated subsidiary:
Associated company:

FGS Co., Ltd.
Digitec Industrial Ltd.

(Reason for not applying the equity method)
The nonconsolidated subsidiaries and associated companies have no material impact
on net income (loss) (based on the Company’s equity interest) and retained earnings(based on the Company’s equity interest) and they as a whole are not material to theconsolidated financial statements.
(6)

As the fiscal year ends of Highsonic Industrial Ltd., a nonconsolidated subsidiary towhich the equity method is applied, and CMET FUNAI Optical Electric Co., Ltd., anaffiliate to which the equity method is applied, differ from the consolidated fiscal year
end, their financial statements compiled for their respective fiscal years are used.

(7)

Fiscal years of consolidated subsidiaries
The consolidated subsidiaries whose fiscal year ends differ from the consolidated
fiscal year end are as follows:
Name

Fiscal year end

DX ANTENNA Co., Ltd.
P&F MEXICANA, S.A. DE C.V.
Zhong Yue Funai Electron Co.
Zhong Shan Funai Electron Co.
FUNAI Optical Electronics Co., Ltd.

February 28
December 31
December 31
December 31
December 31

For DX ANTENNA Co., Ltd., and P&F MEXICANA, S.A. DE C.V. listed above,
their financial statements as of their respective fiscal year ends are used to prepare theconsolidated financial statements with necessary adjustments provided forconsolidation purpose with regard to material transactions between their respective
fiscal year ends and the consolidated fiscal year end.
For Zhong Yue Funai Electron Co., Zhong Shan Funai Electron Co. and FUNAI
Optical Electronics Co., Ltd., their financial statements compiled based on theprovisional settlement of accounts made as of the consolidated fiscal year end areused to prepare the consolidated financial statements.

-2-

3.

Summary of significant accounting policies(1)

Valuation basis and methods for important assets(i)Securities:
Available-for-sale securities:
Available-for-sale securities for which the fair values are readily determinable:
Stated at fair value on the balance sheet date of the fiscal year (Unrealized
gain or loss is included directly in equity. Costs of securities sold aredetermined by the moving average method.)
Available-for-sale securities for which the fair values are not readily
determinable:
Stated at cost determined by the moving average method(ii) Inventories:
As to the Company and its Japanese consolidated subsidiaries, merchandise andfinished goods and work in process are stated principally at the lower of cost or
market, determined by the average method. Raw materials are stated principallyat the lower of cost or market, determined by the first-in, first-out method.
As to the overseas consolidated subsidiaries, finished goods, work in process, andraw materials are stated principally at the lower of cost or market determined by
the first-in, first-out method.
(2)

Depreciation method of major fixed assets(i)

Property, plant, and equipment (excluding lease assets):
The declining balance method is adopted by the Company and its Japaneseconsolidated subsidiaries (however, with regard to the buildings (excluding
appurtenances thereto) acquired on or after April 1, 1998, the straight-line method
has been adopted). The straight-line method is adopted by the overseas
consolidated subsidiaries.
The main useful lives are as follows:
Buildings and structures:
Machinery, equipment, and motor vehicles:
Tools, furniture, and fixtures:(ii) Intangible assets (excluding lease assets):-3-

3–50 years
3–10 years
1–20 years

The amortization of intangible assets is computed by the straight-line method by
the Company and its consolidated subsidiaries. The amounts of goodwill are
equally amortized for five years; the patents are amortized by the straight-line
method based on the estimated economically usable period (8 - 10 years); andsoftware for internal use is amortized by the straight-line method based on theinternal usable years (five years).
(iii) Lease assets:
Lease assets related to finance lease transactions that do not transfer ownership are
depreciated by the straight-line method, based on the assumption that the usefullife equals the lease term and the residual value equals zero.
The Company applied the revised “Accounting Standard for Lease Transactions”(Accounting Standards Board of Japan (ASBJ) Statement No. 13) effective April
1, 2008. The Company continues to account for leases that existed at the transition
date and does not transfer ownership of the leased property to the lessee as
operating lease transactions.
(3)

Accounting standards for important reserves(i)

Allowance for doubtful accounts:
Allowance for doubtful accounts is provided to cover probable losses oncollection. It is the sum of the probable uncollectable amount estimated using therate of actual collection losses for normal receivables and a review of theindividual collectability of the specific receivables.

(ii) Provision for bonuses:
Some consolidated subsidiaries make provision for the amount of bonuses for
employees deemed to accrue during the fiscal year, based on the Company’s
estimated payment obligation for the current consolidated accounting fiscal year.
(iii) Provision for product warranties:
The provision for product warranties is provided for possible after-sales service
costs of sold products at an amount considered necessary based on the past trackrecord.
(iv) Liabilities for directors’ and corporate auditors’ retirement benefits:
The Company calculates the required amount at the end of the fiscal year based oninternal regulations in preparation for the payment of retirement gratuities todirectors and corporate auditors.
(4)

Other significant accounting policies as the basis of presenting the consolidated-4-

financial statements(i)

Accounting policy for retirement benefits:
The liabilities for retirement benefits and the assets for retirement benefits areprovided for possible payment of employees’ retirement benefits at the amount tobe accrued at the consolidated balance sheet date and are calculated based on
projected benefit obligations and the fair value of plan assets at the consolidatedbalance sheet date.
Certain consolidated subsidiaries apply a simple method.
The total transitional obligation, determined as of April 1, 2000, was charged toincome when first adopted, except that of certain consolidated subsidiaries, and isamortized by the straight-line method over 15 years.
Prior-service cost is amortized by the straight-line method over a period within the
average remaining years of service of the employee (10 years).
Actuarial gains or losses are amortized by the straight-line method over a period
within the average remaining years of service of the employee (10 years) startingfrom the following period.
The unappropriated amount of unrecognized actuarial gains or losses,
unrecognized prior-service cost, and transitional obligation, net of applicable taxes,
are presented as defined retirement benefit plans in accumulated othercomprehensive income in the equity.

(ii) Revenue recognition for construction work:
Construction work for which the outcome is deemed certain during the course ofactivity by the end of the fiscal year:
Revenue and cost of construction work are recognized by the percentage ofcompletion method (the percentage of completion at the end of the fiscal year
shall be estimated by cost-to-cost method.)
Other construction work:
Revenue and cost of construction work are recognized by the completed
contract method(iii) Amortization of goodwill:
Goodwill is amortized by the straight-line method over a period of five years,
except for insignificant goodwill.
-5-

(iv) Accounting for consumption taxes, etc.:
By the tax-exclusive method

Change in Accounting Policy(Adoption of Accounting Standard for Retirement Benefits)
Effective from the end of the fiscal year as of March 31, 2014, the Company has
adopted the “Accounting Standard for Retirement Benefits” (ASBJ Statement No. 26, May
17, 2012) and “Guidance on Accounting Standard for Retirement Benefits” (ASBJ Guidance
No. 25, May 17, 2012), except for the provisions set forth in the main clauses of paragraph 35of the Accounting Standard for Retirement Benefits and paragraph 67 of the Guidance on
Accounting Standard for Retirement Benefits. Accordingly, the Company has changed its
accounting policy to recognize the difference between projected benefit obligations and thefair value of plan assets as a liability for retirement benefits and an asset for retirement
benefits, and records the unappropriated amount of unrecognized actuarial differences,
unrecognized prior-service costs, and transition obligations in the liability for retirement
benefits and the asset for retirement benefits.
The application of the Accounting Standard for Retirement Benefits and Guidance on
Accounting Standard for Retirement Benefits conforms to the transitional treatment set forthin paragraph 37 of the Accounting Standard for Retirement Benefits, and the effect of thechange was added to or deducted from remeasurements of defined benefit plans inaccumulated other comprehensive income at the end of the fiscal year as of March 31, 2014.
As a result of the change, at the end of the fiscal year as of March 31, 2014, an asset
for retirement benefits of ¥315 million and a liability for retirement benefits of ¥642 million
were recorded. Accumulated other comprehensive income decreased by ¥238 million andminority interests increased by ¥13 million.
Book value per share decreased by ¥6.99.

New Accounting Pronouncements
・Accounting Standard for Retirement Benefits (ASBJ Statement No. 26, May 17, 2012)
・Guidance on Accounting Standard for Retirement Benefits (ASBJ Guidance No. 25, May
17, 2012)

-6-

(1)

Outline:Accounting treatment of unrecognized actuarial differences and unrecognizedprior-service costs and calculation method for retirement benefit obligations andservice costs are changed and related disclosure is enhanced.

(2)

Planned date of application:
The Company will apply the new calculation method for retirement benefit
obligations and service costs from the beginning of the fiscal year ending March 31,
2015.
Further, as a transitional treatment is specified in the Accounting Standard for
Retirement Benefits and Guidance on Accounting Standard for Retirement Benefits,
they will not be applied retroactively to the consolidated financial statements of theprevious fiscal years.

(3)

Impact of application of the Accounting Standard for Retirement Benefits andGuidance on Accounting Standard for Retirement Benefits:
The impact on the consolidated financial statements of the change in the calculation
method for retirement benefit obligations and service costs will be an increase of ¥483
million in retained earnings at the beginning of the fiscal year ending March 31, 2015.

Notes to Consolidated Balance Sheet
1.

Accumulated depreciation of assets
Accumulated depreciation of property, plant, and equipment:

2.

¥40,473 million

Accumulated impairment loss on assets
Accumulated depreciation of assets includes accumulated impairment loss on assets.

3.
In accordance with the Act on Land Revaluation (Act No. 34, promulgated on March
31, 1998) of Japan, one of the consolidated subsidiaries revaluated its land used for business.
The applicable tax of the revaluation difference was ¥226 million as revalued deferred tax
liabilities. Also, the revaluation difference is eliminated in consolidation, and so it is notpresented in equity.

-7-

4.

Contingent liability(Arbitration)
The Company resolved to acquire from Koninklijke Philips N.V. (hereinafter,“Philips”) all shares in a company that would succeed the operation of Philips’ LifestyleEntertainment Business and concluded a share purchase agreement on January 29, 2013.
However Philips filed against the Company a petition as of October 25, 2013, for arbitration toclaim compensation for damages on the grounds of breach of the agreement by the Company
and the petition was served on the Company by the International Chamber of Commerce on
November 8, 2013.
With regard to this matter, the Company recognizes that there was no breach of theagreement on its part. Consequently, on December 6, 2013, the Company filed with theInternational Chamber of Commerce a counterclaim for claiming compensation for damages
on the grounds of breach of the agreement and undue action by Philips.
On May 20, 2014, the Company was given notice of a compensation for damages
Philips brought forward against the Company in the amount of €171.8 million, as well as
statutory interest thereon and arbitration expenses.
The results of these arbitration proceedings may have an effect on the operating
results of the Company and its consolidated subsidiaries (the “Group”). However, it is notpossible to make a reasonable estimate of the effect of the arbitration proceedings, as of theend of the fiscal year and the effect thereof, if any, on the operating results, and the financial
position of the Group remains unclear.
The following is an outline of the petition for arbitration filed against the Company
and the counterclaim filed by the Company:
1.

Outline of the petition for arbitration filed against the Company(1)

Institution and date of the petition for arbitration:(i) Institution with which the petition for arbitration was filed:International Chamber of Commerce(ii) Date of the petition for arbitration: October 25, 2013

(2)

Petitioner for arbitration:(i) Name: Koninklijke Philips N.V.
(ii) Location: Eindhoven, The Netherlands(iii) Title and name of representative: Chief Executive Officer, Frans van Houten
-8-

(3)

Details of the petition and claimed amount for damages:(i) Details of the petition: A claim for damages on the grounds of breach of theagreement by the Company(ii) Claimed amount: €171.8 million, statutory interest thereon and arbitration
expenses2.

Outline of the counterclaim filed by the Company(1)

Institution with which the counterclaim was filed and the date thereof:(i) Institution with which the counterclaim was filed:International Chamber of Commerce(ii) Date of the counterclaim: December 6, 2013

(2)

Party to the counterclaim filed:(i) Name:

Koninklijke Philips N.V.

(ii) Location: Eindhoven, The Netherlands(iii) Title and name of representative: Chief Executive Officer, Frans van Houten(3)

Details of the counterclaim and claimed amount for damages:(i) Details of the counterclaim:
Claim for damages on the grounds of breach of the agreement and undue action
by Philips(ii) Claimed amount:
A specific claimed amount has not been stipulated. The Company was
instructed by the arbitration court to calculate the amount of damages incurred by
the Company and bring forward a claimed amount against Philips no later thanOctober 2014.
An overview of the above-mentioned share purchase agreement is as follows:
1.

Name of the other party and the content of the business to be acquired(1)

Name of the other party:(2)

Content of the business to be acquired:

Koninklijke Philips N.V.
Lifestyle Entertainment Business(Note) The Lifestyle Entertainment Business involves the development, design, salesand (partial) manufacture of the Philips-brand Audio, Video, and Multimedia-9-

products, Home Communication products, and Accessories products.
2.

Reasons for acquiring the shares

In September 2008, the Company entered into a brand licensing agreement
maintaining responsibility for the sourcing, distribution, marketing, and sales activities
of Philips consumer televisions in the United States and Canada. Following this, inJuly 2012, the Company entered into an agreement with Philips involving the sale in
the United States, Canada, and Mexico of products that Philips designed and developed
through the Lifestyle Entertainment Business.
The Company has positioned the “strengthening and expanding existing
businesses,” “making forays into new markets,” and “developing new businesses” as
the three pillars of its growth strategy. To achieve this growth strategy, in addition toreinforcing its existing management resources, the Company has searched for growth
opportunities through business alliances and M&A activities with other companies,
such as those outlined above.
The transaction to assume the Lifestyle Entertainment Business from Philips
will enable the Group to expand the lineup of products that it handles and expand its
sales region to include Asia, South America, and other emerging markets, as well as
advanced countries in Europe. The Company decided to acquire the shares, based on
the belief that the acquisition would foster sustained growth of the Group’s business.
3.

Acquisition price and the percentage of shares held after the acquisition
Acquisition price:€150 million

Percentage of shares held after the acquisition:
5.

100%

Financial covenants

With regard to bank loans, a syndicated loan agreement (balance as of the end of the
fiscal year: ¥5,146 million) includes financial covenants; if the Company breaches any of thefollowing clauses, it shall forfeit the benefit of time in relation to the entire obligation under
the agreement and immediately pay the principal of and interest on the loan:(Clauses)(1)
The Company shall maintain the amount of the equity section in the consolidatedbalance sheet as of the end of each fiscal year at no less than ¥100 billion.
(2)

The Company shall, for two consecutive fiscal years, not report an operating loss on
the consolidated statement of operations for the fiscal year ending March 31, 2015,
and for each fiscal year thereafter.

(3)

The Company shall, for two consecutive fiscal years, not report an ordinary loss on
the consolidated statement of operations for the fiscal year ending March 31, 2015,- 10 -

and for each fiscal year thereafter.

Notes to Consolidated Statement of Operations
1.

Impairment losses

During the fiscal year ended March 31, 2014, the Group recorded losses on impairment
in the following asset groups:
Use
Business assets
Business assets

Location
Zhong Yue Funai Electron Co.
(Guangdong, China)
Zhong Shan Funai Electron Co.
(Guangdong, China)

Type
Machinery, equipment, andvehicles, etc.
Machinery, equipment, andvehicles, etc.

In principle, the Group groups business assets on the basis of a legal entity whosecash inflows and outflows are continuously recorded. Idle assets are separated individually.
Since the prospects for future profitability are expected to worsen due to factors
including a decrease in orders for information equipment, during the fiscal year ended March
31, 2014, the Company reduced the book value of manufacturing facilities, etc., to theirrecoverable amounts and recorded the decrease in value of ¥266 million as extraordinary
losses. The details of the losses are ¥149 million for machinery, equipment, and vehicles;¥51 million for tools, furniture, and fixtures; and ¥65 million for long-term prepaid expenses.
The recoverable amounts of the assets were determined at net realizable value. The
net realizable value of long-term prepaid expenses and assets other than long-term prepaid
expenses is determined at zero and reasonable estimates based on market value, respectively.
2.

Business structure improvement expenses

Business structure improvement expenses were mainly expenses incurred due toshrinking of the overseas LED business, including an inventory valuation loss of ¥205
million, a loss on revaluation of investment in nonconsolidated subsidiaries and associatedcompanies of ¥651 million and impairment losses of ¥393 million.

- 11 -(Impairment losses)
During the fiscal year ended March 31, 2014, the Group recorded losses on
impairment in the following asset groups:
Use
Business assets
Business assets
Business assets

Location
Zhong Yue Funai Electron Co.
(Guangdong, China)
Zhong Shan Funai Electron Co.
(Guangdong, China)
FUNAI Optical Electronics Co., Ltd.
(Guangdong, China)

Type
Machinery, equipment, andvehicles, etc.
Machinery, equipment, andvehicles, etc.
Machinery, equipment, andvehicles, etc.

In principle, the Group groups business assets on the basis of a legal entity whose cash
inflows and outflows are continuously recorded. Idle assets are separated individually.
Mainly, as a result of the decision to downsize the overseas LED business, during the
fiscal year ended March 31, 2014, the Company reduced the book value of manufacturing
facilities, etc., with no prospects of future use to their recoverable amount, and recorded thedecrease in value of ¥393 million as business structure improvement expenses under
extraordinary loss. The details of the losses are ¥238 million for machinery, equipment, andvehicles; ¥99 million for tools, furniture, and fixtures; and ¥55 million for long-term prepaid
expenses.
The recoverable amounts of the assets were determined at net realizable value. The
net realizable value of long-term prepaid expenses and assets other than long-term prepaid
expenses is determined at zero and reasonable estimates based on market value, respectively.
3.

Advisory fees

Advisory fees were paid as specified compensation and fees to third-party advisors todetermine an acquisition price for the intended acquisition of all shares in a company
handling the Lifestyle Entertainment Business of Philips. However, the Company recorded
these compensation and fees as expenses since Philips terminated the share purchaseagreement and filed a petition for arbitration with the International Chamber of Commerce,
and the Company filed a counterclaim in this regard.

- 12 -

Notes to Consolidated Statement of Changes in Equity
1.
Type and total number of shares issued, and type and number of shares of treasury
stock(thousands of shares)
Decrease in the
Number of
number ofshares as ofshares during
March 31, 2014
the year

Number ofshares as ofApril 1, 2013

Increase in thenumber ofshares during
the year

36,13036,130--36,13036,130

2,011
2,011

-

-

2,011
2,011

Shares issued
Shares of common stock
Total
Shares of treasury stock
Shares of common stock
Total

2.

Dividends(1)

Amount of dividends paid:

Resolution

Type ofsharesTotal amountof dividends(millions ofyen)Amount ofdividend per
share
(yen)

Record date

Effective
date

Meeting of the Boardof Directors held on
May 20, 2013

Shares ofcommon
stock

1,194

35

March 31,2013

June 10,2013(2)

Dividends whose record date is in the fiscal year ended March 31, 2014, but whose
effective date will be in the fiscal year ending March 31, 2015, are as follows:

Resolution

Type ofsharesTotalamount ofdividends(millionsof yen)Meeting of theBoard of Directors
held on May 26,
2014

Shares ofcommon
stock

1,194

Source ofdividends

Amount ofdividend
per share(yen)

Recorddate

Effective
date

Retainedearnings

35

March 31,2014

June 9,2014- 13 -

3.

Stock acquisition rights

Description of stock acquisitionrightsType of shares to be issued ortransferred upon exercise ofstock acquisition rights

Number of shares for stockacquisition rights (share)
As of March 31, 2014

The first stock acquisition rights
issued in the year ended March 31,
2006

Shares of common stock

346,400

The first stock acquisition rights
issued in the year ended March 31,
2009

Shares of common stock

310,800

Total

657,200

Notes to Financial Instruments
1.

Status of financial instruments

The Group finances by bank loans and invests funds by short-term deposits. In
principle, the Group has a policy of not using derivatives.
With regard to customers’ credit risks relating to notes and accounts receivable - trade,the Group has stipulated in its sales management rules that it will manage trading terms andcredit lines by each customer.
Investment securities are exposed to market risks. With regard to such risks, themarket values and the financial positions of the issuers are reviewed periodically and reported
to the internal Investment and Loan Committee.
Notes and accounts payable - trade and accounts payable - other mostly become dueand payable within one year.
Bank loans are principally for the Group’s operations. The Group has a policy of notusing derivatives. However, as floating-rate loans are exposed to interest rate risk, theGroup may utilize derivatives (interest rate swap agreements) as hedging instruments
according to individual loan contracts. To trade in derivatives, such derivatives are
executed and managed in accordance with the internal rules. To mitigate credit risk, theGroup enters into transactions solely with financial institutions with high ratings.

- 14 -

2.

Matters concerning fair values, etc., of financial instruments

The amounts recorded in the consolidated balance sheet, fair value, and the difference
between them as of March 31, 2014, are as follows:(millions of yen)Amountrecorded in the
consolidatedbalance sheet*

Fair value*

Difference(1)

Cash and deposits

49,16749,167-(2)

Notes and accounts receivable - trade

37,681

37,681-(3)

Investment securities:
Available-for-sale securities

1,872

1,872

-

(4)

Notes and accounts payable - trade(32,942)(32,942)-(5)

Short-term bank loans(4,526)(4,526)-(6)

Accounts payable - other(11,571)(11,571)-(7)

Long-term bank loans(6,121)(6,121)-(8)

Derivatives

-

-

-

* The items recognized as liabilities are shown in parentheses.
(Notes)1. Calculation method of the fair values of financial instruments, securities andderivatives:(1) Cash and deposits and (2) Notes and accounts receivable - trade:
The book value is used for these items, as the fair value is nearly equal to thebook value as a result of their short settlement periods.
(3) Investment securities:
The fair value of stocks is determined by the prices of the stocks traded on an
exchange.
(4) Notes and accounts payable - trade, (5) Short-term bank loans, and (6)Accounts payable - other:
The book value is used for these items, as the fair value is nearly equal to thebook value as a result of their short settlement periods.
(7) Long-term bank loans:
The long-term bank loans are based on floating rates. To reflect market
interest rates over a short period of time, the book value is used as the fairvalue is nearly equal to the book value.
- 15 -

(8) Derivatives:
This item is not applicable.
2. Unlisted shares (¥2,491 million on the balance sheet) have no market priceand it is impossible to estimate their future cash flow. As determining themarket value is considered to be extremely difficult, they are not included in“(3) Investment in securities – Available-for-sale securities.”

Notes to Per Share Information
Book value per share
Net loss per share¥3,414.77¥197.70

Other Notes
Additional Information(Business Combinations)
Business Combination through Acquisition
1.

Outline of the business combination(1) A counterparty and business acquired:
Name of the counterparty:

Lexmark International, Inc. (hereinafter,“Lexmark”)

Business acquired:

Inkjet-related technologies and assets, including
patents(2) Main reason for the business combination:
As a contract manufacturer, the Company has supplied inkjet printer (IJP) hardware to
Lexmark since July 1997. The Company has worked closely with Lexmark foraround 16 years in developing printer hardware and has established a strong
relationship with Lexmark.
The acquisition of the patents for printer-related products, including ink cartridges thathave long been marketed by Lexmark globally (specifically, in North America), as
well as product-developing functions and technologies and manufacturing functions
and technologies, enables the Company to start and grow its own inkjet business,
including manufacture and sale of more profitable ink cartridges, rather than as acontract manufacturer of printer products, by utilizing the strong inkjet business- 16 -

platform that Lexmark has spent years establishing. As a result, the Company
believes the Group will be able to sustainably expand its business going forward.
(3) Date of the business combination:
April 30, 2013(4) Legal form of the business combination:
Acquisition of patents and development facilities, and acquisition of shares in a
manufacturing subsidiary(5) Name of the manufacturing subsidiary after business combination:
Funai Electric Cebu, Inc.
(6) Ratio of voting rights acquired: 100%2.

Period of operating results of the acquired business included in the consolidated
financial statements
From May 1, 2013 to March 31, 2014

3.

Amount and breakdown of the acquisition cost
Consideration for the acquisition:
Expenses directly associated with the acquisition
Acquisition cost4.

(millions of yen)Cash10,036Advisory fees, etc.
242
10,278Amount of gain on bargain purchase generated and the reason for recognition(1)

Amount of gain on bargain purchase generated:¥8 million(2) Reason for recognition:
As the net amount of acquired assets and assumed liabilities exceeded the acquisition
cost, the difference was recorded as a gain on bargain purchase.

- 17 -

5.
Amount and breakdown of the assets acquired and the liabilities assumed at theacquisition dateCurrent assets
Fixed assets
Total assets
Current liabilities
Long-term liabilities
Total liabilities(millions of yen)544
10,397
10,942402
252
655(Tax system for dealing with tax havens)
1.

On June 28, 2005, and June 16, 2008, the Company received notices from the Osaka
Regional Taxation Bureau regarding the implementation of corrective action. These
notices indicated a decision regarding our subsidiary in Hong Kong, suggesting that it
did not satisfy the conditions for exclusion from application of the tax system for
dealing with tax havens. The notification further indicated that the Osaka Regional
Taxation Bureau decided to incorporate the income generated by our subsidiary inHong Kong into the income of the Company for the duration of the three years from
April 1, 2001 to March 31, 2004 and from April 1, 2004 to March 31, 2007 fortaxation purposes. Because the Company objected to this corrective action, theCompany applied for assessment by the Osaka National Tax Tribunal on July 25,
2006, and again on August 6, 2008. Thereafter, the Company received written
verdicts on this case on July 3, 2008, and again on July 23, 2009, indicating that ourassertions had been dismissed. The Company filed an appeal with the Osaka District
Court to have the action cancelled on November 16, 2006, and again on November 14,
2008, and hearings by consolidation of those actions had been held since November
26, 2008. The court dismissed the claims of the Company on June 24, 2011.
Thereafter, as the Company was unable to accept the Osaka District Court’s judgment,
the Company filed notices of appeal at the Osaka High Court on July 7, 2011. With
respect to this action, on July 20, 2012, the court dismissed the claims of theCompany. The Company, unable to accept the judgment, filed an appeal andapplication for the acceptance of the appeal with the Supreme Court on August 1,
2012. On December 12, 2013, the Company received from the Supreme Court
notices of its decision to dismiss the appeal dated December 11, 2013.
The additional tax amounted to ¥16,651 million (¥19,184 million, including incidental
taxes) and ¥15,038 million (¥16,838 million, including incidental taxes), including
corporate income taxes, inhabitant taxes, and enterprise taxes. The Company
processed these amounts in the respective fiscal years ended March 31, 2007 and2009, as “Income taxes - prior years,” since the accounting procedures relating to
additional tax amounts have been clarified through the amendment of the “Treatmentof Accounting and Presentation of Taxes for the Purpose of Audits” (JICPA Audit
and Assurance Practice Committee Report No. 63).

2.

On June 29, 2011, the Company received notices from the Osaka Regional Taxation- 18 -

Bureau suggesting that our subsidiary in Hong Kong did not satisfy the conditions for
exclusion from application of the Tax system for dealing with tax havens andindicating its decision to incorporate the income generated by the subsidiary into theincome of the Company for the duration of three years from April 1, 2007 to March
31, 2010, for taxation purposes. Because the Company objected to this corrective
action, the Company applied for assessments by the Osaka National Tax Tribunal on
August 25, 2011. On July 18, 2012, the Company received written verdicts on thiscase indicating that our assertions had been dismissed. The Company, unable toaccept the verdicts, filed an appeal to have the action cancelled with the Tokyo
District Court on January 17, 2013.
The additional tax, including corporate income taxes, inhabitant taxes, and enterprisetaxes, amounted to ¥825 million (¥935 million, including incidental taxes). This
amount has been processed as expenses under the category of “Income taxes - prioryears” in the fiscal year ended March 31, 2012.
3.

With regard to the actions the Company filed with the Osaka District Court on June
28, 2005, and June 16, 2008, seeking the rescission of supplementary tax assessments,
on June 24, 2011, a decision was reached in which the court dismissed the claims of
the Company. Accordingly, the Company determined to treat the amount that would
be affected if the taxation were applied in the fiscal year ended March 31, 2011,
which is the fiscal year following the fiscal year to which the assessment was applied,
as an expense as from the fiscal year ended March 31, 2012.

========================================================================(Note)All figures in the notes to consolidated financial statements are shown bydisregarding any fractions of the relevant units. Book value per share and net
loss per share are shown by rounding off to two decimal places.

- 19 -NOTES TO NONCONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies:
1.

Valuation basis and methods for assets(1) Securities:
Investment in subsidiaries and associated companies:
Stated at cost determined by the moving-average method.
Available-for-sale securities:
Available-for-sale securities for which the fair values are readily determinable:
Stated at fair value on the balance sheet date of the fiscal year (Unrealized
gain or loss is included directly in equity. Selling costs are determined by
the moving-average method.)
Available-for-sale securities for which the fair values are not readily
determinable:
Stated at cost determined by the moving-average method.
(2)

2.

Inventories:
Finished goods:

Stated at the lower of cost or market, determined by theaverage method.

Raw materials:

Stated at the lower of cost or market, determined by the
first-in, first-out method.

Depreciation method of fixed assets:(1) Property, plant, and equipment (excluding lease assets):
The depreciation of property, plant, and equipment is computed by the
declining-balance method.
However, with regard to the buildings (excluding appurtenances thereto) acquiredon or after April 1, 1998, the straight-line method has been adopted.
(2) Intangible assets (excluding lease assets):
The amortization of intangible assets is computed by the straight-line method.
- 20 -

The amounts of goodwill are equally amortized for five years; the patents areamortized by the straight-line method based on the estimated economically usable
period (8-10 years); and software for internal use is amortized by the straight-line
method based on the internal usable years (five years).
(3)

Lease assets:
Lease assets related to finance lease transactions that do not transfer ownership are
depreciated by the straight-line method, based on the assumption that the usefullife equals the lease term and the residual value equals zero.

3.

Accounting standards for reserves:(1) Allowance for doubtful accounts:
Allowance for doubtful accounts is provided to cover probable losses oncollection. It is the sum of the probable uncollectable amount estimated using therate of actual collection losses for normal receivables and a review of theindividual collectability of the specific receivables.
(2) Provision for product warranties:
The provision for product warranties is provided for possible after-sales service
costs of sold products at an amount considered necessary based on the past trackrecord.
(3) Liabilities for retirement benefits:
The liabilities for retirement benefits are provided for possible payment of
employees’ post-retirement benefits at the amount to be accrued at the balance
sheet date and are calculated based on projected benefit obligations and the fairvalue of plan assets at the balance sheet date.
Prior service cost is amortized by the straight-line method over a period within the
average remaining years of service of the employee (10 years).
Actuarial gains or losses are amortized by the straight-line method over a period
within the average remaining years of service of the employee (10 years) startingfrom the following period.
(4) Liabilities for directors’ and corporate auditors’ retirement benefits:
The Company calculates the required amount at the end of the fiscal year based oninternal regulations in preparation for the payment of retirement gratuities todirectors and corporate auditors.

- 21 -

4.
Other significant accounting policies as the basis of presenting the nonconsolidated
financial statements(1) Accounting policy for retirement benefits:
The method of accounting for the unappropriated amount of unrecognizedactuarial gains or losses and unrecognized prior service cost related to retirement
benefits differs from the method of accounting for the same in the consolidated
financial statements.
(2) Accounting for consumption taxes, etc.:
By the tax-exclusive method

Notes to Nonconsolidated Balance Sheet:1.

Accumulated depreciation of assets:
Accumulated depreciation of property, plant, and equipment:

2.

Monetary receivables/payables from/to subsidiaries and associated companies:
Short-term monetary receivables:
Long-term monetary receivables:
Short-term monetary payables:3.

¥11,073 million¥42,473 million¥17,046 million¥25,406 million

Contingent liabilities(Arbitration)
The Company resolved to acquire from Philips all shares in a company that would
succeed the operation of Philips’ Lifestyle Entertainment Business and concluded a sharepurchase agreement on January 29, 2013. However, Philips filed against the Company apetition as of October 25, 2013, for arbitration to claim compensation for damages on the
grounds of breach of the agreement by the Company and the petition was served on the
Company by the International Chamber of Commerce on November 8, 2013.
With regard to this matter, the Company recognizes that there was no breach of theagreement on its part. Consequently, on December 6, 2013, the Company filed with theInternational Chamber of Commerce a counterclaim for claiming compensation for damages
on the grounds of breach of the agreement and undue action by Philips.
On May 20, 2014, the Company was given notice of a compensation for damages
Philips brought forward against the Company in the amount of €171.8 million, as well as
statutory interest thereon and arbitration expense.
- 22 -

The results of these arbitration proceedings may have an effect on the operating
results of the Company. However, it is not possible to make a reasonable estimate of theeffect of the arbitration proceedings as of the end of the fiscal year and the effect thereof, ifany, on the operating results and financial position of the Company remains unclear.
The following is an outline of the petition for arbitration filed against the Company
and the counterclaim filed by the Company:
1.

Outline of the petition for arbitration filed against the Company(1)

Institution and date of the petition for arbitration:(i) Institution with which the petition for arbitration was filed:International Chamber of Commerce(ii) Date of the petition for arbitration:(2)

October 25, 2013

Petitioner for arbitration:(i)Name: Koninklijke Philips N.V.

(ii)

Location: Eindhoven, The Netherlands(iii) Title and name of representative: Chief Executive Officer, Frans van Houten(3)

Details of the petition and claimed amount for damages:(i) Details of the petition: A claim for damages on the grounds of breach of theagreement by the Company(ii) Claimed amount: €171.8 million, statutory interest thereon and arbitration
expenses2.

Outline of the counterclaim filed by the Company(1)

Institution with which the counterclaim was filed and the date thereof:(i) Institution with which the counterclaim was filed:International Chamber of Commerce(ii) Date of the counterclaim:(2)

December 6, 2013

Party to the counterclaim filed:(i) Name:

Koninklijke Philips N.V.

(ii) Location: Eindhoven, The Netherlands- 23 -

(iii) Title and name of representative: Chief Executive Officer Frans van Houten(3)

Details of the counterclaim and claimed amount for damages:(i) Details of the counterclaim:
Claim for damages on the grounds of breach of the agreement and undue action
by Philips.
(ii) Claimed amount:
A specific claimed amount has not been stipulated. The Company was
instructed by the arbitration court to calculate the amount of damages incurred by
the Company and bring forward a claimed amount against Philips no later thanOctober 2014.
An overview of the above-mentioned share purchase agreement is as follows:
1.

Name of the other party and the content of the business to be acquired(1)

Name of the other party:(2)

Content of the business to be acquired:

Koninklijke Philips N.V.
Lifestyle Entertainment Business(Note) The Lifestyle Entertainment Business involves the development, design, sales,and (partial) manufacture of the Philips-brand Audio, Video, and Multimedia
products; Home Communication products; and Accessories products.
2.

Reasons for acquiring the shares

In September 2008, the Company entered into a brand licensing agreement
maintaining responsibility for the sourcing, distribution, marketing, and sales activities
of Philips consumer televisions in the United States and Canada. Following this, inJuly 2012, the Company entered into an agreement with Philips involving the sale in
the United States, Canada, and Mexico of products that Philips designed and developed
through the Lifestyle Entertainment Business.
The Company has positioned the “strengthening and expanding existing
businesses,” “making forays into new markets,” and “developing new businesses” as
the three pillars of its growth strategy. To achieve this growth strategy, in addition toreinforcing its existing management resources, the Company has searched for growth
opportunities through business alliances and M&A activities with other companies,
such as those outlined above.
The transaction to assume the Lifestyle Entertainment Business from Philips
will enable the Group to expand the lineup of products that it handles and expand its
sales region to include Asia, South America, and other emerging markets, as well as
advanced countries in Europe. The Company decided to acquire the shares, based on- 24 -

the belief that the acquisition would foster sustained growth of the Group’s business.
3.

Acquisition price and the percentage of shares held after the acquisition
Acquisition price:€150 million

Percentage of shares held after the acquisition:

100%(Liabilities on guarantee)
The Company has provided a guarantee for accounts payable to suppliers for thefollowing subsidiary:
FUNAI ELECTRIC EUROPE Sp. z o.o.
4.

¥120 million

Financial covenantsA ¥5,146 million bank loan is based on a syndicated loan agreement, which includes
financial covenants; if the Company breaches any of the following clauses, it shall forfeit thebenefit of time in relation to the entire obligation under the agreement and immediately pay
the principal of and interest on the loan:(Clauses)(1) The Company shall maintain the amount of the equity section in the consolidatedbalance sheet as of the end of each fiscal year at no less than ¥100 billion.
(2)

The Company shall, for two consecutive fiscal years, not report an operating loss in the
consolidated statement of operations for the fiscal year ending March 31, 2015, andfor each fiscal year thereafter.

(3)

The Company shall, for two consecutive fiscal years, not report an ordinary loss in the
consolidated statement of operations for the fiscal year ending March 31, 2015 and foreach fiscal year thereafter.

- 25 -

Notes to Nonconsolidated Statement of Operations:
1.

Amount of transactions with subsidiaries and associated companies
Trading transaction:
Sales:
Purchase:
Other operating expenses:
Transactions other than trading:2.

¥138,661 million¥154,508 million¥1,824 million¥182 million

Business structure improvement expenses

Business structure improvement expenses stem mainly from costs incurred due to theshrinking of the overseas LED business, principally including an inventory valuation loss of¥79 million and an loss on revaluation of investment in subsidiaries and associatedcompanies of ¥997 million.
3.

Advisory fees

Advisory fees were paid as specified compensation and fees to third-party advisors todetermine an acquisition price for the intended acquisition of all shares in a company
handling the Lifestyle Entertainment Business of Philips. However, the Company is treatingthese fees as expenses, as Philips has terminated the share purchase agreement and filed apetition for arbitration with the International Chamber of Commerce, and the Company has
filed a counterclaim in this regard.

Notes to Nonconsolidated Statement of Changes in Equity
Matters concerning the number of shares of treasury stock:
Type of shares
Common stock（thousands of shares）

Decrease in the Number of shares
Number of shares Increase in theas of April 1, 2013 number of shares number of shares as of March 31,
during the year
during the year
2014
2,011

-

- 26 --

2,011

Notes on Accounting for Deferred Tax
Principal components of deferred tax assets and deferred tax liabilities:(millions of yen)
Deferred tax assets
Liabilities for directors’ and corporate auditors’ retirement
benefits
Accounts payable - other
Allowance for doubtful accounts
Accrued expenses (bonuses)
Loss on revaluation of investment securities
Loss on revaluation of investment in subsidiaries and associatedcompanies
Transfer pricing taxation adjustments
Impairment loss on fixed assets
Tax loss carryforwards
Other
Subtotal
Valuation allowance
Total
Deferred tax liabilities
Unrealized gain on available-for-sale securities
Asset for retirement benefits
Reserve for advance depreciation of fixed assets
Other
Subtotal
Deferred tax assets, net

381
839
5,299
269
395
2,950
352
196
5,699
451
16,835(15,169)
1,665
(321)
(326)
(277)
(45)
(971)
694

2.
Revision of deferred tax assets and deferred tax liabilities as a result of the revision of
the rate of corporate income taxes.
The “Act for Partial Amendment of the Income Tax Act, etc.” (2014 Act No. 10) was
promulgated on March 31, 2014, and the special corporate income tax for reconstruction has
ceased to be imposed from the fiscal year beginning on or after April 1, 2014. Accordingly,
the statutory effective tax rate to be used for the calculation of deferred tax assets anddeferred tax liabilities will be reduced from the previous 38.0% to 35.6% with regard to thetemporary differences expected to be eliminated for the fiscal year beginning on April 1,
2014.
The tax rate revision has decreased the amount of deferred tax assets (after the
deduction of the amount of deferred tax liabilities) by ¥96 million and increased income taxes- deferred by ¥96 million.

- 27 -

Notes on Transactions with Related Parties
1.

Subsidiaries, etc.
Type

Name

Voting rights
held by theCompany (orheld by others)

Subsidiary

DX ANTENNA
Co., Ltd.

Direct, 91.40%

Sale of productsof the Company

Subsidiary

Funai Electric(HK) Ltd.

Direct, 100.00%

Production of
products of theCompany

Subsidiary

FUNAI(THAILAND)
CO., LTD.

Direct, 80.87%
Indirect, 19.13%

Production of
products of theCompany

Subsidiary

Zhong Shan
Funai ElectronCo.

Indirect,100.00%

Production of
products of theCompany

Subsidiary

FUNAI
CORPORATION,
INC.

Direct, 100.00%

Sale of productsof the Company;
interlocking
directorate

Subsidiary

Subsidiary

Subsidiary

Subsidiary(Note)

P&F USA, INC.

P&F
MEXICANA,
S.A. DE C.V.

FUNAI
ELECTRICEUROPESp. z o.o.

Direct, 100.00%

Direct, 100.00%
Indirect, 0.00%

Direct, 100.00%

FUNAI EUROPE
Direct, 100.00%
GmbH

RelationshipSale of productsof the Company

Sale of productsof the Company

Sale of productsof the Company

Sale of productsof the Company

Transaction
Sale ofelectronic
products
Purchase ofelectronic
products
Loan of
funds
Purchase ofelectronic
products
Purchase ofelectronic
products
Sale ofelectronic
products
Transfer
pricing
taxationadjustments
Sale ofelectronic
products

Amount2,529
81,3581,322
46,79915,022

93,789-18,156

Loan of
funds

4,086

Sale ofelectronic
products

21,046

Loan offunds

199

Sale ofelectronic
products

2,205

Loan offunds-

Loan offunds-(millions of yen)
Balance asofAccount
March 31,2014
Accounts
receivable 339
trade
Accounts
payable 12,187
tradeShort-term
loans
1,337
receivable
Accounts
payable 4,603
trade
Accounts
payable 1,194
trade
Accounts
receivable 14,242
trade
Accruedexpenses
Accounts
receivable trade
Short-term
loans
receivable
Accounts
receivable tradeLong-term
loans
receivable
Accounts
receivable tradeLong-term
loans
receivable
Long-term
loans
receivable

3,735

10,404

4,116
9,427
1,781
1,375
2,691
10,440Transaction terms and policies on the determination of transaction terms, etc.:
As with the terms of ordinary transactions, transaction terms are determined in considerationof market prices and other factors.

- 28 -

2.

Directors, corporate auditors and individual and principal shareholders, etc.
Type

Company,
etc., whose
director(s)and his/herclose
relative(s)own amajority ofthe voting
rights(millions of yen)
Balance asofAccount
March 31,2014
Accounts
receivable 18
trade

Name

Voting rights
held by theCompany (orheld by others)

Relationship

Propia Co. Ltd.

-Sales of products;
interlocking
directorate

Sales ofproducts

132

Niigata
Seimitsu Co.,Ltd.

-

Sublease of
production
equipment, etc.

Sublease of
production
equipment,
etc.

12

Other
current
assets4

XTrillion Inc.

-

Lease of offices;interlocking
directorate

Lease ofoffices29--

PreXion Co.,Ltd.

-

Sales of products

Sales ofproducts

202

Accounts
receivable trade

25

Transaction

Amount(Notes) Transaction terms and policies on the determination of transaction terms, etc.:
1. Propia Co., Ltd.
(1) As with the terms of ordinary transactions, transaction terms are determined inconsideration of market prices and other factors.
(2) 100.00% of the voting rights are owned directly by the company in which a close relativeof director of the Company, Tetsuro Funai, owns a majority of the voting rights.
2. Niigata Seimitsu Co., Ltd.
(1) Lease prices of production equipment, etc., are determined in consideration of current
market prices.
(2) 100.00% of the voting rights are owned directly by the company in which a close relativeof Director of the Company, Tetsuro Funai, owns a majority of the voting rights.
3. XTrillion Inc.
(1) Lease prices of offices are determined upon consultation in consideration of market rates
in the neighborhood and other factors.
(2) 61.01% of the voting rights are owned directly by director of the Company Tetsuro
Funai.
4. PreXion Co., Ltd.
(1) As with the terms of ordinary transactions, transaction terms are determined inconsideration of market prices and other factors.
(2) 61.01% of the voting rights are owned directly by director of the Company Tetsuro
Funai.

Notes to Per Share Information
Book-value per share:¥2,433.69

Net loss per share:¥153.37- 29 -

Other Notes
Additional Information(Business Combinations)
Business Combination through Acquisition
1.

Outline of the business combination(1) A counterparty and business acquired:
Name of the counterparty:

Lexmark International, Inc. (hereinafter,“Lexmark”)

Business acquired:

Inkjet-related technologies and assets, including
patents(2) Main reason for the business combination:
As a contract manufacturer, the Company has supplied inkjet printer (“IJP”)
hardware to Lexmark since July 1997. The Company has worked closely with
Lexmark for around 16 years in developing printer hardware and has established astrong relationship with Lexmark.
The acquisition of the patents for printer-related products, including ink
cartridges that have long been marketed by Lexmark globally (specifically, in North
America), as well as product developing functions and technologies andmanufacturing functions and technologies, enables the Company to start and grow its
own inkjet business, including manufacture and sale of more profitable ink cartridges,
rather than as a contract manufacturer of printer products, by utilizing the strong inkjet
business platform that Lexmark has spent years establishing. As a result, theCompany believes the Group will be able to sustainably expand its business going
forward.
(3) Date of the business combination:
April 30, 2013(4) Legal form of the business combination:
Acquisition of patents and development facilities, and acquisition of shares in a
manufacturing subsidiary(5) Name of the manufacturing subsidiary after business combination:
Funai Electric Cebu, Inc.
- 30 -

(6) Ratio of voting rights acquired: 100%2.

Period of operating results of the acquired business included in the nonconsolidated
financial statements
From May 1, 2013, to March 31, 2014

3.

Amount and breakdown of the acquisition cost
Consideration for the acquisition:
Expenses directly associated with theacquisition:
Acquisition cost:4.

(millions of yen)Cash10,036242
Advisory fees, etc.
10,278Amount of gain on bargain purchase generated and the reason for recognition(1) Amount of gain on bargain purchase generated:¥160 million(2) Reason for recognition:
Because the net amount of acquired assets and assumed liabilities exceeded theacquisition cost, the difference was recorded as a gain on bargain purchase.
5.
Amount and breakdown of the assets acquired and the liabilities assumed at theacquisition dateCurrent assets
Fixed assets
Total assets
Current liabilities
Long-term liabilities
Total liabilities(millions of yen)
10,43910,439-(Tax system for dealing with tax havens)
1.

On June 28, 2005, and June 16, 2008, the Company received notices from the Osaka
Regional Taxation Bureau regarding the implementation of corrective action. These
notices indicated a decision regarding our subsidiary in Hong Kong, suggesting that it
did not satisfy the conditions for exclusion from application of the tax system for
dealing with tax havens. The notification further indicated that the Osaka Regional
Taxation Bureau decided to incorporate the income generated by our subsidiary inHong Kong into the income of the Company for the duration of the three years from
April 1, 2001, to March 31, 2004, and from April 1, 2004, to March 31, 2007 fortaxation purposes. Because the Company objected to this corrective action, the- 31 -

Company applied for assessment by the Osaka National Tax Tribunal on July 25,
2006, and again on August 6, 2008. Thereafter, the Company received written
verdicts on this case on July 3, 2008, and again on July 23, 2009, indicating that ourassertions had been dismissed. The Company filed an appeal with the Osaka District
Court to have the action canceled on November 16, 2006, and again on November 14,
2008, and hearings by consolidation of those actions had been held since November
26, 2008. The court dismissed the claims of the Company on June 24, 2011.
Thereafter, as the Company was unable to accept the Osaka District Court’s judgment,
the Company filed notices of appeal at the Osaka High Court on July 7, 2011. With
respect to this action, on July 20, 2012, the court dismissed the claims of theCompany. The Company, unable to accept the judgment, filed an appeal andapplication for the acceptance of the appeal with the Supreme Court on August 1,
2012. On December 12, 2013, the Company received from the Supreme Court
notices of its decision to dismiss the appeal dated December 11, 2013.
The additional tax amounted to ¥16,651 million (¥19,184 million, including incidental
taxes) and ¥15,038 million (¥16,838 million, including incidental taxes), including
corporate income taxes, inhabitant taxes, and enterprise taxes. The Company
processed these amounts in the respective fiscal years ended March 31, 2007 and2009 as “Income taxes - prior years,” since the accounting procedures relating to
additional tax amounts have been clarified through the amendment of the “Treatmentof Accounting and Presentation of Taxes for the Purpose of Audits” (JICPA Audit
and Assurance Practice Committee Report No. 63).
2.

On June 29, 2011, the Company received notices from the Osaka Regional Taxation
Bureau suggesting that our subsidiary in Hong Kong did not satisfy the conditions for
exclusion from application of the tax system for dealing with tax havens andindicating its decision to incorporate the income generated by the subsidiary into theincome of the Company for the duration of three years from April 1, 2007, to
March 31, 2010, for taxation purposes. Because the Company objected to thiscorrective action, the Company applied for assessments by the Osaka National Tax
Tribunal on August 25, 2011. On July 18, 2012, the Company received written
verdicts on this case indicating that our assertions had been dismissed. The
Company, unable to accept the verdicts, filed an appeal to have the action canceledwith the Tokyo District Court on January 17, 2013.
The additional tax, including corporate income taxes, inhabitant taxes, and enterprisetaxes, amounted to ¥825 million (¥935 million, including incidental taxes). This
amount has been processed as expenses under the category of “Income taxes - prioryears” in the fiscal year ended March 31, 2012.

3.

With regard to the actions the Company filed with the Osaka District Court on
June 28, 2005, and June 16, 2008, seeking the rescission of supplementary tax
assessments, on June 24, 2011, a decision was reached in which the court dismissed
the claims of the Company. Accordingly, the Company determined to treat theamount that would be affected if the taxation were applied in the fiscal year ended
March 31, 2011, which is the fiscal year following the fiscal year to which the- 32 -

assessment was applied, as an expense from the fiscal year ended March 31, 2012.

========================================================================(Note)All figures in the notes to nonconsolidated financial statements are shown bydisregarding any fractions of the relevant units, respectively. Book-value pershare and net loss per share are shown by rounding off to two decimal places.

- 33 -