(Translation)

Dear Shareholders:Information to be Disclosed on the Internet upon Giving
Notice of the 61st Ordinary General Meeting of Shareholders

June 5, 2013

Funai Electric Co., Ltd.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes on Matters Forming the Basis of Presentation of Consolidated Financial
Statements
1.

Matters concerning the scope of consolidation(1)

Number of consolidated subsidiaries:(2)

Names of major consolidated subsidiaries:

18

FUNAI CORPORATION, INC., Funai Electric (HK) Ltd., and DX ANTENNA Co.,
Ltd.
Funai India Private Limited is included in the scope of consolidation as from thefiscal year under review as it has taken on increased importance. Zhong Shan Funai
Electron Co., FUNAI CMET Optical Electronics Co., Ltd., FEP REAL ESTATE,
INC., and HIGH DEFINITION COMMERCIAL SOLUTIONS, subsidiaries
incorporated during the fiscal year under review, are included in the scope of
consolidation.
(3)

Name of major non-consolidated subsidiary:
FGS Co., Ltd.
(Reason for exclusion from consolidation)
The non-consolidated subsidiary is a small company and its aggregate amount of total
assets, net sales, net income (based on the Company’s equity interest), and retained
earnings (based on the Company’s equity interest) are not material to the consolidated
financial statements.

2.

Matters concerning the application of equity method(1)

Number of non-consolidated subsidiaries towhich the equity method is applicable:(2)

1

Name of the non-consolidated subsidiary to which the equity method is applicable:
Highsonic Industrial Ltd.

(3)
(4)

Number of affiliates to which the equity method
is applicable:

1

Name of the affiliate to which the equity method is applicable:
CMET FUNAI Optical Electronics Co., Ltd.
CMET FUNAI Optical Electronics Co., Ltd., an affiliate incorporated during the
fiscal year under review, is included in the scope of the equity method.
-2-

(5)

Name of the major non-consolidated subsidiary and affiliates to which the equity
method is not applicable:
Non-consolidated subsidiary:
Affiliate:

FGS Co., Ltd.
Digitec Industrial Ltd.

(Reason for exclusion from the equity method)
The non-consolidated subsidiary and affiliate have no material impact on net income(based on the Company’s equity interest) and retained earnings (based on the
Company’s equity interest) and generally, they are not material.
(6)

As the fiscal year ends of Highsonic Industrial Ltd., a non-consolidated subsidiary towhich the equity method is applicable, and CMET FUNAI Optical Electronics Co.,
Ltd., an affiliate to which the equity method is applicable, differ from theconsolidated 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.

February 28

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

December 31

Zhong Yue Funai Electron Co.

December 31

Zhong Shan Funai Electron Co.

December 31

FUNAI CMET Optical Electronics Co., Ltd.

December 31

For DX ANTENNA Co., Ltd. and P&F MEXICANA, S.A. DE C.V. listed above,
their financial statements compiled as of their respective fiscal year ends are used totabulate consolidated results. However, significant transactions that occur between
that time and the consolidated fiscal year end are reflected in the consolidated
financial statements as so required.
For Zhong Yue Funai Electron Co., Zhong Shan Funai Electron Co., and FUNAICMET Optical Electronics Co., Ltd., their financial statements compiled based on theprovisional settlement of accounts made as of its group’s consolidated fiscal year end
are used to tabulate consolidated results.

-3-

3.

Matters concerning accounting policies(1)

Valuation basis and methods for major assets(i)Securities:
Available-for-sale securities:
Marketable securities:
Stated at fair value on the balance sheet date of the fiscal year (Unrealized
gain or loss and net of applicable taxes are reported in a separate
component of equity. Costs of securities sold are determined by themoving-average method.)
Non-marketable securities:
Stated at cost determined by the moving-average method(ii) Inventories:
As to Funai Electric Co., Ltd. (the “Company”) and its Japanese consolidated
subsidiaries, merchandise and finished goods and work-in-process are statedprincipally at cost-under-the-average method (book value is written down to net
realizable value if not profitable). Raw materials are stated principally at cost by
the first-in, first-out method (book value is written down to net realizable value if
not profitable).
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)

Method of depreciation of major fixed assets:(i)

Tangible fixed assets (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:-4-

3–50 years
3–10 years
1–20 years

(ii) Intangible assets (excluding lease assets):
Stated by the straight-line method by the Company and its consolidated
subsidiaries. However, depreciation of goodwill is made equally for five years;
depreciation of patent rights is made by the straight-line method based on theestimated economically usable period; and depreciation of software for internal
use is made by the straight-line method based on the internal usable years (fiveyears).
(iii) Lease assets:
Lease assets related to finance lease transactions that do not transfer ownershipare depreciated by the straight-line method based on the assumption that theuseful life equals to the lease term and the residual value equals to zero.
Any finance lease transaction that does not transfer ownership, which became
effective prior to the fiscal year during which the “Accounting Standard for Lease
Transactions” (Accounting Standards Board of Japan (ASBJ) Statement No. 13)
first became applicable, is treated similarly to the manner in which ordinary leasetransactions are treated.
(3)Standards for providing important allowances:(i)

Allowance for doubtful receivables:
To meet losses from loan default, the Company sets aside an estimateduncollectible amount by taking into consideration the actual loss rate in respect ofgeneral credits and the individual possibilities of collection in respect of possible
non-performing credits and other specific claims.

(ii) Accrued bonuses:
To meet the payment of bonuses to employees, some consolidated subsidiaries set
aside the portion for each fiscal year of an estimated amount of bonuses to be paidin the future.
(iii) Reserve for products warranty:
To meet expenses of after-sales services with regard to the products sold, theCompany sets aside an estimated amount based on the past sales record.
(iv) Liabilities for retirement benefits:
To meet the payment of retirement benefits to employees, the Company provides
an amount based on estimated retirement benefit obligations and plan assets as ofthe end of the fiscal year.

-5-The total transitional obligation, determined as of April 1, 2000, was charged toincome when first adopted, except that of certain subsidiaries, which is amortizedby 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.
(v) Liabilities for directors’ retirement benefits:
To provide for the payment of retirement gratuities to officers, an amount payableat the end of the fiscal year under the Company’s internal rules is reserved.
(4)

Other significant accounting policies forming the basis of presentation of consolidated
financial statements:(i)Standards for recognizing of revenue and costs of completed construction work:
Construction work for which the outcome is deemed certain during the course ofactivity by the end of the fiscal year:
By the percentage-of-completion method (The percentage of completion at theend of the fiscal year shall be estimated by the method of comparison of
incurred cost to date with estimated total contract costs.)
Other construction work:
By the completed-contract method(ii) Method and period of amortization of goodwill:
Goodwill is amortized by the straight-line method over a period of five years,
except for insignificant goodwill.
(iii) Accounting for consumption taxes, etc.:
By the tax-exclusive method-6-Note on Change in the Accounting Policy(Change in the method of depreciation)
In accordance with the revisions to the Corporate Tax Code, as from the fiscal year
under review, the Company and some of its consolidated subsidiaries in Japan switched tothe method of depreciation based on the revised Corporate Tax Code for tangible fixed assets
acquired on or after April 1, 2012.
The resultant impact on operating loss, ordinary loss, and loss before income taxes andminority interests is minor.

Notes to Consolidated Balance Sheet
1.

Accumulated depreciation of assets
Accumulated depreciation of tangible fixed assets:

2.

¥34,533 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 taxes of the revaluation difference were ¥226 million as revalued deferred tax
liabilities. Also, the revaluation difference is eliminated in consolidation, and so it is notpresented in equity.

Notes to Consolidated Statement of Operations
1.

Impairment losses

During the fiscal year under review, the Funai Group (the “Group”) recorded losses on
impairment in the following asset groups:
Use
Idle assets

Location
Funai Electric Co., Ltd.
(Daito City, Osaka)TypeLong-term prepaid expenses,
etc.

In principle, the Group groups business assets on the basis of legal units that strive tomaintain an ongoing understanding of income and expenses. The idle assets are grouped byindividual asset.
During the fiscal year under review, the Company revised its production model in line-7-with decreasing global demand. As a result, the Group revalued its licensing of patents
based on their expected future degree of use, thereby reducing the expected amountcollectible for these assets by ¥1,614 million. This impairment loss was recorded as an
extraordinary loss.
As the recoverable value of these assets is estimated as their value in use and no future
cash flows can be expected, their value in use has been reduced to zero.
2.

Income taxes - prior years

A consolidated subsidiary, FUNAI EUROPE GmbH, is under investigation by theGerman tax authorities with regard to transfer pricing taxation on transactions with theCompany and FUNAI ELECTRIC EUROPE Sp.z o.o., which is also a consolidated
subsidiary. During the fiscal year under review, the Funai Electric Group posted additional
income tax expense as “Income taxes - prior years” based on the belief that a request forcorrection by the German tax authorities was increasingly likely under their transfer pricing
taxation scheme.
Notes to Consolidated Statement of Changes in Equity
1.
Matters concerning the classes and total number of issued shares, and the classes andnumber of shares of treasury stocks:(thousand shares)

Issued shares
Shares of common stock
Total
Shares of treasury stock
Shares of common stock(Note)
Total(Note)

Number ofshares as ofApril 1, 2012

Increase in thenumber ofshares during
the year

Decrease in thenumber of
Number ofshares during
shares as of
the yearMarch 31, 201336,13036,130--36,13036,130

2,011

0

-

2,011

2,011

0

-

2,011

The number (0 thousand) of shares of common stock issued by the Company increased as aresult of the purchase of less-than-one-unit shares.

-8-

2.

Matters concerning dividends from surplus(1)

Amount of dividends paid:

Resolution

Class ofsharesTotal amountof dividends(million yen)Amount ofdividend per
share
(yen)

Record date

Effective
date

Meeting of the Boardof Directors held on
May 21, 2012

Shares ofcommon
stock

1,705

50

March 31,2012

June 14,2012(2)

Dividends for which the record date falls during the fiscal year under review, but theeffective date falls during the next fiscal year:

Resolution

Class ofsharesTotalamount ofdividends(millionyen)

Meeting of theBoard of Directors
held on May 20,
2013

Shares ofcommon
stock

1,194

3.

Source ofdividends

Amount ofdividend
per share(yen)

Recorddate

Effective
date

Retainedearnings

35

March 31,2013

June 10,2013

Matters concerning stock acquisition rights
Description of stock option

Class of shares to be issued ortransferred upon exercise ofstock option

Number of shares for stock
option (share)
As of March 31, 2013

The first stock option for the year
ended March 31, 2005

Shares of common stock

359,900

The second stock option for theyear ended March 31, 2005

Shares of common stock

25,600The first stock option for the year
ended March 31, 2006

Shares of common stock

346,400

The first stock option for the year
ended March 31, 2009

Shares of common stock

330,400

Total

1,062,300-9-

Notes to Financial Instruments
1.

Matters relating to the status of financial instruments

The Group raises funds by bank loans and invests funds by short-term deposits.
principle, the Group has a policy of not using derivatives.

In

With regard to customers’ credit risks relating to notes and accounts receivable-trade,the Group has stipulated its sales management rules to manage trading terms and credit lines
by client.
Investment securities are exposed to market risks. With regard to such risks, themarket values and the financial positions of the issuers are reviewed periodically andreported to the Investment and Loan Committee, an internal organ.
Notes and accounts payable-trade and accounts payable-other shall mostly becomedue and payable within one year.
Both short-term loans payable and long-term loans payable are funds procured inrelation to business transactions. The Group has a policy of not using derivatives.
However, as floating-rate loans are exposed to interest rate risk, the Group may utilize
derivatives (interest rate swap agreements) as hedging instruments according to individualloan contracts. To trade in derivatives, such derivatives are executed and managed inaccordance with the internal rules. To avert credit risk, the Group enters into transactions
solely with financial institutions receiving high ratings.
2.

Matters concerning fair values, etc. of financial instruments

The following chart shows amounts for items recorded in the consolidated balance
sheet as of March 31, 2012, along with their fair values and the variances:(million yen)
Balance sheet
amount*Fair value*

Variance(1)

Cash and deposits

67,81367,813-(2)

Notes and accounts receivable-trade33,19333,193-(3)

Investment securities:
Available-for-sale securities

1,652

1,652

-

(4)

Notes and accounts payable-trade(39,178)(39,178)-(5)

Short-term bank loans(12,981)(12,981)-(6)

Accounts payable-other(11,124)(11,124)-(7)

Derivatives

-

-

-

* The items recognized as liabilities are shown in the parentheses.
(Notes)1. Matters concerning the calculation method of the fair values of financial
instruments, as well as securities and derivatives:- 10 -

(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) Derivatives:
The Group does not utilize any derivatives.
applicable.

Hence, this item is not

2. Unlisted shares (¥3,321 million on the balance sheet) have no market priceand it is impossible to estimate their future cash flow. As determining themarket value is recognized as being extremely difficult, they are not includedin “(3) Investment in securities – Available-for-sale securities.”

Notes on the Information per Share
Book-value per share:¥3,520.11

Net loss per share:¥250.38

Notes on Significant Subsequent Events(Acquisition of Ink-jet Patents, as well as Related Technologies and Assets)
The Company, pursuant to the resolution adopted at the meeting of its Board of Directors held
on February 26, 2013, entered into an agreement with Lexmark International, Inc. (headoffice: the United States, NYSE: LXK; hereinafter, “Lexmark”) on April 2, 2013, to acquire
its ink-jet patents, as well as related technologies and assets (hereinafter, the “Transaction”).

- 11 -

1.

Reasons for the acquisition

As a contract manufacturer, the Company has supplied ink-jet 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 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 ink-jet business, including manufacture andsale of more profitable ink cartridges, not as a contract manufacturer of printer products any
longer, with the strong inkjet business platform that Lexmark has established for years. As aresult, the Company believes the Group will be able to expand its business going forwardsustainably.
2.

Name of the counterparty
Lexmark International, Inc.

3.

Assets, etc., to be acquired(1)

Details of the assets, etc.
(i) Ink-jet patents(ii) IJP-related product R&D resources in the United States(iii) All of outstanding shares in an IJP-related product manufacturingsubsidiary of Lexmark in the Philippines(iv) Other related technologies and assets(2)

Amount of the assets, etc., to be acquired

The acquisition price in the Transaction is ¥9,947 million (US $100 million).
The items and amounts of the individual assets, etc., are currently under review.
4.

Legal form of business combinations
Acquisition of patents, development facilities, and manufacturing subsidiary’s shares

5.

Schedule:(1)(2)

Conclusion of agreements
Acquisition date

April 2, 2013
April 30, 2013- 12 -

Other Notes
Additional Information(Tax system for dealing with tax havens)
1.

On June 28, 2005 and June 16, 2008, we received a notice from the Osaka Regional
Taxation Bureau regarding the implementation of a corrective action. This noticeindicated a decision regarding our subsidiary in Hong Kong, suggesting that it did notsatisfy the conditions for exclusion from application of the tax system for dealing withtax havens. The notification furthermore indicated that the Osaka Regional Taxation
Bureau decided to incorporate the income generated by our subsidiary in Hong Kong
into the income of the Company for the duration of three years, from April 1, 2001 to
March 31, 2004, and from April 1, 2004 to March 31, 2007, for taxation purposes.
Because the Company objected to this corrective action, we applied for assessments
by the Osaka National Tax Tribunal on July 25, 2006, and again on August 6, 2008.
Thereafter, we received written verdicts on this case on July 3, 2008, and again on
July 23, 2009, indicating that our assertions had been dismissed. We filed an appeal
to have the action cancelled with the Osaka District Court on November 16, 2006, andagain 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, we filed a notice 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 appeal and an
application for the acceptance of the appeal with the Supreme Court on August 1,
2012.
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. We
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, we received a notice from the Osaka Regional Taxation Bureausuggesting 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, we applied for assessments by the Osaka National Tax Tribunal on August 25,
2011. On July 18, 2012, we received written verdicts on this case indicating that ourassertions had been dismissed. The Company, unable to accept the verdicts, filed an
appeal to have the action cancelled with the Tokyo District Court on January 17,- 13 -

2013.
The additional tax, including corporate, residential, and business taxes, amounted to¥825 million (¥935 million including incidental taxes). This amount has beenprocessed as expenses under the category of “income taxes - prior years” 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 year to which the assessment was applied, as an
expense as from the fiscal year ended March 31, 2012.

(Acquisition of a Company by Acquisition of Shares)
The Company, pursuant to the resolution adopted at the meeting of its Board of Directors heldon January 24, 2013, determined on January 29, 2013, to acquire from Royal Philips
Electronics (head office: the Netherlands, NYSE: PHG, AEX: PHIA; hereinafter, “Philips”)
the entire shares of a company (the “New Company”) assuming operations (the “Operation”)
of Philips’ Lifestyle Entertainment business (see Note) and entered into a share purchaseagreement on the same day (the “Transaction”).
(Note) The Lifestyle Entertainment business involves the development and design, sale and(partial) manufacture of the following Philips-brand products:
Audio, video, and multimedia
products:
Home audio equipment, headphone, speaker,
in-car audio, video-related products, portableaudio, portable video player, home media
player, etc.
Home communication products:

DECT cordless phone

Accessories products:

Batteries, cables/connectors, storages products,
power solutions, portable chargers for cell
phone, antennas, etc.

The Transaction does not include the acquisition of business related to general-purpose
remote control equipment within the Lifestyle Entertainment business. In addition, as part of
the Transaction, it has been agreed that businesses related to the development and design andmanufacture of video-related products will be transferred to the New Company in 2017.
1.

Reasons for acquiring the shares
In September 2008, the Company entered into a brand licensing agreement maintaining- 14 -

responsibility for the sourcing, distribution, marketing, and sales activities of Philips
consumer televisions in the United States and Canada. Following this, in July 2012, theCompany 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 Operation.
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 to reinforcing its existing
management resources, the Company has searched for growth opportunities through businessalliances and M&A activities with other companies, such as those outlined above.
The Transaction to assume the Operation will enable the Group to expand the lineup of
products that it handles and expand its sales region to include Asia, South America, and otheremerging markets, as well as advanced countries in Europe. The Company decided toacquire the shares in the New Company, based on the belief that the acquisition would foster
sustained growth of the Group’s business.
2.

Name of the counterparty to the share acquisition
Royal Philips Electronics

3.

Name of the New Company, etc.
(1)

Name:

Undecided (Note)(2)

Location:

Undecided (Note)(3)

Name and position of representative:

Undecided (Note)(4)

Capital:Undecided (Note)(5)

Business:(Note)
4.

Development and design, sale and(partial) manufacture of products in the
Operation
As the New Company is to be established in the first half of the fiscal year
ending March 31, 2014, these decisions are not in place at present.

Schedule for the acquisition of the shares(1)

Conclusion of share purchase agreement

January 29, 2013

(2) Expected date of share transfer
Within 2013 (expected) (Note)(Note)The share transfer date is expected to be during 2013, after confirming items
related to competition laws in various regions, including most probably theUnited States, Germany, Ukraine, Russia, Poland, Turkey, and Taiwan.
5.
Number of shares acquired, acquisition price, and shareholding ratio after theacquisition- 15 -

(1)Ratio of the number of shares held tothe number of shares issued prior totransfer-%(Ratio of voting rights: ― %)(2)

Ratio of the number of shares acquired
to the number of shares issued

100.0%(3)

Acquisition price

Shares of the New Company’s stock¥17,250 million(Notes 1 and 2)
Advisory fees, etc. (approximate amount) ¥830 million(Notes 1 and 3)
Total (approximate amount)¥18,080 million(4)

Ratio of the number of shares held tothe number of shares issued after
transfer

100.0%(Ratio of voting rights: 100.0%)(Notes) 1. These calculations assume an exchange rate of ¥115 to the euro.
2. The acquisition price of the New Company’s shares is expected to be as
indicated above. However, this figure is expected to be adjusted basedon the Operation’s cash and deposits, interest-bearing liabilities, tangible
fixed assets, and working capital as of the share transfer date.
3. Advisory fees, etc., are approximations. This total includes amounts forthe payment of advisory fees for the services of financial advisors, legal
advisors, accounting advisors, and tax advisors, as well as other costs
related to the acquisition of the New Company’s shares.
6.

Method of procuring funds
Costs for the Transaction are all to be funded through resources on hand.

========================================================================(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.

- 16 -NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
Notes on Matters Concerning Major Accounting Policies:
1.

Valuation basis and methods for assets:(1) Valuation basis and methods for securities:
Investment in subsidiaries and associated companies:
At cost, determined by the moving-average method.
Available-for-sale securities:
Marketable securities
Stated at fair value on the non-consolidated balance sheet date of the fiscal
year (Unrealized gain or loss and net of applicable taxes reported in a
separate component of equity. Selling costs are determined by themoving-average method).
Non-marketable securities:
Stated at cost, determined by the moving-average method.
(2)

2.

Valuation basis and methods for inventories:
Finished goods:

Stated at cost, determined by the average method (Bookvalue is written down to net realizable value if not
profitable).

Raw materials:

Stated at cost, determined by the first-in, first-out method(Book value is written down to net realizable value if not
profitable).

Method of depreciation of major fixed assets:(1) Tangible fixed assets (excluding lease assets):
Stated 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):
Stated by the straight-line method.
- 17 -

However, depreciation of goodwill is made equally for five years, depreciation ofpatent rights is made by the straight-line method based on the estimatedeconomically usable period, and depreciation of software for internal use is madeby 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 ownershipare depreciated by the straight-line method, based on the assumption that theuseful life equals to the lease term and the residual value equals to zero.
Any finance lease transaction that does not transfer ownership, which became
effective prior to the fiscal year during which the “Accounting Standard for Lease
Transactions” (ASBJ Statement No. 13) first became applicable, is treatedsimilarly to the manner in which ordinary lease transactions are treated.

3.

Standards for providing allowances:(1) Allowance for doubtful receivables:
To meet losses from loan default, the Company sets aside an estimateduncollectible amount by taking into consideration the actual loss rate in respect ofgeneral credits and the individual possibilities of collection in respect of possible
non-performing credits and other specific claims.
(2) Reserve for product warranty:
To meet expenses of after-sales services with regard to the products sold, theCompany sets aside an estimated amount based on the past sales record.
(3) Liabilities for retirement benefits:
To meet the payment of retirement benefits to employees, the Company provides
an amount based on estimated retirement benefit obligations and plan assets as of
the non-consolidated 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).
As plan assets exceeded retirement benefit obligations as of the end of the fiscal
year under review, “other” in “investments and other assets” were recorded byinclusion of ¥868 million of prepaid pension cost.
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.
- 18 -

(4) Liabilities for directors’ retirement benefits:
To provide for the payment of retirement gratuities to officers, an amount payableat the end of the fiscal year under the Company’s internal rules is reserved.
4.
Other significant accounting policies forming the basis of presentation of
non-consolidated financial statements:
Accounting for consumption taxes, etc.:

By the tax-exclusive method

Note on Change in the Accounting Policy(Change in the method of depreciation)
In accordance with the revisions to the Corporate Tax Code, as from the fiscal year
under review, the Company switched to the method of depreciation based on the revised
Corporate Tax Code for tangible fixed assets acquired on or after April 1, 2012.
The resultant impact on operating loss, ordinary income, and income before income
taxes is minor.
Notes to Non-Consolidated Balance Sheet:1.

Accumulated depreciation of assets:
Accumulated depreciation of tangible fixed assets:

2.

¥10,770 million

Monetary debts due from and to subsidiaries and associated companies:
Short-term monetary debts due from associated companies:
Long-term monetary debts due from associated companies:
Short-term monetary liabilities due to associated companies:¥26,430 million¥14,324 million¥19,623 million

Short-term money liabilities due to associated companies include ¥3,311 million oftransfer pricing taxation adjustments due from the Company to its U.S. subsidiary as
described in Note 2 to Non-Consolidated Statement of Income below.

- 19 -

Notes to Non-Consolidated Statement of Income:1.

Amount of transactions with subsidiaries and associated companies:
Trading transaction:
Sales:
Purchase:
Other operating expenses:
Transactions other than trading:¥126,024 million¥138,402 million¥1,461 million¥32,980 million

Transactions other than trading include ¥6,046 million of transfer pricing taxation
adjustments due from the Company to its U.S. subsidiary as described in Note 2 to
Non-Consolidated Statement of Income below.
2.

Transfer pricing taxation adjustments:

With regard to prior confirmation concerning Japan-U.S. transfer pricing applied by
the Company’s consolidated group, the Japanese and U.S. taxation authorities have agreed
provisionally. Transfer pricing taxation adjustments recorded as non-operating expenses areprior-year adjustments due from the Company to P&F USA, INC., pursuant to theprovisional agreement.
3.

Impairment losses:

During the fiscal year under review, the Company recorded losses on impairment in thefollowing asset groups:
Use
Idle assets

Location
Funai Electric Co., Ltd.
(Daito City, Osaka)TypeLong-term prepaid expenses,
etc.

In principle, the Group groups business assets on the basis of legal units that strive tomaintain an ongoing understanding of income and expenses. The idle assets are grouped byindividual asset.
During the fiscal year under review, the Company revised its production model in linewith decreasing global demand. As a result, the Group revalued its licensing of patents
based on their expected future degree of use, thereby reducing the expected amountcollectible for these assets by ¥1,614 million. This impairment loss was recorded as an
extraordinary loss.
As the recoverable value of these assets is estimated as their value in use and no future
cash flows can be expected, their value in use has been reduced to zero.

- 20 -

Notes to Non-Consolidated Statement of Changes in Equity
Matters concerning the number of shares of treasury stock:
Class of shares
Common stock (Note)（thousand shares）

Decrease in the Number of shares
Number of shares Increase in theas of April 1, 2012 number of shares number of shares as of March 31,
during the year
during the year
2013
2,011

0

-

2,011

(Note) The number (0 thousand) of shares of common stock issued by the Company increased asa result of the purchase of less-than-one-unit shares.

Notes on Accounting for Deferred Tax
Principal components of deferred tax assets and deferred tax liabilities:
Deferred tax assets
Liabilities for directors’ retirement benefits
Accounts payable-other
Allowance for doubtful receivables
Accrued expenses (bonuses)
Impairment loss on investment securities
Impairment loss on 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 loss on available-for-sale securities
Prepaid pension costReserve for advanced depreciation of fixed assets
Subtotal
Deferred tax assets, net- 21 -(million yen)
381
579
3,757
334
371
1,984
1,055
427
5,862
382
15,136(13,412)
1,723
(211)
(309)
(283)
(804)
918

Notes on the Fixed Assets Used by Lease
Finance lease agreements that do not transfer ownership, which became effective onor before March 31, 2008, are treated similarly to the manner in which ordinary leasetransactions are treated.
Amounts equivalent to the acquisition prices, accumulated depreciation, and balance at theend of the year:
Amount equivalent
to the acquisition
costs
Tools, furniture, and fixtures
38
Total:
38(million yen)Amount equivalent Amount equivalent
to accumulated
to balance at the end
depreciationof the year
38
38-

Notes on Transactions with Related Parties
1.

Subsidiaries, etc.
(million yen)
Voting rights
held by theCompany (orheld byothers)RelationshipTransaction

Type

Name

Subsidiary

DX ANTENNA
Co., Ltd.

Direct,91.40%

Sale of productsof the Company

Subsidiary

Funai Electric(HK) Ltd.

Direct, 100%

Production of
products of theCompany

Sale ofelectronic
products
Purchase ofelectronic
products

Subsidiary

FUNAI(THAILAND)
CO., LTD.

Production of
products of theCompany

Purchase ofelectronic
products

Subsidiary

Zhong Shan
Funai Electron
Co.

Production of
products of theCompany

Subsidiary

FUNAI
CORPORATION,
INC.

Purchase ofelectronic
products
Sale ofelectronic
products
Transfer
pricing
taxationadjustments
Sale ofelectronic
products
Transfer
pricing
taxationadjustments
Sale ofelectronic
products

Subsidiary

Subsidiary

P&F USA, INC.

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

Direct,66.67%
Indirect,33.33%
Indirect,100.00%

Direct, 100%

Direct, 100%

Direct,100.00%Indirect,
0.00%

Sale of productsof the Company;
interlocking
directorate

Sale of productsof the Company

Sale of productsof the Company- 22 -

Loan offunds

Amount4,494
88,80232,396

7,868

87,434

Account
Accounts
receivable trade
Accounts
payable trade
Accounts
payable trade
Accounts
payable trade
Accounts
receivable trade

Balance asof March
31, 2013
1,721
8,753

3,216

1,414

9,392

Accruedexpenses

3,006

18,586

Accounts
receivable trade

7,879

6,046

Accounts
payable other702-

11,5301,229

Accounts
receivable trade
Short-term
loans
receivable

2,375
1,524

Type

Name

Subsidiary

FUNAI
ELECTRICEUROPE Sp. zo. o.

Subsidiary

Voting rights
held by theCompany (orheld byothers)Direct, 100%FUNAI EUROPE
Direct, 100%
GmbH

RelationshipSale of productsof the Company
Sale of productsof the Company;
interlocking
directorate

Transaction

AmountSale ofelectronic
products

2,158

Loan offunds-

Loan offunds

862

Balance asof March
31, 2013

Account
Accounts
receivable tradeLong-term
loans
receivable
Long-term
loans
receivable

1,078
2,293

10,431(Note)

Transaction terms and policies on the determination of transaction terms, etc.:
Like the terms of ordinary transactions, transaction terms are determined in consideration ofmarket prices and other factors.

2.

Officers and individual, principal shareholders, etc.
(million yen)
Type

Officer

Name

Tetsuro Funai

Voting rights
held by theCompany (orheld by others)(Direct, 37.25%)

RelationshipSale of land andbuilding

Sale of shares

Balance asof March
31, 2013

Transaction

AmountSale of landand building

380

-

-

331

-

-

300

-

-

Gain on saleof land andbuilding
Sale ofshares

Account(Notes) Transaction terms and policies on the determination of transaction terms, etc.:
1. Selling prices of lands and buildings are determined by reference to appraisal values by realestate appraisers.
2. Selling prices of shares, in case of a sale and purchase of unlisted shares, are determined
upon mutual consultation.

Note on the Information per ShareBook value per share:¥2,616.22

Net income per share:¥384.35

Note on Significant Subsequent Events(Acquisition of Ink-jet Patents, as well as Related Technologies and Assets)
The Company, pursuant to the resolution adopted at the meeting of its Board of Directors held
on February 26, 2013, entered into an agreement with Lexmark International, Inc. (headoffice: the United States, NYSE: LXK; hereinafter, “Lexmark”) on April 2, 2013, to acquire- 23 -

its ink-jet patents, as well as related technologies and assets (hereinafter, the “Transaction”).
1.

Reasons for the acquisition

As a contract manufacturer, the Company has supplied ink-jet 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 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 ink-jet business, including manufacture andsale of more profitable ink cartridges, not as a contract manufacturer of printer products any
longer, with the strong inkjet business platform that Lexmark has established for years. As aresult, the Company believes the Group will be able to expand its business going forwardsustainably.
2.

Name of the counterparty
Lexmark International, Inc.

3.

Assets, etc., to be acquired(1)

Details of the assets, etc.
(i) Ink-jet patents(ii) IJP-related product R&D resources in the United States(iii) All of outstanding shares in an IJP-related product manufacturingsubsidiary of Lexmark in the Philippines(iv) Other related technologies and assets(2)

Amount of the assets, etc., to be acquired

The acquisition price in the Transaction is ¥9,947 million (US $100 million).
The items and amounts of the individual assets, etc., are currently under review.
4.

Legal form of business combinations
Acquisition of patents, development facilities, and manufacturing subsidiary’s shares

5.

Schedule:(1)(2)

Conclusion of agreements
Acquisition date

April 2, 2013
April 30, 2013- 24 -

Other Notes
Additional Information(Tax system for dealing with tax havens)
1.

On June 28, 2005 and June 16, 2008, we received a notice from the Osaka Regional
Taxation Bureau regarding the implementation of a corrective action. This noticeindicated a decision regarding our subsidiary in Hong Kong, suggesting that it did notsatisfy the conditions for exclusion from application of the tax system for dealing withtax havens. The notification furthermore indicated that the Osaka Regional Taxation
Bureau decided to incorporate the income generated by our subsidiary in Hong Kong
into the income of the Company for the duration of three years, from April 1, 2001 to
March 31, 2004, and from April 1, 2004 to March 31, 2007, for taxation purposes.
Because the Company objected to this corrective action, we applied for assessments
by the Osaka National Tax Tribunal on July 25, 2006 and again on August 6, 2008.
Thereafter, we received written verdicts on this case on July 3, 2008, and again on
July 23, 2009, indicating that our assertions had been dismissed. We filed an appeal
to have the action cancelled with the Osaka District Court on November 16, 2006, andagain 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, we filed a notice 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 appeal and an
application for the acceptance of the appeal with the Supreme Court on August 1,
2012.
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. We
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, we received a notice from the Osaka Regional Taxation Bureausuggesting 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, we applied for assessments by the Osaka National Tax Tribunal on August 25,
2011. On July 18, 2012, we received written verdicts on this case indicating that ourassertions had been dismissed. The Company, unable to accept the verdicts, filed an
appeal to have the action cancelled with the Tokyo District Court on January 17,- 25 -

2013.
The additional tax, including corporate, residential, and business taxes, amounted to¥825 million (¥935 million including incidental taxes). This amount has beenprocessed as expenses under the category of “income taxes - prior years” 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 year to which the assessment was applied, as an
expense as from the fiscal year ended March 31, 2012.

(Acquisition of a Company by Acquisition of Shares)
The Company, pursuant to the resolution adopted at the meeting of its Board of Directors heldon January 24, 2013, determined on January 29, 2013, to acquire from Royal Philips
Electronics (head office: the Netherlands, NYSE: PHG, AEX: PHIA; hereinafter, “Philips”)
the entire shares of a company (the “New Company”) assuming operations (the “Operation”)
of Philips’ Lifestyle Entertainment business (see Note) and entered into a share purchaseagreement on the same day (the “Transaction”).
(Note) The Lifestyle Entertainment business involves the development and design, sale and(partial) manufacture of the following Philips-brand products:
Audio, video, and multimedia
products:
Home audio equipment, headphone, speaker,
in-car audio, video-related products, portableaudio, portable video player, home media
player, etc.
Home communication products:

DECT cordless phone

Accessories products:

Batteries, cables/connectors, storages products,
power solutions, portable chargers for cell
phone, antennas, etc.

The Transaction does not include the acquisition of business related to general-purpose
remote control equipment within the Lifestyle Entertainment business. In addition, as part of
the Transaction, it has been agreed that businesses related to the development and design andmanufacture of video-related products will be transferred to the New Company in 2017.
1.

Reasons for acquiring the shares
In September 2008, the Company entered into a brand licensing agreement maintaining- 26 -

responsibility for the sourcing, distribution, marketing, and sales activities of Philips
consumer televisions in the United States and Canada. Following this, in July 2012, theCompany 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 Operation.
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 to reinforcing its existing
management resources, the Company has searched for growth opportunities through businessalliances and M&A activities with other companies, such as those outlined above.
The Transaction to assume the Operation will enable the Group to expand the lineup of
products that it handles and expand its sales region to include Asia, South America, and otheremerging markets, as well as advanced countries in Europe. The Company decided toacquire the shares in the New Company, based on the belief that the acquisition would foster
sustained growth of the Group’s business.
2.

Name of the counterparty to the share acquisition
Royal Philips Electronics

3.

Name of the New Company, etc.
(1)

Name:

Undecided (Note)(2)

Location:

Undecided (Note)(3)

Name and position of representative:

Undecided (Note)(4)

Capital:Undecided (Note)(5)

Business:(Note)
4.

Development and design, sale and(partial) manufacture of products in the
Operation
As the New Company is to be established in the first half of the fiscal year
ending March 31, 2014, these decisions are not in place at present.

Schedule for the acquisition of the shares(1)

Conclusion of share purchase agreement

January 29, 2013

(2) Expected date of share transfer
Within 2013 (expected) (Note)(Note)The share transfer date is expected to be during 2013, after confirming items
related to competition laws in various regions, including most probably theUnited States, Germany, Ukraine, Russia, Poland, Turkey, and Taiwan.
5.
Number of shares acquired, acquisition price, and shareholding ratio after theacquisition- 27 -

(1)Ratio of the number of shares held tothe number of shares issued prior totransfer-%(Ratio of voting rights: ― %)(2)

Ratio of the number of shares acquired
to the number of shares issued

100.0%(3)

Acquisition price

Shares of the New Company’s stock¥17,250 million(Notes 1 and 2)
Advisory fees, etc. (approximate amount) ¥830 million(Notes 1 and 3)
Total (approximate amount)¥18,080 million(4)

Ratio of the number of shares held tothe number of shares issued after
transfer

100.0%(Ratio of voting rights: 100.0%)(Notes) 1. These calculations assume an exchange rate of ¥115 to the euro.
2. The acquisition price of the New Company’s shares is expected to be as
indicated above. However, this figure is expected to be adjusted basedon the Operation’s cash and deposits, interest-bearing liabilities, tangible
fixed assets, and working capital as of the share transfer date.
3. Advisory fees, etc., are approximations. This total includes amounts forthe payment of advisory fees for the services of financial advisors, legal
advisors, accounting advisors, and tax advisors, as well as other costs
related to the acquisition of the New Company’s shares.
6.

Method of procuring funds
Costs for the Transaction are all to be funded through resources on hand.

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

- 28 -