Annual Report 2013

Contents2

Corporate Profile

3

Financial Highlights

5

Special Feature:

Stepping up Globalization
through M&A and Alliances
7

Message from Management

11

Research & Development

13

Production & Sales

15

Corporate Governance19

Members of the Board and Corporate
Auditors and Officers

20Management Discussion and Analysis

28

Financial Section
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditor’ s Report561

Corporate Data

Annual Report 2013

Corporate Profile
Business Areas
In addition to continually improving quality and cost efficiency since its founding, Funai’s strength lies in its exceptional supply capabilities, which have earned
the Company an enormous amount of trust throughout the digital consumer electronics industry.
Currently, we conduct business in three areas: Audiovisual Equipment, which handles LCD TVs and DVD and Blu-ray Disc-related products; Information
Equipment, which handles printers; and Others, which handles audio accessory products such as headphones and speakers, as well as antenna products, via
subsidiary DX ANTENNA CO., LTD.
In our mainstay area, Audiovisual Equipment, we provide the market with five brands of compact to large LCD TVs sold in Japan and overseas. We are alsoenhancing our lineup of Blu-ray Disc-related products through such means as reinforcing our business under OEM* agreements.
The high quality and reasonable price of these products have been well received both domestically and overseas and we proudly maintain a top share in
the North American market for LCD TVs and in Japan for Blu-ray Disc recorders.
In Information Equipment, we are increasing sales and profits as a result of strong partnerships with OEM customers and expanded sales of products
developed in-house.
* The manufacture and supply of products under the customer’s brand.

Others 12.7%
Audiovisual Equipment 81.1%
Antennas

Audio accessories

Information Equipment 6.2%

2013/3LCD TVs

DVD/ Blu-ray Disc-related
products

Printers

Funai’s Strengths
Cutting Costs by Transferring Design
Functions Overseas

Constantly Improved Productivity and
Optimized Local Production

We are working to improve productivity and cut costs bypromoting in-house production of core items and reducing
the number of parts at
Overseas 38%
the design stage. We also
keep development costs
low through globalization,by transferring partial
2013/4
control of ourdevelopment and design
to our facilities in
Malaysia, China andOverseas Employment Ratio forSingapore.
Design Staff

The Funai Production System (FPS) continually improves
productivity by applying stresses to production lines todiscover where and how problems
occur. We also concentrate
Apply
stress to
our production
production
functions in thelinemost appropriate
Identify
locations andResolve
FPS
problemenhance cost

PSI Management for Product Supply
that Matches Market Movements
To create a structure for adjusting production volumes andinventories, we will foster closer communication between
the three departments
responsible for “PSI”
Purchase(Purchase, Sales andInventory) functions and theProduction Department. Our
goal is to maximize profits
through controls that will allow
us to supply products promptly
in sync with market
movements.

Strength 1

Strength 2

DesignProduction

Strength 4

Strength 3

Inventory
Control

Sales

PSI
InventorySales

competitiveness bypurchasing parts inbulk.

Introduce
improvement

Maintaining a Top Share in the North
American Market
We sell products under a variety of brands in Japan, North
America, Europe, and Asia. Funai Electric maintains a top
share in the North
American market, thelargest in the world, by
creating close
relationships with major
mass retailers. We arealso strengthening oursales structures inemerging markets thatshow marked growth.

Disclaimer regarding Forward-looking Statements
This report contains forward-looking statements regarding business indices, strategies and performance representing the expectations and judgments of the
management, based on information available to the Company and publishable at the time this report was prepared. When reading this report, please understand thatforward-looking statements involve potential risks and uncertainties; actual future business performance and forecasts may therefore differ materially from thosecontained in these statements, given the possible emergence of new factors or changes in economic circumstances and/or the business environment.

Annual Report 20132

Financial Highlights(Years ended March 31)
Millions of yen

2004

2005

2006

2007

Net Sales

342,133

383,034

360,885396,712

Operating Income (Loss)

36,53433,34823,305

20,766Net Income (Loss)

26,28025,723

21,596( 3,666)–––

Comprehensive Income (Loss)–

Depreciation Expense

5,626

6,676

7,097

7,178

Capital Investment

7,577

15,227

3,758

5,485

Total Equity

149,748

174,044

197,871

187,362

Total Assets

223,191

255,326

288,524

272,811

Shareholders’ Equity

149,748

174,044

197,871

186,981

Shareholders’ Equity per Share(¥)

4,244.78

4,919.43

5,752.92

5,484.38

Net Income (Loss) per Share(¥)

744.13719.61620.02( 107.01)

Diluted Net Income per Share(¥)

741.52716.95619.08–

Ratio of Operating Income to Net Sales

10.68%

8.71%

6.46%

5.23%

Shareholders’ Equity Ratio

67.09%

68.17%

68.58%

68.54%

Return on Equity

18.88%

15.89%

11.61%(1.90%)

20.29

18.37

18.77

–
46,508( times )Price Earnings Ratio
Net Cash Provided by (Used in) Operating Activities

36,53822,019(14,195 )Net Cash Provided by (Used in) Investing Activities( 9,497 )( 32,508 )(47,611 )3,039

Net Cash Provided by (Used in) Financing Activities
Cash and Cash Equivalents, End of Year
Number of Total Employees

1,727(420 )

9,204( 26,564)

113,606

101,156

58,58883,321

3,899

3,882

4,025

3,319

Note 1: The exchange rate of ¥94.00=U.S.$1.00 (as of March 31, 2013 in the Tokyo foreign exchange market) is used for the above calculations.
Note 2: The figure for number of total employees does not include those employees of consignment production plant located in China.

Net Sales

Operating Income (Loss)
Ratio of Operating Income (Loss) to Net Sales

Net Income (Loss)
Comprehensive Income (Loss)( ¥millions )( ¥millions )( ¥millions )302,778

314,912(%)

3.54

295,924

10,329

11,148
246,148

192,008

0.47

0.26
772

1,410
1,409

0.19
462

( 910 )

(1,170 )(4,629 )(6,487)(10,252 )

2009

2010

2011

2012

2013

2009

2010

2011

( 5,273 )(2.75)
2012
2013

Operating Income (Loss)
Ratio of Operating Income (Loss) to Net Sales

3

Annual Report 2013

( 8,543 )(17,365 )
2009

2010

Net Income (Loss)

2011

2012

2013

Comprehensive Income (Loss)(Years ended March 31)

Thousands of
U.S. dollars

Millions of yen

2008

2009

2010

2011

2012

2013

2013

277,168

302,778

314,912295,924

246,148

192,008

2,042,638( 56,096 )( 2,406 )1,410

11,148772

462( 5,273 )( 5,377 )( 17,365 )

10,329( 1,170 )( 4,629 )( 8,543 )( 90,883 )

–

–

–

( 10,252 )( 6,487)( 910 )

( 9,681 )

4,836

3,670

4,300

4,867

4,971

4,057

43,160

4,980

5,013

4,310

6,062

3,932

5,346

56,872

158,356

135,596

142,780

131,229

123,844

121,398

1,291,468

224,415

199,883

204,058

193,910

176,607

194,524

2,069,404

157,871

135,135

141,992

130,088

122,762

120,103

1,277,691

4,630.58

3,963.72

4,164.86

3,813.57

3,598.03

3,520.11

37.45( 157.71 )( 509.33 )302.97( 34.31 )( 135.69 )( 250.38 )( 2.66 )––300.77––––( 0.87% )

0.47%

3.54%

0.26%

0.19%

( 2.75% )–70.35%

67.61%

69.58%

67.09%

69.51%

61.74%–( 3.11% )(11.85% )7.45%( 0.86% )( 3.66%)( 7.03% )

–

–

–

13.00

–

–

–

–

( 13,714 )(729 )

3,640( 5,166 )

16,416( 8,023 )( 85,351 )( 9,476 )( 10,795 )( 2,714 )4,071( 6,435)

12,864

136,851( 8,142 )(2,563 )( 7,871 )2,466( 6,717)5,129

54,564

57,10040,18034,06333,74536,56750,238534,447

2,628

2,590

2,553

2,861

3,990

4,776

Shareholders’ Equity Ratio

Depreciation Expense

Capital Investment(%)( ¥millions )( ¥millions )

67.61

69.58

67.09

69.51

61.74

6,062

5,346
4,867
4,300

2010

2011

2012

2013

2009

2010

4,310

4,057

3,670

2009

5,013

4,971

2011

2012

2013

2009

2010

3,932

2011

2012

2013

( Years ended March 31)

Annual Report 20134

Special Feature

We are stepping up our globalization throughM&A and alliance activities.

By adding the Lifestyle Entertainment (LE)business, we expect to expand our productportfolio and increase our sales regions.
Funai Electric has built up a positive relationship with Philips
spanning more than 20 years through OEM* agreements in suchareas as videos and DVDs. We have entered into an agreement totake over from Philips its LE business, which handles audio video
multimedia products, home communication products andaccessory products. We already commenced sales in 2012 underan exclusive agreement with Philips in the United States, Canada
and Mexico.
As a result, in addition to expanding the portfolio of productsthat the Group offers, we expect to augment our sales region to
include Europe and emerging markets, including in Asia andSouth America.
* OEM: Original equipment manufacturing, meaning the manufacture and supplyof products under the customer’s brand5

Annual Report 2013

Sales by Region

Asia, Other
South America
EuropeNorth America
Japan

Funai Electric,
fiscal year ended
March 31, 2013

After approval of
the business transfer

The Funai Electric Group 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 thisgrowth strategy, in addition to reinforcing existing management resources the Group is aggressively leveraging
M&A and alliance opportunities. We have entered into an agreement to acquire businesses and assets that promise
to contribute to the Group’s growth from Philips and Lexmark, companies with which we have forged strong
relationships.

By including the production and sale of highly
profitable ink cartridges, we will build a complete
system employing our own resources.
Our relationship with Lexmark spans approximately 16 years,
back to 1997. Since that time, we have cooperated with thatcompany since the development stage under hardware OEMagreements involving inkjet printers.
The current acquisition is of patent rights and otherassets involving ink cartridges and other printer-related productsthat Lexmark has developed globally over many years, centeringon North America. Until now, our hardware development has
been only in OEM business. However, the current acquisition will
enable us to build a complete system employing our own
resources to manufacture and sell products including highly
profitable ink cartridges.

Strategic Significance of the Acquisition•By employing FPS to handle an increased number of products, supply
products in a more cost-competitive manner• Acquisition of development and production functions involving highly
profitable ink cartridges
Before the Transaction
Patents

Ink cartridges

After the Transaction++

HardwarePlanning, development
and design
Production
Sales

Leverage our sales network, centering on
major mass retailers in North America

Product brands

Annual Report 20136

Message from Management

Amid a severe business environment,
we steadily put in place thesteppingstones for growth by accelerating
M&A and alliance activities.

Tomonori Hayashi
President and CEO

7

Annual Report 2013

Performance in the Fiscal Year Ended March 31, 2013

Sales and income were both down, but weinvested aggressively to make a significant
leap forward in the upcoming fiscal year.
Conditions remained difficult in the consumer electronics
industry, with the monetary value of the digital consumer
electronics market in 2012 falling below on a monetary basis
for the first time since the Lehman Brothers collapse. In
particular, global shipments of LCD TVs fell below theprevious year’s level for the first time, while demand forsmartphones and tablet devices has grown sharply, in achanging role of the products that are driving the market.
Owing to these conditions, the Group posted
consolidated net sales of ¥192 billion, a 22% decrease
compared with preceding fiscal year. The operating loss
amounted to ¥5.2 billion, compared with an operating profitof ¥0.4 billion in the previous term; and the net loss was¥8.5 billion, compared with net loss of ¥4.6 billion in theprevious fiscal year.
During the year, the Group also posted a reversal ofdeferred tax assets. Such factors led to the posting of final
losses for the third consecutive fiscal year. We deeply
apologize to our stakeholders for having failed to meet their
expectations.
However, during the year the Group undertook
initiatives under its growth strategy, which has three pillars:“strengthening and expanding existing businesses,” “making
forays into new markets,” and “developing new businesses.”
In line with this strategy, we accelerated our M&A andalliance activities, putting in place the steppingstones for
growth in upcoming fiscal years.

Sales by Product TypeLCD TVs
Sales rose in Mexico, compensating for a decline in the Japan. North
American sales were flat.
DVD-Related Products
Sales of Blu-ray Disc players increased, but sales of Blu-ray Disc
recorders fell sharply, due to sluggish Japanese demand.
Printers
Sales declined as a result of a decrease in orders.
OthersSales of audio accessories in North America and other areas
contributed to sales, but a major decrease in sales of antennas inJapan caused sales for the category to drop.

Strategy for the Future

We have agreed to acquire businesses andassets from Philips and Lexmark.
We are pushing forward with a host of measures under thethree pillars of the Group’s long-term strategy. In January
2013, we reached an agreement to acquire the lifestyleentertainment (LE) business from Royal Philips, followed byan agreement in April to acquire inkjet-related technology
and assets from Lexmark International Inc.
To avoid the current risk of leaning too heavily on the
U.S. market, we are promoting sales in Central and SouthAmerica, including Mexico, as well as in India, Thailand andother emerging markets. Of the two businesses mentioned
above, the Philips business already has a global sales
channel in place, centering on Europe. By acquiring thisbusiness, we expect to give a sharp boost to efforts to further
accelerate the Group’s globalization.

Annual Report 20138

Message from Management

Synergistic Effects with Our Growth Strategy

Strengthening and expanding
existing businesses

9

Improve business performance stability
Strengthen earning performance

Making forays into new markets

Accelerate globalization(1) Expand sales channels(2) Restructuring of production base(3) Acquire global human resources

Developing new businesses

Strengthen patent portfolio
Improve marketing and design capabilities

Annual Report 2013

Outlook for the Fiscal Year Ending March 31, 2014

By aggressively pursuing our growth strategy,
we aim to expand our business and improvesales and profits.
In the upcoming fiscal year, the Group expects the operating
environment to remain problematic, plagued by ongoing
uncertainty in its operating environment. Nevertheless, bypulling together as a Group to enact our three growthstrategies, we aim to expand our business and improve sales
and profits.
In particular, to maximize synergies with our growthstrategies, we will work to ensure the smooth transfer of thetwo businesses mentioned above and ensure their steady
operation. Among our existing businesses, we expect growthin sales of LCD TVs to be in the single digits, but we expect
sales of laser printers to contribute to printer sales from thestart of the fiscal year. In September 2012, we commenced
operations under an exclusive agreement with Philips to sellPhilips-brand audio accessories in the United States, Canada
and Mexico. This business will contribute to Group sales
throughout the upcoming fiscal year.
As a result of these initiatives, for the fiscal year ending
March 31, 2014, we anticipate consolidated net sales of¥202.0 billion, up 5.2% from the year ended March 31,
2013, and we expect operating income of ¥0.2 billion. This
forecast assumes an exchange rate of US$1=¥96.
Our performance forecasts do not include plans
involving the acquisition of the Philips and Lexmark
operations in the upcoming fiscal year. We will incorporate

the inkjet-related patents acquired from Lexmark into our
in-house branded printer development activities. We willpromptly provide notice about the degree to which thesebusinesses will impact our operating performance as soon as
this information has been confirmed.

About Dividends
The Funai Electric Group is aware that providing returns toshareholders is one of the most important issues thatmanagement faces. With this in mind, the Group’s basic
policy on profit distribution is to maintain a stable dividendlevel while ensuring the operating base of the Group is
continually strengthened. The basic measurement used to
track the policy is the dividend-to-consolidated net assets
ratio, with the current target figure being set at 1.0%. Basedon this target, the Group plans to implement a stable dividend
policy while taking into consideration the operating
environment facing the business.
We have set the year-end dividend for the fiscal year
ended March 31, 2013, at ¥35 per share.
While no change to our dividend policy is planned forthe next fiscal year, the recent fluctuations in the foreignexchange markets are having a large impact on consolidated
net assets, so the forthcoming dividend will be announced
when possible.
We look forward to receiving your continued
understanding and support as we implement our strategies in
the future.

Tomonori Hayashi
President and CEO

Next year’s plan
(Billions of yen)

246.1

2012/3

Sales

192.0

2013/3* IJP: Inkjet printers, LBP: Laser printers
Net sales

Per-share dividend

sion
expan

(¥)

Global developmentof the LE business

Global development
New productsof LED-related
resulting from R&D
business
Global development
202.0
of IJP/LBP*

2014/3(forecast)

50
40

40

40

2009/3

2010/3

2011/335

2012/3

2013/3

Annual Report 201310

Research &Development
We aim for continuous review andimproved production of our main
product designs. We also attempt tocreate profits from intellectual
properties by promoting technologicaldevelopment as the source of new
growth potential.

China
Japan

Malaysia
Singapore
Design and Development Base

11

Annual Report 2013

Striving to Achieve Overwhelming Cost CompetitivenessLeveraging Three Design Strengths
We are working to cut costs by promoting in-house production ofcore items, reducing the number of parts at the design stage andreviewing the materials used.
In addition, to achieve major productivity improvements we aredecreasing the number of processes, while at the same time
pursuing environmental measures such as using lead-free solder
and developing designs aimed at ease of manufacturing.
We are also promoting globalization and reducing development
costs by shifting design responsibilities previously handled in Japanto R&D facilities in locations such as Malaysia, China (Shenzhen)
and Singapore.

Major Improvements to Productivity Result from
Review of LCD TV Design
Traditionally, labor costs had been cheap China, and even if there

were many processes involved in manufacturing there, parts werecheap. This was the thinking when it came to LCD TV design, buteach year,labor costs in China continue to rise, and our thinking haschanged. Our strategy has shifted to one focused on automation
rather than human hands, to raising productivity and lowering costs.

Overwhelming costcompetitivenessIn-house productionof core items

Reducing thenumber of parts

Overseas
onsite designIntellectual Property Strategy
Shifting to an Open Platform Basis
A number of new patent portfolios are being created that employ
technology to combine equipment with dispersed functionality using
the Internet. We will quickly introduce an intellectual property
strategy that employs an open platform basis, representing a majorchange from a conventional intellectual property network based onstandardization.

Formulating Optimal Strategies for Traditional Main
Products and New Areas
The competition for our main LCD TVs and DVD and Blu-ray
Disc-related products, major global electronics manufacturers, havean advantage regarding the development of core technologies.
Because of this, Funai Electric is engaged in building a portfolio
focused on related technologies to enhance the value of existingproducts. At the same time, we are also standing at the samestarting line as the major manufacturers when it comes to thecultivation of new areas. We promote the aggressive development ofcore technologies in new areas in pursuit of a robust portfolio thatmeets or exceeds that of other companies. Looking ahead, we will
focus on generating profits by providing our patented content toother companies and promoting a sound intellectual property
strategy.

Sowing Seeds for Future Growth
The R&D Division promotes technical development involving theservices and software that will be required during the era of cloudservices and full-fledged broadband environments. We are also
working on “ultra AV home electronics,” which feature superior
human interfaces.

collaboration, the Funai Electric Advanced Applied Technology
Research Institute conducts pursues research related to energy,
healthcare and next-generation displays.

Automotive/Human Interface
Funai Electric is applying the technology it has cultivated over theyears in developing Blue-ray Disc-related and other products toward
the development of applications for automotive and human interface
products. We plan to develop and commercialize human interface
devices for such promising areas as electric cars and healthcare
locations.

Advanced Technology Development
As a base for leading-edge technology development and a control
center for industry–academia and industry–industry R&D

FUNAI ELECTRIC ADVANCED APPLIED TECHNOLOGY RESEARCH INSTITUTE INC.

Annual Report 201312

Production &Sales
The Funai Production System (FPS)
proprietary manufacturing systemcreates the world’s mostprice-competitive products, which areprovided through a diverse array of
global brands.

PolandU.S.
Mexico

China

*

*
Japan

India
Philippines
Thailand

Sales subsidiaries
Production subsidiaries* Consignment production
plants (China accounts for
1 of 2 locations).

13

Annual Report 2013

Production
The Funai Production System (FPS) is the Realization of
Global Top Class Price-CompetitivenessWe make continual efforts to improve productivity to provide high-quality,
user-friendly products at a reasonable price. The focal point of these efforts
is the Funai Production System (FPS) proprietary manufacturing system. Thissystem creates stresses on the production line, such as by reducing thenumber of operators or increasing the speed of the conveyor belt, until
conditions are created resulting in the stoppage of the production line. The
FPS creates these conditions in order to analyze what causes the line tostop, then improves on those conditions that caused the failure.

to competitively procure raw materials and parts as well as secure a
low-cost, high-quality labor force. Due to the recent labor shortages andwage increases in China, we have enhanced our Thai plant to reduce
our risk of dependence on China.
In April 2013, we also acquired from Lexmark an inkjet printerfactory located on the island of Cebu, in the Philippines. At the sametime, we have purchased land on the island of Luzon, and we areconstructing a factory there. This new production base is scheduled
to commence operation in 2014.
The FPS: Continuous Productivity Enhancement

Optimizing Production Facility Locations to Further
Improve Cost CompetitivenessAlong with FPS, the source of Funai Electric’s cost competitiveness is
optimized production facility locations. Funai Electric concentrates its
production facilities in the most appropriate locations and enhances costcompetitiveness by purchasing parts in bulk. In particular, our production
facilities are concentrated in the Asian region, where we have the ability

Applystress to
production
line
Resolveproblem

FPS

Identify
problem(Funai Production System)

Introduce
improvement

Sales
Developing a Variety of Brands with High Recognitionin North America
In North America, the world’s largest market and Funai’s area of primary
focus, our audiovisual brands PHILIPS, MAGNAVOX and Emerson enjoy
high name recognition. And, we maintain a top-class share in thismarket through the creation of close relationships with leading massretailers such as Walmart. In the giant European market, comparable to
North America, we have facilities in Hamburg, Paris and Warsaw, where
we develop FUNAI brand LCD TVs and DVD and Blu-ray Disc-related
products. We also make an effort to build strong relationships withleading mass retailers in each country. In Japan, the DX BROADTEC
brand sells LCD TVs and DVD and Blu-ray Disc-related products.

audiovisual demand in these promising markets. Recognizing theimportance of these markets, in 2012 Funai established a local
subsidiary in Mumbai, India, which is commencing sales. Going forward,
we expect to increase sales in Latin America, including Mexico.
Including Thailand, where we commenced sales in 2012, we also plan
to enter emerging markets that are rapidly growing, such as the ASEAN
countries and the Near and Middle East regions.
Our acquisition of the LE business from Philips andinkjet-related assets from Lexmark should also enable us to expand
our sales regions
further.

Cultivating Emerging Markets
Economic and population growth in BRICs and other emerging markets
is increasing at a rapid pace, fueling expectations over increased

We develop LCD TVs and DVD and Blu-ray Disc-related
products for the FUNAI, PHILIPS, MAGNAVOX andEmerson brands, which are sold at Walmart, Target andother leading mass retailers.

The FUNAI brand sells
LCD TVs and DVD and
Blu-ray Disc-related
products.

The DX BROADTEC brand sells LCD TVs and DVD
and Blu-ray Disc-related products. The DX ANTENNA
brand sells antennas.

Selling Funai brand
LCD TVs.

Thai plant

Top 5 Companies by share of shipments
in North America (Based on a 2012 survey
by NPD DisplaySearch)
RankingCompany

Share (%)

1

A

19.3

2

FUNAI

14.7

3

B

14.0

4

C

10.2

5

D

6.2

Selling PHILIPS brand LCD TVs and DVD and Blu-ray
Disc-related products.

Annual Report 201314

Corporate GovernanceCorporate Governance Policies and Organization

Board of Directors
The Funai Electric Group Board of Directors consists of six directors,of whom two are highly independent outside directors. Internal
directors are well-versed in Group business matters, enabling rapid
decision-making. At the same time, soundness and transparency ofoperations is ensured through the independence of the outside
directors. As a general rule, scheduled Board of Directors meetings
are held once every three months. When necessary, nonscheduled
meetings are also held. Additionally, to ensure that this systemremains flexible and clarifies the responsibilities of the Board of
Directors, the director’s term of office is one year.

The Funai Electric Group’s basic philosophy on corporate
governance is to continuously increase the value of the corporation
by being transparent to all stakeholders, both internal and external,
ranging from shareholders and consumers, vendors, local
communities and employees; ensuring the soundness and efficiencyof management and responding to changing operating environments
through quick decision-making capabilities. Based on thisphilosophy, the Group adopted an executive officer system in 2002,
and subsequently transitioned into a “Company with Committees”
system in June 2005, with both moves aimed at separating themanagement and execution functions of its operations. However,with the aim of nurturing internal management for the future of theCompany and to strengthen the management structure, a resolution
to change the organizational structure of the Group to a “Company
with a Board of Corporate Auditors” was passed at the Annual
General Shareholders’ Meeting on June 22, 2010. We formulated
the Funai Group Code of Conduct, which regulates the conduct of all
members of the Funai Group. In March 2012, we established theFunai Group Procurement Policy, which is based upon the Code of
Conduct, so as to strengthen our corporate social responsibility(CSR) structure. In December 2012, we established a CSR
Committee as a companywide organization. We have also
formulated compliance rules as part of an active campaign for morethorough compliance.

Board of Corporate Auditors
The Board of Corporate Auditors consists of three corporate
auditors, of whom two are highly independent outside auditors. No
special financial relationship exists between these outside auditors
and the Funai Electric Group. Full-time Corporate Auditor Hiromu
Ishizaki has sufficient knowledge of finance and accounting. As arule, the Board of Corporate Auditors meets once each month.

Nomination Committee
An advisory body whose members are appointed by the Board of
Directors to recommend candidates for the Board of Directors andother bodies, and ensure that the director nomination and otherselection processes are transparent and objective.

Ordinary General Meeting of Shareholders
Nominate/Dismiss

Nominate/Dismiss

Nominate/Dismiss

Agree to nominate/ Decision on appropriateness
renominate of accounting audits

Audit Committee

Account Auditor
Accounting audit
reporting

Coordination

Audit

Account audit

Coordination
Deliberations/Report

Board of Directors
ReportNominate/
Dismiss/
Director

ReportPresident andRepresentative Director

Nomination Committee

Compensation Committee
Internal Investment and
Loan Committee

Director Responsible for Business/Executive Director
ReportAudit Office

ReportInternal audit

Commands/Orders

Respective business divisions/subsidiaries
Coordination

15

Annual Report 2013

Compensation Committee
Appointed and authorized by the Board of Directors to determine
compensation for directors and executive officers and ensure thatthe compensation selection process is transparent and objective.
Remuneration, etc. of corporate auditors is determined throughconsultation with the corporate auditors.

Internal Investment and Loan Committee
Appointed by the president to ensure transparency and objectivity with respect
to the decision-making process regarding major investment and loan projects
through council providing an individualized, companywide perspective.

Outside Director (Auditor) Support System
The administration department sends out reference materials to outside
directors and corporate auditors ahead of scheduled Board of Directors andBoard of Corporate Auditors meetings. In addition, meeting minutes and othernecessary information are provided to outside directors and corporate auditors
unable to attend meetings. Further, outside directors and corporate auditors
are given the opportunity to meet regularly with the heads of various sectionsand view internal documents that contain important decision-making matters.
In this manner, the system allows outside directors and corporate auditors to
sufficiently exhibit their respective supervisory and audit functions. In addition,
one employee has been assigned to assist the corporate auditors.

Systems to Ensure that Directors Execute Business
Duties Efficiently
We have implemented an executive officer system to promote quick andefficient decision-making in management, placing executive officers under
the supervision of managing directors to ensure quick execution of businessduties as determined by the managing director. To heighten transparency andstrengthen the supervisory function, we also introduced outside directors.

Systems for Ensuring Employee Execution of Business
Duties Complies with the Law and Articles ofIncorporation
The Funai Group Code of Conduct and Executive Compliance Regulations
clarify proper conduct for employees and ensure their business duty execution
is compliant with the law and articles of incorporation. We also strive tostrengthen our compliance structure with the establishment of an internalreporting system independent from normal lines of communication.

Systems to Ensure Appropriate Business Practices
Across Entire Corporate GroupThe Funai Group Code of Conduct establishes standards of conduct for all Group
executives and employees. The Affiliate Management Regulations are intended
to address important issues facing Group companies, while respecting theindependence and clarifying the rights and responsibilities of those companies,
to ensure appropriate business practices across the entire Group.

Internal Control System Enhancements

Matters Relating to Auditor Request for Employee
Assistance with Execution of Business Duties

In accordance with resolutions passed by the Board of Directors, ourinternal control system will be enhanced to ensure appropriate
business activities as follows.

In the event auditors request employee assistance with execution ofauditor business duties, upon deliberation of the Board of Corporate
Auditors, the Office of Corporate Auditors shall assign an employee
to assist the Board of Corporate Auditors.

Systems for Ensuring Director Execution of Business
Duties is Compliant with the Law and Articles ofIncorporation
The Funai Group Code of Conduct and Executive Compliance Regulations
clarify proper conduct for directors and ensure their business duty
execution is compliant with the law and articles of incorporation.

Systems for Managing and Storing Information
Relating to Director Execution of Business of Duties
In accordance with the law and document management regulations, we
conduct the appropriate management and storage of Board of Director’sother important meeting minutes, key documents and other informationnecessary to ensure the appropriate execution of business duties.

Regulations Concerning Management of Exposure to
the Risk of Loss and other Systems
We institute risk management regulations with regard to the
management of exposure to the risk from loss. Each division anddepartment shall manage risks to its operations and also takemeasures to manage those risks systematically.

Matters Relating to Independence from Director’s
Previous Employ
In the event the employee assigned to the Board of Corporate Auditors by the
Office of Corporate Auditors in the previous matter is recalled, to ensure
independence from the director, the Board of Corporate Auditors will respect
the change of employees and/or change in personnel evaluations.

Systems for Directors and Employees to Report toCorporate Auditors
Corporate auditors attend Board of Directors and other important meetings,
hear about the execution of executives’ business duties from directors andview related documents. Also, in accordance with the Regulations for
Reporting to the Board of Corporate Auditors, directors, executive officers andemployees report important matters that they determine have the potential toimpact the ability to perform job duties to corporate auditors.

Other Systems to Ensure Corporate Auditors Conduct
their Duties Effectively
To ensure corporate auditors conduct their duties effectively,

Annual Report 201316

Corporate Governancecorporate auditors maintain a close relationship with accounting
auditors and regularly meet with the president to exchange opinions
regarding risk and management policies.

System for Ensuring the Reliability of Financial Reports
The Funai Group has established the Basic Policy on Internal Controls on
Financial Reporting so as to ensure the reliability of financial reports and for
effective and appropriate disclosure of Internal Control Reports. The Internal
Control Committee, which is chaired by the President and Chief Executive
Officer, is established under this policy, to conduct continuous improvement,
application and evaluation of the internal controls on financial reporting, andto implement corrective measures when necessary.

System for the Exclusion of Antisocial Forces(Fundamental Perspective on Excluding Antisocial Forces)
We have formulated the Funai Group Code of Conduct targeting all
Group employees. As our basic compliance policy, this code calls for us
to take a determined stance against antisocial forces and organizations
that threaten the peace and safety of civil society, to have no relations
with such forces and to refuse any demands they might make.
In the event that our evidence appears of business partners
being involved with organizations, companies or individuals involved
with antisocial forces, we will swiftly cease any transactions withthese partners. (Status of Preparations for Excluding Antisocial
Forces) The Company has designated its Personnel and General
Affairs Department as the organization in charge of dealing with
antisocial forces, thereby unifying the management of information.
To ensure that all employees comply with its fundamental
policy, the Company stipulates the policy clearly in related rules andregulations and has in place a system to provide education on the
topic. In addition, whenever necessary, the Company devises
countermeasures to prevent damage from antisocial forces.
In the event that any undue claim is put forward by anantisocial force, the Company will work closely with external
specialized agencies, including the police and its legal counsel, andestablish a cooperative system for emergency situations.

Corporate Social Responsibility (CSR)
We formulated the Funai Group Code of Conduct and the Environmental,
Occupational Health and Safety Charter to contribute to the development of asustainable society and comply with laws and regulations. The CSR structure
was partially amended in March 2012 through the establishment of the Funai
Group Procurement Guidelines. In terms of environmental activities, we aremaking an effort to receive ISO 14001 certification at all our facilities outside
Japan. We also aim to contribute to environmental protection activities throughstrict compliance Furthermore, in accordance with the Home Appliance
Recycling Law, we have increased the ratio of recyclable materials in our
products. We engage in Green Procurement, which uses fewer materials andlessens the impact on the environment, and strive to reduce the amount of
toxic substances in our products. In addition, we are moving forward withactivities aimed at reducing the amount of waste generated from production, as
well as the amount of energy consumed during production, in order to reduce
our environmental impact. We formulated compliance rules in an attempt toimprove compliance awareness among all group employees. Funai Electric isaggressively engaged in initiatives to ensure improved product quality as wellas higher health and safety standard for our employees. We promote obtaining
certification of an international management system at all our facilities as wellas those of our vendors around the world. Given that the need for a system
protecting transaction, trade, customer and stock information is increasingly
critical, we also maintain an information security system. In an effort to disclose
what we determine to be material information to facilitate understanding of theCompany in a fair and timely manner, we have a disclosure policy to provide
shareholders and investors with standardized information in accordance with
the Financial Instruments and Exchange Act and securities exchanges.

Funai Group Code of Conduct
All members of the Funai Group (hereinafter “We”) pledge to make a sincere effort to observe the following code of conduct. Senior management recognizes
that it is their role to embody this code of conduct, and that they must take the initiative and set an example for others in the company to follow. In the event
their conduct is in opposition to this code, it will be their responsibility to correct themselves publicly and ensure such conduct is never repeated.

1

2
3
4
5

17

We shall develop and provide products and services useful to society
with sufficient consideration for the safety and privacy of personal andcustomer information, and strive to earn the trust and satisfy the needsof consumers and customers while ensuring the healthy developmentof society.
We shall engage in fair, transparent and free competition andtransactions while maintaining a healthy and proper and relationshipwith politicians and political administrations.
We shall ensure management transparency and health through the timely,
proactive and fair disclosure of Company information aimed at widening thecommunication channel with shareholders and greater society.
We shall maintain a safe and comfortable work environment where
employee diversity, character and individuality are respected.
We shall respect fundamental human rights and do not engage in

Annual Report 2013

6
7
8
9

discriminatory actions or human rights violations. We do not sanction
child labor or forced labor.
We shall voluntarily engage in initiatives aimed at mitigating environmental problems, which we see as common challenge facing all
humanity, and recognize as a necessary activity of all corporations.
We shall aggressively promote social contribution activities as a good
corporate citizen.
We shall firmly oppose anti-social forces or groups, block all ties withthem and reject their undue claims.
We shall observe international law and local ordinances in terms of ourinternational business activities, always respecting local cultures andcustoms to develop business efficiently.
June 22, 2012
Tomonori Hayashi President and CEO

Environmental and Occupational Health and Safety Charter
Basic Ideas

3

In keeping with our corporate commitment “to adopt continual productimprovements, to continually promote ever deeper trust, and to seek further
harmony and mutual prosperity,” all employees of Funai pledge to remainaware of the need to protect the environment and to operate our businessin an environment-friendly manner. We shall provide our customers withsimple, high-quality products and shall make an effort to use resources
effectively, minimize waste, and reduce our environmental impacts. In
short, we remain committed to contributing to a society that remains inharmony with nature. We shall respect employee diversity, personality andindividuality, and provide an environment that is safe and conducive towork.

Environmental Policies
1
2

4
5
6

We shall establish goals for environmentally conscious design and shalloffer environment-friendly products.
We shall implement initiatives to attain zero emissions.
We shall establish environmental goals, conduct periodic reviews, andimplement continual improvements.
We shall provide all employees with environmental education and shallstrive to adopt environmental improvements.

Occupational Health and Safety Policies
1
2
3

We shall practice ethical management and comply with all laws andregulations.
We shall take the initiative in voluntarily eliminating the use ofhazardous substances and shall offer environment-friendly products.

We shall practice ethical management and comply with all laws andregulations with respect to occupational health and safety.
We shall look into occupational health and safety risks in the workplace
to prevent injury and illness to employees and visitors.
We shall make ongoing improvements to occupational health andsafety management, while making an effort to improve occupational
health and safety performance.
June 22, 2010
Tomonori Hayashi President and CEO

Funai Group Procurement Policy
Basic Policy

The Funai Group is responding to heightened societal demand for corporatesocial responsibility (CSR) by performing its daily business activities on the basisof the Funai Group Code of Conduct. We have established the basic policies
described below with regard to our parts and materials procurement activities.
Conform with laws, regulations and social norms, and pay attention toenvironmental preservation.
Conduct fair and equitable transactions.
Strive for mutual cooperation with business partners and build
trust-based relationships.

Procurement Partner Selection Standards
In accordance with the above-mentioned basic policy, when selecting
companies as procurement partners the Funai Group gives priority to thosethat satisfy the following conditions when commencing transactions.
1
2
3

Conformance with laws, regulations and social norms
Respect for human rights, occupational health and safety
Environmental consideration

4
5
6Construction of systems to ensure excellent product quality
Provision of parts, materials and services that are priced appropriately
and competitively
Construction of systems to ensure certain delivery dates and stable supply

CSR Procurement
From a CSR perspective, we ask our business partners to perform thefollowing. We also ask our customers’ business partners to understand theFunai Group Procurement Policy and to make requests that will promotethese items.
1
2
3
4
5
6
7
8
9

Conformance with laws, regulations and social norms
Respect for human rights, occupational health and safety
Environmental consideration
Optimal product quality and cost assurance
Construction of systems to ensure certain delivery dates and stable supply
Technological improvement
Confidential information management
Cooperation in reporting and auditing
Response to the issue of conflict minerals

Third party certification acquisition status

Facilitythat hasacquiredcertification

Occupational health andsafety management system
OHSAS18001

Standard

Environmental management
system ISO14001

Quality management system ISO9001

FUNAI ELECTRIC
CO., LTD., andGroup company
facilities

HQ / FUNAI (THAILAND) CO., LTD. / FUNAIELECTRIC EUROPE Sp.zo.o. / CHUGOKU FUNAIELECTRIC CO., LTD / Zhong Shan Funai
Electron Co. / FUNAI SERVICE CO., LTD. /DX ANTENNA CO., LTD.*

HQ / FUNAI (THAILAND) CO., LTD. / FUNAIELECTRIC EUROPE Sp.zo.o. / CHUGOKU FUNAI HQ / FUNAI ELECTRIC
ELECTRIC CO., LTD / Zhong Shan Funai
EUROPE Sp.zo.o. / Zhong
Electron Co. / FUNAI SERVICE CO., LTD. /Shan Funai Electron Co.
DX ANTENNA CO., LTD.*

FUNAI ELECTRIC(H.K.), LTD.
consignment
production plants

HUANG JIANG PLANT

HUANG JIANG PLANT

Information security management
system ISO/IEC27001:2005
JIS Q27001:2006
Information System Department in HQ /Personnel and Administration Department
in HQ / Business Administrative
Department in HQ / Investor and Public
Relations Department in HQ* Only DX ANTENNA was certified by the JQA

Annual Report 201318

Members of the Board and Corporate Auditors and Officers

Members of the Board

Officers

Tetsuro Funai ………… Chairman

Hirofumi Nagaoka …… Executive Officer

Tomonori Hayashi …… President and CEO

Hideaki Funakoshi …… Officer

Yoshikazu Uemura …… Director andExecutive Officer

Shigeki Saji …………… Officer

Jyoji Okada …………… Director and Officer
Mitsuo Yonemoto …… Outside Director
Yoshiaki Bannai ……… Outside Director

Susumu Nojii ………… Officer
Kazuo Uga …………… Officer
Takeshi Ito …………… Officer
Sei Kono ……………… Officer
Kiyoshi Chinzei…………Officer
Tetsuhiro Maeda ……… Officer

Corporate Auditors
Hiromu Ishizaki ……… Full-time Corporate Auditor
Shinichi Komeda ……… Outside Corporate Auditor
Masahide Morimoto … Outside Corporate Auditor

19

Annual Report 2013

Management Discussion and Analysis

Management Policies
Basic management policy
Funai Electric’s basic management
policy is to pursue its businessactivities by building strong trust andseeking the mutual prosperity of allparties related to the Group, by
creating the most efficientdevelopment, production and salesorganization possible and by providing
stable supplies of high-quality andreasonably priced products to global
markets, based on a corporate creed ofcontinual product improvements,
promotion of deeper trust and further
harmony and mutual prosperity.

Target management indicators
The Group prioritizes the operating
margin as its Group management
indicator, seeking to achieve an
operating margin of at least 5% at allcompanies over the medium term.

Basic policy on the distribution of profits
The Group recognizes the return of
earnings to shareholders as animportant management issue, andconsiders its fundamental policy to be
the maintenance of stable dividends
while strengthening the Group’s
management base. The Group employs
a proactive dividend policy that takes
into consideration factors such as theoperating environment and uses a

dividend ratio of 1.0% of consolidated
net assets as its standard. The Groupplans to implement dividend payments
as a year-end dividend (once a year).
Based on this policy, for the fiscal
year ended March 31, 2013, theCompany awarded a year-end dividendof ¥35 per share. The dividend for the
next fiscal year remains undecided.

Medium- to long-term management
strategies and issues to be addressed
In the consumer electronics industry,
the digital consumer electronics
market continued to shrink. Under
these severe conditions, demand for
LCD TVs has slowed down, while
demand for smartphones and tablet
devices has grown sharply, in achanging role of the products that are
driving the market.
Operating in this environment, theGroup faces such issues as raising
management responsiveness while
ensuring quality and price levels toeffectively compete against rival firms
and at the same time expanding sales
and recovering profitability by offering
products that will sell. To achieve theseaims, we will optimize our allocation ofmanagement resources and further
cultivate the Funai Production System,
one of our core competencies. We will
also embark on the development of
new businesses in the areas ofenvironment, network and device
modules, which have a bright future.

We will endeavor to enhance theGroup’s corporate value byimplementing the policies outlined
below.

Increasing net sales and returning
to profitability
The Group has positioned the increaseof net sales and improvement of
earnings as its highest priority issue.
Product strategy:
During the fiscal year under review, in
the audio-visual equipment segment
the Group’s sales of LCD TVs declined,
owing to lackluster Japanese market
demand in the wake of the transition todigital terrestrial broadcasting. In
products related to Blu-ray Discs,
domestic sales of recorders dropped
precipitously, as these devices are
typically purchased at the same timeas LCD TVs. In information equipment
as well, orders of conventional
products from OEM customers weredown, lowering revenues.
Consequently, segment sales andprofits were down year on year forthese mainstay products.
For this reason, the Group isenhancing its PSI management (PSI
standing for “purchase, sales andinventory”). Through this approach, wewill continue to make our products
more competitive pricewise throughredesigns and by restructuring ourcomponent sourcing system, with a

Annual Report 201320

Management Discussion and Analysis

view to augmenting sales andprofitability.
With regard to productdevelopment in new business areas,
during the year we introduced LED
lamps into the Chinese market, andthese went on sale in Japan in October
2012. In July 2012, we concluded an
exclusive agreement with Royal Philips
Electronics involving the sale in the
United States, Canada and Mexico ofPhilips-brand audio accessories andother lifestyle entertainment products.
Sales commenced under thisagreement in September 2012. In
January 2013, we reached anagreement to acquire all shares in a
new company that will assume
operations involving these products,
and we intend to expand the businesson a global scale going forward. In
April 2013, we reached an agreementwith Lexmark International, Inc., toacquire its inkjet-related technology
and assets. This acquisition will enable
Funai to start and grow its own inkjet
business (including profitable ink
cartridges), rather than operating as acontract manufacturer of inkjet printerproducts. Furthermore, in February
2013 we entered an alliance with KDDI
Corporation to offer a service linking
smartphones and televisions provided
via a stick-type compact set-top box(STB), and we began providing theseproducts for sale.
Market strategy:
The Group faces the challenges of
reducing the risk of overemphasizing
the US market, smoothing production

21

Annual Report 2013

and sales throughout the year by
mitigating the effects of seasonality
and increasing sales. To address theseissues, we are considering ways todevelop our business in expansionary
emerging markets in the ASEAN
countries and Near and Middle East
regions, as well as in our existing
markets in Europe, Japan, Mexico andother Latin American countries. In
February 2012, we established Funai
India Private Limited in Mumbai, India,
and we began sales at this subsidiary.
Furthermore, we started selling LCD
TVs in Thailand. Through the steady
implementation of theabove-mentioned strategies, we plan tominimize the time lags between
product planning, development,material procurement, production andsales, enabling us to provide products
in a timely manner that meet market
needs precisely.

Reinforcing production anddevelopment systems
The Group’s production structure ishighly dependent on China, and we
recognize this as a risk that must be
mitigated. Accordingly, during the year
we augmented a production base in
Thailand that will become core to ourprovision of products in the Indian
market.
In addition, after studying thepotential for manufacturing in otherregions, we acquired land in thePhilippines and are planning toconstruct a plant there.

To increase groupwide
development efficiency, we moved
forward with efforts to expand ourdevelopment facilities in Asian
countries, particularly in China, where
we established a development facility
in the preceding fiscal year.

Training and appointment of
human resources
The Group recognizes that improving
employee capabilities and linking thisprogress to bolstering the Group’s
strength is critical to ensure that theGroup maintains its lead in the era ofglobal competition and successfully
implements its medium- to long-termbusiness strategy. Accordingly, ourpolicy is to proactively train and assign
employees, without regard to their age
or position, and we are strengthening
and expanding our internal andexternal language and other training
systems to this end.

Business Performance
The year in review
During the fiscal year ended March 31,
2013, the economy of the United States,
which is the Group’s principal market,
continued to grow gradually as it benefited
from improvements in the housing market
and job situation and a recovery in personal
consumption. The European economy
remained sluggish, as the European Central
Bank’s responses to the debt crisis failed todispel concerns entirely. Although economic
performance in China showed initial signsof decelerating, the new administration’s
economic policies put business conditions
back on a positive track. In Japan, since the
Abe administration came into office theeconomic outlook has brightened as theprospect of monetary easing has prompted
corrections to yen appreciation andbolstered stock prices.
Within the consumer electronics
industry, in 2012 the monetary value of thedigital consumer electronics market
continued the decline that has persisted
since the Lehman Brothers collapse. Under
these difficult conditions, global shipmentsof LCD TVs fell below the previous year’slevel for the first time, while demand forsmartphones and tablet devices has grown
sharply, in a changing role of the productsthat are driving the market.

Net sales:
In the preceding fiscal year, net sales
totaled ¥246,148 million. During the year
under review, net sales decreased 22.0%,
to ¥192,008 million.
( ¥millions )Net loss:
The net loss was ¥8,543 million, comparedwith net loss of ¥4,629 million in thepreceding fiscal year, after reversing
deferred tax assets and posting a corporate
tax adjustment.
( ¥millions )295,924(1,170)246,148(4,629)

192,008
2011/3

2011/3

2012/3

2012/3( 8,543 )2013/3

2013/3Operating income (loss):
Affected by the fall in sales, the Company
posted an operating loss of ¥5,273 million,
compared with operating income ¥462
million in the preceding fiscal year.
( ¥millions )

772

462

( 5,273 )2011/3

2012/3

2013/3

Annual Report 201322

Management Discussion and Analysis

Performance by geographical area
North America:
Sales of our mainstay LCD TVs were up
slightly due to favorable sales of affordable
products at a major mass retailer.
Additionally, we began selling
Philips-branded audio and accessory
products in September 2012, which
contributed to sales. Sales of informationequipment were down, however, owing to adecrease in printer orders.
In DVD-related products, sales ofBlu-ray Disc players increased, but ashrinking overall market demand andincreasingly severe competition led to adecrease in segment sales.
As a result of these factors, sales
came to ¥133,309 million, down 0.6%
year on year.

Europe:Sales of LCD TVs and DVD-related products
declined as a result of a market slowdown
and increasingly severe competition.
Furthermore, lower printer orders caused
sales of information equipment to fall,resulting in sales of ¥6,201 million, down
50.8% year on year.

Sales by product category
Audiovisual equipment:
In the audiovisual equipment sector, theDVD-related products witnessed a decline
in revenue due to weakness in thedomestic Blu-ray Disc recorder market.
Despite expansion in the Mexican market,
the LCD TV market experienced an overall
decline in the wake of Japan’s transition todigital terrestrial broadcasting. As a result,net sales of this equipment were ¥155,686
million, a decrease of 15.2% year on year.

Sales composition by geographical area
(Year ended March 31, 2013)

Sales by geographical area
(Years ended March 31)

6.8%

18.7%

2012/3

Europe3.2%

94,197

Annual Report 2013

8,863

134,11281,291

North
America

69.4%

3,542
6,201
2013/3

Europe13,09135,865 192,008

133,309
North America

23

13,630155,755

9,290
12,592

1.9%( ¥millions )8,505
23,837Japan
2011/3Asia

Others:Although sales commenced forPhilips-branded audio and accessory
products, sales of other products notincluded in the above categories declined
because sales of antennas and related
devices fell in the wake of Japan’stransition to digital terrestrial broadcasting.
As a result, net sales were ¥24,356 million,a decrease of 25.3% year on year.

Asia and others:
A decline in printer orders prompted a
substantial drop in sales of informationequipment, but stronger sales of LCD TVs
caused sales to increase in the Mexican
market. Sales in Asia amounted to ¥3,542
million, down 61.9% year on year, but sales
in other regions increased 47.7%, to¥13,091 million.

Japan:
Conditions in Japan were difficult, withsales of Blu-ray Disc recorders declining
significantly year on year due to weakening
demand.
In addition, sales of LCD TVs,
antennas and related devices fell sharply
due to slower demand in the wake ofJapan’s transition to digital terrestrial
broadcasting. Sales consequently fell
55.9% from the preceding year, to¥35,865 million.

OthersInformation equipment:
In the information equipment sector, adecrease in printer orders resulted in net
sales of ¥11,966 million, a decrease of
60.1% year on year.

Asia

OthersJapan

246,148

295,924

Financial condition

Long-term liabilities:
Long-term liabilities increased ¥965 million
during the year under review, from ¥2,708
million to ¥3,673 million. The primaryreason was a ¥1,164 million increase indeferred tax liabilities, from ¥5 million to¥1,169 million.

Total assets

Current assets:
As of March 31, 2013, total current assets
stood at ¥164,343 million, up ¥18,653
million from ¥145,690 million one year
earlier. Principal factors including an
increase in goods and products (up¥12,160 million, from ¥22,387 million to¥34,547 million) and higher raw materials
and supplies (up ¥8,993 million, from
¥10,005 million to ¥18,998 million.
Lackluster sales were the primary reason.

Fixed assets:
Fixed assets totaled ¥30,181 million at
year-end, falling ¥736 million from¥30,917 million a year earlier.
The main reason was a ¥1,734
million decline in patents, from ¥3,813
million to ¥2,079 million. The principal
cause of the decline was the recording of
an impairment loss stemming from therevaluation of licensing of patents based on
their expected future degree of use.

( ¥millions )193,910

2011/3

194,524
176,607

Equity:Total equity at the end of the fiscal year
was down ¥2,446 million from the end of
the preceding term, from ¥123,844 million
to ¥121,398 million.
Major factors included a ¥10,249
million decrease in retained earnings, from¥111,385 million to ¥101,136 million, andforeign currency translation adjustments,
which improved ¥7,195 million from anegative ¥28,918 million to a negative¥21,723 million.

2013/3

2012/3Current liabilities:
As of March 31, 2013, current liabilities
amounted to ¥69,453 million, up ¥19,398
million from ¥50,055 million one year
earlier.
Major factors included increases innotes and accounts payable–trade (up¥9,556 million, from ¥29,623 million to¥39,179 million) and short-term loans
payable (up ¥8,399 million, from ¥4,583
million to ¥12,982 million). An increase inpurchases of raw materials was the main
reason for the rise in notes and accounts
payable–trade. The expansion in short-termloans payable was due mostly to bankborrowings employed as working capital.

Total equity( ¥millions )131,229

2011/3

Sales composition by product category(Year ended March 31, 2013)

123,844

121,398

2012/3

2013/3

Sales by product category(Years ended March 31)( ¥millions )Information Equipment

6.2%

Others12.7%
2011/3

198,60756,405

2012/3

183,50730,014 32,627 246,148

40,912295,924

Audiovisual
Equipment

81.1%

11,966
2013/3

192,008

155,686
Audiovisual Equipment

24,356

Information Equipment

OthersAnnual Report 201324

Management Discussion and Analysis

Capital investment:

Cash and cash equivalents amounted to¥50,238 million as of March 31, 2013, up¥13,671 million, or 37.4%, from one year
previously. The primary reason was anincrease in short-term loans payable, whileaccounts receivable and time deposits
declined. Cash flows during the fiscal year
under review and the factors behind thesechanges are described below.

During the fiscal year under review, Group
capital investment totaled ¥5,346 million.
Of this amount, investment in Japan totaled¥943 million, in North America ¥38 million,
in Asia ¥4,364 million and in Europe ¥1
million. This capital investment was mainly
for the expansion of production facilities.
The Group did not dispose of or sell any
major facilities during the year underreview.

Cash flows from operating activities:
Net cash used in operating activities cameto ¥8,023 million, compared with ¥16,416
million provided by these activities in thepreceding fiscal year. Negative income
before income taxes and an increase ininventories were the main reasons.

Cash and cash equvalents, end of year

Cash flows from investing activities:
Net cash provided by investing activities
amounted to ¥12,864 million, comparedwith ¥6,435 million used in these activities
in the previous term. Principal factors
included an increase in the purchase ofproperty, plant and equipment, while
payments into time deposits declined.

Cash flows from financing activities:
Net cash provided by financing activitieswas ¥5,129 million, compared with ¥6,717
million used in these activities one year
earlier. An increase in short-term loans
payable was the primary factor.

25

Business and other risks

Cash flows

Annual Report 2013

( ¥millions )50,23833,745

2011/336,567

2012/3

2013/3Risks that may have a significant impact on
the Group’s financial situation andoperating results are outlined below.
Forward-looking statements in this text are
based on decisions made by the Group asof June 21, 2013.

Funai Group management policy
The Group has adopted a policy ofproviding high-quality, low-cost products to
consumers based upon optimized
production and sales systems on a global
scale. We manufacture and sell our
principal products, such as audiovisualequipment (DVD-related products, LCD TVs,etc.) and information equipment (printers,etc.), in addition to other products(receiver-related electronics, etc.). Pricecompetition in these product areas isintense. Additionally, the life cycle of digitalproducts is short and the competition todevelop new technologies and functions is
also growing more severe. Accordingly,
these factors may affect the Group’s
financial situation and operating results.
Product cost and market prices
The Group’s primary target is customers ofmass merchandisers such as Walmart andtherefore we must deliver low prices.
Consequently, the Group is working to cut
costs through measures such as
establishing production systems in optimal
locations, pursuing further application of
the Funai Production System (FPS), theunique productivity improvement systemdeveloped by Funai, and utilizing internal
production of parts and centralizedpurchasing. However, competition in thehome electronic appliance industry isintense and when the cost of parts and raw
materials rise, cost pressures may affect
the Group’s financial situation andoperating results regardless of the fact that
we have implemented these measures.

New technologies
As the number of digital products in thehome electronic appliance industry
increases and the needs of the market
become more diverse, Funai must
improve the quality, volume and speed of
its new product development. The Group
must be able to respond to such issues
and we will improve our technicalcapabilities, primarily in the digitalproduct area, by collaborating with othercompanies, industry and academia, andthrough personnel training. We also willconsider mergers and acquisitions
among our options. However, adiversification of market needs ortechnological innovation beyond our
expectations may affect the Group’s
financial situation and operating results.
Defects relating to products andservices
The Group efforts to increase quality are
centered on the departments that are
responsible for quality management andtechnologies. In addition, a service platform
consisting of service companies in both
domestic and international markets has
been established. However, if there is a
defect in a product that requires the Groupto respond by repairing or replacing suchproduct, the impact of the warranty and/or
the resultant decrease in corporate
reputation may have negative implications
for the Group’s financial situation andoperating results.
Intellectual property rights
Recent years have seen an increase inactivity by so-called “patent trolls.” Theseare entities that sell no products of theirown, but that attempt to generate income
from patent royalties by filing lawsuits
using intellectual property rights acquired
from third parties.
This is a worrisome trend for allcompanies involved in manufacturing andsales. In the United States, legislation tolimit trolls’ activities is going to besubmitted and is under deliberation.
However, as a result of this trend we
could be compelled to make highcompensation payments that may affect
the Group’s financial situation andoperating results.
Corporate Acquisitions and Business
Alliances
The Group pursues corporate acquisitions
and business alliances as ways to improve
its business portfolio and efficiently bolster
sales and profits. However, in the event
that, for various reasons, the synergies thatare achieved fall short of initial expectations
and affiliate relationships cannot be
maintained, this may affect the Group’s
financial situation and operating results, aswell as growth forecasts.

Impact of overseas market trends
Dependence on the North American
marketA large portion of the Group’s net sales
originates in overseas markets. The North
American market in particular accounted
for 69.4% of net sales in the current
consolidated fiscal year. Should the North
American economy rapidly enter arecession, this may affect the Group’s
financial situation and operating results.
Dependence on Chinese production
The Group is working to improve the costcompetitiveness of its products byconcentrating production in positive
cost-benefit regions and purchasing
parts in bulk. In the current consolidated
fiscal year 98.4% of our products were
produced overseas, with 70.3%
produced under consignment fabrication
and at our own plants in China. Changes
in the Chinese government, the outbreakof conflict or natural disasters or other
unforeseen circumstances may affect theGroup’s financial situation and operating
results.

Foreign currency risk
The Group selects production sites for its
principal products after giving consideration
to optimal production sites and sales
systems. DVD-related products, LCD TVs,and printers are produced in China. LCD
TVs are also manufactured in Europe andThailand.
Funai purchases products fromoverseas subsidiaries in these countries
and sells them in overseas markets,particularly North America, either throughFunai’s overseas sales subsidiaries or
through direct sales to OEM supply
partners. Domestic sales are also
conducted through direct sales and sales
subsidiaries. Purchases from overseas
subsidiaries in these countries accounted
for 85.0% of gross purchases during thecurrent consolidated fiscal year. Likewise,
overseas net sales accounted for 81.3% of
net sales. The majority of our purchasing
and sales are conducted in U.S. dollars. We
believe this reduces the risks that
accompany currency fluctuations.
However, it is impossible tocompletely eliminate foreign currency risk,
and large currency fluctuations may affect
the Group’s financial situation andoperating results.

Other Risks
Statutory regulations
The Group conducts business inaccordance with the laws and regulationsof Japan and other countries. These laws
and regulations pertain to areas such ascommercial transactions, antitrust,intellectual property, product liability,
environmental protection, consumer
protection and financial transactions, andlegislation related to corporate taxation.
Increasingly stringent legislation or thestricter interpretation of existing legislation
could affect the Group’s financial situationand operating results.

Annual Report 201326

Management of information
The Group has in place internal systems toprevent information leaks and protect itself
against viruses. However, factors such as
operational mistakes and the advent of new
virus strains may preclude efforts to avoid
information leaks and system shutdowns
altogether. Such events could affect theGroup’s financial situation and operating
results.
Retirement benefit obligations
The Group and its consolidated domestic
subsidiaries have in place defined benefit
corporate pension systems, and retirement
benefit obligations are based on actuarial
assumptions on pension assets, such asrates of return and discount rates. The
Group’s financial situation and operating
results could be affected if changes inthese assumptions become necessary, if adeterioration in the investment environment
results causes pension assets to decrease,or if changes in the pension system cause
future retirement benefit expenses toincrease.
Deferred tax assets
The Group bases its decisions on therecoverability of deferred tax assets on
various forecasts and assumptions related
to future taxable earnings. If these
forecasts and assumptions about futuretaxable earnings change or if the Group
determines that part or all of its deferred
tax assets cannot be recovered,subsequent reductions in deferred tax
assets could affect the Group’s financial
situation and operating results.

Tax assessment based on the anti-tax
haven system
Funai received a rectification notices
from the Osaka Regional Taxation Bureau
on June 28, 2005, and June 16, 2008. The
Bureau determined that Funai’s Hong Kong
subsidiary does not meet the requirements
27

Annual Report 2013

for exclusion under the anti-tax havensystem and the Hong Kong subsidiary’s
income for the three fiscal years ended
March 31, 2002 through 2004, and thethree years from March 31, 2005 through2007, will be considered, and taxed as,
Funai’s income. Funai objected to this
supplementary tax assessment, and filed
petitions seeking a review of the decision
with the Osaka Regional Tax Tribunal on
July 25, 2006, and August 6, 2008. On
July 3, 2008, and July 23, 2009, we
received written verdicts on this case fromthe Administrative Review Office of the
Osaka Regional Taxation Bureau, whichindicated that our assertions had been
dismissed. On November 16, 2006 andNovember 14, 2008, the Company filed
suits in the Osaka District Court to overturnthe supplementary tax assessment orders,and a hearing for consolidation of thoseactions was filed on November 26, 2008.
The court dismissed the claims of ourCompany on June 24, 2011.
As the Company is unable to accept
the Osaka District Court’s judgment, wefiled a notice of appeal at the Osaka
Superior 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 theappeal with the Supreme Court on August
1, 2012.
The additional taxes of ¥16,651 million(¥19,184 million including incidental taxes)and ¥15,038 million (¥16,838 million
including incidental taxes) include corporate,
enterprise and residence taxes. In accordancewith the “Accounting Practices, Disclosureand Audit Treatment for Various Taxes”(Japanese Institute of Certified Public
Accountants, Auditing and Assurance PracticeCommittee, Audit Committee Report No. 63)
Funai charged the tax assessments to income
as “prior year’s taxes” in the fiscal year ended
March 31, 2007, and the fiscal year ended
March 31, 2009.

Funai received a rectification noticefrom the Osaka Regional Taxation Bureau
on June 29, 2011. The Bureau determinedthat Funai’s Hong Kong subsidiary does notmeet the requirements for exclusion under
the anti-tax haven system and the Hong
Kong subsidiary’s income for the threefiscal years ended March 31, 2008 through2010, will be considered, and taxed as
Funai’s income.
Because the Company objected tothis corrective action, we applied forassessments by the Osaka National Tax
Tribunal on August 25, 2011. On July 18,
2012, we received written verdicts on thiscase indicating that our assertions had
been dismissed. The Company, unable toaccept the verdicts, filed an appeal to havethe action cancelled with the Tokyo District
Court on January 17, 2013.
The additional tax of ¥825 million(¥935 million including incidental taxes)
includes corporate, enterprise andresidence taxes. This amount is charged toincome as “prior year’s taxes” for the year
ended March 31, 2012.
With regard to the actions the Company
filed with the Osaka District Court on June
28, 2005 and June 16, 2008, seeking therescission of supplementary tax
assessments, on June 24, 2011, a decision
was reached in which the court dismissed
the claims of the Company. Accordingly, theCompany determined to treat the amountthat would be affected if the taxation wereapplied in the fiscal year ended March 31,
2011, which is the fiscal year following theyear to which the assessment was applied,
as an expense for the fiscal year ended
March 31, 2012.

Financial Section

Contents

Consolidated Balance Sheet ................................................................ 29
Consolidated Statement of Operations ............................................... 31
Consolidated Statement of Comprehensive Income ........................... 32
Consolidated Statement of Changes in Equity .................................... 32
Consolidated Statement of Cash Flows .............................................. 33
Notes to Consolidated Financial Statements ....................................... 34
Independent Auditor’s Report ............................................................... 52

Annual Report 201328

Consolidated Balance Sheets
FUNAI ELECTRIC CO., LTD. and Consolidated Subsidiaries
March 31, 2013

(Millions of yen)(Thousands of
U.S. dollars)(Note 1)March 31,

March 31,

2013

2012

2013

¥ 50,238¥ 36,567$ 534,447

17,57536,079186,968

Trade (Note 15)

33,19432,296353,128

Other

2,025

1,418

21,543

Allowance for doubtful accounts

(178)

(120)

(1,894)Inventories (Note 4)

55,641

33,963591,925

Deferred tax assets (Note 14)

2,887

2,915

30,713

Prepaid expenses and other current assets

2,961

2,572

31,500164,343

145,690

1,748,330

Land

6,170

5,171

65,638

Buildings and structures

12,332

12,742

131,191

Machinery, equipment and other

30,77832,092

327,426

698

773

7,426

ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 15)
Time deposits (Note 15)
Receivables:

Total current assets
PROPERTY, PLANT AND EQUIPMENT:

Lease assets (Note 13)

1,099

80

11,691

51,07750,858543,372(34,401)(36,073)(365,968)

16,676

14,785

177,404

Investment securities (Notes 6 and 15)

2,900

2,330

30,851

Investments in and advances to unconsolidated subsidiaries and associatedcompanies

3,270

2,440

34,787

Patents (Note 5)

2,079

3,813

22,117

Construction in progress
Total
Accumulated depreciation
Net property, plant and equipment
INVESTMENTS AND OTHER ASSETS:

Long-term loans
Long-term prepaid expenses (Note 5)
Goodwill

223

1,798

1,361

15,6814

1442

Prepaid pension costs (Note 8)

879

887

9,351

Deferred tax assets (Note 14)

437

3,662

4,649

Other assets

2,486

1,700

26,447

Allowance for doubtful accounts

(193)

(298)

(2,053)

13,505

16,132

143,670¥194,524¥176,607$2,069,404

Total investments and other assets
TOTAL
See notes to consolidated financial statements.

29

169
1,474

Annual Report 2013

(Millions of yen)(Thousands of
U.S. dollars)(Note 1)March 31,

March 31,

2013

2012

2013

LIABILITIES AND EQUITYCURRENT LIABILITIES:
Short-term bank borrowings (Notes 7 and 15)¥

12,982

¥

4,550

$

138,106

163

258

1,734

Trade (Note 15)

39,17929,623416,798

Other (Note 15)

Current portion of long-term debt (Notes 7, 13 and 15)
Payables:

11,124

11,158118,341

Income taxes payable (Note 14)

1,691

326

17,989Other current liabilities (Note 14)

4,314

4,140

45,894

Total current liabilities

69,45350,055

738,862

Long-term debt (Notes 7, 13 and 15)

147

281

1,564

Liability for retirement benefits (Note 8)

2,009

2,108

21,372

LONG-TERM LIABILITIES:

4

8

42

1,169

5

12,436

344

306

3,660

3,673

2,708

39,07431,30831,308333,064

33,27233,272353,957

122

107

1,298

101,136

111,385

1,075,915(24,341)(24,341)(258,947)

451

56

4,798

Foreign currency translation adjustments(21,723)(28,918)(231,096)

Total

120,225

122,869

1,278,989

Long-term payables – other
Deferred tax liabilities (Note 14)
Other
Total long-term liabilities
COMMITMENTS AND CONTINGENT LIABILITIES (Notes 13)
EQUITY (Notes 9, 10 and 18):
Common stock:
Authorized, 80,000,000 shares; issued,
36,130,796 shares in 2013 and 2012
Capital surplus
Stock acquisition rights
Retained earnings
Treasury stock – at cost

2,011,615 shares in 2013 and 2,011,607 shares in 2012

Accumulated other comprehensive income (loss):
Unrealized gain on available-for-sale securities

Minority interests

1,173

975

12,479Total equity

121,398

123,844

1,291,468¥194,524¥176,607$2,069,404

TOTAL

Annual Report 201330

Consolidated Statements of Operations
FUNAI ELECTRIC CO., LTD. and Consolidated Subsidiaries
Years Ended March 31, 2013

(Millions of yen)(Thousands of
U.S. dollars)(Note 1)Years ended
March 31,

Years ended
March 31,

2013

2012

2013

NET SALES¥192,008¥246,148$2,042,638

COST OF SALES (Note 12)

163,341

208,780

1,737,670

28,66737,368

304,968

33,94036,906

361,064(5,273)462(56,096)

Interest and dividend income

321

335

3,415

Interest expense

(112)

(127)

(1,191)

Foreign exchange gain (loss) - net

4,691

(379)

49,904Gain on sale or disposal of property, plant and equipment

421

8

4,479

Equity in losses of associates

(70)

(28)

(745)

Loss on sales of investment securities - net (Note 6)

(92)

(311)

(979)

Loss on investments in limited partnership - net

(57)

(136)

(606)

Loss on impairment of investment securities

(413)

(0)

(4,394)

Loss on impairment of long-lived assets (Note 5)(1,614)(397)(17,170)

(313)

12

(3,330)2,762(1,023)29,383(2,511)(561)(26,713)

Current

725

1,386

7,713

Prior years

967

935

10,287

Deferred

4,326

1,618

46,021

6,018

3,939

64,021(8,529)(4,500)(90,734)

(14)

(129)

(149)

¥ (8,543)¥ (4,629)

Gross profit
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Notes 11 and 12)
Operating (loss) income
OTHER INCOME (EXPENSES):

Other – net

Other income (expenses) – net
NET LOSS BEFORE INCOME TAXES AND MINORITY INTERESTSINCOME TAXES (Note 14):

Total income taxes
NET LOSS BEFORE MINORITY INTERESTSMINORITY INTERESTS
NET LOSS(Yen)$(90,883)(U.S. dollars)

PER SHARE OF COMMON STOCK (Notes 2.v and 17):
Basic net loss
Cash dividends applicable to the year
See notes to consolidated financial statements.

31

Annual Report 2013

¥ (250.38)¥ (135.69)

35.00

50.00

$

(2.66)
0.37

Consolidated Statements of Comprehensive Income
FUNAI ELECTRIC CO., LTD. and Consolidated Subsidiaries
Years Ended March 31, 2013

(Millions of yen)(Thousands of
U.S. dollars)(Note 1)Years ended
March 31,

Year ended
March 31,

2013

2012

2013

NET LOSS BEFORE MINORITY INTERESTSOTHER COMPREHENSIVE INCOME (LOSS) (Note 16):
Unrealized gain (loss) on available-for-sale securities
Foreign currency translation adjustments
Share of other comprehensive income (loss) in associates
Total other comprehensive income (loss)¥(8,529)¥(4,500)$(90,734)

396
7,190
33
7,619

(556)
(1,418)(13)(1,987)

4,213
76,489351
81,053COMPREHENSIVE LOSS (Note 16)¥ (910)¥(6,487)$(9,681)TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO (Note 16):
Owners of the parent
Minority interests¥ (953)43¥(6,616)129$(10,138)457

See notes to consolidated financial statements.

Consolidated Statements of Changes in Equity
FUNAI ELECTRIC CO., LTD. and Consolidated Subsidiaries
Years Ended March 31, 2013

(Thousands)(Millions of yen)
Accumulated
other comprehensive income (loss)

BALANCE, APRIL 1, 2011

Number ofshares ofcommon stock
outstanding

Common stock

Capital surplus

Stockacquisitionrights34,112¥31,300¥33,265¥ 88

Net loss
Cash dividends, ¥40.00 per share
Adjustment of retained earnings due tochange in scope of the consolidation
Exercise of stock options
Net change in the year
BALANCE, MARCH 31, 2012
Net loss
Cash dividends, ¥50.00 per share
Purchase of treasury stock
Net change in the year
BALANCE, MARCH 31, 2013

7

8

7

34,11931,30833,27219
107

Retainedearnings¥116,739

Unrealized
gain (loss) on
available-for-sale
Treasury stock
securities¥(24,341)¥612

Foreigncurrencytranslation
adjustments

Total

Minority
interests

Total equity¥(27,487)¥130,176¥1,053¥131,229(4,629)(1,364)(4,629)(1,364)(4,629)(1,364)639(1,431)(28,918)639
15(1,968)122,869

(78)
975

639
15
(2,046)
123,8447,195¥(21,723)(8,543)(1,706)(0)
7,605¥120,225

198¥1,173(8,543)(1,706)(0)
7,803¥121,398

Total

Minority
interests

Total equity

111,385(24,341)(556)
56(8,543)(1,706)(0)34,119¥31,308¥33,27215¥122¥101,136¥(24,341)

395
¥451

(Thousands of U.S. dollars)(Note.1)
Accumulated
other comprehensive income (loss)

BALANCE, MARCH 31, 2012
Net loss
Cash dividends, $0.53 per share
Net change in the year
BALANCE, MARCH 31, 2013

Common stock

Capital surplus

Stockacquisitionrights$333,064$353,957$1,138$333,064$353,957

160$1,298Retainedearnings

Unrealized
gain (loss) on
available-for-sale
Treasury stock
securities$1,184,947 $(258,947)(90,883)(18,149)$1,075,915$(258,947)

Foreigncurrencytranslation
adjustments$596$(307,638)

4,202$4,79876,542$(231,096)$1,307,117 $10,372 $1,317,489(90,883)(90,883)(18,149)(18,149)
80,904
2,107
83,011$1,278,989 $12,479 $1,291,468

See notes to consolidated financial statements.

Annual Report 201332

Consolidated Statements of Cash Flows
FUNAI ELECTRIC CO., LTD. and Consolidated Subsidiaries
Years Ended March 31, 2013

OPERATING ACTIVITIES:Net loss before income taxes and minority interests
Adjustments for:
Income taxes – paid
Prior years' income taxes – paid
Income taxes – refund
Depreciation and amortization
Gain on sale or disposal of property, plant and equipment
Loss on impairment of long-lived assets
Equity in losses of associates
Loss on sales of investment securities – net
Changes in assets and liabilities
Decrease in trade receivable(Increase) Decrease in inventories
Increase in trade payable
Decrease in liability for employees’ retirement benefits
Other – net
Total adjustments
Net cash (used in) provided by operating activities
INVESTING ACTIVITIES:Payments for time deposits
Proceeds from time deposits
Proceeds from sale of property, plant and equipment
Purchases of property, plant and equipment
Purchases of intangible assets
Proceeds from sales of investment securities
Purchases of investment securities
Payments for loans receivable
Proceeds from collection of loans receivable
Other – net
Net cash provided by (used in) investing activities
FINANCING ACTIVITIES:
Increase (decrease) in short-term bank loans – net
Repayments of long-term debt
Purchase of treasury stock
Dividends paid
Other – net
Net cash provided by (used in) financing activities
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND CASH
EQUIVALENTS
NET INCREASE IN CASH AND CASH EQUIVALENTS
INCREASE IN CASH AND CASH EQUIVALENTS FROM NEWLYCONSOLIDATED SUBSIDIARIES, BEGINNING OF YEAR
DECREASE IN CASH AND CASH EQUIVALENTS DUE TO EXCLUSION OF
SUBSIDIARIES FROM CONSOLIDATIONCASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
See notes to consolidated financial statements.

33

Annual Report 2013

(Millions of yen)(Thousands of
U.S. dollars)(Note 1)Years ended
March 31,

Year ended
March 31,

2013

2012

2013

¥ (2,511)

¥

(561)

$ (26,713)(10,745)

684
5,265
(421)
1,614
70
92

(3,578)
(935)
1,353
6,548
(8)
397
28
311

4,389
(15,194)
1,328
(112)
(2,217)(5,512)(8,023)

3,473
9,098
1,087
(316)
(481)
16,977
16,416

46,691(161,638)
14,128(1,192)(23,585)(58,638)(85,351)(59,777)
80,150497(5,384)
(415)
357
(702)
(1,074)85(873)
12,864(96,744)
96,372102(3,608)(2,678)
486
(290)
(4)
11
(82)
(6,435)(635,926)
852,660
5,287(57,277)(4,415)
3,798(7,468)(11,425)904(9,287)
136,851

6,900(5,068)(33)

73,404(1,010)7,277
56,011(4,479)17,170745
979(0)(1,706)(65)
5,129(1,364)(252)(6,717)(0)(18,149)(691)
54,564

3,667
13,637227
3,491

39,011145,075362

34

36,567(669)
33,745

389,010¥50,238¥36,567$534,447

Notes to Consolidated Financial Statements

FUNAI ELECTRIC CO., LTD. and Consolidated Subsidiaries
Years Ended March 31, 2013

1. BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS

The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese
Financial Instruments and Exchange Act and its related accounting regulations and in accordance with accounting principles generally
accepted in Japan (“Japanese GAAP”), which are different in certain respects as to the application and disclosure requirements ofInternational Financial Reporting Standards.
In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated
financial statements issued domestically in order to present them in a form that is more familiar to readers outside Japan. In addition,certain reclassifications have been made to the 2012 consolidated financial statements to conform to the classifications used in 2013.
The consolidated financial statements are stated in Japanese yen, the currency of the country in which Funai Electric Co., Ltd. (the “Company”),
is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience ofreaders outside Japan and have been made at the rate of ¥94 to $1, the approximate rate of exchange at March 31, 2013. Such translations
should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESa. Consolidation—The consolidated financial statements as of March 31, 2013, include the accounts of the Company and its 18 significant(13 in 2012) subsidiaries (together, the “Group”). Funai India Private Limited is included in the scope of consolidation from the fiscal year
under review as it has gained increased importance. Zhong Shan Funai Electron Co., FUNAI CMET Optical Electronics Co., Ltd. and theothers, the subsidiaries incorporated during the fiscal year review, are included in the scope of consolidation.
Under the control or influence concept, those companies over whose operations the Company, directly or indirectly, is able to exercise
control are fully consolidated and those companies over which the Group has the ability to exercise significant influence are accounted
for by the equity method.
In 2013, investments in 1 (1 in 2012) unconsolidated subsidiary and 1 (0 in 2012) associated company are accounted for by the equity
method. CMET FUNAI Optical Electronics Co., Ltd., an affiliate incorporated during the fiscal year under review, is included in the scopeof the equity method.
Investments in the remaining unconsolidated subsidiaries and associated companies are stated at cost. If the equity method of
accounting had been applied to the investments in these companies, the effect on the accompanying consolidated financial statements
would not be material.
All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in
assets resulting from transactions within the Group is also eliminated.
b. Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements—In May 2006,
the Accounting Standards Board of Japan (the “ASBJ”) issued ASBJ Practical Issues Task Force (PITF) No. 18, “Practical Solution on
Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements.” PITF No. 18 prescribes thatthe accounting policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar
circumstances should, in principle, be unified for the preparation of the consolidated financial statements. However, financial statements
prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or the generally accepted
accounting principles in the United States of America tentatively may be used for the consolidation process, except for the following items
that should be adjusted in the consolidation process, so that net income is accounted for in accordance with Japanese GAAP, unlessthey are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions that has been directly
recorded in the equity; (c) expensing capitalized development costs of research and development (R&D); (d) cancellation of the fair value
model accounting for property, plant and equipment and investment properties and incorporation of the cost model accounting; and (e)exclusion of minority interests from net income, if included in net income.
c. Unification of Accounting Policies Applied to Foreign Associated Companies for the Equity Method—In March 2008, the ASBJ
issued ASBJ Statement No. 16, “Accounting Standard for Equity Method of Accounting for Investments.” The new standard requires
adjustments to be made to conform the associate’s accounting policies for similar transactions and events under similar circumstances
to those of the parent company when the associate’s financial statements are used in applying the equity method, unless it is impracticable
to determine such adjustments. In addition, financial statements prepared by foreign associated companies in accordance with either
International Financial Reporting Standards or the generally accepted accounting principles in the United States of America tentatively
may be used in applying the equity method if the following items are adjusted, so that net income is accounted for in accordance withJapanese GAAP, unless they are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions
that has been directly recorded in the equity; (c) expensing capitalized development costs of R&D; (d) cancellation of the fair value modelaccounting for property, plant and equipment and investment properties and incorporation of the cost model accounting; and (e) exclusionof minority interests from net income, if included in net income.
d. Cash Equivalents—Cash equivalents are short-term investments that are readily convertible into cash and exposed to insignificant riskof changes in value.
Cash equivalents include time deposits, certificates of deposit, commercial paper and bond funds, all of which mature or become due
within three months of the date of acquisition.

Annual Report 201334

e. Allowance for Doubtful Accounts—The allowance for doubtful accounts is stated in amounts considered to be appropriate based on
the companies’ past credit loss experience and an evaluation of potential losses in the receivables outstanding.
f. Inventories—Inventories of the Company and its consolidated domestic subsidiaries are mainly stated at the lower of cost, determinedby the average method for finished products and work in process and by the first-in, first-out method for raw materials, or net selling
value.
Inventories of the consolidated foreign subsidiaries are mainly stated at the lower of cost, determined by the first-in, first-out method,or net selling value.
g. Investment Securities—Investment securities are classified and accounted for depending on management’s intent. All investment
securities are classified as available-for-sale securities.
Marketable available-for-sale securities are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported asa separate component of equity.
Non-marketable available-for-sale securities are stated at cost determined by the moving-average method. For other-than-temporary
declines in fair value, investment securities are reduced to net realizable value by a charge to income.
h. Property, Plant and Equipment—Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment of
the Company and its consolidated domestic subsidiaries is computed substantially using the declining-balance method, while thestraight-line method is applied to buildings acquired after April 1, 1998, at rates based on the estimated useful lives of the assets.
Depreciation of property, plant and equipment of consolidated foreign subsidiaries is principally computed using the straight-line method
at rates based on the estimated useful lives of the assets. The range of useful lives is principally from 3 to 50 years for buildings andstructures and from 1 to 20 years for machinery, equipment and other.
Lease assets are depreciated by the straight-line method over the respective lease periods.
(Change in the method of depreciation)
In accordance with the revisions to the Corporate Tax Code, from the fiscal year under review, the Company and some of its consolidated
subsidiaries in Japan switched to the method of depreciation based on the revised Corporate Tax Code for tangible fixed assets acquiredon or after April 1, 2012.
The resultant impact on operating loss, ordinary loss and loss before income taxes and minority interests is minor.
i. Patents—Patents are carried at cost, less accumulated amortization, which is computed using the straight-line method over theestimated useful lives.
j. Goodwil—Cost in excess of the net assets of subsidiaries acquired is amortized on a straight-line basis over 5 years.
k. Intangible Assets—Intangible assets are stated at cost. Amortization of intangible assets of the Company and its consolidated
subsidiaries is computed using the straight-line method. Amortization of software for internal use is computed by the straight-line method
based over the estimated useful life (5 years).
l. Long-Lived Assets—The Group reviews its long-lived assets for impairment whenever events or changes in circumstance indicate thecarrying amount of an asset or asset group may not be recoverable. An impairment loss is recognized if the carrying amount of an asset
or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual dispositionof the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds
its recoverable amount, which is the higher of the sum of the discounted cash flows from the continued use and eventual disposition of
the asset, or the net selling price at disposition.
m. Retirement and Pension Plans—The Company and certain consolidated subsidiaries have non-contributory funded defined benefit
pension plans and unfunded retirement benefit plans for employees. Certain consolidated foreign subsidiaries also have defined
contributed pension plans.
Effective April 1, 2000, the Group adopted a new accounting standard for employees’ retirement benefits and accounted for the liability
for retirement benefits based on the projected benefit obligations and plan assets at the balance sheet date. The total transitional
obligation determined as of April 1, 2000, was charged to income when adopted, except that of a certain domestic subsidiary, which is
being amortized over 15 years.
Actuarial gains or losses are amortized using the straight-line method over a period within the average remaining years of service of theemployees (10 years) starting from the following period. Prior service cost is amortized using the straight line method over a period within
the average remaining years of service of the employees (10 years).
Retirement allowances for directors, corporate auditors and executive officers are recorded as a liability at the amount that would be
required if all directors, corporate auditors and executive officers retired at each balance sheet date.
From starting of the annual period beginning on April 1, 2012, the Company and its domestic consolidated subsidiaries have transferred
their respective retirement benefit plans from the tax-qualified pension plan to defined benefit pension plans. The effect of this transfer on
the consolidated statements of operations is immaterial.

35

Annual Report 2013

n. Asset Retirement Obligations—In March 2008, the ASBJ published ASBJ Statement No. 18, “Accounting Standard for Asset
Retirement Obligations” and ASBJ Guidance No. 21, “Guidance on Accounting Standard for Asset Retirement Obligations.” Under thisaccounting standard, an asset retirement obligation is defined as a legal obligation imposed either by law or contract that results from theacquisition, construction, development and normal operation of a tangible fixed asset and is associated with the retirement of suchtangible fixed asset.
The asset retirement obligation is recognized as the sum of the discounted cash flows required for the future asset retirement and isrecorded in the period in which the obligation is incurred if a reasonable estimate can be made. If a reasonable estimate of the asset retirement
obligation cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when a reasonableestimate of asset retirement obligation can be made. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement
cost is capitalized by increasing the carrying amount of the related fixed asset by the amount of the liability. The asset retirement cost is
subsequently allocated to expense through depreciation over the remaining useful life of the asset. Over time, the liability is accreted to its
present value each period. Any subsequent revisions to the timing or the amount of the original estimate of undiscounted cash flows arereflected as an adjustment to the carrying amount of the liability and the capitalized amount of the related asset retirement cost.
o. Stock Options—In December 2005, the ASBJ issued ASBJ Statement No. 8, “Accounting Standard for Stock Options” and related
guidance. The new standard and guidance are applicable to stock options newly granted on and after May 1, 2006.
This standard requires companies to measure the cost of employee stock options based on the fair value at the date of grant andrecognize compensation expense over the vesting period as consideration for receiving goods or services. The standard also requires
companies to account for stock options granted to non-employees based on the fair value of either the stock option or the goods orservices received.
The Company recognizes compensation expense for stock options granted to directors, corporate auditors, executive officers andemployees based on the fair value at the date of grant and over the vesting period as consideration for receiving goods or services. A
domestic subsidiary also measures options at their intrinsic value if it cannot reliably estimate the fair value. In the consolidated balance
sheets, the stock option is presented as “Stock acquisition right” as a separate component of equity until exercised.
p. R&D Costs—R&D costs are charged to income as incurred.
q. Leases—In March 2007, the ASBJ issued ASBJ Statement No. 13, “Accounting Standard for Lease Transactions,” which revised theprevious accounting standard for lease transactions. The revised accounting standard for lease transactions was effective for fiscal years
beginning on or after April 1, 2008.
Under the previous accounting standard, finance leases that were deemed to transfer ownership of the leased property to the lessee
were capitalized. However, other finance leases were permitted to be accounted for as operating lease transactions if certain “as if
capitalized” information was disclosed in a note to the lessee’s financial statements. The revised accounting standard requires that all
finance lease transactions be capitalized by recognizing lease assets and lease obligations in the balance sheets. In addition, the revised
accounting standard permits leases that existed at the transition date and do not transfer ownership of the leased property to the lessee
to continue to be accounted for as operating lease transactions.
The Group applied the revised accounting standard effective April 1, 2008. In addition, the Group continues to account for leases thatexisted at the transition date and do not transfer ownership of the leased property to the lessee as operating lease transactions.
r. Construction Contracts —In December 2007, the ASBJ issued ASBJ Statement No. 15, “Accounting Standard for Construction
Contracts,” and ASBJ Guidance No. 18, “Guidance on Accounting Standard for Construction Contracts.” Under this accounting standard,
construction revenue and construction costs should be recognized by the percentage-of-completion method if the outcome of aconstruction contract can be estimated reliably. When total construction revenue, total construction costs and the stage of completion of
the contract at the balance sheet date is deemed to be reliably measured, the outcome of a construction contract can be estimatedreliably. If the outcome of a construction contract cannot be reliably estimated, the completed-contract method should be applied. When
it is probable that the total construction costs will exceed total construction revenue, an estimated loss on the contract should be
immediately recognized by providing for a loss on construction contracts.
s. Income Taxes—The provision for income taxes is computed based on the pretax income and included in the consolidated statementsof operations. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes aremeasured by applying currently enacted income tax rates to the temporary differences.
t. Foreign Currency Transactions—All short-term and long-term monetary receivables and payables denominated in foreign currencies
are translated into Japanese yen at the exchange rates at the balance sheet date. The foreign exchange gains and losses from translation
are recognized in the consolidated statements of operations to the extent that they are not hedged by forward exchange contracts.
u. Foreign Currency Financial Statements—The balance sheet accounts of the consolidated foreign subsidiaries are translated into
Japanese yen at the current exchange rate as of the balance sheet date, except for equity, which is translated at the historical rate.
Differences arising from such translation are shown as “Foreign currency translation adjustments” under accumulated othercomprehensive income (loss) as a separate component of equity.
Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the average exchange rate.

Annual Report 201336

v. Per Share Information—Basic net income (loss) per share is computed by dividing net income available to common shareholders by
the weighted-average number of common shares outstanding for the period.
Diluted net income per share reflects the potential dilution that could occur if stock options were exercised into common stock. Diluted
net income per share of common stock assumes full exercise of outstanding warrants.
Cash dividends per share presented in the accompanying consolidated statements of operations are dividends applicable to therespective years, including dividends to be paid after the end of the year.
w. Accounting Changes and Error Corrections—In December 2009, the ASBJ issued ASBJ Statement No. 24, “Accounting Standard
for Accounting Changes and Error Corrections” and ASBJ Guidance No. 24, “Guidance on Accounting Standard for Accounting Changes
and Error Corrections.” Accounting treatments under this standard and guidance are as follows: (1) Changes in Accounting Policies—
When a new accounting policy is applied after revision of an accounting standards, the new policy is applied retrospectively, unless therevised accounting standard includes specific transitional provisions, in which case the entity shall comply with the specific transitional
provisions. (2) Changes in Presentations—When the presentation of financial statements is changed, prior-period financial statements arereclassified in accordance with the new presentation. (3) Changes in Accounting Estimates—A change in an accounting estimate isaccounted for in the period of the change if the change affects that period only and is accounted for prospectively if the change affects
both the period of the change and future periods. (4) Corrections of Prior-Period Errors—When an error in prior-period financial statements
is discovered, those statements are restated.
x. New Accounting Pronouncements
Accounting Standard for Retirement Benefits—On May 17, 2012, the ASBJ issued ASBJ Statement No. 26, “Accounting Standard
for Retirement Benefits” and ASBJ Guidance No. 25, “Guidance on Accounting Standard for Retirement Benefits,” which replaced the
Accounting Standard for Retirement Benefits that had been issued by the Business Accounting Council in 1998 with effective date of April
1, 2000 and the other related practical guidance and followed by partial amendments from time to time through 2009. Major changes are
as follows:(a) Treatment in the balance sheet
Under the current requirements, actuarial gains and losses and past service costs that are yet to be recognized in profit or loss are
not recognized in the balance sheet and the difference between retirement benefit obligations and plan assets (hereinafter, “deficit or
surplus”), adjusted by such unrecognized amounts, is recognized as a liability or asset.
Under the revised accounting standard, actuarial gains and losses and past service costs that are yet to be recognized in profit orloss shall be recognized within equity (accumulated other comprehensive income), after adjusting for tax effects and any resulting
deficit or surplus shall be recognized as a liability (liability for retirement benefits) or asset (asset for retirement benefits).
(b) Treatment in the statement of operations and the statement of comprehensive income
The revised accounting standard does not change how to recognize actuarial gains and losses and past service costs in profit orloss. Those amounts would be recognized in profit or loss over a certain period no longer than the expected average remaining
working lives of the employees. However, actuarial gains and losses and past service costs that arose in the current period and have
not yet been to be recognized in profit or loss shall be included in other comprehensive income and actuarial gains and losses andpast service costs that were recognized in other comprehensive income in prior periods and then recognized in profit or loss in thecurrent period shall be treated as reclassification adjustments.
This accounting standard and guidance are effective for the end of annual periods beginning on or after April 1, 2013, with earlier
application being permitted from the beginning of annual periods beginning on or after April 1, 2013. However, no retrospective
application of this accounting standard to consolidated financial statements in prior periods is required.
The Company expects to apply the revised accounting standard from the end of the annual period beginning on April 1, 2013 andis in the process of measuring the effects of applying the revised accounting standard for the year ending March 31, 2014.

3. Basis of Presenting financial statements

Certain reclassifications have been made to the 2012 financial statements to conform to the classifications used in 2013.
Prior to April 1, 2012, the Gain on sale or disposal of property, plant and equipment was included in the other-net among the other income(expenses) – net section of the operations. During this fiscal year ended March 31, 2013, the amount increased significantly, as suchamount is disclosed separately in the other income (expenses) - net section of the operations as of March 31, 2013. The amount includedin the other-net as of March 31, 2012, was ¥8 million.
Prior to April 1, 2012, the Loss on impairment of investment securities was included in the other-net among the other income (expenses)– net section of the operations. During this fiscal year ended March 31, 2013, the amount increased significantly, as such amount isdisclosed separately in the other income (expenses) - net section of the operations as of March 31, 2013. The amount included in theother-net as of March 31, 2012, was ¥0 million.

37

Annual Report 2013

4. INVENTORIESInventories at March 31, 2013 and 2012, consisted of the following:(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,2013
¥34,547
2,096
18,998¥55,641

Merchandise and finished products
Work in process
Raw materials and supplies
Total

2012
¥22,387
1,571
10,005¥33,9632013$367,521
22,298202,106$591,925

5. LONG-LIVED ASSETS

During the year ended March 31, 2013, the Group recorded losses on impairment in the following asset groups:
Use

LocationType

Idle assets

FUNAI ELECTRIC CO., LTD.
(Daito City, Osaka)

Long-term prepaid expenses, etc.

In principle, the Group groups business assets on the basis of legal units that strive to maintain an ongoing understanding of income
and expenses. The idle assets are grouped by individual asset.
During the year ended March 31, 2013, the Company revised its production model in line with decreasing global demand. As aresult, 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 ($17,170 thousand). 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.

6. INVESTMENT SECURITIESThe costs and aggregate fair values of investment securities at March 31, 2013 and 2012, were as follows:(Millions of yen)March 31, 2013
Securities classified as:
Available-for-sale:
Equity securities
March 31, 2012
Securities classified as:
Available-for-sale:
Equity securities

Cost

Unrealized
gains¥1,287¥1,228

Unrealized
losses

Fair
value

¥453

¥88

¥1,652¥269¥131¥1,366(Thousands of U.S. dollars)

March 31, 2013
Securities classified as:
Available-for-sale:
Equity securities

Cost$13,691

Unrealized
gains

Unrealized
losses$4,819

Fair
value

$936

$17,574

Available-for-sale securities whose fair values are not readily determinable as of March 31, 2013 and 2012, were as follows:(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,2013
Available-for-sale:
Equity securities
Investments in limited partnerships
Total

¥957
291
¥1,248

2012
¥593
371
¥964

2013
$10,181
3,096$13,277

Annual Report 2013

38

The proceeds, realized gains and realized losses of the available-for-sale securities, which were sold during the years ended March
31, 2013 and 2012, were as follows:(Millions of yen)March 31, 2013
Available-for-sale:
Equity securities
Total
March 31, 2012
Available-for-sale:
Equity securities
Total

Realized
gains

Proceeds

Realized
losses

¥348
¥348

¥92
¥92

¥450
¥450

¥3
¥3

¥314
¥314

(Thousands of U.S. dollars)

March 31, 2013
Available-for-sale:
Equity securities
Total

Realized
gains

Proceeds

Realized
losses$3,702$3,702$979$979

The impairment losses on available-for-sale equity securities for the years ended March 31, 2013 and 2012, were ¥413 million ($4,394
thousand) and ¥0 million, respectively.

7. SHORT-TERM BANK LOANS AND LONG TERM DEBT

Short-term bank loans bore interest at annual average rate of 1.6% and 1.8% at March 31, 2013 and 2012, respectively.
Long-term debt at March 31, 2013 and 2012, consisted of the following:

Unsecured loans from banks and other financial institutions
Obligations under finance leases
Total
Less current portionLong-term debt, less current portion

8. RETIREMENT AND PENSION PLANS(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2013
¥
310
¥310
(163)
¥147

2012
¥ 33
506
¥539
(258)
¥281

2013
$
3,298
$3,298(1,734)$1,564The Company and certain consolidated subsidiaries have severance payment plans for employees, directors, corporate auditors andexecutive officers. Under most circumstances, employees terminating their employment are entitled to retirement benefits determinedbased on the rate of pay at the time of termination, years of service and certain other factors. Such retirement benefits are made in theform of a lump-sum severance payment from the Company or from certain consolidated subsidiaries and annuity payments from atrustee. Employees are entitled to larger payments if the termination is involuntary, by retirement at the mandatory retirement age, bydeath, or by voluntary retirement at certain specific ages prior to the mandatory retirement age.
The Company and certain consolidated subsidiaries have non-contributory funded defined benefit pension plans and unfunded retirement
benefit plans for employees. Certain consolidated foreign subsidiaries also have defined contribution pension plans.
The liability for employees’ retirement benefits at March 31, 2013 and 2012, consisted of the following:

39

Annual Report 2013

Projected benefit obligation
Fair value of plan assets
Unrecognized prior service cost
Unrecognized actuarial loss
Unrecognized transitional obligation
Prepaid pension cost
Net liability(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2012
¥8,771(7,289)630(1,401)(559)
887¥1,0392013¥9,258(8,013)521(1,284)
(434)
879
¥ 927

2013
$98,489(85,245)
5,543(13,660)(4,617)9,351$ 9,861

The components of net periodic benefit costs for the years ended March 2013 and 2012, are as follows:

Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized actuarial gain
Amortization of transitional obligation
Net periodic benefit costs(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2013
¥473
155
(133)
(109)
185
125
¥696

2012
¥572
155
(131)
(83)
226
125
¥864

2013
$5,032
1,649(1,415)(1,160)1,968
1,330$7,404

Assumptions used for the years ended March 31, 2013 and 2012, are as follows:
Discount rate
Expected rate of return on plan assets
Amortization period of prior service cost
Recognition period of actuarial gain/loss

2013
1.1~1.4%
1.1~1.4%
10 years
10 years

2012
1.4~2.0%
1.4~2.0%
10 years
10 years

Retirement allowances for directors, corporate auditors and executive officers at March 31, 2013 and 2012, were ¥1,082 million ($11,511
thousand) and ¥1,069 million, respectively, which were included in liability for retirement benefits. Retirement allowances for directors,
corporate auditors and executive officers are paid subject to the approval by the Compensation Committee or at shareholders’ meeting.

9. EQUITY

Japanese companies are subject to the Companies Act of Japan (the “Companies Act”). The significant provisions in the Companies
Act that affect financial and accounting matters are summarized below:(a) Dividends
Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon
resolution at the shareholders’ meeting. For companies that meet certain criteria, such as (1) having a Board of Directors, (2) having theindependent auditors, (3) having the Board of Corporate Auditors and (4) the term of service of the directors is prescribed as one year
rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends
in kind) at any time during the fiscal year if the Company has prescribed so in its articles of incorporation. The Company meets all theabove criteria.
Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of
the Company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase oftreasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after
dividends must be maintained at no less than ¥3 million.

Annual Report 201340

(b) Increases/Decreases and Transfer of Common Stock, Reserve and Surplus
The Companies Act requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component ofretained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon thepayment of such dividends, until the aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock.
Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The
Companies Act also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings canbe transferred among the accounts under certain conditions upon resolution of the shareholders.
(c) Treasury Stock and Treasury Stock Acquisition Rights
The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of theBoard of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders,which is determined by a specific formula. Under the Companies Act, stock acquisition rights are presented as a separate component ofequity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Suchtreasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights.

10. STOCK OPTIONSThe stock options outstanding as of March 31, 2013, are as follows:(The Company)
Stock option

Persons granted

Number ofoptions granted

Date of grant

Exercise price

Exercise period

2003 Stock option

4 directors
313 employees
6 other persons

378,500 shares

July 22, 2003

¥13,646($ 145)

From August 1, 2005
to July 31, 20122004 Stock option

2 directors
293 employees
5 other persons

359,900 shares

July 21, 2004

¥16,167($ 172)

From August 1, 2006
to July 31, 20132004 Stock option

20 employees
1 other person

25,600 shares

August 13, 2004

¥16,836($ 179)From August 1, 2006
to July 31, 20132005 Stock option

2 directors
293 employees
5 other persons

346,400 shares

July 12, 2005

¥12,369($ 132)

From August 1, 2007
to July 31, 20142008 Stock option

1 director officer
10 executive officers
315 employees

431,700 shares

November 20, 2008

¥ 1,609($
17)

From August 1, 2010
to July 31, 2017

Number ofoptions granted

Date of grant

Exercise price

Exercise period(DX ANTENNA CO., LTD.)
Stock option

41

Persons granted2010 Stock option

4 directors
29 employees

152,000 shares

February 13, 2010

¥384
($ 4)

From February 11, 2012
to February 10, 20192011 Stock option

2 directors
39 employees

116,900 shares

May 27, 2011

¥807
($ 9)

From May 27, 2013
to May 26, 2020

Annual Report 2013

The stock option activity is as follows:(The Company)

Year ended March 31, 2011Non-vested
March 31, 2011 – Outstanding
GrantedCanceled
VestedMarch 31, 2012 – Outstanding
VestedMarch 31, 2011 – Outstanding
VestedExercised
Canceled
March 31, 2012 – Outstanding
Year ended March 31, 2012
Non-vested
March 31, 2012 – Outstanding
GrantedCanceled
VestedMarch 31, 2013 – Outstanding
VestedMarch 31, 2012 – Outstanding
VestedExercised
Canceled
March 31, 2013 – Outstanding
Exercise price2003
Stock option(Shares)

2004
Stock option(Shares)

2004
Stock option(Shares)2005
Stock option(Shares)

2008
Stock option(Shares)378,500

359,900

25,600346,400

386,200

Average stock price at exercise
Fair value price at grant date
From August 1, 2010 to July 31, 2017378,500

359,900

25,600346,400

7,200
18,500360,500

378,500

359,900

25,600346,400

360,500

378,500¥13,646($ 145)359,900¥16,167($ 172)25,600¥16,836($ 179)346,400¥12,369($ 132)30,100330,400¥1,609($ 17)
¥
($
¥
($
¥
($
¥
($
¥
($
¥
($
¥
($

From August 1, 2011 to July 31, 2017
From August 1, 2012 to July 31, 2017
From August 1, 2013 to July 31, 2017
From August 1, 2014 to July 31, 2017
From August 1, 2015 to July 31, 2017
From August 1, 2016 to July 31, 2017

440
5)
447
5)
454
5)
458
5)
475
5)
487
5)
510
5)

(DX ANTENNA CO., LTD.)For the year ended March 31, 2011Non-vested
March 31, 2011 – Outstanding
GrantedCanceled
VestedMarch 31, 2012 – Outstanding
VestedMarch 31, 2011 – Outstanding
VestedExercised
Canceled
March 31, 2012 – Outstanding
Year ended March 31, 2012
Non-vested
March 31, 2012 – Outstanding
GrantedCanceled
VestedMarch 31, 2013 – Outstanding
VestedMarch 31, 2012 – Outstanding
VestedExercised
Canceled
March 31, 2013 – Outstanding
March 31, 2013 – Outstanding

2012
Stock option(Shares)

150,000
3,500
146,500

2013
Stock option(Shares)

116,900
5,600
111,300

146,500
146,500
111,300
17,50093,800146,500
24,000122,500
¥384
($ 4)

¥807
($ 9)

Annual Report 2013

42

The Assumption Used to Measure Fair Value(DX ANTENNA CO., LTD.)On February 13, 2010 and May 27, 2011, DX ANTENNA CO., LTD., one of the subsidiaries, granted stock options. As DX ANTENNA
CO., LTD., was a non-public company, the fair unit value of the stock options was measured at their intrinsic value.
The total intrinsic value of the stock options granted on February 13, 2010, for the year ended March 31, 2013, was ¥68 million ($723
thousand). The total intrinsic value of the stock options granted on May 27, 2011, for the year ended March 31, 2013, was ¥12 million($128 thousand).
Estimated Method of Number of Vested Options(The Company)
Estimated number of vested options of the Company is determined based on the historical data.
(DX ANTENNA CO., LTD.)
Estimated number of vested options of DX ANTENNA CO., LTD., is determined based on the actual cancellation data because thenumber of options canceled in the future cannot be reasonably estimated.

11. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the years ended March, 31 2013 and 2012, principally consisted of the following:

Promoting fee
Royalty on patents
Depreciation
Amortization of goodwill
Provision for accrued pension and severance costs(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2013
¥ 991
8,916
1,565
9
359

2012
¥1,961
9,037
1,986
21
467

2013
$10,543
94,851
15,64996
3,819

12. R&D COSTS

R&D costs charged to income were ¥9,383 million ($99,819 thousand) and ¥10,531 million for the years ended March 31, 2013 and2012, respectively.

13. LEASESThe Group leases certain machinery, computer equipment, office space and other assets.
Obligations under finance leases were as follows:

Due within 1 year
Due after 1 year
Total

(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2013
¥ 163
147
¥ 310

2012
¥ 225
281
¥ 506

2013
$ 1,734
1,564$ 3,298

The minimum rental commitments under noncancelable operating leases at March 31, 2013 and 2012, are as follows:

Due within 1 year
Due after 1 year
Total

(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2013
¥ 859
2,185
¥3,0442012¥1,018
2,072¥3,0902013$ 9,138
23,245$32,383

Pro forma information for leased property whose lease inception was before March 31, 2008
ASBJ Statement No. 13, “Accounting Standard for Lease Transactions,” requires that all finance lease transactions be capitalized torecognize lease assets and lease obligations in the balance sheets. However, ASBJ Statement No. 13 permits leases that do not transfer
ownership of the leased property to the lessee and whose lease inception was before March 31, 2008, to be accounted for as operatinglease transactions if certain “as if capitalized” information is disclosed in the notes to the financial statements. The Company applied the
ASBJ Statement No. 13 effective April 1, 2008 and continued to account for such leases as operating lease transactions.

43

Annual Report 2013

Pro forma information for leased property whose lease inception is before March 31, 2013, was as follows:

Acquisition cost
Accumulated depreciation
Net leased property(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2013
¥ 98
97
¥
1

2012
¥ 375
365
¥ 10

2013
$ 1,043
1,032$
11

Obligations under finance leases:

Due within 1 year
Due after 1 year
Total

(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2013
¥
1
¥

1

2012
¥ 10
1
¥ 11

2013
$
11
$

11

Depreciation expense, interest expense and other information under finance leases:

Depreciation expense
Interest expense
Total
Lease payments(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2013
¥ 10
0
¥ 10
¥ 10

2012
¥ 57
1
¥ 58
¥ 61

2013
$ 106
0
$ 106
$ 106

Depreciation expense and interest expense, which are not reflected in the accompanying consolidated statements of operations, arecomputed using the straight line method and the interest method, respectively.

14. INCOME TAXESThe Company and its domestic subsidiaries are subject to Japanese national and local income taxes, which, in the aggregate, resulted ina normal effective statutory tax rate of approximately 38.0% and 40.7% for the years ended March 31, 2013 and 2012.
The tax effects of significant temporary differences and tax loss carryforwards, which resulted in deferred tax assets and liabilities, at March
31, 2013 and 2012, were as follows:

Deferred tax assets:
Liability for retirement benefits
Accounts payable – other
Allowance for doubtful accounts
Accrued employees’ bonuses
Impairment loss on investment securities
Inventories
Intercompany profit
Tax loss carryforwards
Other
Less valuation allowance
Total
Deferred tax liabilities:
Unrealized gain on available-for-sale securities
Prepaid pension cost
Other
Total
Net deferred tax assets(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2013

2012

2013

¥ 718
650
3,792
396
399
807
6
9,659
2,464
(15,885)¥3,006

¥ 752
1,247
3,381
426
253
652
20
9,869
823
(10,176)¥7,247$ 7,638
6,915
40,340
4,213
4,245
8,585
64
102,755
26,213(168,989)$31,979

¥ 243
310
299
¥ 852
¥2,154¥$ 2,585
3,298
3,181$ 9,064$22,915

25
316
335
¥ 676
¥6,571

Annual Report 201344

A reconciliation between the normal effective statutory tax rate and the actual effective tax rates reflected in the accompanying
consolidated statement of operations for the years ended March 31, 2013 and 2012, was not presented because of the net loss for theperiod.
On June 28, 2005 and June 16, 2008, the Company received notices of supplementary tax assessment for additional tax on theincome of its subsidiary in Hong Kong under the tax haven rules for the three financial years ended March 31, 2002 to March 31, 2004
and the three financial years ended March 31, 2005 to March 31, 2007, from the Osaka Regional Taxation Bureau, as the subsidiary inHong Kong did not satisfy the conditions for exemption from the application of tax haven rules. The Company has contested the validity
in court as the Company disagreed with this assessment and considered it to be unacceptable. Therefore, the Company asked the
Osaka National Tax Tribunal to examine the case on July 25, 2006 and again on August 6, 2008. Thereafter, the Company received
written verdicts on this case on July 3, 2008 and July 23, 2009, indicating that its assertions had been dismissed. The Company broughta case for the cancellation of the notice to the Osaka District Court on November 16, 2006 and again on November 14, 2008 and thesecases had been consolidated and held since November 26, 2008. The court dismissed the claims of the Company on June 24, 2011.
Thereafter, as the Company did not accept the Osaka District Court’s judgment, the Company 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 the Company. 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 assessments were ¥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. They were recognized as “INCOME
TAXES – Prior years” for the fiscal years ended March 31, 2007 and 2009 in accordance with the “Treatment of Accounting and Presentationof Taxes for the Purpose of Audits” (JICPA Audit and Assurance Practice Committee Report No. 63).
On June 29, 2011, the Company received notices of supplementary tax assessment for additional tax on the income of its subsidiaryin Hong Kong under the tax haven rules for the three financial years ended March 31, 2008 to March 31, 2010 from the Osaka Regional
Taxation Bureau, as the subsidiary in Hong Kong did not satisfy the conditions for exemption from the application of tax haven rules. The
Company has contested the validity in court as the Company disagreed with this assessment and considered it to be unacceptable.
Therefore, the Company asked the Osaka National Tax Tribunal to examine the case on August 25, 2011. On July 18, 2012, the Company
received written verdicts on this case indicating that its assertions had been dismissed. The Company, unable to accept the verdicts,
filed an appeal to have the action canceled with the Tokyo District Court on January 17, 2013.
The additional tax assessments were ¥825 million (¥935 million including incidental taxes), including corporate income taxes, inhabitanttaxes and enterprise taxes. They were recognized as “INCOME TAXES – Prior years” for the year ended March 31, 2012.
The cases that were brought to the Osaka District Court by the Company on June 28, 2005 and June 16, 2008, were dismissed onJune 24, 2011. Accordingly, the Company has been accounting at an amount that was estimated based on an assumption that theCompany had been applying the tax haven rules for expenses from the fiscal year ended March 31, 2011, which is the fiscal year following
the year when the assessment was applied, as an expense from the fiscal year ended March 31, 2012.

15. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES
1. The Situation of Financial Instruments(1) Group Policy for Financial Instruments
The Group uses bank loans for fund-raising and short-term deposits to fund operations. The Group does not use derivatives. In
principle, derivatives are not permitted.
(2) Nature and Extent of Risks Arising from Financial Instruments and Risk Management for Financial Instruments
Receivables, such as trade notes and trade accounts, are exposed to customer credit risk.
To avoid such a risk, the Group sets up sales management regulations and determines trading conditions and credit limit by eachcustomer.
The Company has many receivables and payables based on foreign currencies due to its overseas operations. Basically, the Group
does not make forward foreign currency contracts because of its U.S. dollar basis trading.
Investment securities, mainly equity instruments, are exposed to the market risk. Marketable and investment securities are managedby monitoring market values and financial position of issuers on a regular basis. This risk should be reported to investment committee
internally.
Payment terms of payables, such as trade notes and trade accounts, are less than one year.
Loans, both short-term and long-term, are financed for sales operations. Basically, derivatives are not permitted. Although the variableinterest rates of loans are exposed to market risks, those risks may be mitigated by using interest rate swap derivatives. This derivativetransaction should be executed and managed by corporate regulations. To decrease credit risks, the Group enters into relationships withhighly rated financial institutions only.
Trade credit and loans are exposed to liquidity risks. The Group manages these risks by having the associated companies makemonthly financial plans.

45

Annual Report 2013

2. Fair Value of Financial Instruments
Fair values of financial instruments are based on quoted prices in active markets. If quoted prices are not available, another rational
valuation technique is used instead. The list below does not contain financial instruments for which fair values are difficult to determine.
(a) Fair value of financial instruments(Millions of yen)March 31, 2013
Cash and cash equivalents
Time deposits
Receivables trade
Investment securities
Total
Short-term bank loans (excluding finance lease obligation)
Payables trade
Payables other
Long-term debt (excluding finance lease obligation)
Total
March 31, 2012
Cash and cash equivalents
Time deposits
Receivables trade
Investment securities
Total
Short-term bank loans (excluding finance lease obligation)
Payables trade
Payables other
Long-term debt (excluding finance lease obligation)
Total

Carrying
amountFair
value¥ 50,238
17,57533,194
1,652¥102,659¥ 50,238
17,57533,194
1,652¥102,659¥ 12,982
39,17911,124¥ 12,982
39,17911,124¥ 63,285¥ 63,285¥ 36,567
36,07932,296
1,366¥106,308¥ 36,567
36,07932,296
1,366¥106,308

¥

¥

4,583
29,623
11,158¥ 45,364

Unrealized
gain/loss

4,583
29,623
11,158¥ 45,364(Thousands of U.S. dollars)

March 31, 2013
Cash and cash equivalents
Time deposits
Receivables trade
Investment securities
Total

Carrying
amountFair
value$ 534,447
186,968
353,128
17,574$1,092,117$ 534,447
186,968
353,128
17,574$1,092,117

Short-term bank loans (excluding finance lease obligation)
Payables trade
Payables otherTotal$ 138,106
416,798
118,341$ 673,245$ 138,106
416,798
118,341$ 673,245

Unrealized
gain/loss

AssetsCash and cash equivalents, time deposits and receivables trade
The carrying values of cash and cash equivalents, time deposits and receivables trade approximate fair values because of their shortmaturities.
Investment securities
The investment securities are measured at the quoted market prices on the stock exchange for the equity instruments.
Liabilities
Short-term bank loans, payables trade and payables other
The carrying value of short-term bank loans and payables approximate fair value because of their short maturities.
Long-term debt
The carrying value of long-term debt approximates the fair value because loans based on floating rates reflect market interest rates overa short period of time, as long as the credit standing of the Group does not change significantly from the time of borrowing.
Derivatives
Not applicable because derivatives are not permitted.

Annual Report 201346

(b) Financial instruments whose fair values cannot be reliably determined(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2012

2013
Investments in equity instruments and investment in limited
partnerships that do not have a quoted market price in an active market¥ 964¥1,2482013$13,277(c) Maturity analysis for financial assets and securities with contractual maturities(Millions of yen)Due in1 yearor less

March 31, 2013
Cash and cash equivalents
Time deposits
Receivables trade
Total¥ 50,238
17,57533,194¥101,007

March 31, 2012
Cash and cash equivalents
Time deposits
Receivables trade
Total¥ 36,567
36,07932,296¥104,942

Due after
1 yearthrough
5 years

Due after
5 years
through
10 years

Due after
10 years(Thousands of U.S. dollars)

March 31, 2013
Cash and cash equivalents
Time deposits
Receivables trade
Total

Due in1 yearor less

Due after
1 yearthrough
5 years

Due after
5 years
through
10 years

Due after
10 years$ 534,447
186,968
353,128$1,074,543

Please see Note 13 for obligations under finance leases.

16. COMPREHENSIVE INCOME

The components of other comprehensive income for the years ended March 31, 2013 and 2012, were as follows:(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2013

47

2012

2013

Unrealized gain (loss) on available-for-sale securities:
Gain (loss) arising during the year
Reclassification adjustments to profit or loss
Amount before income tax effect
Income tax effect
Total

¥ 201
413
614
(218)
¥ 396

¥(1,388)
445
(943)
387
¥ (556)$ 2,138
4,394
6,532(2,319)$ 4,213

Foreign currency translation adjustments:
Adjustments arising during the year
Total

¥7,190¥7,190¥(1,418)¥(1,418)$76,489$76,489

Share of other comprehensive income (loss) in associates:
Loss arising during the year
Total
Total other comprehensive loss

¥ 33
¥ 33
¥7,619¥ (13)¥ (13)¥(1,987)$351$351$81,053

Annual Report 2013

17. NET INCOME PER SHARE

Information on basic net loss per share (“EPS”) for the years ended March 31, 2013 and 2012, were as follows:
Millions of yen
Net Loss

For the year ended March 31, 2013:
Basic EPS
Net loss available to common shareholders
For the year ended March 31, 2012:
Basic EPS
Net loss available to common shareholders

Thousands ofshares
WeightedAverage
SharesYen

Dollars
EPS¥(8,543)

34,119¥(250.38)¥(4,629)

34,114¥(135.69)$(2.66)

Diluted net income per share in 2013 and 2012 are not disclosed due to the loss positions.

18. SUBSEQUENT EVENT(1) Appropriations of Retained Earnings
The following appropriation of retained earnings at March 31, 2013, was approved at meeting of the Company’s Board of Directors held on
May 20, 2013:(Millions of yen)(Thousands of
U.S. dollars)¥1,194$12,702

Year-end cash dividends, ¥35.00 ($0.37) per share(2) 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 anagreement with Lexmark International, Inc. (head office: 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”).
(a) 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 that have long been marketed by Lexmark
globally (specifically, in North America), as well as product developing functions and technologies and manufacturing functions andtechnologies, enables the Company to start and grow its own ink-jet business, including manufacture and sale 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 a result, the Company believes the Group will be able to expand its business going forward sustainably.
(b) Name of the counterparty
Lexmark International, Inc.
(c) 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 manufacturing subsidiary 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.
(d) Legal form of business combinations
Acquisition of patents, development facilities and manufacturing subsidiary’s shares(e) Schedule:(1) Conclusion of agreements

April 2, 2013

(2) Acquisition date

April 30, 2013

Annual Report 201348

19. SEGMENT INFORMATION

Under ASBJ Statement No. 17, “Accounting Standard for Segment Information Disclosures” and ASBJ Guidance No. 20, “Guidanceon Accounting Standard for Segment Information Disclosures,” an entity is required to report financial and descriptive information about
its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified
criteria. Operating segments are components of an entity about which separate financial information is available and such information isevaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally,
segment information is required to be reported on the same basis as is used internally for evaluating operating segment performance anddeciding how to allocate resources to operating segments.

(1) Description of Reportable Segments
The Group’s reportable segments are those for which separate financial information is available and regular evaluation by the Company’s
management is being performed in order to decide how resources are allocated among the Group. The Group is engaged in the
manufacture and sale of consumer electronics products. The reportable segments of the Group are composed of four segments:“Japan,” “North America,” “Asia” and “Europe,” which consist of geographic segments based on the manufacturing and sales
operations.
Those areas, Japan, North America, Asia and Europe, are mainly covered by the Company and DX ANTENNA CO., LTD., FUNAICORPORATION, INC. and P&F USA, INC., FUNAI ELECTRIC (H.K.) LTD. and FUNAI ELECTRIC EUROPE Sp.zo.o., respectively. Each
local entity sets up and carries out its own strategy as a single business unit.
(2) Methods of Measurement for the Amounts of Sales, Profit (Loss), Assets and Other Items for Each Reportable Segment
The accounting policies of each reportable segment are consistent with those disclosed in Note 2, “Summary of Significant Accounting
Policies.” Intersegment sales are based on arm’s-length price.

49

Annual Report 2013

(3) Information about Sales, Profit (Loss), Assets and Other Items:(Millions of yen)

2013
North
AmericaJapan

Sales:
Sales to external customers
Intersegment sales or transfers
Total
Segment (loss) profit (Note.2)
Segment assets
Other
Depreciation
Amortization of goodwill
Investment in equity method affiliate
Increase in property, plant and equipment andintangible assets
Impairment losses of assets

Asia

EuropeTotal

Reconciliations(Note.1)

Consolidated¥51,678
120,863¥172,541¥(4,295)¥108,875¥136,165
0¥136,165¥ 1,529¥ 55,362¥812
133,492¥134,304¥(491)¥ 66,697¥3,3530¥3,353¥ (390)¥4,382¥192,008
254,355¥446,363¥(3,647)¥235,316¥(254,355)¥(254,355)¥ (1,626)¥ (40,792)¥192,008

¥

¥

¥

¥

¥

¥

¥

1,797
9
71

87

3,320

61

222

1,318
1,614

38

4,373

5

5,265
9
293
5,734
1,614

¥192,008¥ (5,273)¥194,524

(5)

5,265
9
293
5,729
1,614

(Millions of yen)
2012
North
AmericaJapan

Sales:
Sales to external customers
Intersegment sales or transfers
Total
Segment profit (loss) (Note.2)
Segment assets
Other
Depreciation
Amortization of goodwill
Investment in equity method affiliate
Increase in property, plant and equipment andintangible assets
Impairment losses of assets

Asia

EuropeTotal

Reconciliations(Note.1)

Consolidated¥111,871
112,132¥224,003¥ 4,690¥111,957¥124,1270¥124,127¥ (1,344)¥ 35,895¥4,717
160,758¥165,475¥426¥ 77,704¥5,433
5¥5,438¥(1,530)¥4,286¥246,148
272,895¥519,043¥2,242¥229,842¥¥246,148(272,895)¥(272,895)¥ (1,780)¥ (53,235)¥246,148¥462¥176,607

¥

¥

¥

¥ 106

¥

¥

¥

2,421
21

109

3,914
231

3,523
397

23

3,171

20

6,550
21
231
6,737
397

(2)

(128)

6,548
21
231
6,609
397

(Thousands of U.S. dollars)

2013

Sales:
Sales to external customers
Intersegment sales or transfers
Total
Segment (loss) profit (Note.2)
Segment assets
Other
Depreciation
Amortization of goodwill
Investment in equity method affiliate
Increase in property, plant and equipment andintangible assets
Impairment losses of assets

Japan

North
AmericaAsia$ 549,766
1,285,777$1,835,543$(45,692)$1,158,245$1,448,564
0$1,448,564$
16,266$ 588,957$
8,638
1,420,128$1,428,766$(5,223)$ 709,543$$$

19,11796755
14,021
17,170926

35,319Reconciliations(Note.1)

Consolidated$35,670
0$35,670$ (4,149)$46,617$2,042,638 $
2,705,905(2,705,905)$4,748,543 $(2,705,905)$ (38,798) $ (17,298)$2,503,362 $ (433,958)$2,042,638$2,042,638$ (56,096)$2,069,404

$

$

$

Europe

Total

649

2,362
405

46,521

53-

56,01196
3,117
61,00017,170$-(53)

56,01196
3,117
60,947
17,170

Annual Report 201350

Note.1 Components of reconciliation are as follows:(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,

2012
¥ 10
(948)
(842)
¥(1,780)

2013
¥
(1)
(886)
(739)
¥(1,626)

Segment (loss) profit
Elimination of intersegment transactions
Company-wide expenses(*1)
Adjustment of inventory
Total(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,2012
¥ 27,148(958)(79,425)¥(53,235)

2013¥ 37,615(1,698)(76,709)¥(40,792)

Segment assets
Company-wide assets
Adjustment of inventory
Elimination of intersegment assets and liabilities, etc.
Total

2013
$
(11)
(9,425)(7,862)$(17,298)2013$ 400,160(18,064)(816,053)$(433,957)(*1) Company-wide expenses are mainly general and administrative expenses not attributable to any reportable segments.
(*2)	Company-wide asset mainly consists of cash surplus (cash and deposits) and long-term-investments (investment securities, etc.) that are not attributable to any
reportable segments.

Note.2 Segment profit (loss) is adjusted to operating income in consolidated statements of operations.
(4) Related Information
1. Information about product or service(Millions of yen)

2013
Audiovisualequipment

Sales to external customers

Informationequipment¥155,686

Other

Total

¥24,356¥192,008¥11,966(Millions of yen)

2012
Audiovisualequipment

Sales to external customers

Informationequipment¥183,507¥30,014

Other

Total

¥32,627¥246,148(Thousands of U.S. dollars)

2013
Audiovisualequipment

Sales to external customers

Informationequipment$1,656,234

Other$127,298$259,106

Total$2,042,638

2. Information about geographical areasa. Sales(Millions of yen)

2013
North America
Japan¥35,865

USA

Other

¥127,327

Asia¥5,982¥3,542Europe¥6,201

Other¥13,091

Total¥192,008(Millions of yen)

2012
North AmericaJapan¥81,291

USA

Other

¥127,989

Asia¥6,123¥9,290Europe¥12,592

Other¥8,863

Total¥246,148(Thousands of U.S. dollars)

2013
North AmericaJapan$381,542

USA$1,354,543

Other$63,638

Asia$37,681Note: Sales are classified in countries or regions based on location of customers.

51

Annual Report 2013

Europe$65,968

Other

Total

$139,266$2,042,638

b. Property, plant and equipment(Millions of yen)

2013
Asia
Japan

North America¥9,694China¥96

Thailand¥1,966Other¥2,440Europe¥1,032

Total¥1,448¥16,676(Millions of yen)

2012
Asia
Japan

¥9,473

China

North America

Other¥2,570¥106

Europe¥1,203

Total¥1,433¥14,785(Thousands of U.S. dollars)

2013
Asia
Japan

$103,128

North America

China$1,021Thailand$20,915

Other$25,957

Europe$10,979

Total$15,404$177,404

3. Information about major customer
Sales(Thousands of
U.S. dollars)(Millions of yen)

2013
¥93,918

Name of Customer
WAL-MART STORES, INC.

2012
¥82,791

2013$999,128

Related Segment Name
North America(5) Goodwill by Reportable Segment(Millions of yen)

2013
North
AmericaJapan

Amortization of goodwill
Goodwill at March 31, 2013

Asia

EuropeElimination

Total

¥ 9
4

¥ 9
4
(Millions of yen)

2012
North
AmericaJapan

Amortization of goodwill
Goodwill at March 31, 2012

Asia

EuropeElimination

Total

¥21
14

¥21
14
(Thousands of U.S. dollars)

2013
North
AmericaJapan

Amortization of goodwill
Goodwill at March 31, 2013

Asia

EuropeElimination

$96
42

Total

$96
42

20. RELATED PARTY TRANSACTIONSTransactions of the Company with officer for the year ended March 31, 2013, were as follows:Type

Director

Name

Tetsuro Funai

Voting rights held by theCompany (or held byothers)(Direct, 37.25%)

RelationshipSale of land andbuilding
Sale of shares

Transaction

Sale of land andbuilding
Gain on sale of landand building
Sale of shares

Amount(Millions of yen)Amount(Thousands of
U.S. dollars)¥380$4,043¥331$3,521¥300$3,191(Notes) Transaction terms and policies on the determination of transaction terms, etc.:
1. Selling prices of land and buildings are determined by reference to appraisal values by real estate appraisers.
2. Selling prices of shares, in case of a sale and purchase of unlisted shares, are determined upon mutual consultation.

Annual Report 201352

21. ADDITIONAL INFORMATION(Acquisition of a Company by Acquisition of Shares)
The Company, pursuant to the resolution adopted at the meeting of its Board of Directors held on January 24, 2013, determined on
January 29, 2013, to acquire from Royal Philips Electronics (head office: the Netherlands, NYSE: PHG, AEX: PHIA; hereinafter, “Philips”)
all the shares of a company (the “New Company”) assuming operations (the “Operation”) of Philips’ Lifestyle Entertainment business (seeNote) and entered into a share purchase agreement 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, portable audio,
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 LifestyleEntertainment business. In addition, as part of the Transaction, it has been agreed that businesses related to the development anddesign and manufacture 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 responsibility for the sourcing, distribution,marketing and sales activities of Philips consumer televisions in the United States and Canada. Following this, in July 2012, the Company
entered into an agreement with Philips involving the sale in the United States, Canada and Mexico of products that Philips designed anddeveloped 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 business alliances and merger and acquisition activities withother 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 other emerging 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’sbusiness.
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:
Development and design, sale and (partial) manufacture of products in the Operation
Note: 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 placeat present
4. 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 the UnitedStates, Germany, Ukraine, Russia, Poland, Turkey and Taiwan.

53

Annual Report 2013

5. Number of shares acquired, acquisition price and shareholding ratio after the acquisition(1) Ratio of the number of shares held to the number of sharesissued prior to transfer-%(Ratio of voting rights: - %)(2) R atio of the number of shares acquired to the number ofshares issued

100.0%(3) A cquisition 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) R atio of the number of shares held to the number of sharesissued 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 based on 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 for the 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.

Annual Report 201354

Independent Auditors’ Report55

Annual Report 2013

Corporate Data

OutlineName
Established
Head office
Phone
Fax
URL
CapitalNet Sales
Employees
Category

Major Business Operations

FUNAI ELECTRIC CO., LTD.
August 1961
7-7-1 Nakagaito, Daito,
Osaka 574-0013, Japan+81-72-870-4303+81-72-871-1112
http://www.funaiworld.com/¥31,307 million (March 31, 2013)¥192,008 million(Year ended March 31, 2013)
1,032(March 31, 2013 / Non-Consolidated)
Electrical Equipment

Display Business
LCD TVs
Digital Media Business
DVD Players / Recorders
Blu-ray Disc Players / Recorders
Office Solutions Business
Printers
Others Business
Audio accessories
Antennas

History
Aug. 1961 FUNAI ELECTRIC CO., LTD. was established in Ikuno-ku, Osaka capitalized at ¥20 million.
Mar. 1964	CHUGOKU FUNAI ELECTRIC CO., LTD. was established as a production subsidiary in Fukayasu-gun (nowFukuyama), Hiroshima.
Sep. 1976 The head office was relocated to Daito, Osaka.
May 1991 FUNAI CORPORATION, INC. was established as a sales subsidiary in New Jersey, U.S.
Mar. 1992	HIGHSONIC INDUSTRIAL LTD. (now FUNAI ELECTRIC (H.K.), LTD.) was established in Hong Kong, China.
Jan. 1996 FUNAI SERVICE CO., LTD. was established as a service subsidiary in Higashi-Osaka, Osaka.
May 1996	HIGHSONIC INDUSTRIAL LTD. (now FUNAI ELECTRIC (H.K.), LTD.) established H.F.T. INDUSTRIAL LTD. by joint
investment with a Japan company.
Feb. 1999 FUNAI ELECTRIC CO., LTD. was listed on the Second Section of Osaka Securities Exchange.
Mar. 2000	FUNAI ELECTRIC CO., LTD. was listed on the First Section of Tokyo Stock Exchange and the First Section of
Osaka Securities Exchange.
Nov. 2001 Acquired the majority stocks of DX ANTENNA CO., LTD. in Japan.
July. 2003	FUNAI (THAILAND) CO., LTD. was established as a production subsidiary in Nakornratchasima, Kingdom ofThailand.
Dec. 2003	HUANG JIANG PLANT in Dongguan City, Guangdong Province started operations as a consignment production
plant in China.
Apr. 2004 FUNAI ELECTRIC ADVANCED APPLIED TECHNOLOGY RESEARCH INSTITUTE INC. was established.
Oct. 2006	FUNAI ELECTRIC (POLSKA) Sp. z o.o. (now FUNAI ELECTRIC EUROPE Sp. z o.o.) was established as a
production subsidiary in the city of Nowa Sol, Poland.
Oct. 2007 FUNAI SERVICE CORPORATION was established as a service subsidiary in Ohio, U.S.
Jun. 2008	P&F USA, Inc. was established as a sales subsidiary in Georgia, U.S., for PHILIPS brand consumer TVs. Tetsuro
Funai, President and CEO, assumed the post of Chairman. Tomonori Hayashi, Senior Executive Officer, assumed
the post of President and CEO.
Apr. 2009 P&F MEXICANA, S.A. DE C.V. was established as a sales subsidiary in Mexico.
Feb. 2012 Funai India Private Limited was established as a sales subsidiary in Mumbai, India.
Jun. 2012 Zhong Shan Funai Electron Co. was established as a production subsidiary in Guangdong Province, China.
Apr. 2013 Acquired FUNAI ELECTRIC CEBU, INC. (the former Lexmark International (Philippines), Inc.) from Lexmark.

Annual Report 201356

7-7-1 Nakagaito, Daito, Osaka 574-0013, Japan
Phone +81-72-870-4303 Fax +81-72-871-1112
http://www.funaiworld.com/