YUHO REPORT
AnnualFiscal Year Ended

March 31, 2006

TradedTSE1Stock Code6419

MARS ENGINEERING CORPORATIONYUHOREPORTMars Engineering Corporation

Fiscal Year Ended

March 31, 2006

TradedTSE1Stock Code

6419

MARS

ENGINEERING

CORP ORATI ON

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

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

BUSINESS OVERVIEW ........................................................................................................5
Description of business .....................................................................................................................................5Group companies..............................................................................................................................................5
History ...............................................................................................................................................................6
Risk factors .......................................................................................................................................................7
Research and development ..............................................................................................................................7
Important agreements with third parties............................................................................................................9
Analysis of financial condition and results of operations ..................................................................................9
Corporate governance ....................................................................................................................................11
Directors ..........................................................................................................................................................14
Employees ......................................................................................................................................................14
Union ...............................................................................................................................................................14
Stock option plan.............................................................................................................................................15

CASH FLOWS ....................................................................................................................16
Consolidated statement of cash flows ............................................................................................................16
Capital expenditures .......................................................................................................................................17
Dividend policy ................................................................................................................................................18

OPERATIONS .....................................................................................................................19
Consolidated statement of income..................................................................................................................19
Consolidated statement of retained earnings .................................................................................................20
Results of operations ......................................................................................................................................20
Issues requiring action ....................................................................................................................................24
Production and sales.......................................................................................................................................24
Leases.............................................................................................................................................................26

CAPITAL STRUCTURE ......................................................................................................29
Consolidated balance sheet............................................................................................................................29
Market value of securities ...............................................................................................................................31
Facilities ..........................................................................................................................................................33
Borrowings ......................................................................................................................................................34
Retirement benefits .........................................................................................................................................34
Deferred taxes.................................................................................................................................................35

NONCONSOLIDATED FINANCIAL STATEMENTS...........................................................36
Nonconsolidated statement of income............................................................................................................36
Nonconsolidated appropriation of retained earnings ......................................................................................38
Cost of goods sold ..........................................................................................................................................38
Nonconsolidated balance sheet......................................................................................................................39
Trade credits ...................................................................................................................................................42
Securities ........................................................................................................................................................43
Tangible fixed assets ......................................................................................................................................44
Reserves .........................................................................................................................................................44

ACCOUNTING POLICIES...................................................................................................45
SHARE-RELATED INFORMATION....................................................................................47
YUHOREPORT is a trademark of Pacific Associates and Asia Securities Printing.
The translation is copyrighted by Pacific Associates.

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

2006

Change2006/2002

Net sales

21,404,851 24,959,669 30,723,810 35,208,425 33,703,740

157%

Ordinary profit

5,958,626

5,521,514

8,263,972 10,587,915

8,586,209

144%

Net income (loss)

3,030,640(714,837)

4,240,475

4,353,043

144%

Shareholders' equity

26,446,783 25,030,579 28,987,920 34,108,043 33,091,859

125%

Total assets

39,879,762 38,699,119 45,280,360 49,668,130 46,146,327

116%

2002

2003

2004

2005

Consolidated

6,063,611

Shareholders' equity per share (Yen)

2,328.08

2,197.95

2,543.34

1,496.61

1,541.67

Net income (loss) per share (Yen)

266.78(68.38)364.85262.25191.04

Net income per share, fully diluted (Yen)

-

-

-

-

190.56

Net cash provided by (used in) operating
activities

4,158,507

1,853,845

8,948,394

6,394,301

3,124,818

Net cash provided by (used in) investing
activities(1,286,444) (1,030,841)(823,020) (1,082,945) (1,489,009)

Net cash provided by (used in) financing
activities(2,043,303)

1,343,337(873,677) (1,226,356) (6,343,292)

Cash and cash equivalents, end of term

6,513,699

8,680,028 15,931,724 19,787,424 15,079,940

Employees

483

510

520

543

574

75%

232%
119%

The Company conducted a 2-for-1 stock split with a recording date of September 17, 2004. Calculations of shareholders' equity per shareand net income (loss) per share for the fiscal year ended March 2005 assume that the split occurred at the beginning of the year.

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Common size statements
Years ended March 31; Percent

2004

Consolidated
2005
2006

2004

Parent2005

2006

Balance sheet
Assets

100.0

100.0

100.0

100.0

100.0

100.0

Current assets

71.1

74.5

72.0

68.7

73.3

64.6

Tangible fixed assets

23.2

20.8

20.8

16.5

14.8

13.1

Intangible fixed assets

0.2

0.3

0.3

0.2

0.5

0.5

Investments and other assets

5.5

4.4

6.9

14.6

11.4

21.8

Total fixed assets

28.9

25.5

28.0

31.3

26.7

35.4

Liabilities and shareholders' equity

100.0

100.0

100.0

100.0

100.0

100.0

Current liabilities

27.8

24.9

20.8

16.6

15.6

12.7

Long-term liabilities

7.4

5.4

6.1

2.3

1.5

2.0

Total liabilities

35.2

30.3

26.9

18.9

17.1

14.7

Minority interests

0.8

1.0

1.4

Common stock

17.5

16.0

17.2

22.6

20.6

22.8

Capital reserves

18.5

16.9

18.2

23.9

21.7

24.1

Retained earnings

27.5

35.3

44.7

34.0

39.9

49.5

Unrealized gains or losses on other securities

0.5

0.5

0.8

0.6

0.7

1.1

Treasury stock

(0.0)

(0.0)

(9.2)

(0.0)

(0.0)

(12.2)

Total shareholders' equity

64.0

68.7

71.7

81.1

82.9

85.3

Net sales

100.0

100.0

100.0

100.0

100.0

100.0

Cost of sales

53.7

52.2

54.8

56.2

54.1

57.0

Gross profit

46.3

47.8

45.2

43.8

45.9

43.0

Selling, general and administrative expenses

19.7

18.0

20.0

20.5

19.4

22.0

Operating income

26.6

29.8

25.2

23.3

26.5

21.0

Nonoperating income

0.4

0.3

0.3

0.5

0.5

0.8

Nonoperating expenses

0.1

0.0

0.0

0.0

0.0

0.0

Ordinary profit

26.9

30.1

25.5

23.8

27.0

21.8

Extraordinary income

0.0

-

0.4

0.0

0.0

0.5

Extraordinary losses

2.4

0.6

3.2

2.9

1.0

4.0

Income before taxes and other adjustments

24.5

29.5

22.7

20.9

26.0

18.3

10.2

11.7

9.2

8.9

10.6

7.5

Minority interest in income of consolidated
companies

0.5

0.6

0.6

Net income

13.8

17.2

12.9

12.0

15.4

10.8

Statement of income

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

Group companies
Name

Operations

Common stock,
Millions of yen

Percent
ownership(Consolidated subsidiaries)
Mars Corporation

Pachinko business

2,000

100

Mars Techno-Science Corporation

Pachinko business

250

87

WINTEC Co., Ltd.

Pachinko business

107

80

Hotel Sunroute Hakata, Inc.

Other business

10

100

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History
Year

Month

Event

1974

SeptemberMars Engineering Corporation is established in Shinjuku-ku, Tokyo, to design,
trial-manufacture, manufacture and sell electronic devices.

1975

DecemberEnters into an exclusive distributorship agreement with Casio Computer Co., Ltd. to sell
Casio business systems.

1980

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

1981

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

1985

February

Develops and begins selling counting machines.

1987

OctoberConcludes an agreement with Nippon Signal Co., Ltd. related to the development,
manufacture and sales of small magnetic-card readers and writers; develops and begins
selling a magnetic card-based prize control-system.

1989

October

Opens Higashi Fuji Plant in Gotemba, Shizuoka Pref.

1990

OctoberDevelops and begins selling auto-dispenser systems; expands Higashi Fuji Plant.

1992

March

Develops and begins selling a prize-control system with membership management
capabilities.

1993

March

Opens Technical Center in Mishima, Shizuoka Pref.

November

Registers shares for over-the-counter trading with Japan Securities Dealers Association.

1994

July

Develops and begins selling computers for pachinko parlor management (parlor computer
systems).

1995

October

Opens Technology and Distribution Center in Gotemba, Shizuoka Pref.

1996

July

Obtains ISO 9001 certification for meeting quality control standards.

AugustDevelops and begins selling “personal systems.”

September

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

NovemberMakes AM Planning Corp., which was established to operate pachinko parlors as antenna
outlets for the Company, an affiliated company.

DecemberCompletes construction of a new headquarters building and moves its corporate
headquarters to the new site; establishes Mars Corporation (now a consolidated subsidiary)
to engage in real estate management and general leasing.

April

Opens Technology Center in Susono, Shizuoka Pref.

October

Acquires Asama Sangyo Inc., a leading developer and builder of pachinko ball replenishment
systems; incorporates this company into the Group as an affiliate (in Sept. 1998, changes its
trade name to ASAMA Engineering Corp.).

July

Develops and begins selling a reusable pachinko cycle card (PCC) system.

October

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

April

Completes construction of Hotel Sunroute Hakata.

AugustLaunches K1 Cycle Card system as part of the prepaid card business.

July

Acquires WINTEC Co., Ltd., a leading developer of peripheral devices for pachinko parlor
operations; incorporates this company (now a consolidated subsidiary) into the Group as anaffiliate.

September

Acquires RFID business (manufacture of IC cards and radio identification tags) from Toshiba
Chemical Corp.; establishes M&T Card Technology Corp. to sell RFID products.

December

Discontinues operations of AM Planning Corp. after concluding that it had achieved its
objectives.

September

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

1997

1998

1999
2000

2001

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Year

Month

Event

2002

January

Liquidates AM Planning Corp.

March

KARD Information System Inc. absorbs operations of M&T Card Technology Corp.

April

KARD Information System Inc. changes its trade name to Mars Techno-Science Corp. (now aconsolidated subsidiary); ASAMA Engineering Corp. changes its trade name to Mars
Line-Tech Corp. (now a consolidated subsidiary).

October

Expands Higashi Fuji Plant.

January

Establishes Mars Frontier Co., Ltd. to develop new businesses and market electronics
devices, computer-related goods and premium gifts.

2006

February

Develops and begins selling “Personal PC Systems” (personal pachinko ball countersystems).

March

Expands Higashi Fuji Plant.

Risk factors(1) The Company is subject to certain indirect legal restrictions• On its ball-dispensing devices, installed between game consoles, which areconsidered to be a part of a pachinko machine• Specifically, ball-dispensing devices are subject to “type testing” under
National Public Safety Commission Regulation No. 4.
(2) Testing can have a significant impact on the manufacture and sales of newball-dispensing devices due to• The need to pass type testing overseen by the Security Electronics andCommunication Technology Association• The need to pass type testing overseen by prefectural public safetycommissions• The fact that the Company’s customers (pachinko parlors) are subject torestrictions established under the Law Regulating Adult Entertainment
Businesses

Research and development
The Mars Engineering Group has shifted the focus of its new product development tobasic and applied technologies in the area of radio frequency identification. It has
successfully commercialized a number of products based on RF technology.
The Group spent a total of 947 million yen on research and development during theyear ended March 2006.
The Group’s R&D activities during the year can be summarized as follows:

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MARS

ENGINEERING

CORP ORATI ON(1) Organization: R&D is conducted primarily at the Susono Technical Center and
R&D Center, where work focuses on hardware and software development and on
mechanical design.
(2) Major results of R&D—pachinko business• SL-750DS IC card-operated token-issuing machine for installation between
game consoles• RX-140Z1-VIII coin unit for IC card machines• RX-140Z1-IX coin unit for IC card machines• MX140K1-X card unit for IC card machines• MX140K1-XI card unit for IC card machines• m3300 IC card reader for vending machines• MX140K1-XII card unit for IC card machines• MX140K1-XIII card unit for IC card machines• HC-8000 prize and customer management system• m80 PCC terminal for management by non-players• m8800 POS prize-management device• m17 ball counter with receipt-issuing function• m21 token-counting machine with receipt-issuing function• m18 ball-counting machine for installation between game consoles• Personal Counter p160-personal system
The hotel business has no R&D program.

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

Nature of agreement

Period of agreement

Nippon Signal Co., Ltd.

Joint development and manufacture ofsmall magnetic-card readers and writers

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

Nature of agreement

Period of agreement

Casio Computer Co., Ltd.

Exclusive distributorship agreement related
to business machines and personal
computers
Exclusive rights to sell jointly developed
magnetic-card readers and writers; joint
development and manufacture

One year, beginning March 21, 1982
(renewed automatically on an annual basis
thereafter)Three years, beginning January 9, 1996
(renewed automatically on an annual basis
thereafter)

Nippon Signal Co., Ltd.

(3) Franchise agreement
Name of licenser

Nature of agreement

Period of agreement

Sunroute Co., Ltd.

Sunroute Co., Ltd. agrees to allow the
Company to use the “Hotel Sunroute xxx”
name and to conduct business using its
trademarks, services and other hotelmanagement know-how; the Company willcontinue to operate hotels in accordancewith guidance and advice provided bySunroute, with the aim of achieving
prosperity for both companies.

Twenty years, beginning June 1, 1999
(renewed automatically every five years
thereafter)

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

Analysis of financial condition and results of operations
Analysis of financial condition (year-on-year comparisons)
Current assets: decreased by 3,785 million yen to 33,245 million yen•

2,301 million yen decrease in cash and deposits to 11,664 million yen; largely the
result of the purchase of treasury stock valued at 4,247 million yen•

2,613 million yen decrease in marketable securities to 6,148 million yen; mainly
due to the sale of commercial paper, whose balances declined by 2,049 million
yen to 2,499 million yen•

The marketable securities included 3,422 million yen in cash equivalents

Fixed assets: increased by 263 million yen to 12,900 million yen•

755 million yen increase in investment securities to 1,890 million yen•

Decline in land holdings of 1,082 million yen to 4,719 million yen

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Current liabilities: declined by 2,834 million yen to 9,576 million yen•

Repayment of short-term borrowings (outstanding debt decreased from 1,000
million yen to zero.)•

Decrease in income taxes payable of 1,804 million yen to 1,022 million yen

Long-term liabilities: increased by 166 million yen to 2,827 million yen—marginalincrease in long-term debt and marginal decrease in others
Shareholders’ equity: declined by 1,016 million yen to 33,091 million yen•

3,108 million yen increase in retained earnings to 20,642 million yen•

Shareholders’ equity reduced as a result of acquisition of treasury stock valued at
4,239 million yen

Cash flows
Cash and cash equivalents stood at 15,079 million yen, a 4,707 million yen decrease
compared to the end of the previous year. This reflected a year-on-year decline in the
Company’s sales, which in turn resulted from the deteriorating operating environment
for its principal customers, pachinko parlor operators.
Net cash provided by operating activities amounted to 3,124 million yen.
•

Cash provided: 7,647 million yen in income before taxes and other adjustments, a
2,721 million yen decline•

Cash used:-

972 million yen outlay for operating loans, a 940 million yen increase year
on year-

173 million yen for trade receivables, a 608 million yen increase year on
year-

4,929 million yen for income taxes and others, a 652 million yen increase
year on year

Net cash used in investing activities amounted to 1,489 million yen, reflecting thefollowing:•

Acquisition of investment securities: 510 million yen in stocks; 198 million yen incorporate bonds•

Acquisition of fixed assets: 484 million yen for purchase of the Higashi Fuji No. 3
Plant

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Net cash used in financing activities amounted to 6,343 million yen.
•

Cash provided: a 558 million yen long-term loan•

Cash used:-

1,000 million yen repayment of short-term borrowings-

493 million yen repayment of long-term debt-

4,247 million yen purchase of treasury stock-

1,130 million yen payment of dividends

Analysis of results of operation
While net sales declined by 4.3%, SG&A expenses increased by 6.3%. The major
components of the increase in SG&A expenses were the following:•

Higher personnel expenses due to an increase in the number of employees•

Increases in R&D expenditures

Corporate governanceFundamental thinking with regard to corporate governance
The Company’s aims with regard to corporate governance are twofold: to promote
rapid decision-making by its directors, and to ensure management oversight by all the
directors and enforcement and follow-up with respect to matters of legal compliance.
The Company’s view is that increasing the effectiveness of corporate governancedepends most critically on its ability to clarify management and reporting
responsibilities vis-à-vis all its stakeholders, including its shareholders. While taking
steps to increase its enterprise value through enhanced profitability and a stronger
balance sheet, the Company recognizes the importance of establishing a highly
transparent management structure, and it is implementing various measures to achieve
this end.
•

Corporate institutions- The Company has adopted a system of corporate auditors. The Board of
Corporate Auditors consists of four auditors, of whom three are outside
corporate auditors.
- In April 2002, the Company adopted a system of corporate executive officers
to separate management decision-making from execution of operations clarify
authority and responsibility; and ensure swift decision-making.
- The Company’s Board of Directors comprises six members who are

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responsible both for discussing and making decisions on importantmanagement matters and for evaluating, discussing and reaching decisions on
matters prescribed under law and under the Articles of Incorporation and otherinternal regulations.
•Internal control- Internal control is maintained through a system of corporate auditors. The
corporate auditors participate in meetings of the Board of Directors and otherimportant management meetings, including the Senior Management Meeting,and meet on a regular basis to evaluate and review the execution of operations
by the Board of Directors.
- In conjunction with the Company’s financial auditors, the corporate auditors
also carry out financial audits that are prescribed under the Commercial Codeand the Securities and Exchange Law.

•

Risk management
The directors and corporate executive officers all understand the characteristics ofthe different risks they face. When necessary, they discuss the issues with lawyers
and CPAs and receive advice on matters requiring expert opinion.

•

Internal audits and audits by corporate auditors; financial audits
The corporate auditors participate in Board of Directors meetings and monitor themanner in which the directors execute operations. They also exchange opinionswith the directors. With respect to internal audits, the Company has established an
Office of Internal Audits (with a staff of one), which conducts periodic audits ofthe various departments. When necessary, the corporate auditors and the Office ofInternal Audits exchange information and coordinate their actions with respect toaudit-related issues.
The Company has entered into a financial auditing agreement with Tohmatsu &Co., which audits the Company’s financial statements in accordance with theCommercial Code and the Securities and Exchange Law.
Information related to the certified public accountants directly involved in thefinancial audit is as follows:

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Names of CPAs conducting the audit:
Designated partners: Shigeki Yasunami; Yasuhiko Endo
Others who assisted in the audit:
3 CPAs; 4 junior accountants; 2 other staff•

Compensation to directors and auditors
For the year ended March 2006, the Company paid the following amounts ofcompensation to its directors and corporate auditors and to its financial auditor:
Compensation paid to directors: 112 million yen
Compensation paid to corporate auditors: 12 million yen
Auditing fees
Remuneration in accordance with Article 2-1 of the Certified Public
Accountants Law: 17 million yen•

Relationships with outside directors and with outside corporate auditors
The Company has no relationship—in terms of employment, financing,technology or commercial transactions—with any of its outside corporate auditors
or their close relatives, nor with any company in which its corporate auditors or
their close relatives serve as directors.
None of the Company’s outside corporate auditors is a former employee of any
Mars Engineering Group company.

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Directors
Name

Title

Date joined
company

Previous or current
employers/occupations

Date of birth

Hirokazu Matsunami

Representative Director

Sep-74

TAKACHIHO KOHEKI

9-Apr-38

1,405.6

Shigeo Komiya

Chairman and
Representative Director

Sep-74

TAKACHIHO KOHEKI

19-Dec-50

490.0

Akihiro Matsunami

President andRepresentative Director

Feb-95

Kawasho Corp.

1-Jul-65

1,000.0

Teruo Gomi

Executive Vice President

Apr-75

Hitachi, TAKACHIHOKOHEKI

10-Mar-44

450.0

Toshihisa Oya

Director

Sep-7429-Nov-44

388.0

Hiroshi Murakami

Director

Mar-96

5-Apr-62

248.0

Toshiyuki Goto

Standing Corporate Auditor Sep-89

22-Aug-41

10.0

Koichi Takemata

Corporate Auditor

Jun-91

18-Nov-52-

Chikawo Takashima

Corporate Auditor

Jun-054-Aug-33

3.0

Ikuo Kobayashi

Corporate Auditor

Jun-06

11-Feb-42-

Tokai Bank

Attorney at law

Shares owned(1,000)3,994.6
Current assignments and previous positions in the Company have been omitted.

Employees
Consolidated
Business segment

NumberPachinko business

560

Other business

14
574

ParentTotal or average

Number468

Average age

33.0

Average years of service

8.9

Average annual salary (Yen)

5,707,070

The average annual salary includes bonuses.

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

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Stock option plan
Date of resolution

June 29, 2005

Categories and numbers of persons to be granted rights

Directors, corporate auditors andemployees of the Company and its
subsidiaries
Actual decisions concerning the number ofrecipients, etc., will be made at the Board of
Directors meeting that follows the Regular
General Meeting of Shareholders.

Type of shares subject to rights

Common stock

Number of shares

1,500,000 maximum

Amount paid in at time of execution of rights(Note)

Period of execution of rights

July 1, 2007 - June 30, 2011

Item concerning the assignment of rights

Approval of Board of Directors required.

Payment per share is calculated by the “average closing price in previous month” x 1.01. However, if this amount is lessthan the closing price of the Company’s stock in normal transactions on the Tokyo Stock Exchange on the day on which
the stock acquisition rights are issued (or, in the event that the Company’s shares are not traded on the day of such
issuance, the closing price on the nearest preceding day), then the closing price on the day of issuance shall be theamount paid in.

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

2004

2005

2006

7,531,525

10,369,558

7,647,575

Depreciation

568,510511,257

536,833

Increase (decrease) in allowances

690,297

148,546

326,416

Interest and dividend income(72,762)(28,568)(74,431)

Interest expenses

12,996

5,557

2,233

Amortization of consolidation differences

9,529

8,565

(1,340)Loss (gain) on sales of investment securities

84,993-(5,084)Gain on redemption of investment securities--(143,478)

Valuation loss on investment securities-

38,879-8,973

13,653

2,212

Valuation loss on tangible fixed assets--

1,083,013

Decrease (increase) in operating loans--(972,846)

Decrease (increase) in trade receivables(340,062)

434,741(173,587)

Decrease (increase) in inventories

336,470(243,752)(113,949)

Increase (decrease) in trade payables(24,319)

145,181

236,183

Increase (decrease) in advances(168,670)(284,938)(93,420)

Directors' and corporate auditors' bonuses(64,000)(99,000)(117,823)

Others783,270(334,813)(162,861)

9,356,752

10,684,868

7,975,643

Interest and dividend income

71,67627,33380,274

Interest expenses(14,388)(40,775)(1,552)

Income tax and others(465,645)(4,277,124)(4,929,545)

8,948,394

6,394,301

3,124,818

Net change in holdings of marketable securities

199,168(392,221)

472,634

Payments for acquisition of investment securities(540,000)(201,800)(708,895)

Proceeds from sales of investment securities

172,483-

28,637

Payments for acquisition of tangible fixed assets(695,092)(343,664)(892,877)-(47,278)-

40,420(97,981)(388,509)(823,020)(1,082,945)(1,489,009)

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

Loss on disposal and sales of fixed assets

Net cash provided by (used in) investing activities

Payments for acquisition of stock of a consolidated subsidiary
Others16

MARS

ENGINEERING

Years ended March 31; Thousands of yen

CORP ORATI ON

2004

2005

2006

Net increase (decrease) in short-term borrowings--(1,000,000)

Proceeds from increase in long-term debt--

558,000(300,000)(300,000)(493,000)--(4,247,862)(569,677)(909,716)(1,130,995)(4,000)(16,290)(21,435)-(350)(8,000)(873,677)(1,226,356)(6,343,292)

Cash and cash equivalents

7,251,696

4,084,998(4,707,483)

Cash and cash equivalents, beginning of term

8,680,028

15,931,724

19,787,424-(229,298)-

15,931,724

19,787,424

15,079,940

Net cash provided by (used in) financing activities

Payments of long-term debt
Payments for purchase of treasury stock
Dividends
Dividend payments to minority shareholders
OthersNet change due to elimination of a subsidiary from consolidation
Cash and cash equivalents, end of term

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

2004

2005

2006

Cash and deposit accounts at end of term

10,633,446

13,966,457

11,664,964

Marketable securities at end of term

7,134,206

8,762,072

6,148,816

Short-term investments with redemption periods longer than 3months(1,835,928)(2,941,104)(2,733,839)

Cash and cash equivalents at end of term

15,931,724

19,787,424

15,079,940

Capital expenditures
The Group conducts necessary investments from a long-term perspective, focusing on
R&D projects and business operations that promise growth. During the fiscal year
ended March 2006, it spent 858 million yen on capital investments in these areas.
The Group’s principal investments in the pachinko business consisted of 484 million
yen for construction costs related to the expansion of the Company’s Higashi Fuji
Plant and 268 million yen for product-related dies.
The Group made no significant investments in the Company’s Other business division.
During the fiscal year under review, the Company sold fixed assets (land) located in
Gotemba, Shizuoka Prefecture, to Mars Corporation, a subsidiary. This resulted in its
recognizing an extraordinary loss of 1,083 million yen, due to a write-down of theland’s value.

17

MARS

ENGINEERING

CORP ORATI ON

Capital expenditure and disposal plan

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

Dividend policy
The Company considers its policy on dividends to be extremely significant. Its goalwith respect to dividends is to make payouts in a manner that contributes to stablebusiness growth over the long term. This requires that it strengthen its financial
structure and pay dividends that more closely reflect changes in its financial
performance each term with due consideration given to maintaining a stable payout toits shareholders.
In accordance with this basic policy, and to reward shareholders for their support, theCompany has declared a common dividend of 20 yen per share.
Addition to this of the 20 yen per share paid out as an interim dividend brings total
dividends for the year to 40 yen per share.
The Company intends to invest retained earnings in areas that will foster stable growth,
including measures aimed at strengthening its balance sheet and capital investments.

18

MARS

ENGINEERING

CORP ORATI ON

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

2004

2005

2006

Net sales

30,723,810

35,208,425

33,703,740

Cost of goods sold

16,510,304

18,364,947

18,468,667

Gross profit on sales

14,213,505

16,843,478

15,235,073

Selling, general and administrative expenses

6,038,483

6,340,039

6,738,749

Operating income

8,175,022

10,503,438

8,496,324

Interest income

69,364

24,831

65,411

Rental income

17,40017,40017,400-34,433-25,52824,151

28,333112,292

100,815

111,144

Nonoperating income

Gain from conclusion of interest rate swap
OthersNonoperating expenses
Interest expenses

12,996

5,557

2,233

New share issuance expenses

-

-

8,000

Commissions paid on the purchase of treasury stock

-

-

9,289

10,345

10,781

1,737

23,342

16,33821,2598,263,972

10,587,915

8,586,209

6,962

-

5,084

Gain on redemption of investment securities--

143,478

Reversal of allowance for doubtful accounts

2,200

-

-

Gain on sales of memberships

5,000

-

-

Others

1,000

-

-

15,162-

148,563

Loss on disposal of inventories

158,081

165,824

1,971

Valuation loss on fixed assets--

1,083,013

Valuation loss on investment securities-

38,879-Loss on sales of investment securities

91,956--

Provision for directors' retirement allowances for prior years

487,669

-

-

9,902

13,653

2,212

747,610

218,357

1,087,197

Income (loss) before taxes and other adjustments

7,531,525

10,369,558

7,647,575

Corporate, inhabitant and enterprise taxes

3,029,952

4,267,214

3,125,212

104,940(150,540)(20,068)

3,134,892

4,116,673

3,105,143

156,156

189,273

189,387

4,240,475

6,063,611

4,353,043

OthersOrdinary profit
Extraordinary income
Gain on sales of investment securities

Extraordinary losses

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

19

MARS

ENGINEERING

CORP ORATI ON

Consolidated statement of retained earnings
March 31; Thousands of yen

2004

2005

2006

Capital reserves, beginning of term

8,371,830

8,371,830

8,371,830

Capital reserves, end of term

8,371,830

8,371,830

8,371,830

8,865,052

12,475,532

17,534,549

4,240,475

6,063,611

4,353,043

4,240,475

6,063,611

4,353,043

Dividends

567,996908,793

1,132,379

Directors' and corporate auditors' bonuses

62,00095,800112,235

Capital reserves

Retained earnings
Retained earnings, beginning of term
Increase in retained earnings
Net income
Decrease in retained earnings

Retained earnings, end of term

629,996

1,004,593

1,244,614

12,475,532

17,534,549

20,642,978Results of operations
Fiscal year ended March 31, 2006
Economic and other factors affecting operations(1) A steadily recovering economy•

Increasingly widespread recovery of corporate profits in Japan, leading tofurther growth in capital spending and aggressive hiring by businesses•

But these positive trends clouded by uncertainties surrounding skyrocketing
oil and raw materials prices(2) Trends in pachinko industry•

Amid excessive competition, a continuing polarization of the industry, whichis leaving only very large parlors or very small parlors in operation—with aresulting further decline in the number of parlors in business•

The decision by the police to enforce orders to remove unlicensed or
uncertified game machines from business premises has provoked considerable
uncertainty among parlor operators—and this is causing postponement ofinvestments in peripheral equipment.

Marketing strategies(1) Continued focus on prepaid Cycle Card systems, marketed and sold as “total
systems”

20

MARS

ENGINEERING

CORP ORATI ON(2) Amid declining demand for peripherals in the market, successive launches ofmajor new products with the aim of realizing potential replacement demand for
peripherals
Financial analysis (year-on-year percentage change)(1) Year-on-year declines in sales and profits(2) Overview of income statement•

Net sales: down 4.3%•

Operating income: down 19.1%•

Ordinary profit: down 18.9%•

Net income: down 28.2%

Segment breakdown (year-on-year percentage change)(1) Pachinko business: sales declined by 4.4% to 33,145 million yen. By product area,
sales broke down as follows:•

Cycle Card systems (includes Personal PC Systems, which makerevolutionary changes in pachinko parlor operations possible through theirability to improve parlor operations, enhance parlor environments and reduce
parlor expenses): 15,897 million yen- Sales of Personal PC Systems, begun in February, have already resulted incontracts with large pachinko parlors.
- The Company added 307 new Cycle Card system installations, bringing its
cumulative installations to 1,729. This represented a market share of
15.4%

•

Prize-control systems: 5,514 million yen- The Company is the industry leader in this segment, having pioneered thistype of system.
- Introduction of an LCD touch panel model and renewal of the “m series,”featuring enhanced security features•

RFID division: 833 million yen- IC tags, for controlling access to and from offices and other locations- Also for personnel management systems, to record employees’ presence inor absence from office(2) Other business: Hotel revenues increased by 5.5% to 557 million yen.

21

MARS

ENGINEERING

CORP ORATI ON

Fiscal year ended March 31, 2005
Economic and other factors affecting operations(1) Mixed economic picture•

Capital spending continuing to increase, supported by ongoing recovery incorporate profits•

Unimpressive recovery in consumer spending•

Other factors weighing on the economy: sharply rising oil prices, fears ofpension system insolvency, etc.

(2) Trends in pachinko industry•

Increasing demand for peripheral equipment due to the government’s issuanceof new yen-denominated banknotes (10,000, 5,000 and 1,000 yen bills)•

Amendment of the Regulation Concerning Certification and Official
Inspection of Pachinko Game Machines (effective July 2004), giving rise to a
flurry of game machine replacements and a resulting over-investment bypachinko parlor operators

Marketing strategies and results(1) Continuing emphasis on Cycle Card prepaid systems—leading to sales of Cycle
Card systems to 404 customers, mostly large parlors(2) Proposal and sales of comprehensive systems, which include prize-control systems
and table-top auto dispensers(3) Quick response to the government’s issuance of new banknotes in November 2004,
using the Company’s nationwide maintenance capabilities to complete adjustmentof existing machines, and, in so doing, creating considerable goodwill amongcustomers because of the slower reaction by the rest of the industry
Financial analysis (year-on-year percentage change)(1) Second consecutive year of record high sales and profits(2) Income statement•

Net sales: up 14.6%•

Operating income: up 28.5%•

Ordinary profit: up 28.1%•

Net income: up 43.0%

22

MARS

ENGINEERING

CORP ORATI ON

Segment breakdown (year-on-year percentage change)(1) Pachinko business: sales increase by 14.9% to 34,679 million yen, due principallyto the following:•Continued strong support in the market for the Company’s ability to offer
prize-control capabilities and Cycle Card functions; the Company’s large
market share for prize-control systems and its ability to set the industry
standard for convenience in relation to reusable cards (Cycle Cards)- The growth rate of new installations (based on machines in place and inuse) moderated, but sales of new Cycle Card systems to existing customers
remained strong, resulting in sustained high growth levels in terms of total
installations.
- Cumulative installations, as of the end of March 2005, were 1,582,
accounting for 13.3% of the market.

•

Staying attuned to market opinions and requests and translating these into
innovative new products(2) Other business: Hotel revenues decreased by 0.5% to 528 million yen.
•

Both sales and occupancy rates failed to meet targets set by the Company,
reflecting the following:- Pricing pressures against the background of a growing trend toward
Internet reservations- A decline in leisure and other travel to Fukuoka, reflecting fewer
conventions and other special events during the year•

Despite this, higher average revenue per room due to increases in the numbersof customers choosing more expensive rooms and repeat customers•

Based on customer feedback, the hotel’s “front desk department” is ranked No.
1 in the Sunroute chain for the second consecutive year in 2004.

23

MARS

ENGINEERING

CORP ORATI ON

Issues requiring action(1) In the pachinko industry, a lack of clarity concerning future directions is creating
an extremely difficult environment for business decisions-making.
•With the deadline for removal from premises of unlicensed or uncertified
game machines set for June 2006, the industry is being put in the position of
having to invest in new machines to replace the restricted models.

•Yet it faces the reality of a slowly declining population of pachinko players.

•

Thus, even greater effort on its part will be required to change its methods ofoperation in order to attract more pachinko players.

(2) Issues for the Company•

Lowering costs and investing optimum levels of organizational resources into
each facet of its business: development, manufacturing, sales, maintenance•Differentiating the Company from its competitors through creative productdevelopment(3) Actions by the Company•

Development of the Personal PC System, which improves profitability byenabling pachinko parlor operators to shift from “volume-dependent” to“quality-driven” operations•

Aiming to increase market share for prepaid card systems to 20% byenhancing the brand image and increasing brand recognition

Production and sales
Production
2006
AmountYear-on-yearcomparison (%)

20,714,368

87.4

-

-

20,714,368

87.4

Thousands of yen

Pachinko business
Other business

24

MARS

ENGINEERING

CORP ORATI ON

Procurement
2006
Thousands of yen

AmountYear-on-yearcomparison (%)

Pachinko business

1,205,873

95.8

103,770109.5

1,309,644

96.8

Other business

Sales by product2006
AmountYear-on-yearcomparison (%)

33,145,899

95.6

557,841

105.5

33,703,740

95.7

Thousands of yen

Pachinko business
Other business

25

MARS

ENGINEERING

CORP ORATI ON

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

Land

Number of
employees(squaremeters)Current
payments

77-

214,765

Head office
OfficeRent

OA equipment

Lease

-

7,886

Vehicles and delivery equipment

Lease

-

5,834

-

73,473

Susono Technical Center
OfficeRent

39

OA equipment

Lease

-

193

Vehicles and delivery equipment

Lease

-

558

-

39,033

-

36

-

514

Mishima Technical Center
OfficeRent

OA equipment

Lease

7

Gotemba Technology and Distribution Center
Parking lot

Rent

33

OA equipment

Lease

-

164

Vehicles and delivery equipment

Lease

-

5,078

-

25

-

1,123

-

937

Gotemba Warehouse
OA equipment

Lease

Vehicles and delivery equipment

Lease

6

Higashi Fuji Plant
Parking lot

Rent

33

OA equipment

Lease

-

42

Vehicles and delivery equipment

Lease

-

972

-

205,399

Tokyo Branch, etc.
OfficeRent

OA equipment

Lease

-

4,763

Vehicles and delivery equipment

Lease

-

75,181

26

273

MARS

ENGINEERING

Thousands of yen

CORP ORATI ON

Number ofLand
employees (square meters)

Rent or lease

Current
payments

Mars Corporation

Peripheral equipment

Lease

3

- 1,682,029

Office

Rent

42

-

0

Peripheral equipment

Lease

-

0

OA equipment

Lease

-

0

Vehicles and delivery equipment

Lease

-

0

-

1,185

Mars Techno-Science Corporation

WINTEC Co., Ltd.

Land

Rent

42

OA equipment

Lease

-

171

Equipment and machinery

Lease

-

231

Vehicles and delivery equipment

Lease

-

846

644

146,727

Hotel Sunroute Hakata, Inc.

Buildings and structures

Rent

14

Equipment and machinery

Lease

-

1,816

OA equipment

Lease

-

349

Pro forma information on leased property is as follows:
LesseeThousands of yen

2005

2006

Acquisition cost

1,924,493

1,152,710

Accumulated depreciation

1,246,469

640,382

678,023

512,328

Due within one year

1,804,235

1,595,779

Due after one year

2,291,107

2,200,657

4,095,343

3,796,436

2,241,511

2,161,029

Pro forma depreciation expenses (assuming
declining-balance method)

610,481462,004

Pro forma interest expenses

189,439

156,737

Due within one year

1,003

1,003

Due after one year

1,337

334

2,340

1,337

Tools, appliances and fixtures

Net leased property
Future minimum lease payments,
including interest portion

Lease payments

Operating leases - future minimum lease
payments

27

MARS

ENGINEERING

CORP ORATI ON

LessorThousands of yen

2005

2006

Acquisition cost

148,139

18,600

Accumulated depreciation

128,441

10,580Net leased property

19,6988,019

Due within one year

1,456,931

1,391,078

Due after one year

2,243,230

2,122,183

3,700,161

3,513,261

1,870,866

1,851,638

Depreciation expenses

29,627

3,720

Revenues from interest

234,655

189,876

Tools, appliances and fixtures

Future minimum lease payments,
including interest portion

Lease payments received

28

MARS

ENGINEERING

CORP ORATI ON

Capital Structure
Consolidated balance sheet
AssetsMarch 31; Thousands of yen

2004

2005

2006

Cash and deposits

10,633,446

13,966,457

11,664,964

Notes and accounts receivable

10,518,982

10,082,028

10,255,616

Marketable securities

7,134,206

8,762,072

6,148,816

Inventories

3,184,929

3,367,321

3,481,270

Deferred tax assets

499,330

510,895

468,809

Others239,754

403,424

1,373,608

Allowance for doubtful accounts(36,021)(61,045)(147,476)

32,174,627

37,031,152

33,245,608

6,147,187

6,214,459

6,715,617

1,913,295

2,151,362

2,376,528

4,233,891

4,063,097

4,339,088

246,231247,720

248,940

127,053

148,841

171,175

119,177

98,87977,7652,357,083

2,241,066

2,449,036

1,981,340

1,883,713

1,985,109

375,742357,352

463,926

5,782,399

5,802,266

4,719,872

10,511,211

10,321,596

9,600,653

Consolidation translation adjustments

6,901

-

-

Others84,565

151,425

139,939

91,466

151,425

139,939

Investment securities

1,575,342

1,135,722

1,890,841

Deferred tax assets

587,287

684,103667,718

Others608,629

618,195

1,019,950

Allowance for doubtful accounts(268,206)(274,065)(418,384)

2,503,053

2,163,955

3,160,125

Total fixed assets

13,105,732

12,636,977

12,900,719

Total assets

45,280,360

49,668,130

46,146,327

Current assets

Fixed assets
Tangible fixed assets
Buildings and structures
Accumulated depreciation

Machinery and transportation equipment
Accumulated depreciation

Tools, appliances and fixtures
Accumulated depreciation

Land

Intangible fixed assets

Investments and other assets

29

MARS

ENGINEERING

CORP ORATI ON

Liabilities and shareholders’ equity
March 31; Thousands of yen

2004

2005

2006

Notes and accounts payable

3,392,821

3,364,138

3,600,322

Short-term borrowings

1,000,000

1,000,000-

300,000

300,000

186,000

Income taxes payable

2,836,977

2,826,977

1,022,644

Allowance for bonuses

285,551

348,710395,100

4,008,890

3,723,951

3,630,531

742,424

846,949

741,569

12,566,665

12,410,727

9,576,168

400,000

100,000

279,000--

11,235503,954522,741

560,581

-

1,664

323

2,458,826

2,037,376

1,976,663

3,362,781

2,661,782

2,827,803

15,929,447

15,072,510

12,403,971

362,992

487,576

650,495

Common stock

7,934,100

7,934,100

7,934,100

Capital reserves

8,371,830

8,371,830

8,371,830

Retained earnings

12,475,532

17,534,549

20,642,978206,751

268,206

382,166

(292)

(642)

(4,239,215)

Total shareholders' equity

28,987,920

34,108,043

33,091,859

Total liabilities, minority interests and shareholders' equity

45,280,360

49,668,130

46,146,327

Current liabilities

Long-term debt due within 1 year

Advances received
OthersLong-term liabilities
Long-term debt
Employees' retirement benefits
Reserve for directors' and corporate auditors' retirement
allowances
Consolidation translation adjustments
OthersTotal liabilities

Minority interests
Shareholders' equity

Unrealized gains or losses on other securities
Treasury stock

30

MARS

ENGINEERING

CORP ORATI ON

Market value of securities
Other quoted securities
2005
Thousands of yen

Cost ofacquisition

2006

Unrealized gain
Book value(loss)

Cost ofacquisition

Book value

Unrealized gain
(loss)

Securities valued on the consolidated balance
sheet at amounts greater than purchase cost
Shares

170,949

530,800

359,851

563,127

1,047,380

484,253

JGB, local government bonds, etc.

-

-

-

-

-

-

Corporate bonds

-

-

-

-

-

-

Others

-

-

-

-

-

-

1,658,501

1,763,606

105,105

2,019,9782,195,339

175,361

1,829,451

2,294,407

464,956

2,583,105

3,242,719

659,614

-

-

-

-

-

-

JGB, local government bonds, etc.

-

-

-

-

-

-

Corporate bonds

-

-

-

-

-

-

Bonds

OthersSecurities valued on the consolidated balance
sheet at amounts not greater than purchase
cost
Shares
Bonds

OthersOthers

-

-

-

-

-

-

983,176

970,436(12,739)

800,544786,200(14,343)

983,176

970,436(12,739)

800,544786,200(14,343)

2,812,627

3,264,844

452,216

3,383,649

4,028,920

645,270

When the market value of a security at fiscal year-end has fallen to less than 50% of the acquisition price, a valuation write-off is made forthe full amount. When the market price has fallen by 30%-50% of the acquisition price, an amount deemed necessary is written off, taking
into consideration the actual amount in question and the possibility of recovery.

Other marketable securities sold during the years ended March 31, 2006
Thousands of yen

2005

2006

Amount sold

-

3,552

Total gains on sales

-

5,084

Total losses on sales--

Major investment securities without market prices
Thousands of yen

2005

2006

Bonds being held to maturity
Corporate bonds

253,661

422,875

Commercial paper

4,548,439

2,499,385

51,120165,684

Other securities
Unlisted stocks
Money management funds

1,169,570

812,624

Medium-term government bond funds

110,156

110,167

Bonds

500,000

-

31

MARS

ENGINEERING

CORP ORATI ON

Scheduled redemptions of bonds with maturity dates and bonds being
held to maturity (among holdings in the “other securities” account)
Thousands of yen
2006

Bonds
JGB, local government bonds, etc.
Corporate bonds
OthersOthersUp to 1 year

Longer than 1 andup to 5 years

Longer than 5 andup to 10 years

Longer than
10 years

-

-

-

-

208,225

214,650--

2,499,385---

786,200

349,326--

3,493,811

563,977

-

-

-

-

-

-

8,000

245,661--4,548,439---

701,518

216,705--

5,257,958

462,366

-

-

2005

Bonds
JGB, local government bonds, etc.
Corporate bonds
OthersOthers32

MARS

ENGINEERING

CORP ORATI ON

Facilities
Thousands of yen

Buildings andstructures

Tools,
appliancesand fixtures

Land
Book value

Squaremeters

Other

Total bookvalue

Number of
employees

ParentHigashi Fuji Plant
Manufacturing
equipment
Gotemba Technology and Distribution
CenterManufacturing and distribution facilities
Head Office
Facilities for corporate administration
Susono Technical Center
R&D facilities
Gotemba Warehouse
Warehousing facilities
Fuji Training Center
Training facilities
Mishima Technical Center
Inactive
Dormitories
Employee recreation and welfare
facilities
Tokyo Branch, etc.
Sales, installation and maintenancefacilities

939,497

311,531597,253

11,447

1,415

1,849,697

33

567,138

14,164535,660

2,692

58,873

1,175,836

33

23,97529,321--

945

54,242

77-

17,946--492

18,43939

252,592

1,881

172,813

7,654

2,761

430,048

6

277,439

636

-

-

-

278,076

-

151

645

-

-

-

796

7

164,063297

550,024

1,202

2,193

716,579-

3,133

13,076---

16,209273

1,759,298
-

4,391
911
-

2,773,364-

21,676-44,4704,532,662
4,391
911
44,4703

973-

21,159
4,535
326

-

-

-

22,133
4,535
326

42

349,932
-

5,197
1,556
12,246-90,757-

4,038-

10,708375

440,690
15,905
1,556
12,246
375

42

893
-

2,551
88

-

-

-

3,444
88

14

Mars Corporation

Buildings and structures
Equipment and machinery
OA equipment
Peripheral equipment
Mars Techno-Science Corporation

Equipment and machinery
OA equipment
Peripheral equipment
WINTEC Co., Ltd.

Buildings and structures
Equipment and machinery
OA equipment
Dies
Vehicles and delivery equipment
Hotel Sunroute Hakata, Inc.

Equipment and machinery
OA equipment

33

MARS

ENGINEERING

CORP ORATI ON

Borrowings
Thousands of yen

Previous term

Outstanding

Average rate

Maturity

1,000,000---

Current portion of long-term debt

300,000

186,000

0.40364%-

Long-term debt (excluding current
portion of long-term debt)

100,000

279,000

0.40364%

2006-2008

-

-

-

-

1,400,000

465,000--

Short-term borrowings

Other interest-bearing liabilities

Long-term debt repayable within 5 years of the end of the fiscal year to March 2006
(excluding the amount payable within one year) is as follows:
Thousands of yen

Longer than 1
and up to 2 years

Longer than 2
and up to 3 years

Longer than 3
and up to 4 years

Longer than 4
and up to 5 years

186,000

93,000--Long-term debt

Retirement benefits
Summary of retirement benefit system

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

2005

2006

(1,041,911)(1,265,099)

Pension assets

901,933

1,079,956

Unaccrued pension benefit liabilities(139,978)(185,143)

Unrecognized actuarial gains or losses

248,237

256,512

Net amount shown on consolidated balance sheet

108,259

71,368Prepaid pension expenses

108,259

82,604-(11,235)

Retirement benefit liabilities

Allowance for retirement benefits

34

MARS

ENGINEERING

CORP ORATI ON

Items related to retirement benefit expenses
Thousands of yen

2005

2006

Current service costs

84,501

107,304

Pension premiums paid under multi-party employers'
welfare pension fund106,915

141,504

Interest expenses

16,252

16,932--

Expensing of actuarial differences

35,60333,682Retirement benefit expenses

243,272

299,424

Expected earnings on pension fund assets

Assumptions underlying the calculation of retirement benefit liabilities
Thousands of yen

2005

2006

Discount rate

1.7%

1.7%

Expected rate of return

0.0%

0.0%

Equal payments basis

Equal payments basis

10 years

10 years

Method of allocating prospective retirement benefits toeach period
Amortization period for actuarial gains or losses(Expensed beginning in the(Expensed beginning in the
consolidated fiscal year
consolidated fiscal year
following the year in which the following the year in which theexpenses arise, using
expenses arise, using
straight-line amortization over straight-line amortization overa prescribed number of years a prescribed number of years
that is equal to or less thanthat is equal to or less than
the average remaining period the average remaining periodof service of employees.)of service of employees.)

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

2005

2006

1,146,296

1,675,535

Deferred taxes
Thousands of yen

2005

2006

Deferred tax assets (current)

551,732

480,445

Deferred tax liabilities (current)

40,836

11,636

Deferred tax assets - net

510,895

468,809

Deferred tax assets (fixed)

884,995

972,414

Deferred tax liabilities (long-term)

200,892

304,696

Deferred tax assets - net

684,103667,71835MARS

ENGINEERING

CORP ORATI ON

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

2004

2005

2006

Net sales - finished goods

25,900,391

28,918,150

27,097,086

Net sales - merchandise

212,688

209,679

196,355

26,113,079

29,127,830

27,293,442

Finished goods inventory, beginning of term

1,562,263

1,547,961

1,599,592

Production costs for the term

14,650,062

15,840,204

15,177,625

16,212,326

17,388,165

16,777,218

90,512

126,391

20,132

1,547,961

1,599,592

1,310,196

14,573,851

15,662,181

15,446,888

4,207

5,384

4,654

107,303107,359

99,623

111,511

112,743

104,278

5,384

4,654

4,912

106,127

108,088

99,366

14,679,979

15,770,270

15,546,255

11,433,100

13,357,560

11,747,187

After-sales service expenses

410,120

418,286

478,832

Directors' salaries

125,130

122,440

124,800

Employees' salaries

1,581,695

1,712,929

1,933,937

Bonuses445,467

421,331313,306

Provision for bonuses

210,956

266,520

294,035

Legal welfare expenses

299,583

310,882

340,393

Rent

525,460

515,069

533,071

Depreciation expenses

83,811

84,721

79,895--49,841

36,614

40,62938,2401,626,330

1,744,882

1,825,008

5,345,169

5,637,694

6,011,361

6,087,931

7,719,866

5,735,825

Net sales

Cost of goods soldCost of finished goods soldTransfers to other accounts
Finished goods inventory, end of term

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

Merchandise inventory, end of term

Gross profit on sales
Selling, general and administrative expenses

Provision for doubtful accounts
Provision for directors' and corporate auditors' retirement
allowances
OthersOperating income

36

MARS

ENGINEERING

Years ended March 31; Thousands of yen

CORP ORATI ON

2004

2005

2006

Interest income

14,609

6,719

3,751

Interest income from securities

65,975

22,13564,005

Dividend income

19,37876,027

120,484

Income from contracted operations

9,600

9,600

9,600

-

34,433-

21,733

10,587

17,109131,296

159,502214,951

-

-

9,289

6,143

-

-

54

4,050

1,078

6,197

4,050

10,367

6,213,030

7,875,317

5,940,409

6,962

-

5,084

Gain on redemption of investment securities--

143,478

Reversal of allowance for doubtful accounts

2,200

2,459

-

9,162

2,459

148,563

158,081

163,841

1,971

-

-

1,083,013

8,979

2,439

1,676

Provision for directors' retirement allowances for prior years

487,669--

Loss on sales of investment securities

91,956--

Valuation loss on investment securities-

38,879-Valuation loss on shares in affiliates-

100,000-

746,687

305,161

1,086,660

Income (loss) before taxes and other adjustments

5,475,505

7,572,615

5,002,311

Corporate, inhabitant and enterprise taxes

2,161,037

3,150,912

2,059,624

171,440(63,563)(19,979)

2,332,478

3,087,349

2,039,644

Net income (loss) for the term

3,143,026

4,485,265

2,962,666

Retained earnings brought forward from previous term

4,031,533

6,409,965

9,684,241

227,198454,396

450,787

6,947,362

10,440,834

12,196,121

Nonoperating income

Gain from conclusion of interest rate swap
Miscellaneous income

Nonoperating expenses
Commissions paid on the purchase of treasury stock
Interest expenses
Miscellaneous losses

Ordinary profit
Extraordinary income
Gain on sales of investment securities

Extraordinary losses
Loss on disposal of inventories
Loss on sales of fixed assets
Loss on removal of fixed assets

Adjustment for income and other taxes

Interim dividends
Unappropriated retained earnings, fiscal year-end

37

MARS

ENGINEERING

CORP ORATI ON

Nonconsolidated appropriation of retained earnings
Thousands of yen

June 29, 2004

June 29, 2005

June 29, 2006

6,947,362

10,440,834

12,196,121

Dividends

454,396

681,592

427,807

Directors' and corporate auditors' bonuses

83,00075,00075,000[Corporate auditors' bonuses][ 6,000 ][ 2,000 ][ 2,000 ]537,396756,592

502,8076,409,965

9,684,241

11,693,313

Unappropriated profit, end of term
Appropriation of retained earnings

Retained earnings carried forward to following term

Cost of goods soldYears ended March 31; Thousands of yen

2004

%

2005

2006

%

Cost of materials

13,092,715

88.1

14,262,441

87.7 13,382,855

88.1

Subcontracted processing expenses

1,112,824

7.5

1,300,164

8.0

1,032,363

6.8

Labor costs

335,2212.3

367,470

2.3

367,777

2.4

Manufacturing overhead

314,684

2.1

322,570

2.0

406,765

2.7

14,855,444

100.0

16,252,646 100.0 15,189,761

100.0

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

34,447

66,296

159,192

14,889,893

16,318,942

15,348,954

Work-in-process inventory, end of term

66,296

159,192

58,884

Transfers to other accounts

173,534

319,546

112,443

Production costs for the term

14,650,062

15,840,204

15,177,625

26,271

27,26027,364200,062

182,022232,903

Selling, general and administrative expenses

107,689

156,150

103,709

Loss on disposal of inventories

65,84433,621--

129,774

8,734

173,534

319,546

112,443

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

Labor costs
Provision for bonuses
Manufacturing overhead
Depreciation expenses
Transfers to other accounts

Software under development

38

MARS

ENGINEERING

CORP ORATI ON

Nonconsolidated balance sheet
AssetsMarch 31; Thousands of yen

2004

2005

2006

Cash and deposits

8,217,074

10,950,330

7,482,487

Notes receivable

1,801,918

1,791,588

1,736,860

Accounts receivable - trade

3,988,099

3,744,326

4,093,473

Marketable securities

6,873,957

8,501,804

5,888,526

5,384

4,654

4,912

1,547,961

1,599,592

1,310,196

Materials

463,288599,347934,054Work in process

66,296

159,192

58,884

Supplies

420,965

376,045

351,594

Prepaid expenses

54,946102,274

102,755

Short-term loans

283,000

180,000

221,651

Deferred tax assets

344,647

279,518

223,668

Others

14,591

14,49343,447

Allowance for doubtful accounts(10,341)(9,146)(28,446)

24,071,791

28,294,021

22,424,068

3,507,299

3,534,278

3,985,203

1,613,388

1,717,374

1,815,167

1,893,910

1,816,904

2,170,035

191,175

192,451

216,184

145,425

152,416

158,22945,75040,03457,955

216,723

218,388

218,388

109,156

133,845

152,920

107,566

84,54365,468

Vehicles and delivery equipment

18,304

12,324

12,324

Accumulated depreciation

15,302

10,554

11,110

3,002

1,769

1,213

Tools, appliances and fixtures

1,633,514

1,756,557

2,076,824

Accumulated depreciation

1,406,291

1,510,103

1,687,322

227,223

246,453

389,5023,496,763

3,496,763

1,855,750

5,774,217

5,686,468

4,539,925

Current assets

Merchandise
Finished goods

Fixed assets
Tangible fixed assets
Buildings
Accumulated depreciation

Structures
Accumulated depreciation

Machinery and equipment
Accumulated depreciation

Land

39

MARS

ENGINEERING

March 31; Thousands of yen

CORP ORATI ON

2004

2005

2006

Patents

17,461

14,276

11,094

Telephone subscription rights

15,214

15,214

15,214

Software23,819154,032

137,953-

18,921

8,693

56,495

202,444

172,956

Investment securities

1,575,342

1,135,722

1,777,091

Capital stock of affiliated companies

2,476,860

2,424,138

4,434,138

454

5,454

5,454

Long-term loans to affiliates

410,000

60,000320,868

Rental and guarantee deposits

365,400

388,139

390,063

Claims in bankruptcy and substantial bankruptcy

93,30962,39083,438Long-term prepaid expenses

9,694

11,612

11,593

Deferred tax assets

151,271

237,803

236,970

Prepaid pension expenses

131,363108,259

82,604

Others

66,10066,100367,561(141,895)(110,805)(139,271)

5,137,902

4,388,814

7,570,512

Total fixed assets

10,968,615

10,277,728

12,283,395

Total assets

35,040,407

38,571,749

34,707,463

Intangible fixed assets

Software under development

Investments and other assets

Investments other than securities

Allowance for doubtful accounts

40

MARS

ENGINEERING

CORP ORATI ON

Liabilities and shareholders’ equity
March 31; Thousands of yen

2004

2005

2006

4,160

10,658141,100

Accounts payable - trade2,939,070

3,137,342

3,056,085

Accounts payable - other

158,023

135,485

315,473

Income taxes payable

2,165,011

2,137,324

481,403

Consumption taxes payable

138,358

195,367-

Accrued expenses

90,51856,30663,881

Advances from customers

39,465

17,476

1,901

Deposits received

25,546

16,66319,891

Deferred income

3,534

2,957

1,677

237,228

293,780

321,399

5,800,916

6,003,361

4,402,813

Interest rate swap liability

257,379--

Reserve for directors' and corporate auditors' retirement
allowances

503,954522,741

560,581

Others46,32059,234

129,200

807,655

581,976

689,7816,608,571

6,585,338

5,092,595

7,934,100

7,934,100

7,934,100

8,371,830

8,371,830

8,371,830

8,371,830

8,371,830

8,371,830

372,109372,109372,1094,600,000

4,600,000

4,600,000

6,947,362

10,440,834

12,196,121

11,919,471

15,412,943

17,168,230

206,726

268,180

379,923

(292)

(642)

(4,239,215)

Total shareholders' equity

28,431,835

31,986,411

29,614,868

Total liabilities and shareholders' equity

35,040,407

38,571,749

34,707,463

Current liabilities
Notes payable

Allowance for bonuses

Long-term liabilities

Total liabilities

Shareholders' equity
Common stock
Capital reserves
Additional paid-in capital

Retained earnings
Legal income reserves
Voluntary reserves - total
Special reserve
Unappropriated retained earnings, fiscal year-end

Unrealized gains or losses on other securities
Treasury stock

41

MARS

ENGINEERING

CORP ORATI ON

Trade credits
Notes receivableThousands of yen

2006

GAIA

172,836

Sana Shoji

151,200

Karen

101,050

Sanpo Shoji

93,821W Holdings

85,541Others1,132,411
1,736,860

Accounts receivable — trade
Thousands of yen

2006

Riso

266,526

Dynam Co., Ltd.

222,713

Fuyo General Lease

215,901

Paradise

215,000

Mars Techno-Science Corporation

163,392

Others3,009,939
4,093,473

Turnover of accounts receivableThousands of yen

2006

Beginning balance

3,744,326

Increase

28,951,191

Collected

28,602,044

Ending balance

4,093,473

Turnover87.4%

Average days for collection

49.4

42

MARS

ENGINEERING

CORP ORATI ON

Securities
Marketable and investment securities
Thousands of yen

StocksInvestment securities

Number of sharesBook value

Japan Cash Machine (6418)

250,387

569,630

Resona Holdings, Inc. (8038)

465

188,385

Atom Corp. (7412)

4,000

45,684

Tokyo Tomin Bank (8339)

21,242

114,494

P ARK

20,00040,0003155,800

Nippon Signal (6741)

5,000

5,320

Japan Network System200

20,000Tokyo Tomin Preferred Capital (Cayman) Limited,variable-dividend, noncumulative preferred stock

6

60,000TMI

30-301,361

1,099,315

Total face value

Book value

2,708,000

2,707,610

216,000

214,650

2,924,000

2,922,261

Number of units
investedBook value

1,005,556

3,180,916

46,990463,125

1,052,546

3,644,041

Other securities

Mitsubishi UFJ Financial Group, Inc. (8306)

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

OthersMarketable securities
Other securities
Investment securities
Other securities

43

MARS

ENGINEERING

CORP ORATI ON

Tangible fixed assets
Thousands of yen

Beginning ofterm

Increase

Decrease

End of term

End of term,
net

Depreciation
Accumulated

Current

Tangible fixed assets
Buildings

3,534,278

450,924-

3,985,203

1,815,167

97,7922,170,035

Structures

192,451

23,733-

216,184

158,229

5,812

57,955

Machinery and equipment

218,388--

218,388

152,920

19,07465,468

Vehicles and delivery equipment

12,324--

12,324

11,110555

1,213

Tools, appliances and fixtures

1,756,557

333,292

13,0252,076,824

1,687,322

189,563389,502Land

3,496,763-

1,641,013

1,855,750--

1,855,750-

511,050

511,050

-

-

-

-

9,210,764

1,319,000

2,165,088

8,364,676

3,824,750

312,799

4,539,925

Patents---

25,323

14,228

3,181

11,094

Telephone subscription rights

-

-

-

15,214--

15,214

Software---222,61184,65762,749137,953

Software under development

-

-

-

8,693

-

-

8,693

-

-

-

271,842

98,88665,931

172,956

Long-term prepaid expenses

71,077

5,451

51,11425,414

13,821

5,110

11,593

Construction in progress

Intangible fixed assets

Reserves
Beginning ofterm

Increase

Decrease

End of term

Allowance for doubtful accounts

119,951

60,453

12,687

167,717

Reserve for bonuses

293,780

321,399

293,780

321,399

Reserve for directors' retirement allowances

522,741

38,240400

560,581

Thousands of yen

44

MARS

ENGINEERING

CORP ORATI ON

Accounting Policies
Summary of accounting policies: consolidated
Basis for presentation

Japanese GAAP

Marketable securities andBonds held to maturity: cost amortization method (straight-line)

Investments in securities

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

Inventories

Valued at cost using the moving-average method

Depreciation

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

To provide for potential losses from doubtful accounts, the Company recognizes anamount calculated on the basis of a historical bad debt ratio for general accounts
receivable, plus an amount for specific accounts for which collection appears
doubtful.

Reserve for bonuses

Recognition of the expenses for the current term, based on estimated bonus
expenses for the bonus period

Retirement benefit accounting

To provide for employees’ retirement benefits, the Company recognizes an amountbased on retirement benefit liabilities and estimated pension assets as of the end of
the fiscal year to March 2006.

Reserve for directors' andcorporate auditors' retirement
allowances

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

Opinion of independent auditors

Auditors: Tohmatsu & Co.
Opinion: unqualified

45

MARS

ENGINEERING

CORP ORATI ON

Summary of accounting policies: nonconsolidated
Basis for presentation

Japanese GAAP

Marketable securities andBonds held to maturity: cost amortization method (straight-line)

investments in securities

Shares in subsidiaries and affiliated companies: valued at cost using themoving-average method
Other securities:
Quoted securities: The market value method is applied, based on the market value
as of the fiscal year-end. The entire positive or negative valuation difference fromthe purchase price is booked directly as shareholders’ equity, and the cost of
securities sold is calculated using the moving-average method.
Unquoted securities: valued at cost using the moving-average method

Inventories

Merchandise, finished goods, work in process, raw materials and supplies: valued atcost using the moving-average method

Depreciation

Tangible fixed assets: declining-balance method
Provided, however, that buildings acquired after April 1, 1998 (excluding
appurtenances) are depreciated on a straight-line basis.
Intangible fixed assets:
Software for sale: amortized over a period of 3 years from the commencement ofsales, based on the projected number of sales. However, if the amount calculatedon this basis is less than straight-line amortization over the estimated economic lifeof the software, then the latter is recognized as the minimum amount ofamortization.
Others: straight-line method
Amortization of software for internal use is based on the period of potential use (5years); patent rights are amortized over 5 years.
Long-term prepaid expenses: amortized in equal installments over the period
coveredAllowance for doubtful accounts

To provide for potential losses from doubtful accounts, the Company recognizes anamount calculated on the basis of a historical bad debt ratio for general accounts
receivable, plus an amount for specific accounts for which collection appears
doubtful.

Reserve for bonuses

Recognition of the expenses for the current term, based on estimated bonus
expenses for the bonus period

Reserve for directors' andcorporate auditors' retirement
allowances

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

Retirement benefit accounting

To provide for employees’ retirement benefits, the Company recognizes an amountbased on retirement benefit liabilities and estimated pension assets as of the end of
the fiscal year to March 2006.

Opinion of independent auditors

Auditors: Tohmatsu & Co.
Opinion: unqualified

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ENGINEERING

CORP ORATI ON

Share-related Information
Shares in issue
Class of shares

CommonNumber of shares authorized

67,620,000

IssuedAs of March 31, 2006

22,720,000

As of June 30, 2006

22,720,000

Stock exchange listings

Tokyo Stock Exchange, First Section

Comments-

Changes in common stock and number of shares outstanding
Thousands of shares

Shares outstanding

Thousands of yen
Date

Increase or
decrease

11,360

September 17, 2004

Common stock

Additional paid-in capital

Balance

Increase or
decrease

Balance

Increase or
decrease

Balance

22,720-7,934,100-

8,371,830

Remarks

Split 2 for 1

Shareholders by type of investor
Type of investor;
Hundred shares

Number ofshareholders

Number of units
owned% owned---Financial institutions

39

25,014

11.01

Securities companies

31

1,345

0.59

Business and other corporations

78

44,59019.63

Non-residents (businesses and corporations)79

41,556

18.29

Non-residents (individuals)

3

5

0.00

6,776

114,686

50.48

7,006

227,196

100.00-400-

National and local government agencies

Individuals and others

Shares less than one unit

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ENGINEERING

CORP ORATI ON

Largest shareholders
Name

Thousands ofshares owned

Held in trust
accounts% of shares
outstanding

EM Planning

4,250.0

18.71

Hirokazu Matsunami

1,405.6

6.19

State Street Bank and Trust Company

1,071.3

4.72

Kayoko Matsunami

1,028.0

4.52

Akihiro Matsunami

1,000.0

4.40

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

677.5

Mizuho Trust & Banking Co., Ltd., employee pension
trust; sub-trustee, Tokyo Tomin Bank, Ltd. asset
management service trust for sub-trustees

600.0

213.8

2.98
2.64

Shigeo Komiya

490.0

2.16

BBH PUTNAM INTERNATIONAL VOYAGER FUND

489.0

2.15

Teruo Gomi

450.0

1.98

11,461.4

50.45

Share information
Fiscal year-end

March 31

Ex-rights date

March 31

Ex-rights date for interim dividend

September 30

Annual general meeting of shareholders

June

Trading unit

100 shares

Types of share certificates

100, 1,000 and 10,000 shares

Transfer agent
Publication of record

The Sumitomo Trust & Banking Co., Ltd.
1-4-4 Marunouchi, Chiyoda-ku, Tokyo
The Company’s official announcements shall bemade electronically. However, when matters arise
which cannot be conveyed electronically or whenelectronic announcements cannot be made for someother justifiable reason, the Company shall make its
official announcements through The Nihon Keizai
Shimbun.
The Company’s electronic announcements can beaccessed through the Company’s home page at thefollowing address:
http://www.mars-eng.co.jp/kessan/index.html.

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ENGINEERING

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

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CORP ORATI ON

MARS ENGINEERING CORPORATION
1-10-7, Shinjuku, Shinjuku-ku, Tokyo 160-8420
Phone : 81-3-3352-8555
Facsimile : 81-3-3351-7368
URL : http://www.mars-eng.co.jp

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